MMT, Models, Multidisciplinarity

By Pavlina R. Tcherneva, an associate professor of economics and director of the economics program at Bard College. Originally published at New Economic Perspectives

The attacks on MMT are taking a comical turn. A recent one, courtesy of Noah Smith, takes aim at a paper I wrote in the 90s titled “Monopoly Money: The State as a Price Setter”.

It focused on a key MMT idea—that the currency-issuing monopolist (just like any other monopolist) is a price setter. The economics that I was taught didn’t even consider the implications. So I wrote down a few equations to look at different scenarios of prices paid and real resources purchased by a currency-issuing government, given the level of aggregate tax liability and private saving desires.

The paper was followed by other empirical work from the MMT community. So, while I initially started responding to Noah’s hysterical blog, I decided to say a few words about the implications of the paper instead, and provide a short reading list of other empirical work from MMTers on various topics.

Still, Noah isn’t getting a pass.

Now, all models make simplifications and all models are flawed. But they can be used to clarify an idea. The important question is, did they attempt to analyze some real world stylized facts or some fictional story. An example of the latter would be the mainstream model of a shipwrecked Robinson Crusoe, who makes production and consumption decisions on a deserted island. I stuck with the real world.

The paper starts off with an example where the public sector (the currency monopolist) purchases one good (rather, a service) from the economy – that of firefighters – and asks “how many hours of firefighting labor can the public sector purchase, given prices, taxes, and saving desires”. For this, Noah is accusing me of modeling an economy in which “everyone in the entire economy dies” (his emphasis).

Heck, I can’t think of a more appropriate example! The planet is burning, isn’t it?

Has Noah forgotten his Econ 101 “guns and butter” tradeoff? That’s where an economy can either produce butter (e.g., feed its people) or guns (e.g., wage endless wars), but so long as any combination of the two goods lies of the production possibilities frontier (PPF), the economy would be allocating its resources efficiently!

Generations of students were initiated into economics with this model, the effect of which was to teach them an unexamined acceptance of morally reprehensible expenditures and investments as efficient market outcomes (in this case – on war, but you can substitute fossil fuel production, incarceration, or anything else into the PPF).

Maybe I should have stuck with orthodoxy and used guns, so that Noah’s dramatic conclusion that my model is an “employment of doom” makes a bit more sense.

I chose firefighters. I thought they were saviors, not mercenaries.

Next, Noah wants you to believe that my 1-good model is “people [who] are effectively doing slave labor for the government,” because of some quotes in the paper on taxation in colonial Africa. (This argument is so inane that it doesn’t merit a reply, so here is some background for the MMT-curious with links.)

My paper does start with quotes from prominent scholars about how taxes were used in colonial Africa to create demand for the colonizers’ currencies (which also gave rise to cash crops and wage labor). The point was to show an example of the coercive nature of taxation.

Is there one person who disagrees with the statement that taxes are coercive? Taxes are compulsory. They are non-reciprocal. And this is true for democratic societies or authoritarian ones.

When I first heard Warren Mosler’s argument that people used a given currency because their taxes were denominated in it, I thought it was the most implausible idea. But then I started digging. My undergraduate professor Mat Forstater sent me direct historical evidence of how taxes could and had been used to require people to use an otherwise-useless-to-them currency—the case of colonial Africa. I passed these examples on to Charles Goodhart who, lo and behold, cited them in his seminal paper The Two Concepts of Money. (Lucky for him, Noah hasn’t discovered his paper yet.)

And thus began the MMT research project on the history of money.

There are of course many “democratic examples” of the tax-driven nature of currencies. Take the example of the Argentinean provinces, which in the depths of the 2001 crisis launched their own currencies (e.g., patacones). They did this by requiring citizens to pay local taxes and utility bills in the new currency and then by paying state employees and contractors in the new currency. I was in Argentina at that time and can vouch that people didn’t like it, but storefronts were plastered with signs “We Accept Patacones”. Then I found an argument put forth by Ben Franklin – a well-known advocate of paper money – that it is the future repayment of taxes that gave it value. In other words, taxes were used not to ‘fund’ the states (indeed the colonies could not collect taxes before they had spent the paper currency first), but to maintain the currency’s value by removing some of it from circulation.

