Sunday, May 5, 2019

Smith, MMT, and science in economics

Many blog readers have asked for my opinions of "Modern Monetary Theory." I haven't written yet, because I try to read about things in some detail, ideally from original sources, before reviewing them, which I have not done. Life is short.

From the summaries I have read, some of the central propositions of MMT draw a false conclusion from two sensible premises. 1) Countries that print their own currencies do not have to default on excessive debts. They can always print money to pay off debts. True. 2) Inflation in the end can and must be controlled by raising taxes or cutting spending, sufficiently to soak up such printed (non-interest-bearing) money. True. The latter proposition is the heart of the fiscal theory of the price level, so I would have an especially tough time objecting.

It does not follow that the US need not worry about deficits, and may happily borrow tens of trillions to finance all sorts of spending. Borrow $50 trillion or so. When bondholders revolt, print money to pay off the bonds. When this results in inflation, raise taxes to soak up the money. OK, but this latter step is exactly raising taxes to pay off the bonds. Moreover, if bondholders see that the plan is to pay off bonds with printed money, they refuse to buy or roll over bonds in the first place and the inflation can happen right away.

This may reflect a common confusion between today's money with the new money that pays off debt. It would only take $1.5 trillion in extra taxes or lower spending to retire current currency (non-interest bearing government debt) outstanding. But  that's not the task after the great bond bailout. Then we have to raise taxes or cut spending by, in my example,  the $50 trillion printed to pay off the bonds. Large debts are either paid or defaulted, and inflation is the same thing economically as default. Period. (Currency boards run in to some of the same problem. Backing today's currency is not enough to avoid devaluation, if one does not back all the debt which promises to pay currency.)

I must admit some amusement that Keynesian commentators, having urged fiscal stimulus and decried evil "Austerians" for years, are apoplectic to be passed on the left. But that does not make the ideas of those passing on the left any more right.  There is also a different and interesting strain of thought, exemplified by recent writings by Larry Summers and Olivier Blanchard, that the current low interest rate environment might allow for somewhat, but not unlimited, extra borrowing. Those ideas are completely different analytically. I hope to cover them in a later blog post.

Noah Smith and guru-based theory

But, as I said, I have not studied MMT, so perhaps I'm missing something. Enter Noah Smith, who has delved in to figure out just what MMT is and whether or how it hangs together.

Noah interestingly characterizes MMT as  "Guru-based theory." Noah:

Formal Models vs. Guru-Based Theories
These days, most economic theories are collections of mathematical models. If you want to know what the theory says, you can parse out the models and see for yourself. You don't have to go ask Mike Woodford what New Keynesian theory says. You don't have to go ask Ed Prescott what RBC theory says. You can go read a New Keynesian model or a Real Business Cycle model and figure it out on your own.
MMT is different. There are many wordy explainers and videos that will explain some of the concepts behind MMT, or tell you some of MMT's policy recommendations. But that's different than having a formal model of the economy.
... formal models have important advantages. For one thing, a good formal model can be compared with quantitative data, to see whether it works or whether it fails. Formal models can make testable predictions.
A second advantage of formal models is that you can figure them out for yourself, without having to ask any gurus. If you have to run to the gurus to ask them what the theory says any time you think you've found a flaw, it becomes almost impossible to skeptics or outsiders to evaluate the theory objectively.
This is a good insight, and well supported by the rest of Noah's post. After an exhaustive tour of Noah's struggles with one paper that does seem to offer a framework, he offers
I'm not confident in my ability to answer these and other important questions by reading L. Randall Wray blog posts, or long online explainers, or wordy MMT papers. I want to be able to read a concrete, formal, well-specified model like the Tcherneva model above, and answer these questions myself. And the rest of the non-MMT econ deserves this as well. 
(The paper is "Monopoly Money: The State as a Price Setter" By Pavlina R. Tcherneva, published in Oeconomicus, which as far as I can tell is a newsletter of the University of Missouri-Kansas City.)

There are plenty of guru-based theories around. Much of literature and philosophy is concerned with "what did x really mean?," from Shakespeare to Marx. The impersonality of theory is the main distinction of science. If you want to know what Newton really meant, you do not learn latin to read the original, you pick up the most recent undergraduate textbook.

The sociology of science 

I view it somewhat differently however.

