On Modern Monetary Theory and Some Odd Twists and Turns in the Evolution of Macroeconomics

Jörg Bibow | October 16, 2018

Mainstream neoclassical economics is hooked on the idea of individual worker-savers as prime movers in capitalist market economies. As workers, individuals choose how much to work, determining the economy’s output; as savers, they determine how much of that output takes the shape of the economy’s capital investment. With banks as conduits channeling saving flows into investment, firms churn inputs into outputs that match worker-savers’ tastes. In this way, the neoclassical world gets shaped by what rational intertemporal utility-maximizing worker-savers wish it to be.

In its most fanciful version – erected on supposedly sound micro foundations and known as “real business cycle theory” (RBC) – the neoclassical fantasy world of intertemporally optimizing worker-savers is subject to exogenous shocks to tastes and technology. Random technology shocks may be either positive or negative, and as Edward Prescott—acclaimed RBC founding father, together with Fynn Kydland—famously explained, negative technology shocks arise whenever there is a traffic jam on some bridge (see Romer 2016). That’s truly creative: Imagine a couple of dancers receiving the Nobel prize in medicine for wildly hopping around a coconut tree while peeing on a rotten banana and screaming voodoo until they are blue in the face. Unlikely to happen in medicine, you might say, but in economics voodoo routines and hallucinations of this kind can still earn you a pseudo-Nobel prize properly known as “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.”

There also exists a “New Keynesian” variety of mainstream neoclassical economics that accepts the RBC framework as its core but adds some “frictions” to the modeled worker-saver paradise that hinder continuous and smooth full-employment equilibrium. Both camps share a common modeling technique (or speak the same language) known as “Dynamic Stochastic General Equilibrium” (DSGE) methodology. The only thing “Keynesian” about the New Keynesian variety is that it provides a rationale for government stabilization policies.

Hardcore (“New Classical”) RBC proponents interpret the Great Depression as a worker-saver mass movement into the world of leisure. By contrast, New Keynesians offer an apology for why market economies might take their time in returning to full employment. Regaining full employment may then be accelerated by government intervention, preferably to be enacted by an independent central bank – with central bank independence being re-interpreted as “rules rather than discretion” in another extraordinarily muddled piece of obscurantism by said RBC-duo Kydland and Prescott (1977) (see Bibow 2001).

Needless to say, and obvious to any serious economist, the worker-saver fantasy world depicted in DSGE models has little in common with capitalism as we know it on this planet. In fact, modern mainstream macroeconomics has completely unlearned the “Keynesian revolution” and essentially turned macroeconomics into an especially shoddy version of microeconomics.

Keynes identified two key flaws in the mainstream neoclassical economics of his time. continue reading…


Modern Money Theory: How I Came to MMT and What I Include in MMT

L. Randall Wray | October 1, 2018

My remarks for the 2018 MMT Conference, September 28-30, NYC.

I was asked to give a short presentation at the MMT conference. What follows is the text version of my remarks, some of which I had to skip over in the interests of time. Many readers might want to skip to the bullet points near the end, which summarize what I include in MMT.


As an undergraduate I studied psychology and social sciences—but no economics, which probably gave me an advantage when I finally did come to economics. I began my economics career in my late twenties, studying mostly Institutionalist and Marxist approaches while working for the local government in Sacramento. However, I did carefully read Keynes’s General Theory at Sacramento State and one of my professors—John Henry—pushed me to go to St. Louis to study with Hyman Minsky, the greatest Post Keynesian economist.

I wrote my dissertation in Bologna under Minsky’s direction, focusing on private banking and the rise of what we called “nonbank banks” and “off-balance-sheet operations” (now called shadow banking). While in Bologna, I met Otto Steiger—who had an alternative to the barter story of money that was based on his theory of property. I found it intriguing because it was consistent with some of Keynes’s Treatise on Money that I was reading at the time. Also, I had found Knapp’s State Theory of Money—cited in both Steiger and Keynes—so I speculated on money’s origins (in spite of Minsky’s warning that he didn’t want me to write Genesis) and the role of the state in my dissertation that became a book in 1990—Money and Credit in Capitalist Economies—that helped to develop the Post Keynesian endogenous money approach.