In a subsequent paper on the relationship between power and money, I argue that political sovereignty is never fully complete without monetary sovereignty, and that the right to issue and control a nation’s currency was a critical victory for former colonies in their battle for economic independence. In the US, we fought a war (in part) to acquire the right to issue currency and in response to the Currency Acts of 1751 and 1764. No taxation without representation.

So yes, currencies are ‘acceptable’ because of the tax requirement, no matter if the state is a democratic one or not. And if we are serious about democratizing money (given that it’s born out of this tax relationship), we must also ensure that it is employed to serve the public good and eliminate the very unemployment it creates. Furthermore ‘democratizing money’ cannot be done without ‘democratizing labor, ’ as I argued recently at Christine Desan’s Harvard conference on “Money as a Democratic Medium.”

While Colonial Africa was among the first examples we found, research on the origins of money confirmed and reconfirmed the taxes-drive-money mechanism. We dug deeper and wrote a ton on the history of (and the history of thought on) money (these papers, books, dissertations by Charles Goodhart, Mat Forstater, Randy Wray, John Henry, Eric Tymoigne, Alla Semenova, myself are a small selection).

Innes, Knapp, and Keynes offered important insights, but modern economists were of no use—after all they relied on fictitious barter/neutral money models (Farley Grubb was a rare exception). We searched the other disciplines and found more evidence that money did not emerge spontaneously from markets (or barter), but from the powers of the state (very broadly defined) to impose nonreciprocal obligations on its subjects.

We found the work of historians, anthropologists, sociologists who provided evidence for and corroborated some of our arguments (Philip Grierson, Viviana Zelizer, Michael Hudson, Christine Desan, David Graber, and others). We learned from their work and that of others, though I’m certainly not suggesting they endorse or agree with (everything in) MMT. Colleagues from law, political studies, humanities, finance, etc., joined us – and the MMT project became truly multidisciplinary. Fellow MMT travellers – too many to list here – converged at the first two MMT conferences and Chris Desan’s workshop. Others, called on their own disciplines to reclaim the study of money, e.g., read Rebecca Spang’s recent appeal to historians.

To sum up, taxes drive money, in virtually all economic/historical contexts, whether Noah gets it or not. And even a highschooler would understand that modeling this stylized fact is not endorsing a genocidal regime.

So here is a very short summary of some of the implications of the paper he is criticizing, followed by a short list of other MMT empirical work on a variety of topics.

Monopoly Money: the State as a Price Setter

(Not a single firefighter was harmed in this exercise or enslaved to work for the state.)

What are the questions?

  1. Standard economics talks about monopoly, but ignores the one pure case of monopoly: that of the currency.
  2. There is still no recognition that the tax creates a type of ‘monetary unemployment’ (distinct, though in my view, not incompatible with Keynes’s). The obligation to pay the tax in a given currency creates offers for sale of goods and services (g&s) in that currency.
  3. The government can choose the manner in which to purchase those g&s and thereby provide adequate amount of currency to the population to satisfy the tax. If it does not, involuntary unemployment results.
  4. The government has the responsibility to resolve the unemployment it has created.
  5. If it doesn’t, the level of employment/unemployment in the economy will be indeterminate (esp., given uncertain saving desires).
  6. The government has the option and ability to employ the unemployed directly.
  7. As a currency monopolist, it could determine the price of that labor and let the budget float (to accommodate the tax bill or saving desires). We call this the “fixed price-floating quantity” rule.
  8. Today, the government chooses not to do that. Instead, it spends on a “floating price-fixed quantity” rule. It constrains the budget, pays market prices for g&s, and fails to solve the problem of unemployment (as above).
  9. My paper looks at different scenarios that have implications for the fixed budget/floating budget options, and considers questions like “how many resources could be transferred to the public sector, given a certain aggregate tax liability, and in which cases is that amount indeterminate.”
  10. Finally, it raises questions like “If the state can set prices, should it? And if so which ones?”