In fact, formal models don't totally speak for themselves, especially on the research frontier. New-Keynesian models are a good example since there is an active debate on just what the equations say and how to interpret them. I've devoted a lot of energy to this debate. It is conducted in the pages of peer-reviewed journals. There is, or was, an active debate on what the equations of quantum mechanics and general relativity say too. And while the occasional testable prediction makes for spectacular rhetoric, economics like other non-experimental sciences is pretty thin on testable predictions. Otherwise, we would still not be debating what really caused the Great Depression, whether minimum wages help or hurt disadvantaged people, whether the government borrowing money and spending it, even on totally useless projects, stimulates the economy or not.

I read Noah's story instead as a good documentation of how MMTers, and especially MMT advocates in the policy world, ignore the scientific sociology of contemporary economics. There are no MMT articles in major peer-reviewed academic journals. There are essentially none at major professional conferences, such as the American Economic Association meetings. There are no academic MMT articles in the major working paper series. There are no MMT books from university presses. While Noah points to the content, the lack of formal modeling, I found Noah's characterization of the messenger just as interesting. It is almost entirely a creature of tweets, blog posts, youtube videos, and so on.

Now, the sociology of science is no guarantee of correct results. Nine out of ten or more published articles are wrong, or just plain silly. From a free-market economists' point of view, whole academic fields, journals, and professional societies seem to have gone off the deep end, especially in the humanities. Fads have come and gone in the pages of the American Economic Review too.

But as many bad ideas survive in the society of "science,"  the number of genuinely successful ideas, ideas eventually seen to be logically and scientifically correct, and (most of all) ideas that are ready to be reliable guides to policy, that ignore this scientific sociology is vanishingly small. Yes, there are new ideas that begin new fields -- economics itself started with a book by Adam Smith. But monetary economics is a well established field, and this range of ideas -- the nature of money, the tax backing of money, the interaction of monetary and fiscal policy,  government budget constraints and so on -- is well within the range that current intellectual institutions debate knowledgeably. The fraction of good solid ready-for-policy ideas of that sort outside the scientific mainstream is vanishingly small, and the fraction of crackpot junk science there is pretty large.

I do not blame the MMTers. They have some ideas, and they have found an audience ready to listen via this nontraditional method. The curious thing is that those who frame the national discussion of economic policy, in politics and media, take so seriously ideas that have not made it in to the "scientific" mainstream.

That larger society of economic discussion and policy bears some of the blame. While disparaging MMTers, their commitment to science-based policy in general is not deep.  Most macroeconomic policy analysis takes place within late 1970s era Keynesian ISLM framework that has not been seen in major peer-reviewed journals since that time. Perhaps, as even luminaries such as Larry Summers and Paul Krugman have written, everything since then has been a misguided waste of time. Such things do happen in economics. But then we can't complain too much and get on our scientific high horses about MMTers relying on guru-based views of the world that avoid the trappings of economic science. Traditional Keynesianism is at this point pretty much a guru-based enterprise and a verbal tradition, not based on formal models (which were eviscerated in the 1980s) published in academic journals. Likewise, much of what the Fed tries to digest and control -- anything with the words "systemic risk," "liquidity," "contagion" for example -- goes, to put it politely, far beyond anything of which we have solid scientific understanding. The rest of economic policy is even further removed. There isn't much scientific basis for the SEC's micro-management of asset markets, the FTC's ideas about competition, the labor departments intensely specific rules, and so on. What study there is tends to be  academics jumping in after the fact to find new questions to which policies might be the answer.

In sum, the policy and political world would have a lot more room to complain if they demanded more "science," both in the method of analysis and the form of its communication, before acting.


I did a little background research, beyond reading Noah's blog post, to find the academic articles on MMT and to document the above views in more detail. If I am missing important things, especially crucial peer-reviewed publications, feel free to let me know via comments.

I started with the the social science research network (ssrn) which  has pretty much every academic article on economics written since its founding. It has a lot of other stuff too. And it's open to everyone, unlike (say) the NBER working papers. (needless to say the same search in NBER working papers came up empty).  I searched for "modern monetary theory" and found a grand total of 11 results. Several of those were spurious -- modern monetary theory, can mean, well, modern (monetary theory) not (modern monetary theory), i.e. new-Keynesian models, micro foundations of money, and so on. All I found were three blog posts,

  • Modern Monetary Theory - A Primer on the Operational Realities of the Monetary System, by Scott T. Fullwiler
  • Modern Money Theory: A Response to Critics, by Scott T. Fullwiler, Stephanie Bell and L. Randall Wray 
  • The Conscience of a Neo-Liberal Scott T. Fullwiler 

Only one that looks like a paper

  • Is Very High Public Debt a Problem? Pedro Leão

And a critique

  • Does Government Spending Increase Your Saving? Hak Choi "This paper works out the rights and wrongs of government spending, but disproves the extreme part of the modern monetary theory."

