Heterodox
138-461: Modern monetary theory or modern money theory ( MMT ) is a heterodox macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. According to MMT, governments do not need to worry about accumulating debt since they can pay interest by printing money . MMT argues that
276-431: A "buffer stock" of labor that can readily switch to the private sector when jobs become available. A job guarantee program could also be considered an automatic stabilizer to the economy, expanding when private sector activity cools down and shrinking in size when private sector activity heats up. MMT economists also say quantitative easing (QE) is unlikely to have the effects that its advocates hope for. Under MMT, QE –
414-454: A "hierarchy of money". MMT proponents such as Warren Mosler say that trade deficits are sustainable and beneficial to the standard of living in the short term. Imports are an economic benefit to the importing nation because they provide the nation with real goods. Exports, however, are an economic cost to the exporting nation because it is losing real goods that it could have consumed. Currency transferred to foreign ownership, however, represents
552-516: A Creature of the State", economists had largely abandoned the idea that the value of money was closely linked to gold. Lerner said that responsibility for avoiding inflation and depressions lay with the state because of its ability to create or tax away money. Hyman Minsky seemed to favor a chartalist approach to understanding money creation in his Stabilizing an Unstable Economy , while Basil Moore , in his book Horizontalists and Verticalists , lists
690-578: A clerk in the India Office . He enjoyed his work at first, but by 1908 had become bored and resigned his position to return to Cambridge and work on probability theory , through a lectureship in economics at first funded personally by economists Alfred Marshall and Arthur Pigou ; he became a fellow of King's College in 1909. By 1909 Keynes had also published his first professional economics article in The Economic Journal , about
828-413: A consequence, some heterodox economists, such as John B. Davis, proposed that the definition of heterodox economics has to be adapted to this new, more complex reality: Heterodox economics is not a school of thought in its own right, but rather an umbrella term for a set of various, diverse schools of economic thought. Despite their diversity, heterodox schools often consider neoclassical economics to be
966-518: A consultant. Keynes had completed his A Treatise on Probability before the war but published it in 1921. The work was a notable contribution to the philosophical and mathematical underpinnings of probability theory , championing the important view that probabilities were no more or less than truth values intermediate between simple truth and falsity. Keynes developed the first upper-lower probabilistic interval approach to probability in chapters 15 and 17 of this book, as well as having developed
1104-473: A discount rate charged to banks for borrowing reserves directly from the central bank, and an Overnight Reverse Repurchase (ON RRP) facility rate paid to banks for temporarily forgoing reserves in exchange for Treasury securities. The latter facility is a type of open market operation to help ensure interest rates remain at a target level. According to MMT, the issuing of government bonds is best understood as an operation to offset government spending rather than
1242-502: A flawed or invalid approach to understanding economics. The reasons behind this rejection may vary. Some of the elements commonly found in heterodox critiques are listed below. One of the most broadly accepted principles of neoclassical economics is the assumption of the "rationality of economic agents". Indeed, for a number of economists, the notion of rational maximizing behavior is taken to be synonymous with economic behavior (Hirshleifer 1984). When some economists' studies do not embrace
1380-424: A future claim over goods of that nation. Cheap imports may also cause the failure of local firms providing similar goods at higher prices, and hence unemployment, but MMT proponents label that consideration as a subjective value-based one, rather than an economic-based one: It is up to a nation to decide whether it values the benefit of cheaper imports more than it values employment in a particular industry. Similarly
1518-526: A generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable, – abhorrent and detestable, even if it was possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe. Also present was striking imagery such as "year by year Germany must be kept impoverished and her children starved and crippled" along with bold predictions which were later justified by events: If we aim deliberately at
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#17327833491581656-463: A graduate student for one term, which constituted his only formal education in the subject. He took civil service exams in 1906. The economist Harry Johnson wrote that the optimism imparted by Keynes's early life is a key to understanding his later thinking. Keynes was always confident he could find a solution to whatever problem he turned his attention to and retained a lasting faith in the ability of government officials to do good. Keynes's optimism
1794-520: A level where employers could profitably offer them jobs. An innovation from Keynes was the concept of price stickiness – the recognition that in reality workers often refuse to lower their wage demands even in cases where a classical economist might argue that it is rational for them to do so. Due in part to price stickiness, it was established that the interaction of " aggregate demand " and " aggregate supply " may lead to stable unemployment equilibria – and in those cases, it
1932-548: A major topic of debate after U.S. Representative Alexandria Ocasio-Cortez said in January that the theory should be a larger part of the conversation. In February 2019, Macroeconomics became the first academic textbook based on the theory, published by Bill Mitchell, Randall Wray, and Martin Watts. MMT became increasingly used by chief economists and Wall Street executives for economic forecasts and investment strategies. The theory
2070-537: A man of science I have ever read". Mary Paley Marshall was "entranced" by the memorial, while Lytton Strachey rated it as one of Keynes's "best works". In 1922 Keynes continued to advocate reduction of German reparations with A Revision of the Treaty . He attacked the post-World War I deflation policies with A Tract on Monetary Reform in 1923 – a trenchant argument that countries should target stability of domestic prices, avoiding deflation even at
2208-497: A middle course between deflation and inflation. This novel interpretation was inspired by the desperate search for control over the economy which permeated the academic world after the Depression. The General Theory challenged the earlier neoclassical economic paradigm, which had held that provided it was unfettered by government interference, the market would naturally establish full employment equilibrium. In doing so Keynes
2346-410: A nation overly dependent on imports may face a supply shock if the exchange rate drops significantly, though central banks can and do trade on foreign exchange markets to avoid shocks to the exchange rate. MMT says that as long as demand exists for the issuer's currency, whether the bond holder is foreign or not, governments can never be insolvent when the debt obligations are in their own currency; this
2484-626: A net basis, Germany received support equal to four times the amount of the post-Second World War Marshall Plan . Schuker also shows that, in the years after Versailles, Keynes became an informal reparations adviser to the German government, wrote one of the major German reparation notes, and supported hyperinflation on political grounds. Nevertheless, The Economic Consequences of the Peace gained Keynes international fame, even though it also caused him to be regarded as anti-establishment – it
