Is MMT nothing but Knapp + Lerner + Minsky + Vertical IS curve?

12 Mar, 2019 at 14:03 | Posted in Economics | 21 Comments

Turning to Brad’s challenge, some of the answers will now be obvious. Do we accept the elements he lists as fundamental to MMT?

Knapp: yes indeed. He’s always been there …

Lerner: dealt with above. What we reject is the aggregate demand approach to full employment and price (and financial) stability. As Minsky argued in the 1960s, pump-priming might get you to full employment but it will never produce sustainable full employment because it will generate financial and price instability. You have to use the Job  Guarantee​ …

Minsky: Yep, he was there from the beginning …

vertical IS curveVertical IS: Now that is a leap. The ISLM framework is completely incoherent. It is not stock-flow consistent. Even its creator—John Hicks—said he could no longer make any sense of it … But I think all Brad means is that MMT rejects the notion that by changing interest rates the central bank can move the economy to full employment by stimulating interest-sensitive spending. And if that is what he means, I whole-heartedly agree.

Unlike Krugman, MMT argues this impotence is not restricted to the “lower bound” of zero interest rates. What MMT has always argued is that when the Fed lowers its rate target, we cannot say for sure whether the Fed is stepping on the gas or hitting the brakes. It depends. One factor that matters a lot is what is the ratio of government debt to nongovernment debt …

MMT has always recommended abandoning any attempt to fine-tune the economy through central bank interest rate policy. We prefer a permanently fixed rate … For me it is the permanent fixing that really matters, and I like a low rate but do not insist on zero.

So there you go, Brad, the ball’s in your court. We seem to be on the same page.

And by the way, I like Brad’s recent call for all the neoliberal Democrats to step aside and let the progressives following MMT take over.

L. Randall Wray


  1. In the 1970s in Canada when Trudeau Sr. began to allow inflation to be fought with interest rates, I wrote letters objecting and warning of the problems. I did not know about MMT then — likely it was still below the radar — but the Neoliberal model he allowed continues its destructive ways. Some are saying that Neoliberalism is dead. Maybe like the zombie economics it represents, but the push-back is growing and hopefully the conflict will continue to escalate and get the attention of more people.

    I am feeling so grateful for these kinds of posts and articles from actual economists!

  2. Arthur C Clarke is a better economist than Wray:
    “The goal of the future is full unemployment, so we can play. That’s why we have to destroy the present politico-economic system.”
    Unimaginative economists offer wage slavery as only goal in perpetuity for mankind. How dismal! We should stop listening to this economically orthodox vision for humanity. We can do better than MMT. Public policy makers should treat economists with the same weight accorded psychics.
    MMT’s inflation model is hopelessly orthodox. For real heterodoxy, consider Fischer Black’s inflation model: Inflation is noise.

    • And the link to that model is ….

        “In my model of inflation, noise is the arbitrary element in expectations that leads to an arbitrary rate of inflation consistent with expectations.”
        “we might define an efficient market as one in which price is within a factor of 2 of value, i.e., the price is more than half of value and less than twice value.11 The factor of 2 is arbitrary, of course. Intuitively, though, it seems reasonable to me, in the light of sources of uncertainty about value and the strength of the forces tending to cause price to return to value. By this definition, I think almost all markets are efficient almost all of the time. ‘Almost all’ means at least 90%.”
        In other words, oil could be $25/barrel or $100/barrel, due to noise. That is 300% inflation (or deflation) due to noise. And 10% of the time noise is beyond the “arbitrary” factor of two …
        “I have been unable to construct an equilibrium model in which changes in money cause changes in prices or income, but I have had no trouble constructing an equilibrium model in which changes in prices or income cause changes in money.”
        “I think that the price level and rate of inflation are literally indeterminate. They are whatever people think they will be. They are determined by expectations, but expectations follow no rational rules. If people believe that certain changes in the money stock will cause changes in the rate of inflation, that may well happen, because their expectations will be built into their long term contracts.”