Another way to do this is to find writings by specific authors, Scott Fullwiler, and Stephanie Kelton. I found their author pages on ssrn, but that's not comprehensive.  I searched for their CVs. Normally, academics post their cvs, or their departments' web administrators do, so you can get a full list of their publications that way. Strangely, I couldn't find CVs for either, even on Kelton's snazzy website.  Pavlina R. Tcherneva has a publication list, but it does not include any peer-reviewed articles. If you know where these are hiding, let me know.

This search did turn up some academic articles.

Setting interest rates in the modern money era ST Fullwiler - Journal of post Keynesian economics, 2006

Timeliness and the Fed's daily tactics ST Fullwiler - Journal of Economic Issues, 2003 s

Macroeconomic stabilization through an employer of last resort ST Fullwiler - Journal of Economic Issues, 2007

Paying interest on reserve balances: it's more significant than you think. ST Fullwiler - Journal of Economic Issues, 2005

In one ranking, the Journal of Post-Keynesian economics is #453, and Economic Issues #972.

Last thought

Now I really don't want to be snooty here. As there is a place for blog posts in trowing out ideas and discussing them (I'm obviously a big believer in discussing economic ideas via blogs!), there is an important place in science for niche journals. Many important new ideas have had to start their own journals, create a community of peers that will review papers, and advance a research agenda that way before breaking in to the mainstream.

But these ideas have clearly not yet made it in to that mainstream. The real question is, when is an idea ready for widespread implementation in public policy? How much of the sociology of science should we wait for before spending trillions of dollars? Though some good ideas have indeed been disparaged by the mainstream and took a long time to be accepted, there are so many bad ideas out there, that I think the answer is, a bit longer. Certainly the advocates of MMT seem not too interested in, say, writings on climate change expressed entirely on critical blog posts, u-tube videos, and nice climate-skeptic journals. Their embrace of MMT has made a mockery of their embrace of "science" on climate questions. But there is plenty of hypocrisy going around on those subjects.

(Note to readers: Yes, the blog is back. I had to take a few weeks off to get through some screaming items on the in-box.)


Sebastian Edwards has read and thought about MMT more than I have, and has written an interesting review of how MMT policies worked out in Latin America
"According to Modern Monetary Theory (MMT) it is possible to use expansive monetary policy – money creation by the central bank (i.e. the Federal Reserve) – to finance large fiscal deficits that will ensure full employment and good jobs for everyone, through a “jobs guarantee” program. In this paper I analyze some of Latin America’s historical episodes with MMT-type policies (Chile, Peru. Argentina, and Venezuela)....The four experiments... ended up badly, with runaway inflation, huge currency devaluations, and precipitous real wage declines. These experiences offer a cautionary tale for MMT enthusiasts."


  1. MMT is a set of statements made by confused individuals or those looking to confuse others. The latter know the sleight of hand they're pulling and use to argue ideologically for government spending, everything else be damned, to counteract what they perceive to be "Austerian" influence in politics. They bring either nothing new, things that are plainly wrong, or they use so many words because if you try to actually get at what they're saying beyond the bluster and veils, the trick becomes apparent and loses its magic. Math has no place in economics, for if it did, you wouldn't be able to use thousands of paragraphs to confuse others with what could have been said with three equation models. It is Romer's mathiness nightmare writ into supposedly serious public policy proposals.

  2. The blog New Economic Perspectives seems to have the major MMT people. I followed it for a few years and got some idea of what MMT is, though I agree with those who argue that the definition of MMT changes as needed.

    L. Randall Wray has a few books out. Understanding Modern Money is from the late 1990s. Modern Money Theory was put together as a short introductory text. Amazon lists a just published Macroeconomics which Prof Wray co-authored which appears to be MMT based.

    The other key feature of MMT is that money is created when government spends and destroyed when it taxes (the Fed is considered part of the government). Thus, if I remember correctly, Prof Wray claimed that the 2008 financial crisis was the result of the government running surpluses in the late 1990s.