2622-399: A practical limitation on lending, the cost of borrowing funds from the interbank market (or the central bank) represents a profitability consideration when the private bank lends in excess of its reserve or capital requirements (see interaction between government and the banking sector ). Effects on employment are used as evidence that a currency monopolist is overly restricting the supply of
2760-420: A profit. Another key theme of the book is the unreliability of financial indices for representing an accurate – or indeed meaningful – indication of general shifts in purchasing power of currencies over time. In particular, he criticised the justification of Britain's return to the gold standard in 1925 at pre-war valuation by reference to the wholesale price index . He argued that
2898-405: A recession Say's Law suggests government intervention. This government intervention can be used to prevent any further increase in savings in the form of a decreased interest rate. Decreasing the interest rate will encourage people to start spending and investing again, or so it is stated by Say's Law. The reason behind this is that when there is little investing, savings start to accumulate and reach
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#17327833491583036-559: A repertories of many ready made rules, one of which they chose according to relevant situation. In microeconomic theory, cost-minimization by consumers and by firms implies the existence of supply and demand correspondences for which market clearing equilibrium prices exist, if there are large numbers of consumers and producers. Under convexity assumptions or under some marginal-cost pricing rules, each equilibrium will be Pareto efficient : In large economies, non-convexity also leads to quasi-equilibria that are nearly efficient. However,
3174-463: A requirement to finance it. In most countries, commercial banks' reserve accounts with the central bank must have a positive balance at the end of every day; in some countries, the amount is specifically set as a proportion of the liabilities a bank has, i.e., its customer deposits. This is known as a reserve requirement . At the end of every day, a commercial bank will have to examine the status of their reserve accounts. Those that are in deficit have
3312-456: A reserve shortage on the interbank lending market . The surplus banks will want to earn a higher rate than the support rate that the central bank pays on reserves; whereas the deficit banks will want to pay a lower interest rate than the discount rate the central bank charges for borrowing. Thus, they will lend to each other until each bank has reached their reserve requirement. In a balanced system, where there are just enough total reserves for all
3450-487: A review of post-Keynesian economics, see Lavoie (1992); Rochon (1999)). David Colander , an advocate of complexity economics , argues that the ideas of heterodox economists are now being discussed in the mainstream without mention of the heterodox economists, because the tools to analyze institutions, uncertainty, and other factors have now been developed by the mainstream. He suggests that heterodox economists should embrace rigorous mathematics and attempt to work from within
3588-487: A slump as the present one, so great as to bring production altogether to a standstill." At the height of the Great Depression, in 1933, Keynes published The Means to Prosperity , which contained specific policy recommendations for tackling unemployment in a global recession, chiefly counter-cyclical public spending. The Means to Prosperity contains one of the first mentions of the multiplier effect . While it
3726-426: A society, is defined by the sum of consumption and investment. In a state of unemployment and unused production capacity, one can enhance employment and total income only by first increasing expenditures for either consumption or investment. Without government intervention to increase expenditure, an economy can remain trapped in a low-employment equilibrium. The demonstration of this possibility has been described as
3864-411: A stopping point in the flow of money. During the normal economic activity, it would be justified to have savings because they can be given out as loans but in this case, there is little demand for them, so they are doing no good for the economy. The supply of savings then exceeds the demand for loans and the result is lower prices or lower interest rates. Thus, the idea is that the money that was once saved
4002-402: A transaction between a government entity ( public sector ) and a non-government entity (private sector) as a "vertical transaction". The government sector includes the treasury and central bank . The non-government sector includes domestic and foreign private individuals and firms (including the private banking system) and foreign buyers and sellers of the currency. MMT is based on an account of
4140-464: Is a creature of law", rather than a commodity . Knapp contrasted his state theory of money with the Gold Standard view of " metallism ", where the value of a unit of currency depends on the quantity of precious metal it contains or for which it may be exchanged. He said that the state can create pure paper money and make it exchangeable by recognizing it as legal tender , with the criterion for
4278-450: Is also possible that the notion of pleasure seeking is itself a meaningless assumption because it is either impossible to test or too general to refute. Economic theories that reject the basic assumption of economic decisions as the outcome of pleasure maximization are heterodox. Shiozawa emphasizes that economic agents act in a complex world and therefore impossible for them to attain maximal utility point. They instead behave as if there are
Modern monetary theory - Misplaced Pages Continue
4416-572: Is also strongly opposed by members of the Austrian school of economics , with Murray Rothbard stating that MMT practices are equivalent to "counterfeiting" and that government control of the money supply will inevitably lead to hyperinflation . MMT's main tenets are that a government that issues its own fiat money : The first four MMT tenets do not conflict with mainstream economics understanding of how money creation and inflation works. However, MMT economists disagree with mainstream economics about
4554-408: Is because the government is not constrained in creating its own fiat currency (although the bond holder may affect the exchange rate by converting to local currency). MMT does agree with mainstream economics that debt in a foreign currency is a fiscal risk to governments, because the indebted government cannot create foreign currency. In this case, the only way the government can repay its foreign debt
4692-555: Is creating a new generation of scholarship in which novel combinations of heterodox ideas are being brought to bear on important contemporary and historical problems, such as socially grounded reconstructions of the individual in economic theory; the goals and tools of economic measurement and professional ethics; the complexities of policymaking in today's global political economy; and innovative connections among formerly separate theoretical traditions (Marxian, Austrian, feminist, ecological, Sraffian, institutionalist, and post-Keynesian) (for
4830-476: Is known as the "father of macroeconomics". During the Great Depression of the 1930s, Keynes spearheaded a revolution in economic thinking , challenging the ideas of neoclassical economics that held that free markets would, in the short to medium term, automatically provide full employment, as long as workers were flexible in their wage demands. He argued that aggregate demand (total spending in