The upshot is that, there is an inverse relationship between the price the government pays for goods and services and the quantity of real goods and services it receives, for a given level of taxation and net saving desires. Constraining the budget creates unemployment and under-provisions the government. If instead, the government allowed its budget to float, if could design a countercyclical policy (such as the Job Guarantee) that would be a superior price anchor and automatic stabilizer, which I modeled in a subsequent paper. So unlike basic neoclassical PPF models that pass objectionable tradeoffs as efficient, the Job Guarantee explicitly rejects the use of unemployment for economic stabilization purposes.

Later, Warren Mosler and Damiano Silipo published another empirical analysis on this precise question (the price setting power of government and its policy prerogative to adopt a fixed price/floating quantity rule) in the Journal of Policy Modeling. They showed how the Job Guarantee (they call it a transitional job offer) can be used to enhance the ECB’s single mandate for price stability and why it was superior to other alternatives. The implication from these two models is that government policy and prices paid by government are the ultimate source of the price level.

Far from the Economics of Doom, MMT points to superior policies for full employment and price stability.


Here is a very brief reading list of other empirical MMT work—a sample of the wide variety of methods and topics to which it has been applied. This scratches the surface of the empirical and analytical work of MMT. Also the list is confined to the UMKC MMT crowd. You should look up the voluminous work of Bill Mitchell (his blog, research center, and book publications) and that of fellow travellers, who have their own research programs (e.g., Bond Economics).


  1. Macroeconomics, Mitchell, Wray and Watts
  2. Money and Banking, Tymoigne


Fed/Treasury operations, Fiscal and Monetary policies

  1. Do Taxes and Bonds Finance Government Spending, Bell/Kelton
  2. Fiscal Effects on Reserves and Fed Independence, Wray and Bell/Kelton
  3. MMT and Fed/Treasury operations, Tymoigne
  4. Helicopter Drops are Fiscal Operations, Fullwiler
  5. Time to Reign in the Fed, Fullwiler and Wray
  6. Quantitative Easing and Proposals for Reform of Monetary Policy Operations Fullwiler and Wray
  7. Treasury Debt Operations—An Analysis Integrating Social Fabric Matrix and Social Accounting Matrix Methodologies, Fullwiler
  8. Functional Finance and the Debt Ratio, Fullwiler
  9. Sector Financial Balances Model of Aggregate Demand and Austerity, Fulwiler
  10. Sustainable Fiscal Policy and Interest Rates under Flexible Exchange Rates, Fullwiler
  11. Monetary Mechanics: a Financial View, Tymoigne
  12. Interest rates and fiscal sustainability, Fullwiler
  13. Yes Deficit Spending adds to Private Financial Assets Even with Bond Sales, Kelton
  14. Debunking the Public Debt and Deficit Rhetoric, Tymoigne

Exogenous Pricing

  1. Monopoly Money the State as a Price Setter, Tcherneva
  2. Maximizing price stability in a monetary economy, Mosler and Silipo

ELR, Job Guarantee

  1. Job Guarantee: Public Service Employment, Wray, Dantas, Fullwiler, Tcherneva, Kelton
  2. Macroeconomic Stabilization Through an Employer of Last Resort, Fullwiler
  3. The Costs and Benefits of a Job Guarantee: Estimates from a Multi-Country Econometric Model, Fullwiler
  4. Employer of Last Resort: A Case Study of Argentina’s Jefes Program, Tcherneva and Wray
  5. ELR-led Economic Development: A Plan for Tunisia, Kaboub

Unemployment, Inequality, Social Security, Poverty, Housing, Financial Instability

  1. Full Employment, Inflation and Income Distribution, Tcherneva
  2. A Hard Nosed Look at Worsening US household Finance, Tymoigne
  3. $29,000,000,000,000: A Detailed Look at the Fed’s Bailout, Felkerson
  4. Who Gains When Income Grows, Tcherneva
  5. Does Social Security Need Saving, Wray
  6. Central Banking Asset Prices and Financial Fragility, Tymoigne
  7. Measuring Macroprudential Risk through Financial Fragility: A Minskian Approach, Tymoigne

Ok that’s for starters.

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  1. Summer

    The monetary system that works best will be in the places where people give a rat’s butt about people over profit.

  2. diptherio

    Book marking this for the bibliography.

    Noah Smith should do a better job of embodying the title of his blog and express no opinion about MMT. He’d save himself a lot of embarrassment.