    MMT also argues that the government need not issue bonds for spending, it can just create the money out of thin air. After all, they argue, would the Fed refuse to pay a US government check if there were nothing left in the Treasury's bank account?

    The other big thing integral to MMT is a government job guarantee. The government will employ anybody who can't get a job elsewhere. I've seen this emphasized by Prof Wray and by John Harvey (TCU professor) who has a blog, currently on Forbes.

    There were other things I saw in the NEP blog but several of the authors are not academics. One wants the treasury to mint a single platinum $50 billion coin and make the Fed buy it, thus eliminating the US Debt and providing plenty of money for whatever the government wants.

  3. Having acknowledged that there are real limits to budget deficits (it was never denied), MMT nevertheless makes clear that budget deficits are the norm, not the exception. This does not mean that budget deficits of any size are okay. They must be consistent with private-sector net-saving intentions. It simply means that ongoing budget deficits of some size will be the appropriate policy under normal circumstances. The reason for this is that the non-government sector typically desires to net save. This means, as a matter of accounting, that the government sector must be in deficit.
    Whenever the non-government sector net saves, it is spending less of the monetary unit than it earns. The result is unsold output and a signal to firms to cut back output unless the government fills the demand gap through deficit expenditure. By doing so, the government is in a position to ensure all output is sold at current prices and the non-government sector satisfies its net saving desires. If, instead, the government allows the demand shortfall to persist by not injecting sufficient expenditure of its own, firms will respond by cutting back production. There will be a contraction in output and income, thwarting non-government net saving intentions. If the non-government sector responds by redoubling its efforts to net save, the result is a further shortfall in demand, further contraction of income (as well as tax revenue), more frustration of non-government saving plans, etc. There is no end to the process until either the non-government sector accepts a smaller net-saving position or the government accepts a bigger deficit. —heteconomist (Dr. Peter Cooper)

  4. I think you look at the picture in reverse.

    Modern Monetary Theory has been with us for quite sometime, but didn't get comprehensive theoretical treatment, like you said.


    Won't some young PHD research and model this new interesting idea?
    No - because he has incentives not to. MMT has been considered foolish and not worthy of academic scrutiny. You don't know about the papers that didn't publish.
    So the only way forward to push it was through blogs, Youtube, etc.

    1. But the biggest rewards in economics come from pursuing an idea that the mainstream considers foolish, writing it up, and convincing the rest of the world. Then collect Nobel prize.

    2. The problem is in step 3-
      "convincing the rest of the world"
      How do you do that? Maybe blogs and youtube?

  5. I’m not sure about John Cochrane’s claim (his 3rd para) that MMTers think the US “may happily borrow tens of trillions”. The two co-founders of MMT, Warren Mosler and Bill Mitchell have actually both written articles claiming that governments should borrow NOTHING: i.e. that the only state liability should be zero interest yielding base money. See:

    Plus see 2nd last para here:


    1. Ralph:
      Thanks for this. I hope I was clear on the disclaimer that I haven't directly studied MMT very well! The proposal you mention is interesting -- it is what Milton Friedman proposed in 1948. I can't quite see how you finance something like WWII, 100% of GDP, or a green new deal, by only printing money, without inflation. It seems that one has been tried many times. Tax smoothing by borrowing has a long history too.

    2. John, While I've supported MMT for about ten years, I have to admit that MMTers are a bunch of people often talking at cross purposes. Re Friedman, he said in his 1948 paper that borrowing might well be justified in war time, so you and he agree there.

      Re other very large increases in public spending, like the Green New Deal, I don't think many MMTers claim that can all
      be funded via money printing.

      Re using borrowing to smooth taxes, clearly that can be done, but my answer to that is that avoiding sudden tax increases is a strictly POLITICAL move: i.e. sudden tax increases can cause riots. Thus I'm sticking with Mosler and Mitchell and their claim that so far as strict economics goes, a permanent (or more or less permanent) zero rate of interest on government liabilities makes sense.

      My published paper in the Journal of Policy Modeling

    4. "I can't quite see how you finance something like WWII by only printing money, without inflation."

      MMT recognizes that inflation will occur if demand backed by spending exceeds productive capacity. This was undeniably the case for the war effort. The economists who arranged the war financing recognized this, and dealt with the inflationary pressure with a combination of rationing, price controls, and currency drains through sales of war bonds.