What was lacking in that literature was an adequate treatment of the role of the state—which played a passive role—supplying reserves as demanded by private bankers—that is the Post Keynesian accommodationist or Horizontalist approach. There was no discussion of the relation of money to fiscal policy at that time. As I continued to read about the history of money, I became more convinced that we need to put the state at the center. Fortunately, I ran into two people that helped me to see how to do it. continue reading…


Register for the 2019 Hyman P. Minsky Summer Seminar

Michael Stephens | September 24, 2018

We are accepting applications for the 2019 Hyman P. Minsky Summer Seminar, held here at the Levy Institute and the wider Bard College campus June 16–22:

The Levy Economics Institute of Bard College is pleased to announce the tenth Minsky Summer Seminar will be held from June 16–22, 2019. The Seminar will provide a rigorous discussion of both the theoretical and applied aspects of Minsky’s economics, with an examination of meaningful prescriptive policies relevant to the current economic and financial outlook. It will also provide an introduction to Wynne Godley’s stock-flow consistent modeling methods via hands-on workshops.

The Summer Seminar will be of particular interest to graduate students, recent graduates, and those at the beginning of their academic or professional careers. The teaching staff will include well-known economists working in the theory and policy tradition of Hyman Minsky and Wynne Godley.

Applications may be made to Kathleen Mullaly at the Levy Institute (mullaly@levy.org), and should include a letter of application and current curriculum vitae. Admission to the Summer Seminar will include provision of room and board on the Bard College campus. The registration fee for the Seminar will be $350.

Due to limited space availability, the Seminar will be limited to 30 participants; applications will be reviewed on a rolling basis starting in January 2019.


Minskyan Reflections on the Ides of September

Jan Kregel | September 14, 2018

The 10th anniversary of the September collapse of the US financial system has led to a number of commentaries on the causes of the Lehman bankruptcy and cures for its aftermath. Most tend to focus on identifying the proximate causes of the crisis in an attempt to assess the adequacy of the regulations put in place after the crisis to prevent a repetition. It is interesting that while Hy Minsky’s work became a touchstone of attempts to analyze the crisis as it was occurring, his work is notably absent in the current discussions.

While it is impossible to discern how Minsky might have answered these questions, his work does provide an indication of his likely response. Those familiar with Minsky’s work would recall his emphasis on the endogenous generation of fragility in the financial system, a process building up over time as borrowers and lenders use positive outcomes to increase their confidence in expectations of future success. The result is a slow erosion of the buffers available to cushion disappointment in those overconfident expectations. And disappointed these expectations must be, for, as Minsky argued, the confirmation of expectations of future results depends on decisions that will only be taken in the future. Since these decisions cannot be known with certainty, today’s expectations are extremely unlikely to be fully validated by future events. In a capitalist economy financial commitments are financed by incurring debt, so the disappointment of expectations will produce a failure to validate debt, leading to the inexorable transformation of financial positions from what Minsky called “hedge” to “speculative” to “Ponzi” financing structures. These structures refer to the ability of current cash flows to meet these commitments.

