Home Economics What's Wrong With Modern Monetary Theory?

What’s Wrong With Modern Monetary Theory?



Richard Murphy, he of the three professorial positions, asks us what is wrong with his exposition of Modern Monetary Theory.

First, in a country with a fiat currency, which means that there is no asset backing to the money in circulation, which money does as a result only get value as a consequence of a government’s promise to pay,….

No, not quite, the asset backing that is the ability to tax. Something that Professor Murphy continually tells us in fact. It is not rare to find him insisting that the value of a fiat currency derives from the insistence of the issuing government that taxes must be paid in that currency issued by that government.

Now, as it happens, it’s not actually true that value is derived from that. Or, to be truly precise, we can agree that some part of the value is so. But most certainly not all of it for if that were so two things would follow. Firstly, that monies in which tax cannot be paid would have no value. Bitcoin has value therefore that is not true. Further, it is entirely possible to pay UK tax in euros, in collections of historical papers, in works of art and so on, so we’ve not even the exclusivity there.

there is, at least in theory, no limit to the amount of money that a government can create.

That is true, only we must add the caveat that there are consequences to money creation.

Second, a government creates money every time it spends because it instructs its central bank to extend it the credit to do so on every such occasion. It is not constrained by the availability of taxation funds when doing so: money can always be created by a bank on demand and at will, and central banks will always do this when instructed to do so by the governments that own them.

Yes, monetisation of fiscal policy. That we have a name for this shows that it’s not actually all that new an observation. Henry VIII’s debasement of the currency is a useful example from our own history of that caveat though.

Third, to prevent this new money creating excess inflation a government has to tax to withdraw currency from circulation. This is the primary fiscal purpose of taxation, although tax also has other, as significant, purposes as noted below.

That’s not a fiscal purpose, that’s a monetary purpose. Fiscal is who and how tax, the preservation of the value of the currency is monetary policy – concerns money, see?

Fourth, the government does not need to borrow if it runs a deficit. Firstly that is because it can, at least in theory, simply run an overdraft at its central bank, on which no interest may be charged.

My bank tells me that my overdraft is me borrowing from the bank. Seems reasonable to adopt the same verb here, no?

This negates the need for borrowing.

No, it is borrowing.

Second, government borrowing actually makes little apparent economic sense in an economy using the fiat money of the national government because the money that is supposedly borrowed has already been created by the government when injecting cash into the economy through its spending.

Perhaps a little education in the notion of “property” is useful here. Sure, pounds have been made b y the government (or the central bank say) but some of those are mine. My property. Belong to me. They are all purpose rationing tokens that I get to deploy as I wish to sate some of my lusts, desires and needs. Government has issued the tokens in order to sate some of the lusts, desires and needs of those running the government and we’ve done a swap. My activity of providing goods and or services to them – they’re spending that money into existence, right?

So, we’ve swapped property then. My property for their paper, their paper now being, as David Graeber pointed out, an entry in the debt ledgers. So, if government wants to come along and use my property, my entries in those debt ledgers, it’s got to offer me something for them. Maybe interest, or perhaps the promise of getting them back or something. But it’s got to either buy or borrow them from me. Because, you know, property, mine.

David Hockney has produced some number of paintings. Which he has swapped for some number of those general ration tickets. Now, that Hockney has originalyl made the paintings does not mean that he can just call them back any time. We might well lend them to him for an exhibition because we’re noce like that. But note the verb – lend. The flip side of which is borrow, right?

Sixth, the fact that the government spends first, and taxes second, means that the answer to the question ‘how are you going to pay for it?’ is always available to anybody who understands this process. A government decision can always be paid for, presuming the actual resources required to deliver it exist within the economy, simply by commanding the central bank to pay for it and then arranging, if necessary, for the additional tax due on the income that has been generated (because all government expenditure is, by definition, somebody else’s income) to be collected.

There’s a heck of a lot of weight resting on that “presuming”. The answer being that sure, if we talk of the bits of paper government can make more of them. As Zimbabwe did until the last run of 100 trillion dollar bills weren’t worth enough to buy the ink for the next run. The real limitation though being the resources available to do whatever thing it is that is desired to be done.

Seventh, the realisation that a government that only borrows in its own currency cannot, as a result of this understanding, ever default on its own debt because it can always issue the instruction to its central bank that the payment of that debt be settled, is also of considerable advantage.

Well, yes, except there are those holding Argentine peso bonds who would like to have a word.

Such a government should never be beholden to financial markets if they do not overheat their economies.

If we had some ham we could have ham and eggs for breakfast if we had some eggs. The economic history of the world is not replete with examples of the monetisation of fiscal policy that did not lead to overheating economies. Diocletian was merely an early warning.

The important part of MMT is of course the part that isn’t discussed. Which is that the practical implication is we’re telling politicians they have a blank, ever-refilling, chequebook. The only limit is their tolerance for inflation.

This will not work out well.



  1. simply by commanding the central bank to pay for it and then arranging, if necessary, for the additional tax due on the income that has been generated…
    And this is the bit that is so glibly stated, as if it’s so easy to just raise taxes. Forget the practicalities of inflation lagging spending and the effect of taxes lagging inflation. The primary aim of all politicians is to get elected. No one got elected by promising to raise taxes (or actually stayed long in power by raising them too high). They’ll spend like sailors on shore leave then forget the tax bit so they get re-elected.

  2. Even if the politicians did have an ever-filling unlimited cheque book, there’s only a finite amount of people and people-hours to use those cheques to buy.
    “We want 20 million nurses!”
    We’ve sold you 10 million nurses, there aren’t any more
    “Run the printing presses, here’s some more money, we want 20 million nurses!”
    Sorry, we’ve run out.
    “Here’s more money, GET US THE NURSES!”
    Ok, we’ve fired all the doctors and stamped ‘nurse’ on their ID cards, here your 10 million nurses.
    “We’ve got no doctors, we want ten million doctors, print some more tenners”

    Look, we’ve sold you 65 million nurses, they’re working 24 hours a day, WE’VE RUN OUT OF PEOPLE!
    “Print some more money!”


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in British English
expunct (ɪkˈspʌŋkt)
VERB (transitive)
1. to delete or erase; blot out; obliterate
2. to wipe out or destroy

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