Macro modelling MMT

“The accounting identities equating aggregate expenditures to production and of both to incomes at market prices are inescapable, no matter which variety of Keynesian or classical economics you espouse. I tell students that respect for identities is the first piece of wisdom that distinguishes economists from others who expiate on economics. The second? … Identities say nothing about causation.” James Tobin, leftist Keynesian 1997

Money is ultimately a creation of government—but that doesn’t mean only government deficits determine the level of demand at any one time. The actions and beliefs of the private sector matter as well. And that in turn means you can have budget surpluses and excess demand at the same time, just as you can have budget deficits and deficient demand.”  Jonathan Portes (orthodox Keynesian).

The increasingly abstruse debate among economists (mainstream, heterodox and leftist) continues on the validity of Modern Monetary Theory (MMT) and its relevance for economic policy.  The debate among leftists went up another gear with the publication of leftist Doug Henwood’s fierce critique of MMT in Jacobin here. Leading MMTer Randall Wray angrily responded to Henwood’s attempted demolition here. And then from the heart of MMT land, Pavlina Tcherneva, program director and associate professor of economics at Bard College and a research associate at the Levy Economics Institute replied to Henwood in Jacobin.

In the mainstream, Paul Krugman had a go, with a response from Stephanie Kelton.  Kelton is a professor of public policy and economics at Stony Brook University, Long Island New York. She was the Democrats’ chief economist on the staff of the U.S. Senate Budget Committee and an economic adviser to the 2016 presidential campaign of Senator Bernie Sanders.

Although this debate is getting very arcane and even nasty, it is not irrelevant because many leftists in the labour movement have been attracted by MMT as theoretical support for opposing ‘austerity’ and for justifying significant government spending to obtain full employment and incomes.  In particular, the radical wing of the Democrat party in the US has used MMT to support their call for a Green New Deal – arguing that more government spending on the environment, climate change and health can easily be financed by the issuance of dollars, rather than by more taxes or more government bonds that would raise public debt.

I won’t pitch into the MMT debate as above as I have already spent some ink in three posts trying to critique the theory and policy of MMT from a Marxist viewpoint, with the aim of working out whether MMT offers a way forward to meeting ‘the needs of the many’ (labour) over the few (capital).  And for me, that is the ultimate purpose of such a debate.

All I would add on the current debate among Keynesian, Post-Keynesians and MMTers is that MMTers argue with orthodox Keynesians over whether government spending can create the money to finance it; or taxation and borrowing is needed to create the money to fund government spending.  But as post-Keynesian Thomas Palley puts it: “government spending and taxation occur simultaneously so creation of money via money financed deficits and destruction of money via taxation also occur simultaneously. It is a pointless exercise to try and determine which comes first.”  Marxist analysis would agree.

Instead, in this post I want to look at MMT’s macro model.  In the twitter debate that is viral (at least among economists and activists!), critics of MMT have sometimes argued that MMT is just a series of vague assertions without any rigorous model.  This riled Kelton.  She immediately posted a paper written in 2011 by Scott Fullwiler of Warburg College, another MMT leader (who also recently commented on one of my blog posts).  In this paper, Scott outlined the MMT macro model in some detail.

Basically, he starts off with a Keynes/Kalecki post-Keynesian macro model of aggregate demand.  This model is simply an identity.  There are two ways of looking at an economy, by total income or by total spending and they must equal each other.

Thus National Income (NI) = National Expenditure (NE).

Following the ‘Keynesian Marxist’ Michal Kalecki, we can break this down into:

(NI) Profits + Wages = (NE) Investment + Consumption.  Now there are two sorts of income and two sorts of spending.

If we assume that all Wages are spent then and all Profits are saved, we can delete Wages and Consumption from the identity.  So

Profits = Investment

In the MMT version from Scott, he puts the same macro identity differently, with Investment on the left side of the equality.  Thus.

Investment = Profits

Why?  Because, as we shall see, all post-Keynesian theory argues that it is Investment that leads Profits, not vice versa.

But Scott re-expands the parts on the right-hand side to look at flows, so that wages that are saved are added back with profits to get Private Saving (so assuming some household saving); and he also adds in Government saving (taxation less spending) and Foreign Saving (net imports or current account deficit).

