MMT as nonsense economics – or not

The first point—that (fiat) money is ultimately a governmental construct in modern capitalist economies, and central banks can indeed produce as much of it as they want—is not news….

is the promising way Jonathan Portes kicks off his argument in ‘Prospect’ against Modern Monetary Theory (MMT), which he calls ‘Nonsense Economics’. He continues:

a sovereign government that prints its own currency (like the US, UK, or Turkey, but unlike eurozone countries) can, in principle, never be forced against its will to default, this is broadly correct.

(I like the broadly), but he doesn’t elucidate, so I won’t…

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. Remember that the UK’s budget was in surplus in 1987, at a time when the economy was in an unsustainable boom.

I don’t think anyone has ever suggested that MMT definitively requires budget deficits. And of course the private sector matters, but it is necessarily less influential than the creator of money, the government.

Does MMT then argue that governments can simply spend whatever they like? This is perhaps the nub of the issue.

It isn’t and no it doesn’t.

You can create money out of nothing, but you can’t create doctors, schools, or consumer goods.

Quite so.

Both from an economic perspective and from a common sense one, taxing and (government) spending happen at the same time. It’s not much help to tell a chancellor trying to write a Budget—setting out her tax and spending plans—that reversing the order would magically solve all their problems.

So that means if I nip out for a pint of milk even whilst I’m being paid to work, it doesn’t matter which comes first because the income and expenditure are happening at the same time? Of course the government budget is not a household and that is rather the point. So knowing that you spend first is very different, even if in doing so you know that you have to tax.

And no matter what the Bank of England did, long-term interest rates would rise, as the private sector—not just “markets” or Goldman Sachs, but ordinary businesses and households—observed that we were not just spending more than we were taxing, but that we were consuming, or trying to consume, more than we were producing, and that inflation was the inevitable consequence.

This goes against Richard Werner’s empirical proof that the Central Bank’s interest rates follow rather than lead, but also suggests that Jonathan Portes has ignored the role of tax in counteracting inflation.

Equally, it also means that MMT—at least the credible version—does not mean there is no limit to deficits, just a different one, dictated by the potential impact on inflation. MMT isn’t a magic money tree after all. And what does this mean in practice?

…..Worse, it’s easy to point to circumstances where on the face of it a naïve MMT-based approach would have pointed you in precisely the wrong direction for the short term. For example, in 2011-12, when inflation rose sharply, even as the economy remained weak. Wren-Lewis and I argued strongly at the time that deficit reduction should have been slowed, not accelerated. MMT—unless you reintroduce some more orthodox thinking via the backdoor—would tell you the opposite.

All this rather proves that either he or MMT or both, have ignored tax.

The conclusion:

But one thing is absolutely certain. The claim that that MMT means that a future government can dodge hard choices about how to pay for decent public services is just plain nonsense.

If we presume that MMT says we don’t need to raise revenue in order to spend it then it doesn’t claim any such thing.

Richard Murphy has always said that MMT supporters do not properly understand tax and Jonathan Portes seems to me, on the evidence of this article, to fall into the same category.

What Jonathan Portes misses is that the ‘financial constraints’ are self-imposed. It’s bad enough – in reality – being short of teachers, nurses and doctors. But having bogus self imposed financial constraints is just – well – self imposed.

Finance is man made.

Jonathan Portes, as a former Treasury civil servant, seems, regrettably, to suggest that finance should make man.


  1. Pingback: MMT is not nonsense economics
  2. Graham -

    If you willfully misunderstand a concept and assign to it assumptions which it doesn’t make then you end up with an article like that of Portes.

    You say that he was a Treasury Official (I’m happy to say I’d never heard of him). Apparently there is something called the ‘Treasury View’, which Skidelsky discusses in “Money and Government” and says that Keynes wrote his “General Theory” to refute. If his “thinking” represents the kind of “thinking” that predominates in the Treasury then it explains a lot.

    1. Peter May -

      Agreed – and interesting point about Keynes’ General Theory…

    2. Marco Fante -

      FYI generally. As I recall (from learning that is, I wasn’t there in the 1920’s, not quite). The “Treasury view” that Keynes complained about was the inherently false idea that government borrowing and investment would “crowd out” an equivalent amount of private sector activity and that it would do so under any circumstances.

      Keynes refuted this by effectively pointing out that “crowding out” (as the idea is now known) could only apply in conditions of full employment when the economy was at capacity. So long as there is unemployment and spare capacity there are still resources available to the private sector.

      Keynes point was effectively suggesting that you can’t be said to have crowded out a space that is half empty. And that if the government does fill the void in a stagnant economy then it creates the strength required to restore demand levels and enable the building of additional capacity- thus creating more opportunity for private investment – and so on etc..