    1. Samuel Conner

      Up until he started dissing MMT, I enjoyed his ‘blog. Perhaps I was unwise to have; maybe he was making other errors that I didn’t have the wit to perceive.

      1. diptherio

        Every time I read him, it seemed like just warmed over neo-classical economic status quo apologetics, which I got plenty of as an undergrad. He’s another Krugman, as far as I can tell.

        1. skippy

          Philip Pilkington and I have gone the rounds with Noah a long time ago in the tubes, go too: – and then put Noah Smith in the search field.

          Especially “Shadow-boxing with DSGE Models” and “Noah Smith Fumbles Argument, Endorses Post-Keynesian Endogenous Money Theory”.

          That’s not to mention the pig wrestling on his site or others back in the day, not to mention the variable goal posts on shifting sand rhetorical jujitsu one has to endure once pinning something down, only to have claims of ignorance or comprehension leveled at detractors of the “utility-maximising agent” faith.

          Then some are confused about neo new Keynesians – new Classicals as being old wine poured into a new bottle or re-labeled monetarists.

    2. Jeremy Grimm

      I found this post’s defense of MMT strange and confusing — so I went to Noah Smith’s site to see what arguments the post was countering. I was unable to make head or tails out of Noah Smith’s verbiage. Is this a fair example of Noah Smith’s thought and writing style … ????? WOW!!!!! I don’t understand why there should be any need to defend against that mass of verbiage.

      I appreciate the summary list of some of the implications of the paper in contention and especially appreciate the list of MMT sources at the tail of this post.

  3. Susan the other`

    This just answered my question about the impasse between sovereignty and federation (thinking about the EU). The difference between democratized money which makes the state the currency monopolist by determining the price of labor directly and letting the budget float to accomodate taxes the saving desires in the economy (MMT currency monopoly employing labor for progress) and the long standing oppressive private finance rule of fixing prices arbitrarily to control maximum profit by manufacturing scarcity. It’s simple: “political sovereignty is never complete without monetary sovereignty.” And as they said in 1776: “No taxation without representation.” And no fudging the representation. Modern sovereignty has a lot of work to do. What a great, clear piece of writing. Thank you.

  4. tiebie66

    Though it might be true that taxes drive money in virtually all economic/historical contexts, it is important to know that other factors exist. Graeber (Debt: the first 5000 years) inadvertently provides evidence that money depends on trust and utility, not necessarily on the state as he claimed. He mentions two important cases. On p. 270 he says that “…Chinese governments were rarely completely willing to accept their own paper money for tax purposes.” It will be difficult to argue that Chinese economies were of little consequence. We are also informed that much commerce in the Muslim world functioned without state involvement – that checks were widely used because its use and acceptance was based on trust and reputation and functioned as a type of de facto money. Conversely, what would happen if trust in a state currency is lost? Zimbabwe?
    As an aside, one thing that I find frustrating is the tendency of MMT to carve out niches where MMT applies, and ignores or dismisses cases where it does not seem to apply. Thus, it seems to apply only to big, advanced economies, but Zimbabwe, with a sovereign currency, does not count. I’d also like to know how Japan’s recent experiments with deficit funding is interpreted.
    I welcome the debate that MMT has spurred, though I’m far from convinced. Most extant alternatives seem to be worse.

    1. DanB

      My limited perspective on this issue is that Zimbabwe printed money instead of addressing its shortages of consumable services and goods. So this case does not negate MMT principles. I think a similar situation occurred with Weimar Germany when it had hyperinflation.

      1. jonhoops

        Zimbabwe also had large foreign debts that it could not pay (the usual IMF boot and heel), not to mention being under a repressive international sanctions regime from the West (war by other means). Funny how these factors are never mentioned.

        1. Summer

          The mainstream economists always leave out the sanctions and predatory loans in the explanations.

      2. Samuel Conner

        I saw a persuasive argument (granting its premises, which I was not in a position to contest) that the Weimar hyperinflation resulted from the central bank keeping real interest rates significantly negative while lending freely to a large range of powerful (I think mostly institutional) borrowers. These borrowers, presented with the opportunity to borrow at negative real rates, did so freely and used the borrowings to purchase real assets, which promptly appreciated in price due to the bidding of potential purchasers.

