Jörg Bibow — On Modern Monetary Theory and Some Odd Twists and Turns in the Evolution of Macroeconomics

Mainstream neoclassical economics is hooked on the idea of individual worker-savers as prime movers in capitalist market economies. As workers, individuals choose how much to work, determining the economy’s output; as savers, they determine how much of that output takes the shape of the economy’s capital investment. With banks as conduits channeling saving flows into investment, firms churn inputs into outputs that match worker-savers’ tastes. In this way, the neoclassical world gets shaped by what rational intertemporal utility-maximizing worker-savers wish it to be....

Models describe possible worlds. The mathematical question is how consistent the model is (proof). The scientific question is how closely the model corresponds to the actual world that the model purportedly represents (evidence).

MMT features the money-first principle: the state has to first issue its money, either by literally spending it into existence or by having its central bank purchase (“monetize”) assets, for taxpayers to then send it back to the treasury as taxes. Seen in this way, taxes do not “finance” government spending. Rather, they are a means to contain inflation depending on the economy’s real resource constraints (as made clear in Keynes’s [1940] “How to pay for the war”). Similarly, government bond issuance – supposedly collecting loanable funds from worker-savers – is not a means to “finance” government spending either, but an instrument to manage interest rates (as Keynes made clear in his reflections on monetary policy and debt management during WWII)....

Rather than using formal modeling, MMT uses institutional analysis to describe actual operations based on institutional arrangements, both formal (law, regulation) and informal (operating procedure).

Multiplier Effect
On Modern Monetary Theory and Some Odd Twists and Turns in the Evolution of Macroeconomics

Jörg Bibow