  6. Dear Mr. Cochrane:

    As one of the readers who asked for this comment, I thank you.

    Fat Man

  7. MMT:

    Print your way to victory, but only if you print USD. ;)

    Kelton does a pretty good interview here on MMT:

    Pay close attention to the premise (some would argue reality) of who creates money in the first place.


  8. My comments refer to the first four paragraphs, where you address the theory itself.

    In modern economies, where central banks control the short term interest rate, it is somewhat misleading to interpret govt expenditures and taxes as adding or soaking up “printed non-interest-bearing money”, and MMTers do not recognize printed non-interest-bearing money as a particularly inflationary asset.
    What fiscal operations change almost automatically is the stock of central bank repo operations or reserves that are remunerated by Interest on Excess Reserves. The govt may offer to the private agents a different remuneration scheme (bonds), but that is almost irrelevant for inflation concerns.
    What causes inflation is not the presence of non-interest-bearing money in the economy, but the amount of purchasing power in the hands of private agents and their willingness to use it. All freely tradable govt liabilities (along with other liquid assets and access to credit) represent purchasing power.

    So the reason that governments that issue their own currencies do not have to default on their debt is not that they can print inflationary money to pay off debts, but because there is little difference between a liquid bond that matures tomorrow and a reserve that pays IOER: both are govt liabilities that have very similar remuneration schedules and both can be used to back up spending. Why would bondholders be upset about it and revolt? In fact, the less the government issued longer term securities, the more scarce they would become in comparison to the amount of existing short-term assets, and the more the private sector would bid bond prices up. So, if anything, government paying its expenditures or its debt by “printing money” pushes the prices of bonds up, not down.

    If private agents are not satisfied with the risk-free remuneration the government is offering in local currency, they may bid up the prices of other assets, including other currencies, until they think these assets are already expensive enough. This may provoke some macroeconomic adjustments, but not necessarily inflation. And usually there is no reason for it to happen all of a sudden.

    But how should we actually deal with inflation. You conclude that the operation described by MMT is exactly raising taxes to pay off debts. I think the difference is the timing and the proportion.
    Standard economics says that, even if govts may not balance their budgets every year, they should keep the level of debt between certain bounds relative to GDP.
    MMT proposal is very different: we don’t have to look at the level of debt any more than we have to look at the level of other monetary aggregates (and the QTM doesn’t have many followers nowadays). Over the very long term, the amount of taxes collected could end up being roughly the same as the amount the government spent. Or it could be not. It doesn’t matter.

    We should worry only about the impact that fiscal actions are causing or are expected to cause to the economy.
    If the govt were to spend an additional $50 trillion in a year, that would have a severe impact even if the govt would levy matching taxes. If it chose not to levy taxes, it probably wouldn’t matter much if it had or not a credible plan to offset this deficit with future surpluses.

    If the private sector is willing to save more of govt assets, even when the debt is already super high relative to any standard (think Japan), govt should accomodate and run deficits. On the other hand, the level of debt may be low, but if the economy is be overheating because of a credit boom or because of high influx of foreign capital, govt should lower its deficits or even run surpluses.

    Actually, we should get down to the sectoral level when assessing the impact of government fiscal actions. Depending on the composition, deficits of the same level may cause very different impacts on the economy and on inflation.

    Last comment: MMT should not be regarded as leftist in itself. Every time someone says “govt can spend more”, another can say “govt can tax less”.

  9. Well, lots of intelligent blogging by John Cochrane.

    And yet, I notice that orthodox macroeconomists must resort to derelict nations to support their views on deficit-spending and money-printing. Thus, nations such as Venezuela or Zimbabwe become highly informative.

    That means real-world results from such developed nations as, oh, say, the United States or Japan, are overlooked.

    Let's get real. Japan has printed money and run deficits for decades. The Bank of Japan has recently purchased back 45% of that nation's heroic levels of national debt. Japan is always teetering on the edge of deflation.

    Less dramatically, the US printed up four or five trillion dollars in the Great Recession and bought back Treasuries and mortgage-backed securities. If there was an inflationary result of running large deficits and printing lots of money in the Great Recession, I would like to see it pointed out.

    From my layman's point of view, the US and Japan have shown that national debts can be monetized, relieving taxpayers of burdens. That is a practical result, even if theoretically impossible.

