To what extent can Positive Money and Modern Monetary Theory join forces?

A recent blog by Clint Ballinger highlights some of the similarities and differences between Positive Money’s proposals and those of Modern Monetary Theory (MMT) and other Post-Keynesian types of analysis. We thought Ballinger makes some good points that are worth highlighting, before suggesting where we think his review could be improved.

Ballinger starts his discussion by complimenting both sides, suggesting that:

“Despite these various approaches having important disagreements…[their] areas of interest all are grounded in reality & therefore their discussions on policy options are coherent and useful, unlike orthodox policy discussions.”

Next, Ballinger distinguishes between the two sides, suggesting that Post-Keynesians and MMTers have conceptualised their approach by deconstructing the fallacies of the current orthodox framework:

“Post-Keynesian economists have been trying to get orthodox economists to understand the way the economy actually works (with endogenous money) in the real world for decades…[Post-Keynesians dismiss] A significant number of monetary reformers [who] focus on a money multiplier [and] are still stuck in a loanable funds world…”

On the Positive Money approach, Ballinger states:

“There is another group of monetary reformers that do understand that we are in an endogenous money – not a loanable funds – world. Their proposals do not focus on a (non-existent) money multiplier. Their proposals are aimed at actually making the current endogenous money system into a true loanable funds system.”

Ballinger then makes an interesting point as to why Post-Keynesians and MMTers take issue with Positive Money style of proposals, as they:

“…have looked on in dismay as orthodox economists have spent whole careers writing about a non-existent loanable funds system and in turn giving terrible, indeed dangerous, policy advice. Thus it is natural to view holders of the loanable funds view as enemies who do real harm to the economy and the public.”

Ballinger however, is quick to state why Positive Money-type (PM) proposals should not be condemned:

“But it is different to be frighteningly delusional about reality (as orthodox economists are about loanable funds) than to understand that the current system is an endogenous money system and want to make it a loanable funds system (as PM-type proposals do. There are other main reasons many Post-Keynesians reject PM-type proposals. At times, though, it seems mere association with the muddled orthodox view of banking does influence how/whether some Post-Keynesians really weigh the details of PM-type proposals).”

Ballinger then cautions Positive Money, by stating:

“Realize the danger of being thought “not to get” endogenous money…Educate those who still talk about “full/fractional reserves” and a money multiplier that these are just not the issue…The loanable funds system PM and others propose is a “no reserves” system, not a full reserve system.”

Later on Ballinger gives some advice to Post-Keynesians and MMters, suggesting they should:

“Try (even) harder to teach monetary reformers that are erroneously still worried about a money multiplier that there simply is not one in the current system…If they understood endogenous money and that loans create deposits they would see that reforming a “money multiplier” is a waste of time.”

Then Ballinger notes that, there is scope for both sides to join forces:

“Rather than arguing among themselves, Post-Keynesians and PM-type groups should focus on the important overlaps of their bank/finance reform proposals.”

Positive Money should (according to Ballinger):

“…Support MMT proposals that get part of the way to your goals, even if you ultimately want further changes… if PM type proposals want to move from “A” (today’s system) eventually to “D” (a loanable funds system), and Mosler-type proposals move the system to “B” (significant restrictions on the way endogenous money is currently created; the existence of a parallel narrow banking system for those who want it) then PM should be very much on board.”

While Post-Keynesians and MMTers should recognize that Positive Money reformers:

“…Are different from orthodox economists in a crucial way – they get endogenous money – they just don’t believe it serves the public purpose…Recognize that real dialogue is possible with them unlike with the vast majority of orthodox economists. If a loanable funds model would not work or would be worse for the public, clearer statements of why could be made.”

Ballinger also notes that both MMT and Positive Money are often unfairly criticized:

“Many of the concerns with the PM proposal I have seen brought up are actually discussed in some detail in the PM literature…and it often seems that critics of the plan simply do not closely read PM explanations of the details of the plan.”

“There are plenty of critiques of MMT – most of which are completely misguided and due to fundamental misunderstandings of the economy due to orthodox economic blinders.”

Yet for Ballinger, the primary line of contention between Positive Money and many Post-Keynesian groups “…is somewhat complicated, and the key reason involves endogenous money…[and] whether or not endogenous private credit-money creation also serves the public purpose”.

Subsequently, concerns regarding both approaches are laid out. For Positive Money, Ballinger asks:

“Would the new system of exclusively state money be able to create a fair system for large business loans? How would that system differ from the current system?”

And for Post-Keynesians and MMTers, Ballinger asks:

“Does the fact that endogenously created private credit-money dwarfs state money restrict the ability of the government to act in the public purpose in the way MMT believes?

“Does this render MMT ideas on the role of the state in the economy unworkable? Does the inherent instability and pro-cyclical nature of endogenous money have too many social costs? Does the endogenous money system stealthily but inexorably lead to regulatory capture? …Lead to unsustainable levels of private debt? To highly inequitable wealth distributions?”

After citing some useful articles (well worth a read), Ballinger concludes by stating:

“PM-type proposals & MMT are in essential agreement that the state can and should just spend state money for public purpose, with inflation the limiting factor. This is sometimes unclear because of the operational peculiarities of various countries, not least of the US. Whether this is just through continued deficit spending, or a 60 trillion dollar coin or similar, circulating treasury notes (the same thing really), or whatever, ultimately makes little difference. PM-type proposals have long used the US Greenback – circulating (mostly digital) treasury notes, as a key example, and MMT economists have the same view.”

From our perspective, there are some really good points that apply for both MMTers and us. The only thing we would want to point out here is that the main argument for our reform is not about transforming “…the current endogenous money system into a true loanable funds system”. While we seek to ensure that banks function as genuine intermediaries, we are more concerned with returning the power to create new money to an accountable body working in the public interest, and removing the dependency on debt-fuelled growth.

The primary difference is that money could be created endogenously in a Positive Money system, if voters and the incumbent government chose to do so, by allowing banks to have overdrafts at the Bank of England. In contrast to the current monetary system, Positive Money proposals would give the Bank of England more flexibility, allowing it to choose when to slow down the rate of creation of new money directly, rather than trying to restrain the creation of money by the banks.