Modern Money Theory: A Response to Critics

12 Pages Posted: 21 Feb 2012

See all articles by Scott T. Fullwiler

Scott T. Fullwiler

Wartburg College; Bard College - The Levy Economics Institute

Stephanie Bell

University of Missouri at Kansas City - Economics

L. Randall Wray

University of Missouri at Kansas City; Bard College - The Levy Economics Institute

Date Written: January 15, 2012

Abstract

Over the past two decades a group of us has developed an alternative approach to monetary theory that integrates the insights of Knapp’s (1924) state money approach (also called chartalist and adopted by Keynes (1930, 1914)), the credit money view of Innes (1913, 1914), Lerner’s (1943, 1947) functional finance approach, Minsky’s (1986) views of banking, and Godley’s (1996) sectoral balance approach. In addition, most of us have used our understanding of the operation of the monetary system to propose an employer of last resort or job guarantee program to provide an anchor to the value of the currency. The approach has come to be known as modern money theory (MMT) and has been widely debated and adopted, especially on the blogosphere. Prominent economists such as Paul Krugman and Brad Delong have taken notice and deemed it to be a theory of note, even if they do not accept all of it. Further, developers of MMT have been credited with foreseeing the global financial collapse as well as the troubles with the Euro as early as the 1990s (Wray 1998, Bell 2003).

Still, MMT has always had its critics. Somewhat surprisingly to us, some of the most vocal critics have been heterodox economists, particularly the Post Keynesians. We see nothing in the MMT approach that should be difficult for PKs to accept. Yet, in recent weeks both Marc Lavoie and Bret Fiebiger have provided critiques. It looks to us as if they have not understood our arguments. Instead of providing a point-by-point response to either of their papers, we think it will be more useful to briefly lay-out our main argument in a way that should be accessible to PKs.

We have been given only 4000 words for this task, hence, we can only hit the main points. More specifically, this response will in turn discuss the role of endogenous money and the circuit for MMT, the MMT understanding of government debt operations, and the links between the MMT approach and heterodoxy in general.

Keywords: Modern Monetary Theory, MMT, Chartalism, central bank operations, treasury operations, fiscal policy, monetary policy

JEL Classification: E4, E5, E6, H3

Suggested Citation

Fullwiler, Scott T. and Bell, Stephanie A. and Wray, L. Randall, Modern Money Theory: A Response to Critics (January 15, 2012). Available at SSRN: https://ssrn.com/abstract=2008542 or http://dx.doi.org/10.2139/ssrn.2008542

Scott T. Fullwiler (Contact Author)

Wartburg College ( email )

222 Ninth St. NW
Waverly, IA 50677
United States

Bard College - The Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States

Stephanie A. Bell

University of Missouri at Kansas City - Economics ( email )

L. Randall Wray

University of Missouri at Kansas City ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

Bard College - The Levy Economics Institute

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States

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