Forget the myths. In this video, I set the record straight on MMT: what it is, how it works, and what it doesn't claim to do. If you've ever wondered how modern monetary theory could change things, this is your explainer.
This is the audio version:
This is the transcript:
Hi, I'm Richard Murphy, and today is one of those days when we're going to try to answer one of the big questions in political economy.
Tom's got the question. What are you going to ask me, Tom?
The question today is, is Modern Monetary Theory or MMT, the cure for global financial crises?
Lots of people have been asking us this question. It was very high on the list of those that people said they wanted us to address.
So, let's start by asking what does Modern Monetary Theory actually say? And I think that's really important because if I don't define this, the rest of the answer makes no sense.
Modern Monetary Theory, or MMT, describes how money really works in what is called a fiat currency economy.
Now, a fiat currency economy is one where money is not backed by gold, silver, or any other asset, but is simply legal tender because the government says it is, and that's all there is to the money in the country in question. It's just a promise to pay from the government.
In those situations, the government spends new money into existence, that new money is created for it by its central bank in the case of the UK, the Bank of England, in the case of the USA, the Federal Reserve, and in the case of many European countries, the European Central Bank. But the point is that the money is simply created by that bank and spent by the government, for the government to fulfil its obligations in the economy.
And then, the government taxes, but it doesn't tax to fund spending. As MMT explains, tax has the role of removing from the economy the money that was created to fund government spending, and the purpose of that is to control inflation because otherwise, there'd simply be too much money in circulation.
But there's a critical point about this. MMT says that if you understand this, then the goal of the government when it comes to economic management is not to provide financial stability for the money that exists within the economy, because that money is created by the government in the first place, so it has the power to do that by implication of its control over the money supply. Instead, the role of the government is to create full employment and price stability, but not balanced budgets.
In that case, what MMT is is an economic explanation. But it isn't a political prescription. A lot of people somehow seem to think that Modern Monetary Theory is some form of left-wing politics, but it isn't. It's just about an explanation of how money really works. It could be used just as much by a right-wing government as a left-wing government. It does allow a government to pursue a policy of full employment, but it doesn't require a government to do so. A government could pursue some other goal instead, like impoverishing everyone in the country it rules. Why it would want to do that, I don't know. But the point is, everything about policy is a choice.
What MMT provides a government with is the opportunity for pursuing what I call active fiscal policy, which just means that it uses the combination of its spending and taxation, and the difference between them, which is the deficit, to manage demand within the economy. As a consequence, it can also manage inflation.
If the difference between spending and taxation is small, it is likely that inflation will be low. If it is large, it is likely that inflation will be higher, and if the difference between spending and taxation is small, there'll be little stimulus effect with regard to increasing employment. But if employment does need to increase, then increasing spending in proportion to taxation provides the incentive to create more employment, and that should not, in that situation, create inflation, so this is a real economic tool.
The contrast is with monetary policy, which uses interest rates to try to control inflation, and at the same time help a government balance its budgets.
Fiscal policy tends to have a bias towards the poorest in a community, because if the government spends more money into the economy, the poorest tend to benefit most by securing employment or better benefits.
In contrast, monetary policy tends to be biased towards the wealthiest because the poorest are the biggest borrowers and they pay more interest, whilst the wealthiest are the owners of the debt that the poor owe, and therefore they earn more if monetary policy is used to increase interest rates.
When making the choice between these two policies, fiscal policy stands out as the more effective, and the reason why is straightforward. Fiscal policy can be put into place very quickly. Monetary policy takes up to two years to have an impact, by when, very often, the inflation which it is meant to be addressing has disappeared.
So, fiscal policy should be the government's preference because it is the best tool available to it. But that might require us, and I think MMT makes this clear, to rethink the role of some taxes. In particular, VAT, which tends to vary in rate very little under existing policy regimes, might have to vary quite a bit to be an instrument to deliver the immediate tax changes that MMT requires.
MMT might also require some form of financial transaction tax, particularly on flows through the bank accounts of larger companies or maybe the wealthy, basically charging a tax on their use of money, if necessary to slow down the economy because there's a risk of inflation, or to eliminate that tax charge to encourage greater investment.