4968-521: Is no absolute definition of what constitutes heterodox economic thought, as it is defined in constrast to the most prominent, influential or popular schools of thought in a given time and place. Groups typically classed as heterodox in current discourse include the Austrian , ecological , Marxist - historical , post-autistic , and modern monetary approaches. Four frames of analysis have been highlighted for their importance to heterodox thought: history, natural systems, uncertainty, and power. In
5106-473: Is now re-invested or spent, assuming lower interest rates appeal to consumers. To Keynes, however, this was not always the case, and it couldn't be assumed that lower interest rates would automatically encourage investment and spending again since there is no proven link between the two. The General Theory argues that demand, not supply, is the key variable governing the overall level of economic activity. Aggregate demand, which equals total un-hoarded income in
5244-407: Is on the state, not the market, that economies must depend for their salvation. In contrast, Keynes argued that demand is what creates supply and not the other way around. He questioned Say's Law by asking what would happen if the money that is being given to individuals is not finding its way back into the economy and is saved instead. He suggested the result would be a recession. To tackle the fear of
5382-503: Is possible to accept the notion that humans are pleasure seeking machines, yet reject the idea that economic decisions are governed by such pleasure seeking. Human beings may, for example, be unable to make choices consistent with pleasure maximization due to social constraints and/or coercion. Humans may also be unable to correctly assess the choice points that are most likely to lead to maximum pleasure, even if they are unconstrained (except in budgetary terms) in making such choices. And it
5520-592: Is precisely with these plants and these men that we shall afford them." The General Theory is often viewed as the foundation of modern macroeconomics . Few senior American economists agreed with Keynes through most of the 1930s. Yet his ideas were soon to achieve widespread acceptance, with eminent American professors such as Alvin Hansen agreeing with the General Theory before the outbreak of World War II. Keynes himself had only limited participation in
5658-438: Is to ensure that its currency is continually in high demand by foreigners over the period that it wishes to repay its debt; an exchange rate collapse would potentially multiply the debt many times over asymptotically, making it impossible to repay. In that case, the government can default, or attempt to shift to an export-led strategy or raise interest rates to attract foreign investment in the currency. Either one negatively affects
Modern monetary theory - Misplaced Pages Continue
5796-418: Is where the government receives more taxes on a particular day than it spends. Then there may be a system-wide deficit of reserves. Consequently, surplus funds will be in demand on the interbank market, and thus the short-term interest rate will rise towards the discount rate. Thus, if the central bank wants to maintain a target interest rate somewhere between the support rate and the discount rate, it must manage
5934-540: The American School dissenters from neoclassical methodology such as the historical school , and advocates of unorthodox monetary theories such as social credit . Physical scientists and biologists were the first individuals to use energy flows to explain social and economic development. Joseph Henry , an American physicist and first secretary of the Smithsonian Institution, remarked that
6072-558: The Sri Lankan economic crisis . MMT scholars Stephanie Kelton and Fadhel Kaboub maintain that the Sri Lankan government's fiscal and monetary policy bore little resemblance to the recommendations of MMT economists. In sovereign financial systems, banks can create money, but these "horizontal" transactions do not increase net financial assets because assets are offset by liabilities. According to MMT advocates, "The balance sheet of
6210-459: The Treasury . Among his responsibilities were the design of terms of credit between Britain and its continental allies during the war and the acquisition of scarce currencies. According to economist Robert Lekachman , Keynes's "nerve and mastery became legendary" because of his performance of these duties, as in the case where he managed to assemble a supply of Spanish pesetas . The secretary of
6348-557: The homo economicus model of human behavior used in the standard neoclassical model. A typical version of the critique is that of Satya Gabriel: Neoclassical economic theory is grounded in a particular conception of human psychology, agency or decision-making. It is assumed that all human beings make economic decisions so as to maximize pleasure or utility. Some heterodox theories reject this basic assumption of neoclassical theory, arguing for alternative understandings of how economic decisions are made and/or how human psychology works. It
6486-557: The "astronomically" high war compensation they wanted to demand from Germany. Keynes was forced to try to exert influence mostly from behind the scenes. The three principal players at the Paris conferences were Britain's Lloyd George, France's Georges Clemenceau and America's President Woodrow Wilson . It was only Lloyd George to whom Keynes had much direct access; until the 1918 election he had some sympathy with Keynes's view but while campaigning had found his speeches were well received by
6624-442: The "fundamental principle of political economy is that the physical labor of man can only be ameliorated by… the transformation of matter from a crude state to an artificial condition...by expending what is called power or energy." The rise, and absorption into the mainstream of Keynesian economics , which appeared to provide a more coherent policy response to unemployment than unorthodox monetary or trade policies, contributed to
6762-485: The "operational realities" of interactions between the government and its central bank, and the commercial banking sector, with proponents like Scott Fullwiler arguing that understanding reserve accounting is critical to understanding monetary policy options. A sovereign government typically has an operating account with the country's central bank. From this account, the government can spend and also receive taxes and other inflows. Each commercial bank also has an account with
6900-460: The 1920s. The work, Treatise on Money , was published in 1930 in two volumes. A central idea of the work was that if the amount of money being saved exceeds the amount being invested – which can happen if interest rates are too high – then unemployment will rise. This is in part a result of people not wanting to spend too high a proportion of what employers pay out, making it difficult, in aggregate, for employers to make
7038-424: The 1929 crisis, Keynes also turned away from a fundamental pillar of neoclassical economics: free trade . He criticized Ricardian comparative advantage theory (the foundation of free trade), considering the theory's initial assumptions unrealistic, and became definitively protectionist. He detailed these ideas in his magnum opus, The General Theory of Employment, Interest and Money , published in early 1936. By
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#17327833491587176-438: The 1933 London Economic Conference opinions remained too diverse for a unified course of action to be agreed upon. Keynesian-like policies were adopted by Sweden and Germany, but Sweden was seen as too small to command much attention, and Keynes was deliberately silent about the successful efforts of Germany as he was dismayed by its imperialist ambitions and its treatment of Jews. Apart from Great Britain, Keynes's attention