    • “wage slavery” is a way to put it. “do something useful for the community, and the community will make sure you can live a decent life” is another.

      • I want to clean up campsites I use and maintain forest roads. The only way society can think of to allow me to do those things is to get a job, with a boss, and deadlines, and people games. I just want to do the work to make a campsite more fun to stay at. I don’t need all the arbitrary social games inevitably involved with jobs. I just ask for access to public equipment, when it is idle.
        Society’s valuations are often fickle, arbitrary, irrational. One day Mortgage-backed securities are valuable, the next panic has made them worth $0, the next the Fed steps in to print digital money to re-inflate them. Instead of trying to follow those wild swings, I just want to live simply and do goid where I can. Why doesn’t society value me for that?

    • It seems that when ever a theorist doesn’t understand a phenomenon, whether it is physics or economics or whatever, unexplainable results are called noise. Because of noise probability theory was invented, to give theorists a sense they were somehow in control when in actuality there reverse is true. As far as I am concerned, the notion of probability and probability theory is bullshit. I would assert everything has a cause. There is no such thing as randomness. Randomness is merely a cop out for the inability to not understand unexplained phenomena.
      So I would say Mr. Black had no idea about inflation.

      • The problem is that no one else has any better idea. If you include financial sector income, which is carefully excluded by System of National Account measures of the money supply, all existing theories of inflation explode.
        I like Black’s theory because it explains my own experience. If you look at historical oil prices, Black’s “factor of two” seems pretty good:

        • “The problem is that no one else has any better idea.”

          Gimme a break!

          • The emotional nature of your response is indicative of the quality of the evidence supporting any theory of inflation.

            • Your claim (that no-one else has a better idea about inflation) is patently absurd to the point it doesn’t warrant a response.

              • If other theories were so great, you would just present them rather than use ridicule to dismiss mine.
                The important point here is that inflation swaps are theory-agnostic. Both sides to an inflation swap can be fully hedged. Speculators can also take an exposure to inflation as they wish, but matched-book dealers can also use inflation swaps to hedge other bets.
                It doesn’t matter what causes inflation; inflation swaps (and Treasury Inflation Protected Securities) let you hedge inflation away.

                • “If you include financial sector income, which is carefully excluded by System of National Account measures”
                  Can you please explain this? Seems like nonsense.

        • ” If you include financial sector income, which is carefully excluded by System of National Account measures of the money supply…”
          Can you please explain this?

          • See the BEA NIPA Primer:
            “It is important to note that the income measures in the NIPAs do not include gains or losses resulting from changes in the prices of assets (that is, capital gains or losses), because a change in the price of an asset does not represent income from production.”
            Translation: if they included financial sector income, their accounting identities would explode because finance produces ten times the volume of dollars included in GDP.

            • OK. It wasn’t clear you were talking about capital gains/losses. It would beinteresting to know what the dimensions of these are.

      • What would you call unexplained phenomena? Noise works for me.

        And BTW it sounds like you are denying the Second law of thermodynamics — namely entropy — which includes ideas about randomness.

        And as a final comment, your theory — which sounds like you have reified — about the reasons for probability theory being invented is also not historically accurate. Game theorists were the ones who invente it, I believe. Human beings look for patterns and probability theory is a tool to help with that. But I will let Lars correct me on that one.

        • “What would you call unexplained phenomena? ”
          If I knew I would have a Nobel Prize siting on my mantle piece.
          “… sounds like you are denying the Second law of thermodynamics ”
          No. Entropic processes are observable everywhere. Randomness is used to explain them.
          Human beings look for patterns and probability theory is a tool to help with that.”
          I would agree that it is a tool – but it is not an explanation.

        • “What would you call unexplained phenomena? ”
          Anything that is characterized by a probability distribution.

          • ““What would you call unexplained phenomena? ”
            Anything that is characterized by a probability distribution.”

            shows an appalling lack of knowledge of natural science

            • “shows an appalling lack of knowledge of natural science”
              How would you answer the question?

Sorry, the comment form is closed at this time.

Blog at
Entries and comments feeds.