But those options exist. It does require a different approach to taxation, and those tools are not there as yet, and I have to stress that's the case, but then that's because nobody's trying to seriously use MMT.
So, is MMT a panacea? No, it clearly isn't. Modern Monetary Theory cannot fix every problem in an economy. For example, it wouldn't have prevented the inflation that happened after the invasion by Russia of Ukraine because that was caused by an external source and the panic in the financial markets about the restriction in the supply of oil and gas that might follow.
There was no financial cure, monetary policy, fiscal policy, MMT, or anything else that could have dealt with that, except better regulation of the financial markets.
But what MMT does offer is a more accurate understanding of how money works, and that is really seriously important because that means it provides practical tools for managing economies in a way that is fairer and more effective. And that's why politicians have to understand MMT when far too few do.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Why does taxation control inflation? The reason I ask is that you appear to proceed from the view that tax has the role of removing money from the economy that was previously created to fund government spending. This is not a true reflection of reality which is that the government spends the money again. A cursory look at government accounts shows that 9/10ths of government spending over the last two decades has been recycling tax receipts, with the rest coming from borrowing or printing. As we can see recycling tax receipts into current spending does not remove money from the economy, so what is the method by which taxation can control inflation because it’s not this one.
You can argue that the tax money is destroyed and the government spends the same again from money creation but that is functionally equivalent to recycling those tax receipts and there’s net nothing removed.
a) It is a technical impossibility for a govermment to spend money again – you have literally no undertsanding of what money is if you claim that. I suggest you do some reading. Every major central bank agrees with me on this issue.
b) You can’t claim things fundamentally different are the same.
c) Don’t troll. It really is very silly.
Excuse me for asking again: but have I understood this right?
a) Removing money and creating an equal amount to spend again into the economy and
b) Recycling the same amount of money into the economy
Are fundamentally different.
Please could you explain that.
Of course they are fundamentally different.
There is no such thing as taxpayers’ money.
There is only government money.
Money if not generated in the private sector. It is generated by the state.
Fiscal policy controls inflation, not monetary policy.
You can’t see the differences? If not, you need to take advice.
It seems to me that MMT needs to be thought of in two aspects. The first being Descriptive MMT which is solely about the operational elements of a fiat currency (double entry bookkeeping). While the second could appropriately be called Prescriptive MMT which is the overlay of politics (political spending and taxing choices) applied to fiat currency operations in accordance with a Descriptive MMT understanding.
Often out there, critics of MMT and even long term MMTers lapse into the sloppy language of “MMT says this” and “MMT says that” when what they are really saying is that they would prefer that this policy or that policy be pursued based upon an MMT understanding of fiat monetary operations.
Agreed
Having watched Adam Curtis’ ‘Shifty’ yesterday it is clear to me at least that we exist in an artificial financial straightjacket created by the private money supply. What is worse is that the politicians believe in it too because they are rewarded and corrupted by it.
MMT will not have its day in the sun as long as this sort of situation is allowed to continue. Nothing new will be allowed unless it creates rent for the system that rules over us. So that is MMT out of the the window for now.
Essentially though, this is about money – a public good, created by sovereign Governments – being monopolised by people looking after themselves at the expense of the sovereign country. This is seditious as far as I am concerned.
People used to have their heads put on pikes for that.
Good luck getting the right on-board.
Calling it lefty dogma suits their aims so well!
Spot on. MMT describes how fiat money works…. it’s neither modern or theory… it’s just true. It’s politically neutral, too.
Why this causes so much discussion is beyond me. (Well, not really, we all know that everyone tries to load all sorts of stuff on to it that is not essential)
Thanks
People think that MMT is proscriptive and political because it challenges prevailing mainstream economic theory, a theory which most definitely IS both proscriptive and political.
Some governments seem to be more sovereign than others. The UK Treasury/BoE often seem to try to anticipate or to shadow – whats happending in the US, and there are still issues about the ‘value of the pound’, and trade deficits – although nothing like the obsession in the seventies.