    But as they say, "What I say may be true in fact, but more importantly, is it true in theory?"

    Another thought: we are told we operate in globalized capital markets. If true, what can the actions of a lone Central Bank be expected to accomplish?

    In contrast, cutting taxes inside the United States might have a good stimulatory effect (especially a holiday on Social Security taxes) and tax losses can be compensated by printing money and placing the cash into the Social Security trust fund.

    I have to say the practice of orthodox macroeconomics appears to be in a discredited shambles. The shamans are accusing the MMT crowd of voodoo.

  10. Professor, John thank for your wonderful research such as "The Fiscal roots of Inflation" You are an awesome scientific real economist unlike Krugman
    I've got good news for you AEA hold a symposium about Fiscal Policy
    Ramey proved even in ZLB, multiplier effect is likely small
    Yared said we need to reduce debt And Alesina proved Spending cut is no harm
    Yay! goodbye Keynesians! Showing these to Krugman would be fun

    1. "Alesina proved Spending cut is no harm" LOL.

    2. What's wrong with that? you just smirk when you have nothing to refute or you think losing so you wanna dodge the bullet just like Paul Krugman Read the Research well he actually wrote the paper that Spending cut might be good for growth for empirical case, well look at Trump's boom, Ireland, new zealand and so on U got anything to say? C:

  11. Professor, John thank for your wonderful research such as "The Fiscal roots of Inflation" You are an awesome scientific real economist
    I've got good news for you AEA hold a symposium about Fiscal Policy
    Ramey proved even in ZLB, multiplier effect is likely small
    Yared said we need to reduce debt And Alesina proved Spending cut is no harm
    Goodbye Keynesians! Showing these to Krugman will be fun
    Why Keynesians love Government Spending so much?

  12. For all the time Noah has spent on MMT, he doesn't really get it. I don't get what is so hard about chartalism(money is a political and legal construct), and functional finance(spend for real economic outcomes), to make it such a mystery. Graeber has written an excellent chapter in his book "Debt: the first 5000 years", titled "On the experience of moral confusion". Everyone has a tendency to implicitly or explicitly moralize debt and fiscal policy. MMT recognizes the true ontological nature of money and associated public debt: it's simply the scorekeeping medium for public accounting. If you get everyone to agree, you can allocate all of the money or none of it however you want, just like if you get people to agree to monopoly, you are playing monopoly. If you get people to agree to the rules of chess, you are playing chess. If you try to say that public will and political process is impotent, because we have too much outstanding debt, that's an inherent contradiction! The public consensus is the entire source of financial and social rights in the first place. Now obviously, you need rules of the game that are fair and can work for everyone, but finance is just a game, in the sense that the rules are arbitrary and determined by custom/tradition. We have to worry about the allocative effects of the rules and their social sustainability, not any arbitrary artificial financial constraint. The "out of bounds" lines, exist to serve us, and if they are doing us a disservice, we should expand the playing field. To quote an ancient philosopher "Was man made for the sabbath, or was the sabbath made for man?" The same could be said for money.

    1. Derek,

      So very true:

      "Everyone has a tendency to implicitly or explicitly moralize debt and fiscal policy."

      Moral hazard as it applies to loans and debt has implications as to the expected behavior of borrowers. But what keeps an economy going, hmmm? Borrowers and savers enter into a contract fraught with peril, but it lubes economic activity; people provide stuff for others. We don't live in Autarky. Of course we want to discourage bad actors that erode trust in the system.

      MMT essentially says fiscal policy is where it's at. Create money as needed and pull out the excess with taxes, and to a certain extent, it just recycles money as it is created. It's a simplified scheme as I've described it, but that's what I took away from it all. It's a shot across the bow at monetary policy as being ineffective. The fears about hyperinflation are somewhat warranted; but if the government is pulling out the money it creates via taxes, what does that really do inflation?

      I *imagine* it'll be sort of similar to what happens in these MMORPGs that see inflation in prices for items **without** an appropriate "gold sink." World of Warcraft dealt with the issue of gold farmers by just selling gold directly to the players and put in gold sinks for luxury in game items, but not on everyday activities, like flying or buying supplies from in game vendors. Prices typically double on the auction house (player to player trades) with every expansion. They triple or quadruple for items for crafting reagants used for older skill leveling. Before all this, there was a market for Real Money Trading; People would buy gold to buy an advantage in game. Blizzard basically caved in and said, "Well, in game inflation is real. Might as well ride the wave and snag the revenue versus giving away the opportunity for profit to gold farmers." The system in the game created gold out of nothing in a sense via conquering enemies and completing quests, over and over and over. (Respawn times and loot tables matter).

