Modern Monetary Theory is no Magic Money Tree

The Magic Money Tree

New paper by neoliberal think tank the Adam Smith Institute breaks down the case for Modern Monetary Theory:

  • MMT adherents claim that government spending can activate substantial unused economic capacity is false, and practice shows impact is inflationary and hyperinflationary.
  • From the Green New Deal to Corbyn’s People’s Quantitative Easing, MMT is gaining ground in mainstream political activism while still being a fringe economic theory
  • Venezuela’s economic collapse following years of deficit spending shows again Hyperinflation marks the end point of thinking that suggests deficits don’t matter
  • MMT deserves critical thinking and debunking before it influences government policy in a major Western state

John Maynard Keynes said that economic ideas are powerful “both when they are right and when they are wrong”. The Adam Smith Institute today argues that an idea that is gaining ground among heterodox economists and left wing politicians in the USA and the UK is powerfully wrong.

Modern Monetary Theory hinges on the claim that since government issues its own currency it cannot go bust, and it is possible to use printing money to fund substantial government spending with the goal to deliver full employment.

It is this belief that leads author of the report, Professor Antony P. Mueller, to say that “Modern Monetary Theory is to economics what the flat earth movement is to geography.”

Despite gaining ground among political activists, Modern Monetary Theory remains rejected by mainstream economists. In a poll of 50 elite economists the University of Chicago’s Booth School of Business found not a single one believed that countries that borrow in their own currency need not worry about deficits. None found it possible to fund as much real government spending as desired simply by creating money.

MMT asserts, with limited evidence, that there is substantial unused economic capacity that government spending can activate. In practice, when government excessively expands the monetary supply (prints money) the impact is inflationary, if not hyperinflationary — as historically seen in the Weimar Republic, Zimbabwe, and today in Venezuela.

Dependent on government knowing precisely the natural rate of unemployment, and therefore when spending and taxing is needed to drain the excessive inflationary impact of creating money, MMT ignores ignorance on the part of politicians and government actors with no price incentive or competition to counterbalance political prejudice.

Instead of a serious theory about the role of money, the free market Adam Smith Institute stresses we should view increase support for Modern Monetary Theory as a sign of the growing tolerance for debt and deficits in political debate.

If there is no fiscal restraint for public spending, the report argues, opposition to huge public expenditure programs loses its legitimacy. Projects like the ‘Green New Deal’, ‘free’ university education, renationalisations, and massive increases in infrastructure spending can be launched with gusto.

There is no Magic Money Tree to be found in the annals of Modern Monetary Theory, the think tank argues, just a new justification for the same historic mistakes of printing money to finance government spending beyond its means.

Matthew Lesh, the ASI’s Head of Research said:

“MMT promises politicians almost limitless cash to spend on their pet projects. But if something sounds too good to be true it probably is. The state cannot print money without risking crippling inflation. More cash chasing the same amount of goods inevitably leads to sellers increasing their prices.

“When inflation spirals out of control it has disasterous consequences from the Weimar Republic to Zimbabwe to now Venezuela. MMT may just be wishful thinking today — the danger is that tomorrow a politician is stupid enough to follow its prescriptions.”

Professor Antony P. Mueller, the paper author, said:

“Old wine in new bottles is a recurring phenomenon in economics, particularly if it is the bad wine of economic ideas that failed in the past. Modern Monetary Theory (MMT) is neither modern nor a theory — it is the attempt to sell something as new which is spoiled and rotten. While promising to cure all kinds of economic woes, MMT is the poisonous elixir that will ruin those who take it as it has happened before.”

Read the full paper here.

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07904 099599.


Originally published at https://www.adamsmith.org on May 20, 2019.