But there does seem need for further explanation of how MMT deals with sovereignty in different jurisdictions and the quasi- reserve currency – the dollar.
Some Marx-influenced analysts seem to suggest that money in its modern form is somehow a creation of international capitalism rather than just of an sovereign state – maybe this is another way of saying we have to look at how the whole system of global money works
Money, tax and the state are inextricably related.
MMT does not ‘deal’ with anything. MMT describes what is.
Isn’t the problem just_one of education of the population? The laws of science and maths have always been there, but only in the past few millenia have they been accepted by everyone. If everyone studying money in economics, was grounded in what money really is, rather than what it does, then we might be able to get rid of some of the ‘household budget’ nonsense. A lot easier said than done, I fear, in my experience. Martin Lewis might be able to explain it to the general public. Without the public understanding it, it will be an uphill struggle.
Richard – to respond to ‘Tom with a question’ query about the ‘government re-spending the money it receives in tax, would it be fair to say that as soon as the government – or a bank for that matter – receives the money from us, in effect or actuality the money is destroyed? Yes, the receipt is accounted for in the double entry book keeping record, but the ‘money’ is destroyed, that right? Would that answer Tom’s question?
The money only exists as an entry in double entry.
It ceases to exist when the entry that created it is cancelled by the one repaying it. That is what the destruction of money means. The debt is expunged.
Could it be said that MMT is the operating system, the windows 11 or iOS 17? After that you can type in whatever (policy) you want. But if you understand the operating system you’ll get more bang for your buck when you hit the keyboard?
Neat
I’d like to see you developing the relationship with employment with respect to these issues (and maybe more):
1. There is supposedly a crunch coming or already here in various jobs impacted by AI, with entry level jobs in particular under threat, and lower grades acting up (eg physician associates) etc.
2. Clearly there are though many worthwhile jobs – but how do we focus on those rather than what David Graeber called BS jobs, and I’d add jobs that create unwanted externalities (eg making bombs, pollution).
3. In any case, is full employment a key goal and can MMT be put to work for a productive, progressive society in which maybe traditional jobs for all is not realistic (eg recognising say carers).
I am wondering how to address this issue…
modern monetary theory gets confused with the magic money tree analogy.
But the best analogy is of banking . Lending in the confidence that returns on investment are available and the principal is safe.
The state should be financing or underwriting all positive business cases for public investment in infrastructure , social housing and health and social care.
Why wouldn’t you?
It wouldn’t crowd out private investment but might cause a bit of inflation in say thé building industry but that could be mitigated by measures to boost supply factors.
It’s a tool to better understand how the economy works. Not a prescription.
Yes, paid work via a “job” is more than just the money to us social animals which have constructed a thing we call an “economy”. That economy is the mechanism by which we can interact at arms length for mutual survival (or destruction in the case of neoliberal finacialised capitalism). Most deal with their friends via socialist mores. This economy thing that we have today is just a derivative of feudalism where the majority exchange their life time for the means for their survival in the form of another human construct called money that we then exchange for resources.
In my idealised society the problem of solving an equitable distribution of resources for survival at a minimum accepted standard is paramount. How to do this? Paid work under capitalism is the current mechanism for the majority. I consider that has shown itself to have failed in western societies which have become ever more socialism for the rich (as captors of public money) and capitalism for the rest. To date society has defined “a job” in a very narrow way and excludes so much as unpaid work which very highly benefits the wellbeing of all of us. A redefining of what is a job for the purposes of paid work needs an enormous rethink as we move into a future of robotics and AI/LLM for repetitive tasks. If the current system were to continue the benefits flow even more majorly than at present to capital at the expense of workers.
Thinking is hard work but it requires time and space for contemplation and debate away from the mousewheel of survival that capital uses to control the citizenry. Give the people too much space and they may actually see the problems clearly and revolt because that is all that’s left overcome vested interests and to effect change. It’s the absolute power of the public purse that must be commandeered for the benefit of the 99% and not the 1% if equable human survival is to be a possibility.