        This may be the item I am recalling:

    2. deplorado

      Yes! Love Prof. Tcherneva’s work and argument – but for the sake of inquiry these need to be addressed.

      And, this – the most clear takeaway:

      “The upshot is that, there is an inverse relationship between the price the government pays for goods and services and the quantity of real goods and services it receives, for a given level of taxation and net saving desires. Constraining the budget creates unemployment and under-provisions the government. If instead, the government allowed its budget to float, if could design a countercyclical policy (such as the Job Guarantee) that would be a superior price anchor and automatic stabilizer” .

      “Allow the budget to float”. Period.

      1. Susan the other`

        yes. reading her explanation, which turns neoliberal policies of austerity upside down, is easy to understand, even though it is a higher level explanation on the social value of MMT than we usually get. I love this post for the absolute focus it has. And I wish the EU would read it. I keep imagining that they can turn things around. And by the recent attempt by private finance to weasel into every pocket on the planet, my guess is private monopoly money is getting worried. If the EU went MMT, that would end the frivolous arguments.

    3. aj

      MMT does not carve out niches where it does or doesn’t apply. It explains the operating space that is available to monetarily sovereign governments. There are clear explanations for the hyperinflation in Zimbabwe and Weimar Germany that don’t negate anything from MMT. I think you are confused because the typical explanation (printing money) is either wrong or doesn’t present the whole picture of what happened to those two countries.

      Germany at the end of WWI had its manufacturing sector pretty well demolished and it owed reparations in a foreign currency. Zimbabw,e similarly lost a lot of it’s productive capacity and was heavily reliant on imports denominated in foreign currency. In both cases the money-printing was a symptom of the underlying supply issues and not the root cause of the inflation. Neither of these two countries was monetarily sovereign during their hyperinflation period since they were vastly reliant on (or enthrall to) outside currency.

    4. rtah100

      I gave my copy of Graeber away (potlatch economy! you have to read the book to find that funny….) and have not got round to buying another but IIRC the Chinese paper money reference was a digression on the Chinese invention of paper money, which circulated at the same time as their coins (not all necessarily coined at the same time, either!) and the Chinese government accepted its coins but not always its notes. I cannot remember why, something to do with insufficient money-ness of the notes?

      I think was part of a wider discussion about later European developments of bills of credit circulating (with endorsements etc.) in the manner of paper currency and the credit nature of money.

  5. Adam1

    A couple points…
    First, MMT does not say that taxes are the only thing that drive money. Taxes are a sufficient requirement for getting STATE money accepted and used. That said those taxes must be enforceable and reasonably consistently enforced. There are plenty of historical instances where the inability to apply and collect taxes has eventually lead to the collapse of the currency. One great example is the Confederate US as the civil war neared its end.

    Secondly, even a monetary sovereign country is constrained by its access to real resources and that constraint varies by country. As Mel and DanB indicated, Zimbabwe tried to ignore that constraint.

    Third item and invariably linked to the second… some countries do have a privileged benefit where foreigners are willing to save in their currency and are able to sustain trade deficits with little or no depreciation of their currency. For countries who do not have that privilege, it does not negate MMT it just means you need to be aware of where your resource constraints are and keep an eye on your balance of payments so as not to import inflation unnecessarily.

  6. Michael K

    I read this at NEP and I’m glad Yves published it here. Prof. Tcherneva’s work is important and deserves to be widely read.

    Years ago, when I first read about MMT here on NC, it made perfect sense to me, unlike the classical economics I studied at Cornell and later at Columbia. “Elegant” theories don’t impress me. I want evidence and a track record. I want to know how the world actually works, not an ideology masquerading as a “useful framework”.

    MMT provides a good explanation of our economy without needless jargon and models that constantly need to be refined (i.e. bad models that need to be fixed every time they fail). I’ve been waiting years for someone to come forth with a quality criticism of why MMT is wrong. Dozens of “respected” economists, including many (fake) Nobel Prize winners, have tried, but their critiques are usually risibly awful.

    It’s good to see MMT making the mainstream press, even if its presentation is incomplete.