7314-489: The 1970s, partly as a result of the stagflation that plagued the British and American economies during that decade, and partly because of criticism of Keynesian policies by Milton Friedman and other monetarists , who disputed the ability of government to favourably regulate the business cycle with fiscal policy . The 2007–2008 financial crisis sparked the 2008–2009 Keynesian resurgence . Keynesian economics provided
7452-532: The Belgian Order of Leopold . Keynes's experience at Versailles was influential in shaping his future outlook, yet it was not a successful one. Keynes's main interest had been in trying to prevent Germany's compensation payments being set so high it would traumatise innocent German people, damage the nation's ability to pay and sharply limit its ability to buy exports from other countries – thus hurting not just Germany's economy but that of
7590-486: The British, while on security grounds, France argued for an even more severe settlement than Britain. Wilson initially favoured relatively lenient treatment of Germany – he feared too harsh conditions could foment the rise of extremism and wanted Germany to be left sufficient capital to pay for imports. To Keynes's dismay, Lloyd George and Clemenceau were able to pressure Wilson to agree to include pensions in
7728-540: The Great Depression of the 1930s, that capitalism caused war. He argued that if capitalism were managed domestically and internationally (with coordinated international Keynesian policies, an international monetary system that did not pit the interests of countries against one another, and a high degree of freedom of trade), then this system of managed capitalism could promote peace rather than conflict between countries. His plans during World War II for post-war international economic institutions and policies (which contributed to
7866-661: The Marxist and institutionalist schools remained active but with limited acceptance or credibility. Up to 1980 the most notable themes of heterodox economics in its various forms included: From approximately 1980 mainstream economics has been significantly influenced by a number of new research programs, including behavioral economics , complexity economics , evolutionary economics , experimental economics , and neuroeconomics . One key development has been an epistemic turn away from theory towards an empirically driven approach focused centrally on questions of causal inference . As
8004-467: The Peace , published in 1919. This work has been described as Keynes's best book, where he was able to bring all his gifts to bear – his passion as well as his skill as an economist. In addition to economic analysis, the book contained appeals to the reader's sense of compassion : I cannot leave this subject as though its just treatment wholly depended either on our pledges or on economic facts. The policy of reducing Germany to servitude for
8142-541: The Treasury was delighted to hear Keynes had amassed enough to provide a temporary solution for the British Government. But Keynes did not hand the pesetas over, choosing instead to sell them all to break the market: his boldness paid off, as pesetas then became much less scarce and expensive. On the introduction of military conscription in 1916, he applied for exemption as a conscientious objector , which
8280-473: The age of five and a half, Keynes started at the kindergarten of the Perse School for Girls for five mornings a week. He quickly showed a talent for arithmetic, but his health was poor leading to several long absences. He was tutored at home by a governess, Beatrice Mackintosh, and his mother. In January 1892, at eight and a half, he started as a day pupil at St Faith's preparatory school. By 1894, Keynes
8418-620: The approaches of Paul Samuelson and Hal Varian . On the other hand, heterodox economics may be labeled as falling into the nexus of institutions, history, and social structure. Over the past two decades, the intellectual agendas of heterodox economists have taken a decidedly pluralist turn. Leading heterodox thinkers have moved beyond the established paradigms of Austrian, Feminist, Institutional-Evolutionary, Marxian, Post Keynesian, Radical, Social, and Sraffian economics—opening up new lines of analysis, criticism, and dialogue among dissenting schools of thought. This cross-fertilization of ideas
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#17327833491588556-427: The banking system (see vertical transactions ). This action typically leads to a system-wide surplus of reserves, with competition between banks seeking to lend their excess reserves, forcing the short-term interest rate down to the support rate (or to zero if a support rate is not in place). At this point, banks will simply keep their reserve surplus with their central bank and earn the support rate. The alternate case
8694-450: The banks to meet requirements, the short-term interbank lending rate will be in between the support rate and the discount rate. Under an MMT framework where government spending injects new reserves into the commercial banking system, and taxes withdraw them from the banking system, government activity would have an instant effect on interbank lending. If on a particular day, the government spends more than it taxes, reserves have been added to
8832-418: The central bank, by means of which it manages its reserves (that is, money for clearing and settling interbank transactions). When a government spends money, its central bank debits its Treasury's operating account and credits the reserve accounts of the commercial banks. The commercial bank of the final recipient will then credit up this recipient's deposit account by issuing bank money. This spending increases
8970-421: The circumstances of its publication were such that his suggestions shaped the course of the 1930s. In addition, Keynes introduced the world to a new interpretation of taxation: since the legal tender is now defined by the state, inflation becomes "taxation by currency depreciation". This hidden tax meant a) that the standard of value should be governed by deliberate decision; and (b) that it was possible to maintain
9108-531: The collapse of the Weimar Republic and the outbreak of the Second World War. However, historian Ruth Henig claims that "most historians of the Paris peace conference now take the view that, in economic terms, the treaty was not unduly harsh on Germany and that, while obligations and damages were inevitably much stressed in the debates at Paris to satisfy electors reading the daily newspapers,
9246-416: The concept of market equilibrium has been criticized by Austrians, post-Keynesians and others, who object to applications of microeconomic theory to real-world markets, when such markets are not usefully approximated by microeconomic models. Heterodox economists assert that micro-economic models rarely capture reality. Mainstream microeconomics may be defined in terms of optimization and equilibrium, following
9384-516: The conference was a treaty which disgusted Keynes both on moral and economic grounds and led to his resignation from the Treasury. In June 1919 he turned down an offer to become chairman of the British Bank of Northern Commerce , a job that promised a salary of £2,000 in return for a morning per week of work. Keynes's analysis on the predicted damaging effects of the treaty appeared in the highly influential book, The Economic Consequences of
9522-445: The correct amount of reserves in the system. MMT economists describe any transactions within the private sector as "horizontal" transactions, including the expansion of the broad money supply through the extension of credit by banks . MMT economists regard the concept of the money multiplier , where a bank is completely constrained in lending through the deposits it holds and its capital requirement, as misleading. Rather than being