Thus Profits as a separate category disappears into Private Savings and we get:

Investment = Private Saving + (Taxation – Government Spending) + (Imports – Exports)

But then Scott also dispenses with the separate category Investment and converts it into Private Saving less Investment or the Private Sector Surplus.  So now we have Private Sector Savings (Wages saved plus Profits less Investment).  So Scott continues:

Private Sector Surplus = Government Deficit + Current Account Balance


Private Sector Surplus – Current Account Balance = Government Deficit

This is the key MMT identity.  It argues that if the Government deficit rises, then assuming the Current Account balance does not change, the Private Sector Surplus (Wages saved +Profits less Investment) rises.  The MMT conclusion (assertion) is that increasing the Government deficit will increase the Private Sector Surplus . And if we exclude Wages saved (the MMT identity does not) and the Current Account balance, then we have:

Net Profits (ie Profits after Investment) = Government deficit

And we can conclude that Government deficits determine Net Profits ie Profits less Investment.

In the paper Scott then presents a time series graph comparing US Private Net Saving (remember this includes Household net saving) with Government deficits and concludes that “It shows how closely the private sector surplus and the government sector deficit have moved historically, which isn’t surprising given they are nearly the opposing sides of an accounting identity.”

But then Scott says: “What we notice (from these graphs) is that the current rise in the government’s deficit is creating net saving for the private sector.”  But is that how to view the causal direction of these macro identities?  The post-Keynesians reckon that the causal connection is that Investment creates Profits or in the MMT version Government deficits create net profits (private saving).  But in my view, the causal direction of this identity is in reality the opposite, namely that Marxian theory says that Profits create Investment, because Profits come from the exploitation of labour power.

Let us go back to the basic Kalecki identity, Profits = Investment, with Investment back on the right hand side.  Investment (which disappeared in Scott Fulwiller’s model) can be broken down to Capitalist investment and Government investment.

Profits = Capitalist investment + Government investment

Under the Kalecki causation, increasing government investment (by deficits, if you want) will raise Profits (and for that matter, wages too through more employment and wage rates – the post-Keynesian identities just refer to Private Saving and (importantly) do not break that out into Wages saved and Profits).

Thus Profits + Wages saved = Private investment + Government investment

But what if the Kalecki causation is back to front?  What if Profits lead Investment, not vice versa.  Then the identity is:

Profits (because Wages are spent) = Investment (comprising Capitalist investment and Government investment).  We can expand this to cover external flows so that:

Domestic Profits + Foreign Income = Capitalist investment + Government Investment + Foreign Inward Investment

Now assume both Domestic Profits and Foreign Income are fixed. What will happen if Government Investment rises?  Private Investment will fall unless foreign inward investment rockets.

How can government investment/spending be increased without Private (capitalist?) investment falling (being crowded out)?  By running budget deficits, say the post-Keynesians (and MMT).  Borrowing could be done by issuing government bonds (orthodox Keynesian) or by ‘printing money’ ie increasing cash reserves in banks (MMT).  Issuing bonds may reduce Private Investment to boost Government investment, but the credit created would stimulate overall Investment.  Printing Money (MMT) would raise Investment without reducing Private Investment (magic!). MMT/Keynesians will say if Government Investment is not funded by taxes on Domestic Profits but by borrowing with bonds or printing money, then it will not affect profits.  Marxists would say that this is ‘fictitious’ investment that must deliver higher profit at some point. 

All this is because identities do not reveal causation and it is causation that matters.  For the Keynesians, it is the right hand side of the equation (Investment) that causes the left hand side (Profits); namely, that it is capitalist investment and consumption that creates profit.  For MMTers, it is a variant of the same, but netted: Net government investment/spending (deficits after taxes) causes Net Private Savings (Profits and Saved wages after investment).