    1. RBHoughton

      Here here – I seldom visit NEP but I come here to Naked Capitalism daily. This is where its happening.

    2. skippy

      “Elegant” theories …

      I’ve always found Einsteins path dependency on framing his GT – Elegant – because he thought the Creator would have functioned as such an allegory to orthodox economics.

      Don’t know how many times I’ve wrangled such thinking, too offer Wray or say Mosler et al getting into the weeds about things, only to have them complain about it being so hard e.g. demanding reality be made simple to the point of meaninglessness – never the less being able to refute what they say.

  7. Sound of the Suburbs

    Something is wrong, but no one knows what.

    Everyone assumes our current knowledge has built up over time as we learn from past mistakes.

    With economics and the monetary the system there is too much to lose from allowing knowledge to develop in the normal way.

    Our knowledge of privately created money has been going backwards since 1856.

    Credit creation theory -> fractional reserve theory -> financial intermediation theory

    “A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner

    Money is power, but that power comes from the majority not understanding the system.

    “Let me issue and control a nation’s money and I care not who writes the laws.”

    If the Government is free to create money that power is diminished.

    If everyone knows money is just numbers typed in at a keyboard it loses a lot of its power. MMT is far too dangerous to be allowed into the mainstream.

    Things went backwards between Milton Freidman (fractional reserve theory) and Ben Bernanke (financial intermediation theory). Milton Freidman’s monetarism demonstrated “fractional reserve theory” didn’t work and they moved further away from reality to “financial intermediation theory” leaving Ben Bernanke unable to understand the debt deflation of the 1930s. Debt deflation can’t happen with “financial intermediation theory”.

    That’s money, what about economics?

    Everything had been going well for 5,000 years and then the classical economists turned up. Those at the top had been living in luxury and leisure, while other people did all the work.

    The European aristocracy were just the same, they lived in luxury and leisure while other people did all the work. The Classical Economists realised they were being maintained by the hard work of everyone else.

    The Classical economist, Adam Smith:

    “The labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”

    Economics was always far too dangerous to be allowed to reveal the truth about the economy.

    How can we protect those powerful vested interests at the top of society?

    The early neoclassical economists hid the problems of rentier activity in the economy by removing the difference between “earned” and “unearned” income and they conflated “land” with “capital”.

    They took the focus off the cost of living that had been so important to the Classical Economists to hide the effects of rentier activity in the economy.

    The landowners, landlords and usurers were now just productive members of society again.

    Our knowledge of economics and the monetary system are fundamentally flawed.

    MMT is far too dangerous to be allowed into the mainstream.

    1. Sound of the Suburbs

      Mark “Austerity, the History of a Dangerous Idea” Blyth pointed me to this short pamphlet that reveals the state of thinking in the 1940s, which is interesting as it reveals the lessons that were learnt after neoclassical economics and it’s thinking had gone wrong in the 1930s.

      They knew Governments could create full employment.

      The US Government ran up huge deficits, no problem.

      Full employment without inflation, no problem.

      The rich only allow Government spending for the military and war.

      You can see the same now:
      1) Let’s have another war, damn the expense
      2) There isn’t the money for entitlements

      They always do this, no change there

      Kalecki did actually see how full employment would cause problems of its own and this came to pass.

      Let’s remember what they used to know.

      1. Sound of the Suburbs

        Now for the good news.

        The only solution to the mistakes they have made is Government created money; they just haven’t worked it out yet. Adair Turner has.

        Adair Turner took over at the FSA when Lehman Brothers collapsed and this gave him the incentive to find out what was going on.

        Adair Turner has looked at the situation prior to the crisis where advanced economies were growing by 4 – 5%, but the debt was rising at 10 – 15%.

        This always was an unsustainable growth model; it had no long term future.

        After 2008, the emerging markets adopted the unsustainable growth model and they too have now reached the end of the line.

        Government created money is the answer Adair came up with and his analysis isn’t bad.

        The money supply ≈ public debt + private debt

        There aren’t many terms in the equation.

        The “private debt” component will be going down with deleveraging from a debt fuelled boom.

        Increase the “public debt” component, like Japan, to create a public debt problem from a private debt problem.

        OR …..

        Government created money, MMT, to get the overall debt down.

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