Modern Monetary Theory (MMT) and international trade

I have been taken to task for my recent post on some of the difficulties of Modern Monetary Theory’s (MMT) conception of international trade by Professor Bill Mitchell, in a post headed ‘There is no internal MMT rift on trade or development.’

Apparently he has been “bombarded with E-mails (and DM Tweets) … The specific article they have held out was published in the so-called Progressive Pulse“. ‘So called’, it appears, because Progressive Pulse “tends to regret Brexit”. He goes on “Europhiles are not known for their reasoned judgement.”

In contrast, I’m sure we all agree, to the clearly argued and well thought out plans of the Brexiters for the UK leaving the EU. Or perhaps he just had in mind the Brexiters personal plans such that Farage is applying to become a German and Rees-Mogg is moving his investment funds to Dublin.

Whilst I can poke a bit of fun at this, this is going for the man not the ball and not in the least worthy of academic criticism, which he presumably considers he is making, when he continues:

It is obvious that the original writer hasn’t read our work or if they have they haven’t grasped it (including the nuance and subtlety) but still feels privileged to hold themselves out as experts to wax lyrical about the technical flaws in the said work.

One thing I have never held myself out as is an expert! I am, rather, on a shared voyage of discovery.

And if only experts are entitled to comment on MMT, as the economy affects us all, then I suggest you do not have to be an expert before commenting  – but I can only apologise if both the nuance and subtlety have escaped me.

He asks ” where, pray tell, have I ever written or said that “exports are like a household” and concludes, correctly, that he hasn’t. Nor did I anywhere suggest he had. But Warren Mosler has.

He takes me to task for saying “what you export is going to make you poorer simply because they used to be your resources.”

But then his response is “Exports mean that we have to give something real to foreigners that we could use ourselves – that is obviously an opportunity cost.” Which has to amount to the same thing.

Later he explains “The ‘cost’ is incurred to generate benefits – to enhance the material prosperity of the nation.

This looks to be terminology disguising a circular argument. When the Cornish exported tin to the Phonecians they did it because they had enough to do so. Was that a cost or was it a benefit? Or a more contemporary example would be that I don’t see too many Germans regretting every BMW they export because they would have so loved to drive around in it themselves. In short one man’s cost is another man’s benefit – and that is the point of trade.

We know that, concentrating on the money in MMT fashion, exports increase the private sector money supply of the surplus nation. MMT usually advocates government spending (so-called deficits) in order that the private domestic sector has spending power to enhance economic activity. Yet when exports also increase the private sector’s balance as well as potentially reducing the requirement for private loans, they are considered a cost!

And since, unlike the government, this sector is unable to create money at will, it would be safe to assume that these private companies rather like extra money – they do not even consider that they should or would be using themselves what they’ve sold to a third party, so how on earth can “Exports mean that we have to give something real to foreigners that we could use ourselves”?

The basic idea seems to be based on this paper which concludes (my bold) that:

Hence, in the world we actually inhabit, free trade is not the panacea its proponents propagate. If we are to advance the economic interests of the bulk of the citizenry in a decent and humane fashion, we must promote a full employment policy domestically, and couple this with a flexible exchange rate regime internationally. With these institutions in place (on a global scale), exports become a cost and imports a benefit, and the conditions under which free trade is beneficial will have been established.

As we do not have these circumstances in place on any sort of scale – never mind globally – then there is no comprehensible justification to suggest, as a general formula, that exports are a cost and imports are a benefit. The conditions that might make it so are not in place.

Unfortunately Bill Mitchell then goes for our integrity, not our ideas:

What the Progressive Pulse article indicates is that Mr May hasn’t read and/or understood what I was writing.

It thus bears on the editorial integrity of Progressive Pulse and the standards of their Op Ed articles that are published.

Perhaps Mr May should stick to food and drink for the time being.

Maybe I should, but I haven’t. And I have no interest at all – never mind the ‘zeal’ he mentions – in finding rifts in the work of MMT academics.

But I am interested in how the monetary and trading systems actually work.


  1. Sean Danaher -

    I can’t comment on MMT as like you I am still learning. The “So called Progressive Pulse” and “tends to regret Brexit” is interesting. I would live to see a good left wing case for Brexit. I understand completely that the Euro has major issues but as the UK is not part of the Euro it is difficult to see how Brexit changes anything in that regard.

    If one of the critics would like to submit a well reasoned progressive case for Brexit I for one would welcome it.

  2. Graham -

    Churlish and petty come to mind. But if you decide to return to wine tasting I’m up for that. However, I shall decline the Australians – too much like their cricketers, and a few others – somewhat abrasive on the palate. Probably if young Albert had stuck to the Patent office he might have made something of himself. And that damn physicist who upset the paleontologists with some fancy theory about the end of the dinosaurs….

    Many of the precepts and logic (such as it is) of economics are not too difficult to understand and comment upon, for it is not a hard science requiring expertise in difficult maths, and probably isn’t even a science which fact tends to make some practitioners regard it as more like a belief system, to be mediated only by the anointed.

    Economics is fundamentally about human behaviour and most of us know at least a little about that to make reasonable comments, even if at times we get it wrong. After all, professional economists seem to have got quite a lot wrong, and with disastrous consequences, over the years.