      See, people seek to maximize their advantages, or, worse, try to keep up. They engage in behavior that's against the rules. Blizzard has a ban hammer, but if they use it too much, they lose their player base.

      Enjoyed your post, Derek.


  13. The scenario of the government printing money and spending it on consumption and then taxing it to stop inflation is not equivalent to the anti inflationary element of money creation in the modern economy, the banking system. When businesses or individuals create money in the process of bank loans they often do so for productive investment and thereafter repay the money, so the cycle there for individuals and businesses is not just returning the the money supply to its previous level it also increases the amount of goods in the marketplace.

    1. And aside from productive investment, for other bank loans when a member of the public or business repays a loan from a bank, they sell something, and so they reduce the money supply that they created and they also replace goods and services on the market place in the process.

  14. MMT is more internally coherent than it lets on. One element that their proponents don't seem to like to emphasize in public is a willingness to use financial repression and micromanagement of prices as part of the stabilization toolkit. Once you allow for those, you can issue as much debt as you like at low interest rates without ever worrying about inflation.

    Here are some choice quotes from Randall Wray's MMT 101:

    "MMT does not agree with this approach. The government should be directly involved continuously over the cycle, by putting in place structural macroeconomic programs that directly manage the labor force, pricing mechanisms, and investment projects, and constantly monitoring financial developments. Because those programs would be permanent and structural, rather than discretionary and specific to one Administration, they would be isolated from the political cycle and political deliberations. All this eliminates problems of lags, credibility, and time inconsistency that Friedman and others have complained about. "

    "But MMT goes beyond full employment policy as it also promotes capital
    controls for open economies, credit controls, and socialization of investment. Wage rates and
    interest rate management are also important."

    "We do, however, believe that direct
    credit controls can be useful to control lending for speculative behaviors, or to more generally
    fight inflation pressures. This is far more effective than trying to use rate hikes to reduce lending
    to speculators."

  15. John Thoughtful MMTers do not advocate "spending for what you want" and then try to tax it back if those actions turn out to be inflationary. That would be disruptive, unwieldy and unpopular, i.e, crazy. Instead, the idea is to spend more (or tax less) incrementally. If the economy can absorb the additional private income created by these higher deficits without inflationary effects, then that is a boost to the private sector. And, initiatives focused on investment in infrastructure, education, etc. could provide productivity boosts as well. So a win, win.

    In a nutshell, what MMT says:
    "When, and only when, the economy is operating below full utilization of its real resources, the government can tax less or spend more, i.e., increase its deficit, without negative consequences. At the same time, because there are clear limits, spending always should be as productive as possible.”

    This principle applies only to nations with their own free-floating currency and no debt denominated in a foreign currency.

    You could argue that the Trump administrations has embraced MMT, without knowing it. Taxes have been lowered, spending increased - blowing out the deficits. Result: higher growth - no problems - as the economy is not yet at full capacity.

  16. It's never a good idea to do a blog critiquing MMT and then using someone like Noah Smith, who hasn't even taken the trouble to look at the academic work. Even before MMT was popularised, Wray's 1990 book (Money and Credit in Capitalist Economies”) is a good starting point as it is one of the foundational books in the endogenous money literature. Wray also studied under Minsky and has several useful pieces on the private financial sector and includes hundreds of articles, chapters, and books on the topic—including a book co-authored with Tymoigne on the global financial crisis (The Rise and Fall of Money Manager Capitalism, Routledge 2014), and a recent book on Minsky’s approach to finance (Why Minsky Matters, Princeton, 2015).
    No mention of one of the most prolific MMT scholars, Bill Mitchell, who has a considerable body of scholarly work (although better known these days for his blog). And Stephanie Kelton has also done a pile of scholarly work: (there's more, but I really am stunned at the superficiality of the search that was undertaken here by Cochrane).

    Look, every economic theory can and should be critiqued and analysed seriously, regardless of the ultimate conclusions one draws. But that necessitates actually reading THE SOURCE MATERIAL, not the crap that purports to describe MMT by intellectual charlatans.