9660-510: The cost of European reconstruction on the United States. Lloyd George agreed it might be acceptable to the British electorate. However, America was against the plan; the US was then the largest creditor, and by this time Wilson had started to believe in the merits of a harsh peace and thought that his country had already made excessive sacrifices. Hence despite his best efforts, the result of
9798-527: The cost of allowing their currency to depreciate. Britain suffered from high unemployment through most of the 1920s, leading Keynes to recommend the depreciation of sterling to boost jobs by making British exports more affordable. From 1924 he was also advocating a fiscal response, where the government could create jobs by spending on public works. During the 1920s Keynes's pro-stimulus views had only limited effect on policymakers and mainstream academic opinion – according to Hyman Minsky one reason
9936-808: The creation at Bretton Woods of the International Monetary Fund and the World Bank , and later to the creation of the General Agreement on Tariffs and Trade and eventually the World Trade Organization ) were aimed to give effect to this vision. Although Keynes has been widely criticised – especially by members of the Chicago school of economics – for advocating irresponsible government spending financed by borrowing, in fact he
10074-412: The debt ... The redemption of government debt by taxation is the basic law of coinage and of any issue of government 'money' in whatever form. Knapp and "chartalism" are referenced by John Maynard Keynes in the opening pages of his 1930 Treatise on Money and appear to have influenced Keynesian ideas on the role of the state in the economy. By 1947, when Abba Lerner wrote his article "Money as
10212-545: The decline of interest in these schools. After 1945, the neoclassical synthesis of Keynesian and neoclassical economics resulted in a clearly defined mainstream position based on a division of the field into microeconomics (generally neoclassical but with a newly developed theory of market failure ) and macroeconomics (divided between Keynesian and monetarist views on such issues as the role of monetary policy). Austrians and post-Keynesians who dissented from this synthesis emerged as clearly defined heterodox schools. In addition,
10350-502: The differences between bank money and state money. In 1996, Wynne Godley wrote an article on his sectoral balances approach, which MMT draws from. Economists Warren Mosler , L. Randall Wray , Stephanie Kelton , Bill Mitchell and Pavlina R. Tcherneva are largely responsible for reviving the idea of chartalism as an explanation of money creation ; Wray refers to this revived formulation as neo-chartalism . Rodger Malcolm Mitchell's book Free Money (1996) describes in layman's terms
10488-434: The earlier writings of many classical economists, including Adam Smith , Jean-Baptiste Say , J. S. Mill , Karl Marx , and William Stanley Jevons . Alfred Mitchell-Innes wrote in 1914 that money exists not as a medium of exchange but as a standard of deferred payment , with government money being debt the government may reclaim through taxation. Innes said: Whenever a tax is imposed, each taxpayer becomes responsible for
10626-416: The economy) determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment, and since wages and labour costs are rigid downwards the economy will not automatically rebound to full employment. Keynes advocated the use of fiscal and monetary policies to mitigate the adverse effects of economic recessions and depressions . After
10764-417: The economy, as by government deficit spending or bank lending, rather than from outside, perhaps with gold. In the complementary view, MMT explains the "vertical" (government-to-private and vice versa) interactions, while circuit theory is a model of the "horizontal" (private-to-private) interactions. By 2013, MMT had attracted a popular following through academic blogs and other websites. In 2019, MMT became
10902-439: The economy, whether households, firms, or public, could cause inflationary pressures. MMT economists advocate a government-funded job guarantee scheme to eliminate involuntary unemployment . Proponents say that this activity can be consistent with price stability because it targets unemployment directly rather than attempting to increase private sector job creation indirectly through a much larger economic stimulus, and maintains
11040-572: The economy. Economist Stephanie Kelton explained several points made by MMT in March 2019: Economist John T. Harvey explained several of the premises of MMT and their policy implications in March 2019: MMT says that "borrowing" is a misnomer when applied to a sovereign government's fiscal operations, because the government is merely accepting its own IOUs , and nobody can borrow back their own debt instruments. Sovereign government goes into debt by issuing its own liabilities that are financial wealth to
11178-734: The effect of a recent global economic downturn on India. He founded the Political Economy Club , a weekly discussion group. Keynes's earnings rose further as he began to take on pupils for private tuition. In 1911 Keynes was made the editor of The Economic Journal . By 1913 he had published his first book, Indian Currency and Finance . He was then appointed to the Royal Commission on Indian Currency and Finance – the same topic as his book – where Keynes showed considerable talent at applying economic theory to practical problems. His written work
11316-625: The essence of chartalism. Pavlina R. Tcherneva has developed the first mathematical framework for MMT and has largely focused on developing the idea of the job guarantee . Bill Mitchell, professor of economics and Director of the Centre of Full Employment and Equity ( CoFEE ) at the University of Newcastle in Australia, coined the term ' modern monetary theory '. In their 2008 book Full Employment Abandoned , Mitchell and Joan Muysken use
11454-471: The ethical system of G. E. Moore . Keynes was elected to the University Pitt Club and was an active member of the semi-secretive Cambridge Apostles society, a debating club largely reserved for the brightest students. Like many members, Keynes retained a bond to the club after graduating and continued to attend occasional meetings throughout his life. Before leaving Cambridge, Keynes became
11592-430: The fifth tenet: the impact of government deficits on interest rates. MMT synthesizes ideas from the state theory of money of Georg Friedrich Knapp (also known as chartalism ) and the credit theory of money of Alfred Mitchell-Innes , the functional finance proposals of Abba Lerner , Hyman Minsky 's views on the banking system and Wynne Godley 's sectoral balances approach. Knapp wrote in 1905 that "money
11730-522: The financial assets needed to pay taxes and satisfy savings desires. According to MMT, bank credit should be regarded as a "leverage" of the monetary base and should not be regarded as increasing the net financial assets held by an economy: only the government or central bank is able to issue high-powered money with no corresponding liability. Stephanie Kelton said that bank money is generally accepted in settlement of debt and taxes because of state guarantees, but that state-issued high-powered money sits atop
11868-454: The first decision weight approach with his conventional coefficient of risk and weight, c , in chapter 26. In addition to his academic work, the 1920s saw Keynes active as a journalist selling his work internationally and working in London as a financial consultant. In 1924 Keynes wrote an obituary for his former tutor Alfred Marshall which Joseph Schumpeter called "the most brilliant life of