But in the real world of capitalist production, this is back to front.  Profits lead Investment, not vice versa; and Net Private Savings enable Government deficits not vice versa.  The graphs offered by Scott in his paper of the time series of deficits and net private surpluses can be interpreted with just that causality.  What I read from the first graph is not that the current rise in the government’s deficit is creating net saving for the private sector” (Fullwiler), but the opposite: higher net savings (profits after investment) will produce a higher government deficit or lower surplus.  In other words, when capitalists hoard/save and won’t invest, and that is particularly the case in recessions, then government deficits rise (through lower tax revenues and higher unemployment benefits).  And Scott’s graphs show that the US government deficits reach peaks in all the post-war US recessions and are at their lowest in boom times.

Indeed, if I do the correlations between the government balance and net private savings, there is indeed a very small inverse relation of 0.07; in other words, a larger government deficit is correlated (weakly) with a net private savings surplus.  But if I do the correlation between the government balance and GDP growth, there is a small positive correlation.  In other words, more government surplus/less deficit aligns with more GDP growth, the opposite of the Keynes/Kalecki causation, which suggests that it is growth that leads government balances, not vice versa (see the Portes quote above).

Any causation is also modified by the external account.  Scott’s second graph including the current account shows that a persistent current account deficit (net foreign inflows) from the 1980s helped to fund US government deficits, even though the private sector surplus disappeared in the 2000s.  So the main MMT causation argument is further muddied by foreign income.

We can only really better understand the causal connections if we have Investment isolated and Profits isolated. You see, contrary to the Keynesian/post-Keynesian/MMT view, the Marxist view is that “effective demand” (including government deficits) cannot precede production.  There is always demand in society for human needs.  But it can only be satisfied when human beings do work to produce things and services out of nature.  Production precedes demand in that sense and labour time determines the value of that production.  Profits are created by the exploitation of labour and then those profits are either invested or consumed by capitalists.  Thus, demand is only ‘effective’ because of the income that has been created, not vice versa.

Because the Keynesians/post-Keynesians have no theory of value, they do not recognise this and read their own identity the wrong way round. From a Marxist view, profits are the causal variable.  So if profits fall, then either investment, or capitalist hoarding or the government deficit must fall, or all three.

What is the evidence that profits lead investment and government deficits and not the other way round, as the Keynesians argue?  This blog has provided overwhelming empirical support to the Marxist causal direction. See my paper here which compiles all the compelling empirical research (including my own) that supports the Marxist view that, in a capitalist economy, profits lead investment, which in turn drives GDP growth and employment, while government deficits have little influence.

If the Keynes/Kalecki causation direction is right, then all that we need to do to keep a capitalist economy going is to have more government budget deficits.  If the MMTers are right, all we need to achieve permanent full employment is permanent government deficits (subject to some possible inflation constraint).  What the orthodox Keynesians and the MMTers disagree about is whether these deficits (of government spending over taxes) can and should be financed by issuing government bonds for banks to buy or by the central bank printing money.

The more important question, however, is what drives a capitalist economy.  It is the profitability of capitalist investment that drives growth and employment, not the size of a government deficit. The Keynes/Kalecki/MMT macro models hide behind identities and turn them into causes.  But identities “say nothing about causation” (Tobin).  It’s profits, not government spending, that call the tune.

28 thoughts on “Macro modelling MMT

  1. Dear Michael, I find your series on MMT extremely good. It was almost time that this was done. Did you read my email that I sent you months ago? About MMT: you are right. But this is all the rage now and not only in the US. Best regards, Will

  2. Maybe going off on a slight tangent here but there seems to be almost something neo-mercantilist about the MMT fetish of monetary sovereignty and the abstraction of the money form from its content in the social relationships of capitalist production.

  3. The central problem (apart from the empirical one) is simply that those vulgar economic theories consider capitalism a closed system (i.e. a circular, equilibrium system), when reality states it is not. Hell, not even life (biosphere) is a closed system – let alone capitalism.

    The moment you posit capitalism as a system in equilibrium, all hope is gone for your model. The same way econometrics is useless without the theory behind it, so is having only the model without the empirical evidence. If I want an imaginary model that works in the abstract world, I could just go to Russia and revive the corpse of Kant, who’s done it better than anybody else (and, in fact, that’s what the bourgeois philosophers after Hegel have done, see Neokantianism).

