MMT and Economic Theory: A Reply to Critiques Eric Tymoigne Lewis & Clark College The fruit of a collaboration between some post Keynesian economists and a bond trader named Warren Mosler, that started following discussions on the now defunct Post Keynesian Thought listserv, the theoretical framework first developed quietly and largely ignored in a subset of the economics field in the late 1990s and early 2000s. As MMT gained growing attention around 2010, critics have attacked the framework in several ways. Some critiques have argued that MMT is not a theory because there is no mathematical model. Others have argued that there is a theory but that there is nothing new and even if there is, it is not valid and it is misleading and it pushes the logic too far (Lavoie 2013). For example, Palley notes that MMT fails “to produce a model and […] that is why they fail to advance debate. If MMT-ers did produce a model, I am convinced […] readers would also see there is ‘no there there.’” (Palley 2014, 2). Others, like Palley, have argued that “MMT often boils down to nothing more than an especially naïve sort of Keynesianism” (Selgin 2019) with “nothing new under the sun” (Cachanosky 2021). Another criticism, seemingly contradictory to the previous criticisms, is that MMT lacks realism. The consolidation technique has drawn the ire of some economists for not accounting for the institutional constraints within governments that limit the interaction between the central bank and the Treasury. As a consequence, MMT is supposed to provide a poor theoretical framework to understanding government finances and the role of government in the economy. Economic Foundations of MMT: A Theory with Deep Roots Capitalism is a monetary production economy: Money, power and classes MMT combines several theoretical aspects developed by Post Keynesian economics. In terms of economic activity, MMT fully embraces the theory of effective demand developed by John Maynard Keynes (1936) and Michał Kalecki (1933) (Mitchell et al. 2019, ch. 11-14) . It also embraces the contributions made by Joan Robinson, Nicholas Kaldor and many Post Keynesian economists on the causes of economic growth. The importance of income distribution for growth (wage-led versus profitled growth) and the dependence of supply conditions and technological progress on the dynamics of aggregate demand (demand-led growth, Verdoon-law, hysteresis effects) have also been accepted (Tavani and Zamparelli 2017; Lavoie 2014; Oranan and Galanis 2013). Similarly, MMT emphasizes the importance of expected sales and capacity utilization as key drivers of investment, while the cost of credit plays a marginal role. MMT rejects Say’s law, the neutrality of money, methodological individualism, relative-price clearing mechanisms and the existence of “natural” variables to explain how a capitalist economic system behaves. MMT embraces as analytical tools the power relations as expressed through classes, income effects, the role of monetary outcomes for employment, investment and production decisions, and the dependence of productive capacities on current spending decisions (Lavoie 2014). As such, MMT rejects the two following premises that are widely shared in economics: Let us begin with an axiom that I think most economists would accept, and that I have already used in the previous lecture: the objectives of agents that determine their actions and plans do not depend on any nominal value. Agents care only about ‘real’ things, such as goods […] leisure and effort. We know this as the axiom of the 1 absence of money illusion, what it seems impossible to abandon in any sensible analysis. (Hahn 1982, 34) Despite the important role of enterprises and of money in our actual economy, and despite the numerous and complex problems they raise, the central characteristic of the market technique of achieving co-ordination is fully displayed in the simple exchange economy that contains neither enterprises nor money. (Friedman 1962, 13) Capitalism is a monetary production economy not a real exchange economy. The production process is a central point of study because it is at the core of the socio-economic dynamics of a society. Production involves classes with competing economic interests and capitalists are not interested in the additional amount of output obtained from investment (the marginal productivity of capital) but rather in the additional expected monetary profit that comes from the additional expe

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