12006-414: The form of a private tax obligation. In addition, fines, fees, and licenses create demand for the currency. This currency can be issued by the domestic government or by using a foreign, accepted currency. An ongoing tax obligation, in concert with private confidence and acceptance of the currency, underpins the value of the currency. Because the government can issue its own currency at will, MMT maintains that
12144-447: The gold standard and in 1925 they were able to convince the then Chancellor Winston Churchill to re-establish it, which had a depressing effect on British industry. Keynes responded by writing The Economic Consequences of Mr. Churchill and continued to argue against the gold standard until Britain finally abandoned it in 1931. Keynes had begun a theoretical work to examine the relationship between unemployment, money and prices back in
12282-473: The government does not include any domestic monetary instrument on its asset side; it owns no money. All monetary instruments issued by the government are on its liability side and are created and destroyed with spending and taxing or bond offerings." In MMT, "vertical money" enters circulation through government spending . Taxation and its legal tender enable power to discharge debt and establish fiat money as currency, giving it value by creating demand for it in
12420-407: The government), rather than deficit spending , to avoid inflation. Compulsory saving would act to dampen domestic demand, assist in channelling additional output towards the war efforts, would be fairer than punitive taxation and would have the advantage of helping to avoid a post-war slump by boosting demand once workers were allowed to withdraw their savings. In September 1941 he was proposed to fill
12558-431: The impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing. Keynes's followers assert that his predictions of disaster were borne out when the German economy suffered the hyperinflation of 1923 , and again by
12696-451: The index understated the effects of changes in the costs of services and labour. Keynes was deeply critical of the British government's austerity measures during the Great Depression . He believed that budget deficits during recessions were a good thing and a natural product of an economic slump. He wrote, "For Government borrowing of one kind or another is nature's remedy, so to speak, for preventing business losses from being, in so severe
12834-518: The intention was quietly to give Germany substantial help towards paying her bills, and to meet many of the German objections by amendments to the way the reparations schedule was in practice carried out". Only a small fraction of reparations was ever paid. In fact, historian Stephen A. Schuker demonstrates in American 'Reparations' to Germany, 1919–33 , that the capital inflow from American loans substantially exceeded German out payments so that, on
12972-526: The late 1930s, leading Western economies had begun adopting Keynes's policy recommendations. Almost all capitalist governments had done so by the end of the two decades following Keynes's death in 1946. As a leader of the British delegation, Keynes participated in the design of the international economic institutions established after the end of World War II but was overruled by the American delegation on several aspects. Keynes's influence started to wane in
13110-407: The level of taxation relative to government spending (the government's deficit spending or budget surplus ) is in reality a policy tool that regulates inflation and unemployment , and not a means of funding the government's activities by itself. The approach of MMT typically reverses theories of governmental austerity . The policy implications of the two are likewise typically opposed. MMT labels
13248-401: The liquidity in the system to ensure that the correct amount of reserves is on-hand in the banking system. Central banks manage liquidity by buying and selling government bonds on the open market. When excess reserves are in the banking system, the central bank sells bonds, removing reserves from the banking system, because private individuals pay for the bonds. When insufficient reserves are in
13386-401: The mainstream, rather than treating it as an enemy. Some schools of heterodox economic thought have also taken a transdisciplinary approach. Thermoeconomics is based on the claim that human economic processes are governed by the second law of thermodynamics . The posited relationship between economic theory, energy and entropy , has been extended further by systems scientists to explain
13524-441: The mid-19th century, such thinkers as Auguste Comte , Thomas Carlyle , John Ruskin and Karl Marx made early critiques of orthodox economy. A number of heterodox schools of economic thought challenged the dominance of neoclassical economics after the neoclassical revolution of the 1870s. In addition to socialist critics of capitalism, heterodox schools in this period included advocates of various forms of mercantilism , such as
13662-439: The money of a state being "that which is accepted at the public pay offices". The prevailing view of money was that it had evolved from systems of barter to become a medium of exchange because it represented a durable commodity which had some use value , but proponents of MMT such as Randall Wray and Mathew Forstater said that more general statements appearing to support a chartalist view of tax-driven paper money appear in
13800-548: The option of borrowing the required funds from the Central Bank, where they may be charged a lending rate (sometimes known as a discount window or discount rate ) on the amount they borrow. On the other hand, the banks that have excess reserves can simply leave them with the central bank and earn a support rate from the central bank. Some countries, such as Japan , have a support rate of zero. Banks with more reserves than they need will be willing to lend to banks with
13938-502: The president of the Cambridge Union Society and Cambridge University Liberal Club . He was said to be an atheist. In May 1904, he received a first-class BA in mathematics. Aside from a few months spent on holidays with family and friends, Keynes continued to involve himself with the university over the next two years. He took part in debates, further studied philosophy and attended economics lectures informally as
14076-405: The primary risk once the economy reaches full employment is inflation , which acts as the only constraint on spending. MMT also argues that inflation can be controlled by increasing taxes on everyone, to reduce the spending capacity of the private sector . MMT is opposed to the mainstream understanding of macroeconomic theory and has been criticized heavily by many mainstream economists. MMT
14214-429: The private sector. "Private debt is debt, but government debt is financial wealth to the private sector." In this theory, sovereign government is not financially constrained in its ability to spend; the government can afford to buy anything that is for sale in currency that it issues; there may, however, be political constraints, like a debt ceiling law. The only constraint is that excessive spending by any sector of
14352-480: The public only if he promised to harshly punish Germany, and had therefore committed his delegation to extracting high payments. Lloyd George did, however, win some loyalty from Keynes with his actions at the Paris conference by intervening against the French to ensure the dispatch of much-needed food supplies to German civilians. Clemenceau also pushed for substantial reparations, though not as high as those proposed by
