Many organisations have made a case for Modern Monetary Theory (MMT) in recent years. In simple terms, MMT is an argument that nations that issue currencies, like the UK and Pound Sterling, can never run out of money in the same way individuals or corporations can.
It hinges on the claim that governments can print currency to fund substantial government spending to deliver full employment. With economists coming out in favour of MMT, and many arguing against it too, a neoliberal think tank the Adam Smith Institute has attempted to break it down in a newly published paper.
They claim that MMT advocates are driven by Utopian thinking, wanting massive unaffordable public spending programmes, the cost of which never have to be repaid through higher taxes.
According to the Adam Smith Institute, advocates of MMT claim that government spending can activate substantial unused economic capacity, but this claim is false. In practice, the impact of MMT is inflationary and hyperinflationary.
Despite being a fringe economic theory, MMT is gaining mainstream support in areas of political activism, including the Green New Deal and Jeremy Corbyn’s People’s Quantitative Easing. But the economic collapse experienced by Venezuela, following years of spending fuelled by a deficit, should bring an end to any belief that deficits don’t matter to the economy.
As a result, the Adam Smith Institute believes MMT needs critical thinking and debunking before it starts to influence government policy in a major Western country. With the economic idea of MMT gaining ground among heterodox economists and left-wing politicians in the UK and US, the Adam Smith Institute is arguing the theory is powerfully wrong. Lead author of the report, Professor Antony P. Mueller, has drawn comparisons between MMT and the flat earth movement.
Mainstream economists have rejected MMT, with a poll carried out by the University of Chicago’s Booth School of Business, speaking to 50 elite economists, finding that not a single one believed governments don’t need to worry about deficits. None of the economists surveyed found it possible to fund as much government spending as desired, only by printing more money.
“MMT promises politicians almost limitless cash to spend on their pet projects. But if something sounds too good to be true it probably is. The state cannot print money without risking crippling inflation. More cash chasing the same amount of goods inevitably leads to sellers increasing their prices. When inflation spirals out of control it has disasterous consequences from the Weimar Republic to Zimbabwe to now Venezuela. MMT may just be wishful thinking today – the danger is that tomorrow a politician is stupid enough to follow its prescriptions.”
Matthew Lesh, the ASI’s Head of Research
The Adam Smith Institute argues that MMT ignores ignorance on the part of politicians and government actors with no price incentive or competition to counterbalance political prejudice. Instead of treating MMT as a serious economic theory, the Adam Smith Institute argues the growing political support for MMT should be viewed as a sign of growing tolerance for debt and deficits.
The report argues that the absence of fiscal restraint for public spending means massive public spending programmes lose their legitimacy. This includes projects like the ‘Green New Deal’, ‘free’ university education, renationalisation, and considerable increases in infrastructure spending, all of which can be launched with enthusiasm.
“Old wine in new bottles is a recurring phenomenon in economics, particularly if it is the bad wine of economic ideas that failed in the past. Modern Monetary Theory (MMT) is neither modern nor a theory – it is the attempt to sell something as new which is spoiled and rotten. “While promising to cure all kinds of economic woes, MMT is the poisonous elixir that will ruin those who take it as it has happened before.”
Professor Antony P. Mueller, the paper author
