The Basics of Modern Monetary Theory

A Littleecon here gives a skeleton account of Modern Monetary Theory, a heretical economic theory that probably few people outside the ‘dismal science’ have ever heard of. Yet these ideas may become of increasing importance. The ‘I’ a week or so ago carried a story about economics students at one of the universities demanding that their lecturers move away from teaching economic orthodoxy. This indicates that there’s a strong feeling amongst some of the young economists of the future that present, orthodox economics don’t actually work.

As for taxes driving money, this is pretty well true, and has formed the basis of policies formed by some developing nations to destroy indigenous, non-monetary forms of consumption and exchanges amongst tribal groups. For example, about twenty years ago I can remember being told that the Indian government was forcing a particular Indian tribal people to pay their taxes in money. The tribe’s traditional social structure was a form of primitive communism, in which property was held by the village as a whole. The whole point of forcing these people to use money was to break up their social system in order to integrate them into the wider, capitalist economy of the subcontinent. Similar processes, involving the greater availability of money and cash payment for goods are also considered by historians to be the cause of the urbanisation of Europe and the recovery of trade from the 10th century onwards.

This article is most interesting by challenging the government’s rhetoric that we need to make savings to stop the country going bust, and that a concentration on money, rather than providing work and exploiting other resources, is unproductive. In the case of the current government, it’s positively harmful. And these are just two of the points outlined in this article that contradict the government’s orthodox, neo-liberal policies.

alittleecon

I haven’t done a post specifically about Modern Monetary Theory (MMT) for a while now, although that is the perspective from which I approach a lot of the issues I blog about. With that in mind, I thought I’d go back to basics and write a beginner’s guide to MMT as I see it. Any errors that follow will be mine alone. Please let me know if you spot one!

What is MMT?

Modern Monetary Theory (MMT) is a branch of the heterodox Post Keynesian school of economics. At a basic level it is comprised of the following ideas:

1. Taxes drive money;
2. Taxes and borrowing don’t pay for government spending;
3. Countries like the UK cannot go bust;
4. Functional finance;
5. Sectoral balances;
6. Endogenous money;
7. Governments should pursue full employment;
8. Focus on real resources, not money.

So what do all these things means? In turn then:

1. Taxes drive money

In theory…

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