Thus, for Minsky, the crisis that broke out ten years ago would have been considered as the culmination of a process that started much earlier, sometime in the 1980s. An important aspect was the attack on the role of government and support for more restrictive fiscal policies that followed Reagan’s pronouncement “government is not the solution to our problem; government is the problem,” producing more procyclical budget policy that removed the “Big Government” floor under incomes during a recession. For Minsky, the sign of the budget was not important, but its role as an automatic stabilizer was crucial to financial stability. At the same time, the rise of monetarist monetary policies meant the “Big Bank” was no longer assured of placing a floor under asset prices by acting as a lender of last resort. By the early 1990s, Minsky had thus reversed his belief that a repetition of the Great Depression was unlikely because of the role of the “Big Government” and the “Big Bank.” Both had been diminished to the extent that they were no longer able to counter the inevitable translation of fragility into instability. By the 1990s, he clearly believed it could happen again. continue reading…


Wray Guest Lectures, Brazil and Italy (Video)

Michael Stephens | September 13, 2018

L. Randall Wray, Professor of Economics at Bard and Senior Scholar at the Levy Economics Institute, was a visiting professor at the University of Bolzano (Italy) and the University of Bergamo (Italy) in May-June and at the University of Campinas (Brazil) in August. In Campinas, he gave a series of lectures for a course on Modern Money Theory. In Bolzano he gave a talk titled “Secular Stagnation: Is It Inevitable?”

Wray also delivered a series of lectures in Trento for a course on Modern Money Theory and participated on a panel on the Job Guarantee: La rivoluzione dei Piani di Lavoro Garantito. Video of the latter presentations can be viewed here and here.


The Second International Modern Monetary Theory Conference

Michael Stephens | September 10, 2018

The Levy Institute is a cosponsor of the Second International Modern Monetary Theory Conference, which will take place September 28–30 at the New School and will feature Institute scholars L. Randall Wray, Pavlina Tcherneva, Stephanie Kelton, and Mathew Forstater:

Like the first conference, this year will feature contributions from fields as diverse as macroeconomics, law, history, public policy, and corporate finance, with the goal of creating a community of scholars working within the MMT paradigm. This year’s theme, “Public Money, Public Purpose, Public Power,” signals the MMT community’s efforts to build bridges between social justice movements, inspire broad-based participation, and more deeply discuss how our ideas may be concretized politically.

The conference runs from Friday, September 28 through Sunday, September 30. Friday will feature roundtable discussions and keynote addresses from MMT luminaries on the origins of MMT, the process of making MMT “mainstream,” and the relationship between MMT and progressive advocacy for the job guarantee. Saturday will feature workshops facilitated by a range of community leaders and experts seeking to develop and deepen connections between MMT and other fields. Sunday begins with two “town hall” meetings, exploring MMT’s capacity as both a domestic and an international movement. The proceedings will conclude with a plenary session on the strategic and institutional goals of the movement going forward.

To learn more about the Second International MMT Conference or to register, visit their website at mmtconference.org or email conference@mmtconference.org.

Learn more about MMT in these Levy Institute publications: continue reading…


Tcherneva and Wray on the Public Service Employment (PSE) Program

Michael Stephens | August 15, 2018

The job guarantee proposal fleshed out and analyzed by L. Randall Wray, Flavia Dantas, Scott Fullwiler, Pavlina Tcherneva, and Stephanie Kelton — dubbed the Public Service Employment (PSE) program — garnered a considerable amount of media attention as support for some version of a job guarantee began appearing on the agendas of various 2020 Democratic hopefuls. This panel discussion at the Levy Institute’s 27th Annual Hyman P. Minsky Conference, featuring Tcherneva and Wray along with critical engagement from John Henry, provides more background on the rationale behind the PSE proposal as well as its potential economic impact:


Video from all the panels at the Minsky Conference can be found here.


Banks, Capital Markets, and Institutional Investors as Providers of Long-Term Finance

emmaelbaum | May 29, 2018

This is the second in a series of blog posts on financing infrastructure assets.

From 1990 to 2012, the stock of global financial assets increased from $56 trillion to $225 trillion. In 2012, it included a $50 trillion stock market, $47 trillion public debt securities market, $42 trillion in financial institution bonds outstanding, $11 trillion in non-financial corporate bonds, and $62 trillion in non-securitized loans and $13 trillion in securitized loans outstanding (Figure 1).