      I hope I explained that well. At any rate I think that the Treasury’s view would have changed in the post-war period and then changed back again in the neo-liberal era. Its due for another change.

      1. Graham -

        Thanks, Marco. According to Skidelsky again, with the coming of Osborne in 2010 the Treasury View returned to that of 1920’s as he embarked on cutting public expenditure as the State was crowding out the private enterprise whizz kids. Skidelsky critiques this whole farrago consummately. What is frightening is the simplistic and demonstrably nonsensical beliefs on which government (and Treasury) policy was based.

      2. Peter May -

        Yes, Graham. Saw Skidelsky interviewed around the time of his book and he said “Because money is used to represent resources, how it is created will always be political”. And, “By saying taxes fund spending, the government is obliged to kowtow to financial forces. It is in fact another branch of neoliberal deceit.”
        He is also supposed to be well acquainted with MMT which is yet another reason I’m amazed that Portes suggests MMT is nonsense, Skidelsky is a heavyweight.

  3. Adrian Kent. -

    Excellent post.

    In case you missed it, here’s a little something regarding how the markets go about ‘efficiently’ setting interest rates – the EU are investigating 8 major banks for collusion in rigging the bond market:

    And all Portes talk of the zero lower bound ignores all the gymnastics that the BoE employed to avoid hitting it since the crash. But apparently it’s MMT that’s nonsense.

    1. Peter May -

      Thanks, good points – I had missed it!

    2. Marco Fante -

      Beware of Zero Hedge it is actually an unusual alt-right site (check that out if you don’t believe me ).

      You may be forgiven for not having noticed this because their kind of ‘right’ is often so ‘alt’ that it is virtually left. I actually find them to be interesting in a way and keep an eye on them from time to time.

      In any case that’s something that you should know.

      1. Adrian Kent -

        Marco – you’re right about Zerohedge’s general standpoint – certainly more Ron Paul and mainstream GOP – but it’s definitely a site worth checking from time to time for interesting US news and comment. They were included in PropOrNot’s list of pro-Russian sites (along with the likes of the excellent Naked Capitalism) a couple of years ago. Make of that what you will.

  4. Adrian Kent. -

    I just noticed this too (my emphasis added):

    “Here’s where the proponents of MMT end up tying themselves in knots. Murphy says: “Experience in recent years has suggested that total tax revenues should be less than total government SPENDING or additional money supplies required to ensure the liquidity to permit growth is NOT present in the economy. The differential expressed as a percentage of GDP might well be close to the desired inflation rate.”

    If this means anything coherent at all—there seems to be a misplaced “not,” but even so the logic or economics here baffles me—the implication is that the government’s DEBT should over time grow broadly in line with nominal GDP, with ups and downs reflecting cyclical movements in the economy. But this is about as orthodox a policy prescription as you can get.”

    First, that not is perfectly well placed, but the thing that really got my attention was how he slipped in the notion that all this spending was Government DEBT.

    1. Striebs -

      Adrian Kent ,

      I’m not a defender of Richard Murphy who once accused me of being racist for pointing out that cheap EU labour had taken the lower skilled jobs which less able Britons were totally reliant upon causing much hardship , marriage breakdowns and insecure stressed children .

      However , based on the extract of his you quoted , you are putting words into his mouth .

      There is no mention of DEBT (capitals are yours) in the extract . The whole point is that HM Govt as monopoly money issuer can issue new endogenous money DEBT FREE .

      1. Striebs -

        PS not only DEBT FREE but interest free too .

      2. Peter May -

        Quite so – and just for clarity the debt word was a quote from the original Portes article.

  5. Andrew (Andy) Crow -

    “You can create money out of nothing, but you can’t create doctors, schools, or consumer goods.”

    Jeeeezus!! What a minuscule brain this person has.

    He’s completely missing the point that the money created can be spent on developing useful resources. The most useful resource of any nation state is its educated and trained population. The process generates economic activity and basically pays for itself as it goes along.

    This pillock doesn’t understand MMT He has barely a half formed grasp of his subject.

    To pretend that MMT is a false economic philosophy when it has been up and running for the best part of five decades as the only game in town demonstrates an ignorance which is frankly staggering.

  6. John -

    In my largely layman reading of this whole discussion is that Portes has written this simply for political reasons and seems to make the underlying neoliberal point that governments should not be trusted with the power to spend. He does not seem to disagree with any of the core points of MMT and seems to put in obvious hyperinflation scares just to for political appease. This is one of those papers that are written for an entirely different purpose than what most here assume and attacking it on logical grounds is a giant waste of time. The real purpose has been fulfilled, the neoliberal overlords must be pleased and Portes will receive some sort of backpay.

    1. Marco Fante -


      To be realistic I would think it more likely that, if anything, the “neo-liberal overlords” have scarcely noticed.

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