14490-471: The purchasing of government debt by central banks – is simply an asset swap, exchanging interest-bearing dollars for non-interest-bearing dollars. The net result of this procedure is not to inject new investment into the real economy, but instead to drive up asset prices, shifting money from government bonds into other assets such as equities, which enhances economic inequality . The Bank of England's analysis of QE confirms that it has disproportionately benefited
14628-527: The rationality assumption, they are seen as placing the analyses outside the boundaries of the Neoclassical economics discipline (Landsberg 1989, 596). Neoclassical economics begins with the a priori assumptions that agents are rational and that they seek to maximize their individual utility (or profits ) subject to environmental constraints. These assumptions provide the backbone for rational choice theory . Many heterodox schools are critical of
14766-431: The redemption of a small part of the debt which the government has contracted by its issues of money, whether coins, certificates, notes, drafts on the treasury, or by whatever name this money is called. He has to acquire his portion of the debt from some holder of a coin or certificate or other form of government money, and present it to the Treasury in liquidation of his legal debt. He has to redeem or cancel that portion of
14904-410: The reparations bill. Towards the end of the conference, Keynes came up with a plan that he argued would not only help Germany and other impoverished central European powers but also be good for the world economy as a whole. It involved the radical writing down of war debts, which would have had the possible effect of increasing international trade all round, but at the same time thrown over two-thirds of
15042-497: The rest of his life his professional energies were directed largely towards the practical side of economics: the problems of ensuring optimum allocation of resources for the war efforts, post-war negotiations with America, and the new international financial order that was presented at the Bretton Woods Conference . In the General Theory and later, Keynes responded to the socialists who argued, especially during
15180-401: The revolutionary formal achievement of the work. The book advocated activist economic policy by government to stimulate demand in times of high unemployment, for example by spending on public works . "Let us be up and doing, using our idle resources to increase our wealth," he wrote in 1928. "With men and plants unemployed, it is ridiculous to say that we cannot afford these new developments. It
15318-454: The role of energy in biological evolution in terms of such economic criteria as productivity , efficiency , and especially the costs and benefits of the various mechanisms for capturing and utilizing available energy to build biomass and do work. Various student movements have emerged in response to the exclusion of heterodox economics in the curricula of most economics degrees. The International Student Initiative for Pluralist Economics
15456-510: The same house throughout their lives, where the children were always welcome to return. Keynes received considerable support from his father, including expert coaching to help him pass his scholarship exams and financial help both as a young man and when his assets were nearly wiped out at the onset of Great Depression in 1929. Keynes's mother made her children's interests her own, and according to Skidelsky, "because she could grow up with her children, they never outgrew home". In January 1889, at
15594-515: The suspension of specie payments – the gold equivalent of banknotes – but with Keynes's help, the Chancellor of the Exchequer (then Lloyd George ) was persuaded that this would be a bad idea, as it would hurt the future reputation of the city if payments were suspended before it was necessary. In January 1915 Keynes took up an official government position at
15732-403: The system, the central bank buys government bonds from the private sector, adding reserves to the banking system. The central bank buys bonds by simply creating money – it is not financed in any way. It is a net injection of reserves into the banking system. If a central bank is to maintain a target interest rate, then it must buy and sell government bonds on the open market in order to maintain
15870-474: The term to explain monetary systems in which national governments have a monopoly on issuing fiat currency and where a floating exchange rate frees monetary policy from the need to protect foreign exchange reserves. Some contemporary proponents, such as Wray, place MMT within post-Keynesian economics , while MMT has been proposed as an alternative or complementary theory to monetary circuit theory , both being forms of endogenous money , i.e., money created within
16008-542: The theoretical debates that followed the publication of the General Theory as he suffered a heart attack in 1937, requiring him to take long periods of rest. Among others, Hyman Minsky and Post-Keynesian economists have argued that as a result, Keynes's ideas were diluted by those keen to compromise with classical economists or to render his concepts with mathematical models like the IS–LM model (which, they argue, distort Keynes's ideas). Keynes began to recover in 1939, but for
16146-712: The theoretical underpinning for economic policies undertaken in response to the 2007–2008 financial crisis by President Barack Obama of the United States, Prime Minister Gordon Brown of the United Kingdom, and other heads of governments. When Time magazine included Keynes among its Most Important People of the Century in 1999, it reported that "his radical idea that governments should spend money they don't have may have saved capitalism". The Economist has described Keynes as "Britain's most famous 20th-century economist". In addition to being an economist, Keynes
16284-536: The total reserve deposits in the commercial bank sector. Taxation works in reverse: taxpayers have their bank deposit accounts debited, along with their bank's reserve account being debited to pay the government; thus, deposits in the commercial banking sector fall. Virtually all central banks set an interest rate target, and most now establish administered rates to anchor the short-term overnight interest rate at their target. These administered rates include interest paid directly on reserve balances held by commercial banks,
16422-498: The wealthiest. MMT economists say that inflation can be better controlled (than by setting interest rates) with new or increased taxes to remove extra money from the economy. These tax increases would be on everyone, not just billionaires, since the majority of spending is by average Americans. Heterodox economics Heterodox economics is a broad, relative term referring to schools of economic thought which are not commonly perceived as belonging to mainstream economics . There
16560-473: The wider world. Unfortunately for Keynes, conservative powers in the coalition that emerged from the 1918 coupon election were able to ensure that both Keynes himself and the Treasury were largely excluded from formal high-level talks concerning reparations. Their place was taken by the Heavenly Twins – the judge Lord Sumner and the banker Lord Cunliffe , whose nickname derived from
16698-599: Was a firm believer in balanced budgets and regarded the proposals for programmes of public works during the Great Depression as an exceptional measure to meet the needs of exceptional circumstances. During the Second World War , Keynes argued in How to Pay for the War , published in 1940, that the war effort should be largely financed by higher taxation and especially by compulsory saving (essentially workers lending money to
