The Great Hypocrisy: Neoliberalism’s Critique of Modern Monetary Theory

Abstract

There is something disingenuous, something hypocritical in the vociferous critiques of Modern Monetary Theory (MMT). The hypocrisy among neoliberal economists reveals itself in tacitly accepting quantitative easing (QE) while criticizing MMT. QE involves creating money to purchase treasury bonds and mortgage-backed securities, benefiting primarily asset holders. MMT involves creating money to employ people, attaining full employment. Neoliberalism rejects Keynesian interventionism, instead advocating using government to channel market forces in ways that benefit corporations and the affluent. The dynamic stochastic general equilibrium (DSGE) model incorporates the neoliberal vision in showing the irrelevance of fiscal policy in achieving full employment. Problems with the DSGE model revealed themselves in its inability to explain the great financial crisis. Nevertheless, neoliberal economists seek to retain the DSGE model while rejecting MMT. The article further contrasts QE with MMT, showing the similarities and difference between the Fed purchasing assets and the government engaged in functional finance. Governments throughout the world are resorting to creating money to increase employment and sustain their economies, policies advocated by MMT.

Keywords:

• modern monetary theory
• Great Financial Crisis
• quantitative easing
• dynamic stochastic general equilibrium model

JEL Classification Codes:

• B52
• E100
• E120
• E170
• G01

Notes

1 Friedman identified three sources of monopoly: economics of scale, government, and collusion. “Probably the most important sources of monopoly power has been government assistance, direct and indirect” (Friedman 1962, 129).

2 Regarding human nature, neoliberalism oversimplifies, depicting human beings as utility-maximizing automatons. Human beings are complicated, often myopic if not irrational, capable of both selfishness and altruism (See Wrenn and Waller 2017).

3 The federal funds rate, known as the overnight interest rate in other countries, is set by the Fed. If the interest rate increases above the target, the Fed can increase reserves, reducing the rate. If the interest rate falls below the target, the Fed can withdrawal reserves.

4 The national income accounts define gross national product as follows: GNP ≡ C + I + G + CAB. In words, gross national product equals consumption plus investment plus government spending plus the current account balance, exports less imports plus net external foreign income (income earned by domestic factors abroad less income earned by foreign factors domestically). Subtracting consumption and taxes from both sides, GNP – C – T ≡ I + (G – T) + CAB. GNP – C – T equals private saving (S). Subtracting I from both sides yields net financial assets of the private sector (S–I) ≡ (G – T) + CAB.

5 Ball (1999) argues that expansionary monetary policy combined with changes in labor-market incentives may reduce unemployment, creating a hysteresis in reverse.

6 Later, some economists added a measure of realism by introducing various “distortions”: wage rigidities, imperfect competition, and so on, but the basic model remains competitive.

7 Romer concludes that “the methods and conclusions of macroeconomics have deteriorated to the point that much of the work in this area no longer qualifies as scientific research” (2016, 1).

8 “It is now clear that the power of the rational expectations/new classical macroeconomic revolution was derived from the heroic specifications of the model that agents use to guide decisions, rather than upon the proposition that agents use “all” of the available information in making decisions where “all information” takes the form of models (theories) of how the world behaves. The heroic specification was that all agents have a common understanding of the environment within which they operate and that in this commonly understood environment the effect of agents seeking their own good sustains a general equilibrium. The assumption of the rationality of expectations takes the role of Smith’s “invisible hand” in assuring that equilibrium exists and that the commonly understood environment is logically equivalent to the unsatisfactory assumption of perfect foresight in general equilibrium theory (Minsky 1996, 360–61).

9 “A hypothesis is important if it “explains” much by little, that is, if it abstracts the common and crucial elements from the mass of complex and detailed circumstances surrounding the phenomena to be explained and permits valid predictions on the basis of them alone. To be important, therefor, a hypothesis must be descriptively false in its assumptions” (Friedman 1953, 14).

10 The top decile owns 59% (Board of Governors of the U.S. Federal Reserve System 2019).

11 McCloskey attributes the mathematization of economics to the influence of Paul Samuelson’s Foundations of Economic Analysis (1998, 35). Mirowski attributes the mathematization of economics to the “influx of a cohort of scientists and engineers trained specifically in physics who conceived their project to be nothing less than becoming the guarantors of the scientific character of political economy” (1991, 147).

Additional information

Notes on contributors

John P. Watkins

John P. Watkins is a professor of economics at Westminster University. James E. Seidelman is Distinguished Service Professor of Economics at Westminster University and Former Provost at Westminster College. An earlier version of this article was presented at the conference of the International Confederation of Associations for Pluralism in Economics on January 5, 2020. The authors would like to thank the editor and reviewers for their helpful suggestions, particularly with regard to the founding or the Mont Pèlerin Society. As always, all errors and omissions reside with the authors.

James E. Seidelman

John P. Watkins is a professor of economics at Westminster University. James E. Seidelman is Distinguished Service Professor of Economics at Westminster University and Former Provost at Westminster College. An earlier version of this article was presented at the conference of the International Confederation of Associations for Pluralism in Economics on January 5, 2020. The authors would like to thank the editor and reviewers for their helpful suggestions, particularly with regard to the founding or the Mont Pèlerin Society. As always, all errors and omissions reside with the authors.