    1. Peter May -

      Graham – thanks for that!
      But actually the Ozzies are mostly very similar to us and their big – ‘A European’ wines are becoming steadily more subtle and, well, European!
      Ozzies were used to producing ‘sherry’ and ‘port’ for the home market and now have approached winemaking much more scientifically and have considerable success in the near – and of course much larger market of China – as well as ‘the old country’.
      On economics, it is certainly, as you say, about human behaviour but for Bill Mitchell, unfortunately it seems to me, and very surprisingly, to be faith that is required.
      Even after a glass of something Ozzie – I still like to try to understand the basic evidence!

  3. Michael Green -

    Bravo Peter May! Getting savaged by Bill Mitchell should mean that you are now qualified as an MMT economist. I was taken aback by a statement in your earlier blog, that Mitchell considered exports a cost rather than a benefit. I had a go at reading his blog on the subject and found it heavy going.
    As I understand it, MMT argues that Governments create the money that they spend out of thin air. If they create and spend too much money, it generates inflation. If they create and spend too little, it generates austerity. Thus there should be a “right” amount of money in the system.
    On this basis, if a country needs to import goods and services, it has to spend some of its money, leaving too little in the system.
    It cannot redress this shortage by creating more new money, because this will simply cause its currency to depreciate.
    It cannot just borrow the money, because it needs a way of paying the loan back.
    To pay for imports, it has to export goods or services of equivalent value. On this basis, exports should be a benefit, and should keep the “right” amount of money in the system
    I am not sufficient of a biblical scholar to fully understand the nuances of Mitchell’s arguments. As far as I can see, he is lumping exports, which are a good thing, with unbalanced trade which is a bad thing. The whole point of trade, within a country or between countries, is for each party to sell things they value less in order to buy things they value more. Pure win-win.
    Imbalance either within a country or between countries is likely to be bad in two ways. Firstly it reduces overall economic activity (austerity). Secondly it creates a vicious circle, likely to end in a crash. As a non-economist, I question the belief that economic systems naturally tend to equilibrium. From what I can see, vicious circle is the norm, equilibrium is the exception.

  4. Peter May -

    Agree entirely with your line on not being sufficient of a “Biblical scholar”. Reading Mitchell’s piece I felt the tablets of stone should be nearby. I think Bill Mitchell is the reason why some think MMT is a religion – dissenters are, I think, supposed to remove themselves from the church!

  5. Ivan Horrocks -

    By a roundabout route welcome to the world many of us in academia have had to put up with for years, Peter. By which I mean that in my experience it’s quite commonplace when you submit an article for publication in an academic journal to get at least one reviewer who goes off on one (plays the man not the ball) in similar vein to Prof Mitchell – except of course they are anonymous.

    To give you a case in point, last year I reviewed a paper which sought to analyse a particular example of social policy from a critical realist perspective. The authors of the paper explained their approach plus the pros and cons compared with other analytical approaches, and then did what I considered to be an pretty good job in carrying out what they stated they intended to do. I recommended publication subject to minor revisions, as did the second reviewer. I was therefore a bit taken aback when I noticed the third reviewer had recommended rejection – until I read their comments. These consisted of nothing on the research the paper covered, or whether or not the paper did what the authors claimed, but simply an attack on critical realism, and an opportunity to attack one of its leading figures – the work of which the paper cited quite extensively.

    I’ve no doubt that review was written by an academic of far more standing than I or the second reviewer enjoyed – that was evident from the work they cited in their attack on critical realism. But the point was, the paper – which I’ve little doubt was the work of a new/young academics – was trashed not because of any failing with their work but simply because they chose to adopt and approach what they did from a standpoint this person didn’t agree with.

    Anyway, keep up the good work for ‘so called’ Progressive Pulse, from which we all learn even if you and the rest of us are not perfect enough to avoid making the odd mistake as we learn our way through this world.

    1. Peter May -

      Intriguing.. Thanks, Ivan

  6. Edward Zimmer -

    As an American engineer whose hobby is macroeconomics, I regularly read Bill Mitchell’s blog. I too find him exceptionally abrasive – he does not take kindly to being disagreed with. But I find that common among economists (especially the academics) – they frequently appear more interested in attacking others than others’ work. But Mitchell is also exceptionally prolific (as in quantity of output). On balance, I find putting up with his occasional rants a reasonable price to pay for his insights. BTW, I’ve added Progressive Pulse to my regular reading regimen.

  7. Peter May -

    Thanks for that. I don’t mind the abrasion (which is why I found his inclusion of ‘nuance and subtlety’ so amusing) but I was surprised at the lack of engagement on the ideas. Still, reading Ivan’s post above, perhaps I shouldn’t have been!

  8. Charles Adams -

    Hi Peter, Only just noticed this and posted this comment on taxresearch

    I am sad to read Bill write this:

    “Perhaps Mr May should stick to food and drink for the time being.”

    Members of the economics profession and academia in general need to welcome interest from non-specialists, not attack them.
    I cannot imagine telling someone that shows an interest in quantum physics to forget it and stick with their day job. The so-called experts need to remain humble and also recognise that sometimes non-specialists may be better placed than the specialists at communicating ideas.

    Keep going!

  9. Peter May -

    Thank you, Charles. I believe it was Churchill who said experts should be on tap, not on top….

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