16836-453: Was addressed chiefly to the British Government, it also contained advice for other nations affected by the global recession. A copy was sent to the newly elected President Franklin D. Roosevelt and other world leaders. The work was taken seriously by both the American and British governments, and according to Robert Skidelsky , helped pave the way for the later acceptance of Keynesian ideas, though it had little immediate practical influence. In
16974-693: Was also a civil servant , a director of the Bank of England , and a part of the Bloomsbury Group of intellectuals. John Maynard Keynes was born in Cambridge , England, in June 1883 to an upper-middle-class family. His father, John Neville Keynes , was an economist and a lecturer in moral sciences at the University of Cambridge and his mother, Florence Ada Keynes , a local social reformer. Keynes
17112-677: Was also cultural, in two senses: he was of the last generation raised by an empire still at the height of its power and was also of the last generation who felt entitled to govern by culture, rather than by expertise. According to Skidelsky , the sense of cultural unity current in Britain from the 19th century to the end of World War I provided a framework with which the well-educated could set various spheres of knowledge in relation to each other and life, enabling them to confidently draw from different fields when addressing practical problems. In October 1906 Keynes began his Civil Service career as
17250-639: Was also intensely debated by lawmakers in Japan, which was planning to raise taxes after years of deficit spending. In June 2020, Stephanie Kelton's MMT book The Deficit Myth became a New York Times bestseller. In 2020 the Sri Lankan Central Bank, under the governor W. D. Lakshman, cited MMT as a justification for adopting unconventional monetary policy, which was continued by Ajith Nivard Cabraal. This has been heavily criticized and widely cited as causing accelerating inflation and exacerbating
17388-568: Was an English economist and philosopher whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in mathematics, he built on and greatly refined earlier work on the causes of business cycles . One of the most influential economists of the 20th century, he produced writings that are the basis for the school of thought known as Keynesian economics , and its various offshoots. His ideas, reformulated as New Keynesianism , are fundamental to mainstream macroeconomics . He
17526-653: Was awarded the Tomline Prize for mathematics. At Eton, Keynes experienced the first "love of his life" in Dan Macmillan, older brother of the future Prime Minister Harold Macmillan . Despite his middle-class background, Keynes mixed easily with upper-class pupils. In 1902, Keynes left Eton for King's College, Cambridge , after receiving a scholarship for this also, to read mathematics. Alfred Marshall begged Keynes to become an economist, although Keynes's own inclinations drew him towards philosophy, especially
17664-526: Was effectively granted conditional upon continuing his government work. In the 1917 King's Birthday Honours , Keynes was appointed Companion of the Order of the Bath for his wartime work, and his success led to the appointment that had a huge effect on Keynes's life and career; Keynes was appointed financial representative for the Treasury to the 1919 Versailles peace conference . He was also appointed Officer of
17802-403: Was not until after the outbreak of the Second World War that Keynes was offered a directorship of a major British Bank, or an acceptable offer to return to government with a formal job. However, Keynes was still able to influence government policy-making through his network of contacts, his published works and by serving on government committees; this included attending high-level policy meetings as
17940-484: Was partly setting himself against his former teachers Marshall and Pigou. Keynes believed the classical theory was a "special case" that applied only to the particular conditions present in the 19th century, his theory being the general one. Classical economists had believed in Say's law , which, simply put, states that " supply creates its demand ", and that in a free-market workers would always be willing to lower their wages to
18078-420: Was persuaded by Felix Frankfurter to address President Roosevelt directly, which he did by letters and face-to-face in 1934, after which the two men spoke highly of each other. However, according to Skidelsky, the consensus is that Keynes's efforts began to have a more than marginal influence on US economic policy only after 1939. Keynes's magnum opus , The General Theory of Employment, Interest and Money
18216-469: Was primarily focused on the United States. In 1931, he received considerable support for his views on counter-cyclical public spending in Chicago, then America's foremost center for economic views alternative to the mainstream. However, orthodox economic opinion remained generally hostile regarding fiscal intervention to mitigate the depression , until just before the outbreak of war . In late 1933 Keynes
18354-406: Was published in 1936. It was researched and indexed by one of Keynes's favourite students, and later economist, David Bensusan-Butt . The work served as a theoretical justification for the interventionist policies Keynes favoured for tackling a recession. Although Keynes stated in his preface that his General Theory was only secondarily concerned with the "applications of this theory to practice,"
18492-509: Was published under the name "J M Keynes", though to his family and friends he was known as Maynard. (His father, John Neville Keynes, was also always known by his middle name). The British Government called on Keynes's expertise during the First World War . While he did not formally rejoin the civil service in 1914, Keynes travelled to London at the government's request a few days before hostilities started. Bankers had been pushing for
18630-870: Was set up as an umbrella network for various smaller university groups such as Rethinking Economics to promote pluralism in economics, including more heterodox approaches. # Listed in Journal of Economic Literature codes scrolled to at JEL: B5 – Current Heterodox Approaches . § Listed in The New Palgrave Dictionary of Economics Some schools in the social sciences aim to promote certain perspectives: classical and modern political economy ; economic sociology and anthropology ; gender and racial issues in economics; and so on. John Maynard Keynes Heterodox John Maynard Keynes, 1st Baron Keynes CB , FBA ( / k eɪ n z / KAYNZ ; 5 June 1883 – 21 April 1946),
18768-512: Was that at this time his theoretical justification was "muddled". The Tract had also called for an end to the gold standard. Keynes advised it was no longer a net benefit for countries such as Britain to participate in the gold standard , as it ran counter to the need for domestic policy autonomy. It could force countries to pursue deflationary policies at exactly the time when expansionary measures were called for to address rising unemployment. The Treasury and Bank of England were still in favour of
18906-484: Was the firstborn and was followed by two more children – Margaret Neville Keynes in 1885 and Geoffrey Keynes in 1887. Geoffrey became a surgeon and Margaret married the Nobel Prize-winning physiologist Archibald Hill . According to the economic historian and biographer Robert Skidelsky , Keynes's parents were loving and attentive. They attended a Congregational Church and remained in
19044-424: Was top of his class and excelling at mathematics. In 1896, St Faith's headmaster, Ralph Goodchild, wrote that Keynes was "head and shoulders above all the other boys in the school" and was confident that Keynes could get a scholarship to Eton. In 1897, Keynes won a King's Scholarship to Eton College , where he displayed talent in a wide range of subjects, particularly mathematics, classics and history: in 1901, he
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