    But today’s vulgar economics case is even worse, as even the principle behind the theory (i.e. that capitalism is an equilibrium system) is failed. The debate is deteriorating, not getting better. Economics as a science is doomed; we only have Marxism now.

  4. My sense is MMT is growing in appeal in some establishment progressive circles because it doesn’t directly challenge our profit class based capitalistic system. It seems to suggest we can ameliorate our current system without directly challenging the capital class.

    What our your thoughts?

  5. Thanks for another great post! Perhaps you could clear something up for me. For a capitalist firm, it seems reasonable that investment (in labor, plant and equipment) would very much so be determined by previous profit, although I would think at least some degree of future profit expectations would factor in as well. Anyways, my confusion seems to arise when I imagine (I have zero personal experience with running a business) a capitalist firm from its origin. Now there could be a number of scenarios, but wouldn’t one be that I come up with a great business idea for a new restaurant, I go to a bank, convince them it’s a great idea too, they create a loan on a computer and I go out and invest (purchase labor and ovens and burgers etc.). Then I exploit my workers to create surplus value. Now maybe I will invest again from that surplus value I created, but doesn’t the first investment have to come before I produced my first profit? And the loan was created on a keyboard, profits/savings didn’t have to exist prior to the bank making it. Perhaps I didn’t get a loan and I had saved up my wages working in an amazon warehouse. My saved wages aren’t capitalist profit, are they? If I use them to start a restaurant, do my “household” sector savings suddenly become “business” sector savings (i.e. profit)? I didn’t exploit any labor when saving my wages working at amazon, I was the one being exploited.

    I apologize if these are silly questions or if you’ve addressed them before. Thanks again for all of your very informative posts.

    1. Your example is clear. Start-ups and for that matter companies that wish to expand will get a loan from a bank. So the money is created by the bank and appears in your account. You spend it to employ people, get premises, buy food for the restaurant etc. When you open the restaurant you eventually get income (and maybe profits). These profits come from the exploitation of your labour force (which may include you). The profits can be used to pay back the bank (or just service the debt), expand the business or live a great life. The loan from the bank is money created but it does not create more money until you put it to use in capitalist production (the restaurant). If you did nothing and spent the loan on a good life, the bank would eventually be after you. The venture would go bust and the bank would take a loss. Money as value from the bank would have been transferred to you and to the people you bought things from. But no new money (value) would have been created by the loan. If you used money saved from previous work, you would be converting your savings from wages into capital (premises and employees) to make more money out of production. Profit (business savings) only follows from that production.

  6. Hi Michael,

    Just one comment on the key point in your blog. You claim to have produced overwhelming evidence that investment leads profits. But the link goes to a paper that sets out some evidence that *business* investment leads *business* profits. But the equation you are dealing with in the blog is not just business investment: it is *all* national expenditure including government investment. To make the assertion you have made, you would have to analyse both. Academically, you shouldn’t make this assertion without more evidence and are misleading your readers. Since it is the key assertion, I think this renders your conclusion/assertion unsound.

    Bill Mitchell has done huge amounts of empirical work and shown that many recessions were caused by a fall in government investment: usually a form of austerity in an attempt to seek a balanced budget, which can be either via reduced spending or increased taxes.

    And logically, that is not surprising. In a dynamic system, if government decides to cut spending then, all else being equal, total private sector profit/savings must go down. Once those profits go down, then of course businesses will cut investment costs to try and maintain profitability, and if government declines to intervene then the business cuts will further eat into profits and so the fall continues. From the business perspective, profits fall first leading investment to fall, but from a full macro perspective it would be the government investment that fell even earlier.


    1. When I say “government declines to intervene” I mean government does not reverse its original cuts and/or add further stimulus.

    2. No -I argue profits lead investment. And Investment downturns precede recessions, not consumption downturns. The correlations that I and others show are between corporate or business profits and investment. There is clear evidence that government spending rises not falls just before recession – see Carchedi in our book World in Crisis. Government investment in most capitalist economies is only one-fifth of business investment, so it is not surprising that recessions follow a downturn in the latter.