  17. Funding government spending from taxation of private sector created money rather than government created money has its own inbuilt anti inflationary function, as private sector money , as it is created from and represents debt, is accompanied by a legal obligation by the debtors to replace goods and services to the market place at a later date,

  18. "Does Government Spending Increase Your Saving? Hak Choi "This paper works out the rights and wrongs of government spending, but disproves the extreme part of the modern monetary theory.""

    I laughed at this citation because I recognize the author's name from Quora. Let's just say this guy is very heterodox.

  19. Stephanie Kelton was Stephanie Bell before she got married. Here is a 1998 paper with MMT concepts.

    (Not that I agree with it)

    1. Brian thanks for the reference. At it roots, MMT appears to just be an accurate description of the monetary system. For example, public deficit = private surplus, etc. As such, with what do you disagree? Thx.

  20. Carolyn Sissoko has good critique of Cochrane

  21. You can find more MMT papers here:

    And here:

  22. Economics a science? Surely you are joking, Mr. Cochrane
    Comment on John Cochrane on ‘Smith, MMT, and science in economics’

    MMTers assert that mainstream economics is defective. MMTers are right. Mainstreamer, in turn, assert that MMT is defective. Mainstreamer are right.

    The fact of the matter is that the major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism, MMT ― are mutually contradictory, axiomatically false, materially/formally inconsistent and that all get the foundational concept of the subject matter ― profit ― wrong. Economics is a failed science. By consequence, discussions between mainstream and MMT never get above the talk-show level.#1, #2, #3

    John Cochrane freely admits that he did not “read about things [MMT] in some detail, ideally from original sources, before reviewing them, which I have not done. Life is short.” Yes, but fortunately it is long enough to waste it on brain-dead blather.

    John Cochrane has not realized that orthodox economics, which he represents, is proto-scientific garbage. Neither does he refute MMT in a scientifically correct way by proving material/formal inconsistency.#4 He simply echoes Noah Smith’s slander of MMT as Guru-based theory.

    After having himself exposed as an incompetent scientist, John Cochrane goes fully off-topic by extensively waffling about the “sociology of science”. This “sociology” is essentially a description of how contemporary academic economics works. It confirms what Feynman has described long ago as cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

    What is still missing in economics after 200+ years is the true theory. Economics is a failed science. This is the common denominator of mainstream economics and MMT. Both are refuted on all counts.#5

    Life is short ― trivially true ― so, in no case waste it with the fake science of economics, not with the proto-scientific garbage of mainstream and MMT, and not with the confused blatherers who call themselves scientists but have never been anything else than clowns in the political Circus Maximus.

    Egmont Kakarot-Handtke

    #1 MMT vs Mainstream: examining proto-scientific garbage in detail

    #2 The not so funny MMT vs Neoliberalism slapstick

    #3 Economics ― nothing but claptrap, twaddle, drivel, slip-slop, wish-wash, waffle, and proto-scientific garbage

    #4 For the full-spectrum refutation of MMT see cross-references MMT

    #5 Economics: The greatest scientific hoax in modern times

  23. Why did you bother writing this post on a topic that you obviously didn't do much research on and didn't bother to understand? And to be quoting Noah Smith's blog, an individual with limited and superficial understanding (no understanding!) of MMT, is damaging to you. There are a ton of academic writings on MMT (I know, WORDS!) and I'll let the academics point you to them. And if they aren't published in mainstream journals it's because mainstream journals refuse to accept and acknowledge their complicity in promulgating false economic narratives for decades.

    A gentleman and a scholar (a human) recently outlined MMT in bullet-point form for other humans. You might want to start there:

  24. I'm not sure he even correctly interpreted Noah Smith's incorrect critique.

  25. Also:

  26. Adam Smith noted in his The Wealth of Nations that the "corn price" of gold in Spain was higher than the "corn price" of gold in Britain at the time. "Corn" being synonymous with real goods, and "gold" being a form of money at the time, Smith was observing the effect that a surfeit of money has on the price of real goods.

    Adoption of monetary policy based on MMT will have the same effect on the money price of real goods. The "corn price" of money in the U.S.A. under an MMT-monetary policy regime will be higher than the "corn price" of money under a non-MMT-monetary policy regime elsewhere. The short-term sugar-high of money expansion will be followed by a long-term malaise as the price of real goods in MMT-money adjusts and keeps on adjusting. A popsicle for $1 Billion; an ounce of sirloin for $1 Trillion; etc.


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