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Paul Krugman and Modern Monetary Theory, yet again

August 15, 2011

It’s disappointing to see Paul Krugman continue in his refusal to honestly engage with MMT / Functional Finance.

But there’s a bigger issue here that Paul and some MMT’ers sometimes overlook. The reality of our political economy is that wealth is controlled by a fantastically small number of people. They control the means of production and they control the money supply (via the practice and ideology that society cannot spend unless it taxes or borrows from wealth). The MMT idea is fully correct, and obviously so, in my opinion – society doesn’t need to beg for funds from the wealthy in order to spend. But it’s correct in the same sense as saying that society doesn’t need to beg from the owners of the means of production in order to produce. Completely true, but for it to be true, capitalism will have been overthrown.

As long as we wish to continue in a system called capitalism, where only a few are in control of the prosperity of society, then those few must control both the means of production and the supply of money.  MMT is, when you get down to it, a back door attack on capitalism and it wouldn’t at all be surprising to see the owners fight against it, perhaps even leading to the hyperinflation that Krugman claims to fear.  Where Krugman misses the boat is in his implication that hyperinflation would arise from a calculus of neutral economic theory.  That’s an absurdity – MMT is completely right in claiming that no sound economic theory predicts hyper-inflation when society is producing below its potential. But the power element is missing not just in Krugman’s views but in the MMT’ers as well who seem sometimes to overlook the fact they’re attacking the very roots of power in today’s society.  That’s not necessarily wrong if the goal is to move economics to the left via academic scholarship but I can’t help but feel the lack of a deeper critique.

Nevertheless, in opposing MMT, Krugman is arguing in favor of oligarchy since there’s little alternative given the reality of modern capitalism. If our only option is to beg from the oligarchs, then we’re lost and we might as well be serfs. By defending the status quo in this most important area, Paul is aligning himself with a very long list of undistinguished apologists of an immoral socio-economic system. It’s what mainstream economists have done for almost two centuries now.

From → Wealth & Poverty

  1. Schofield permalink

    Excellent insight.

  2. Andrew permalink

    In the comments, Nick from Kyoto, after stating that Krugman has MMT wrong, added:

    MMT is a deeply flawed economic philosophy. It leads to debt traps, creeping socialism, lower productivity, and lower growth. Its basic assumptions are also unrealistic. (There are no “unconstrained nations”, for example.)

    What’s really funny about this is that we’re already doing MMT. As you point out, the real issue isn’t MMT, the issue is using the tools afforded one by a true fiat currency for the benefit of all. Nick, obviously, has a different perspective than you do about the value of redistribution. I’m not sure what he means by a “debt trap.” He is also wrong when he says that there are no unconstrained nations – you are always constrained by your real resources.

    As for your comment, it seems obvious to me that the excesses of the current system are unsustainable (and immoral). But it doesn’t seem obvious to me that certain aspects of the system aren’t valuable. Private property ownership can provide motivation and a sense of place. And as Lewis Lapham said recently:

    It is a country of expectant millionaires. You have the notions of risk, of labor put to a productive use, deferred pleasure — ideas that come out of our Puritan ancestry.

    This notion really is imbued in most Americans, and I don’t think it’s vanishing anytime soon. The question is how you can eliminate the worst of the excesses of the current system and at least attempt to provide opportunity for all. There are ways that don’t necessarily lead to that evil socialism thing. Still people will piss and moan if change occurs, especially those that currently control resources, technology and politics. People like to claim that change means the end of the world, and they are wrong.

  3. Tom Hickey permalink

    Good post.

    This is why we need to tax away economic rent. BTW, Michael Hudson, one of the chief proponents of taxing away economic rent is a profess at UMKC, which is the academic focal point of MMT in the US.

    UMKC profs Bill Black and Randy Wray, a developer of MMT, are on on the cutting edge of criticism of the financial sector fraud.

    MMT developer Bill Mitchell (Australia) is also personally pretty far to the left.

    MMT ally James K. Galbraith is also extremely vocal in his criticism of the system.

    MMT founder Warren Mosler has put forward many specific proposals for systemic reform.

    So I wouldn’t say that MMT is complacent about the existing institutional arrangements, but it is not revolutionary either. It shows a way for a mixed economy to function more effectively and efficiently in meeting public purpose and promoting national prosperity.

  4. Hi Andrew,

    I think if we look to history we would find that liberal (using the original meaning) ideas of individualism were the driver to which protestantism / puritanism adopted to well. It gave a moral polish to what otherwise would be seen as very un-Christianlike greed.

    I think your position sounds like one where a discussion could start. I’d think the important thing would be to identify what the worse excesses are and propose solutions to them. For starters, I’d think we should reject any system that permits billions to live in poverty and allows huge accumulations of economic power. Any attempt to address that, I’d think, would involve strong regulation over oligopoly, substantial high end taxation, and a great deal of public investment and redistribution. The key must be to break up concentrated economic power once and for all, otherwise it will just come back again, probably even stronger.

    I’m in favor of small businesses and I think we should do vastly more to help individuals survive. We know, though, that money is not a primary driver so I don’t think that large differences in income can be morally justified and are unnecessary economically.

    If us humans are going to survive, it surely isn’t going to be with the type of capitalism we have today. I think the reality is that if we aren’t pretty close to socialism in 100 years or less, we’ll be back to some form of feudalism / fascism. A capitalism where 500 companies control 40% of revenues cannot be sustainable.

  5. Hi Tom,

    I’m sure you know that any criticisms I make about MMT are completely friendly. MMT and Functional Finance are critical insights all progressives need to know. And, sadly, so few do. Many, even on the radical left, Doug Henwood, for example and the WSWS, reject its key ideas. The problem there, I think, is that MMT and fiat currency happened after Marx and much of the far left is cemented into a Marxian bible.

    I think we need more radical ideas than MMT and especially recognitions of the nature of economic power – but we certainly need MMT.


    PS – I’m wondering if Randy Wray or James Galbraith or Bill Mitchell or any of the other key MMT’ers ever tried to directly contact Krugman – propose a detailed conversation over a few brews perhaps.

  6. Tom Hickey permalink

    Hi Jim, just putting that up for the record.

    Many people are for a more radical solution but short of revolution that is unlikely to happen. Even radical reform is not politically practical in the US. What is possible is using the present system to best advantage by eliminating the corruption that has crept in and it now reflected in principal institutions, laws, and regulation. The tools are in place to do this, and it might be difficult but not infeasible.

    Yes, MMT economists have been in touch with PK, and I know that Warren has explained it to him personally.

  7. Andrew permalink


    My main point is that unless a revolution occurs (and a unique one at that), change will have to occur incrementally. What might that look like? I’ve proposed some things here before, but most importantly, these changes have to be achievable. I think that perhaps you don’t recognize how ingrained some of the capitalistic ideals are in people, and not just in those who benefit. Capitalism has been linked to morality in a very significant way.

    I just don’t think there’s much real interest in replacing “the system.” That doesn’t mean that the system can’t change. Progressive taxation could help. Universal government-funded healthcare and education (into college) would help. A reduced work-week would help. These are things that people might think worth trying.

    MMT, to me, is not a solution. I suppose its acceptance eliminates the deficit as a point of debate with regard to policy, but really, it just creates a shift. Instead of arguing about deficits, you start arguing about inflation, which doesn’t seem like much of an improvement to me.

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