    3. The problem with Mitchell’s “conclusion” that you take here is that recessions in capitalism can only happen when evil politicians mysteriously don’t spend. The contradiction can be highlighted when you say that “And logically, that is not surprising. In a dynamic system, if government decides to cut spending then, all else being equal, total private sector profit/savings must go down.” Well, if capitalism is a dynamic system, why does it simply depends on the individual decisions of politicians to spend/not to spend?

      That would be great news for capitalism, since a government could just keep spending ad eternum and never experience a recession. This lacks cohesion, since that’s not what we can observe in reality: not even our sun will last forever, so there’s no reason capitalism can (by just spending with the government).

      The most cohesive “conclusion” we can take from this is that a fall in government spending is the symptom of a crisis/recession, and not vice versa (and that’s assuming Mitchell is correct, which he’s not).

      Capitalism already presupposes capital is the dominant mode of social reproduction, so there’s no need to demonstrate, at this stage of abstraction, that the State behaves, in the investment level, as an individual capital like any other (although a very big one and with some special features).

  7. Thank you for this series of posts on MMT, I really had no clue about the ideology before reading them, and now I know to look out for it!

    However, leaving aside the MMTer’s denial that their policy would cause inflation (IE, assuming it does cause inflation), I think their policy really could be beneficial to the bourgeoisie. Say we have a toy economy whose productive sector outputs $100 of goods. If the government prints an additional $20 which they subsequently spend on stuff, and their political role as money printers isn’t challenged, they have effectively done a 16% flat tax across the whole economy. A flat tax, as opposed to a progressive tax, has traditionally been championed by certain schools of libertarians/free marketers. From a Marxist point of view, the question is whether this “flat tax” simply propagates via cost of labor into reduced profits (meaning we don’t care), or whether it actively lowers the worker’s standard of living (seems pretty likely, meaning we are against it).

    There’s an added dimension to it in the age of imperialism. The USA is able to force other countries to hold US$ and trade using them due to its dominant position. There’s a similar situation with some other currencies. If the USA prints a bunch of extra dollars but only injects them into the US economy, they are taxing all of the holders of US$ equally, but only spending the revenue on the US economy. This mechanism is why MMTers say they don’t have to fear inflation so much. Due to power politics, the USA could probably enact this policy to a moderate extent without collapsing their currency and chasing everyone away from the dollar and towards, EG, the RMB.

    So with that in mind, and correct me if I’m wrong on any of this, it would seem that Alexandria Ocasio-Cortez’s MMT GND financing scheme is actually an imperialist tax, which is very alarming! It would also be very consistent with the history of Western social democrats, like Attlee for instance.


    1. “Dollar imperialism” is one of the popular legends that right and left Anti-Americanists share.
      The legend of dollar imperialism tells of the seemingly inexhaustible possibilities that arise from the fact that the national currency of the United States also functions as a “world currency”:

      Even those who have not studied the “capital” of Karl Marx know from their expereance that a thing that can be produced “indefinitely” in capitalism, that is, in any quantity, is worth little to nothing. Since just the money, the capitalistic embodiment of value, should be produced “unlimited”? If that were the case, nobody would bother with the production of other goods.

      A few facts about alleged dollar imperialism:
      Around half (45%) of all cross-border flows of goods in the world are billed and paid in dollars. All banks in the world that act as clearing houses in international trade therefore need dollars for their customers. More than 60% of all bank reserves in the world are held in US dollars. The global demand for dollars thus clearly exceeds domestic US dollar demand.
      This brings economic benefits to US capitalists and the US government, but these benefits are not nearly as great as the legend of dollar imperialism would have it believe.

      1) For the US capitalists fall away almost all currency transaction costs and almost all exchange rate risks that the capitalists of other currency areas have to bear.
      2) Because many companies and governments outside the US also take dollars and hold dollars, the potential buyer market for US government bonds is larger than any other nation’s. The US government can therefore afford cheaper debts than any other governments.

      These two factors, according to calculations by the McKinsey Global Institute in the US, bring benefits to the US of up to $ 100 billion a year. (see The Economist, 01.08.2015).