Figure 1. Stock of Global Financial Assets (USD trillion)

Source: Lund et al. 2013, p. 2

From 2007 to 2012, government debt securities increased by 47 percent (Figure 1) while financial depth rose to 355 percent of global GDP in 2007 from 120 percent in 1980 (Lund et al. 2013: 2). In spite of a massive increase in the stock of global financial assets—equivalent to 302 percent between 1990 and 2012—“[m]ost of the increase in financial depth prior to the crisis was due to financial system leverage and equity valuations” (Lund et al. 2013: 2). Yet the world needs more and better infrastructure, and redirecting finance towards sustainable infrastructure will require a major shift in policy coordination with various stakeholders. For instance, Standard & Poor’s estimated that “institutional investors could provide as much as $200 billion per year—or $3.2 trillion by ­­­2030—for infrastructure financing” (Standard & Poor’s 2014: 2). But “if the right levers are pulled, there is potential to increase investment from private institutional investors by ~$1.2 trillion per year” (Bielenberg et al. 2016: 28). Thus, the problem is not necessarily one of funding but how to direct the finance created by the financial system towards productivity-enhancing investments. continue reading…


The Job Guarantee and the Economics of Fear: A Response to Robert Samuelson

Pavlina Tcherneva | May 25, 2018

The Job Guarantee is finally getting the public debate it deserves and criticism is expected. Building on several decades of research, the Levy Institute’s latest proposal analyzes the program’s economic impact and advances a blueprint for its implementation. Critics have taken note and are (thus far) restating the usual concerns, but with a notably alarmist tone.

The latest, courtesy of the Washington Post’Robert Samuelson, warns that the Job Guarantee would be 1) an expensive big-government takeover, 2) unproductive and impossible to manage, 3) dangerously disruptive to the private sector, and 4) inflationary.

Samuelson wants us to be afraid—very afraid—of big government. But he forgets that we already have big government—one that devotes hundreds of billions of dollars, time, resources, and administrative effort to deal with all the economic and social costs of unemployment, underemployment, and poverty.

Unemployment is already paid for. In this context, the program does not increase the government’s costs—it reduces them—while also cutting costs to households and firms and creating real actual benefits by supporting families, communities, and the economy. As David Dayen points out, whether we can afford the Job Guarantee is not up for debate.

Will the Job Guarantee create impossible-to-manage make-work projects? This is a fear that James Galbraith—a self-proclaimed former skeptic of the Job Guarantee—calls “an admission of impotence and a call for preemptive surrender.” Kate Aronoff recalls that New Deal projects were often derided as boondoggles. Still, they rebuilt communities, the economy, and people’s lives, while leaving a lasting legacy.

The Job Guarantee is subjected to a unique double standard for managerial efficiency. We never hear objections to going to war, “nation building,” or bailing out the financial sector on the grounds that these efforts would be an “administrative nightmare.” And yet our proposal to put our underutilized labor force to productive use, by using much of the existing institutional infrastructure in the nonprofit and state and local government sectors is dismissed as an impossibly difficult task.

The claim that the Job Guarantee is unproductive misses another basic point: unemployment is inherently unproductive. What is the productivity of an unemployed person and her family struggling to make ends meet, compared to her productivity when she is employed in a public service job with decent pay? continue reading…


On the Costs of Doing Without a Job Guarantee

Michael Stephens | May 1, 2018

Pavlina Tcherneva — who, along with L. Randall Wray, Flavia Dantas, Scott Fullwiler, and Stephanie Kelton, authored this report estimating the economic impact of a job guarantee proposal (the Public Service Employment program) — was interviewed by Bloomberg’s Joe Weisenthal and Julia Chatterley about the purposes and costs of the plan.

This recently released policy note by L. Randall Wray also takes on some of the criticisms raised by the interviewers, in addition to seeking a consensus among the job guarantee proposals emanating from progressive think-tanks.