      However, the benefits of $ 100 billion a year are mitigated by a negative factor: the global demand for dollars makes the dollar stronger in comparison to other currencies. The dollar exchange rate is therefore generally higher than it would be normally for the US economy. For the US capitalists, who export goods and services, this brings a competing disadvantage, which McKinsey puts up to 60 billion a year.

      Overall, McKinsey concludes that the US government and US capitalists each year owe about 0.5% of US economic output to the role of the dollar as a world currency.

      And before tune into into the lawsuit of the dollar anti-imperialists, we should keep in mind that this $ 170 billion tribute to the US is not raised by South American farmers and not by us European wage workers, but by capitalists around the world ,
      This “world currency tax” only affects capitalists who operate globally and do business worldwide. I do not think we have feel sorry with them.

      W. Buchenberg, Hannover

      1. „And before….” should read:
        „And before we tune into the lawsuit of the dollar-anti-imperialists, we should keep in mind, that this $ 40 billion tribute to the US ….

        Sorry! Wal B.

      2. If all oil transactions must made in US dollars, isn’t the dollar backed by oil? isn’t the barrel of oil the capitalist world’s commodity money? (…along with the means of mass destruction?)

        US imperial rent (which you show to be extracted even from the dependent Euro nations) would seem to be based on two related US monopolies: (post WW2) political/military supremacy and petro-dollar supremacy (enforced by the former)?

        Most mmters seem to take the above as given/forgotten so as to make their calculations match their illusions.

      3. My post was about the effects of “money printing” policies and inflation. You posted some interesting stats, but unless you think the USA is already enacting these policies (low inflation would suggest otherwise), I don’t see how they’re relevant.
        I would also ask why the USA is so keen on forcing other countries to trade in its currency.

      4. @Mandm
        The dollar could only be “backed by oil” if all the oil in the world belonged to the American state. The payment of oil in USD is not due to a “US-monopoly”, but to the fact that it is cheaper for the oil producing AND oil-consuming countries to trade in a single currency than in a dozen currencies.

        I have explained in my posting, why it is beneficial for the US, that a large part of world trade takes place in their national currency.

        Wal Buchenberg, Hannover

      5. Wal, just as in the modern global, imperial system, imperialism’s leading capitalists and their institutions (IMF/NATO, etc.) do not have to directly govern its ex-colonies, but merely control their economies (under threat of creating chaos and violent regime change), oil, in this violent, liberal global order, does not have to be directly owned by US-NATO states. Its production need only be controlled, so that its production and flow is directed in their economic/monetary (dollar/euro) interest.

        In fact, this attempt to control the production and distribution of oil (and consumer goods produced in the periphery) is what drives US/NATO foreign policy–which, under renewed capitalist competition, is in the process of breaking down, as can be seen in the US’s naked and clumsy attempt to steal Venezuelan oil.

  8. It seems Larry Summers has also entered the “debate”:

    “The left’s embrace of modern monetary theory is a recipe for disaster”

    1. How can Summers embrace secular stagnationism (a relatively heterodox Keynesian theory compared to the Samuelsonian variety), which identifies severe structural problems with capitalism (which means the hydraulic new Keynesianism of automatic fiscal stimulus to the rescue (e.g. Stiglitz/Krugman) is off the table), and this seems to be what MMT is trying to address.

      It seems to me he is heterodox in his diagnosis, yet he has no solution to the problems because he is wedded to Neoclassical models that creates severe incoherence and no solutions to the problems he identifies with secular stagnationism.

  9. Maybe the function of Post-Keynesianism/MMT is not to enact “realistic policy”, but creating a revolution of rising expectations. Namely, having long been traumatized by neoliberal powerlessness (TINA), “Post-Keynesian policy-utopianism” supplies an powerful antidote to that powerlessness. I would position Kalecki as a theorist of “transitional political economy”. Namely, you need significant popular struggles from below to overcome “Bourgeoisie resistance” to full employment and in that struggles there is a radicalization from social democratic reformism to communism.

    1. Yes not very helpful to discussion. Tankus seems to be flavour of the year so far. I have not read much of his stuff but what I have read seems unremarkable. But we learn from everybody a little

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