On trade deficits: MMT is not MMT enough

As a postscipt to my previous piece, there is futher comment using this title as a paragraph heading from Steve Keen who has pretty comprehensively rebutted the MMT (Modern Monetary Theory) view that exports are a cost and imports are a benefit – in so doing it shows again the dangers of viewing the overall economy as a household which was first highlighted in the same earlier post commenting on the way MMT thinks of balance of payment (trade) deficits.

When thinking about the economy of a currency issuing nation, we must never forget that they own a bank!

Steve Keen points out that unless you have completely full employment there will invariably be spare capacity – and potential for exports; that “goods are produced with a view, not to either consuming them or selling them if “the price is right”, but with a view to selling them, period”; and economies of scale, encourages exports where they allow better use of pretty much all (except mineral) resources and drive down the cost per unit.

He concludes:

Exports are a way of increasing capacity utilization over and above the limits imposed by aggregate demand in the home economy; and

Since the extra units exported will drive the firm closer to full capacity utilization, the costs will be lower and the potential profit margin higher.

Exports are therefore not a cost to the exporting firm, or its host country: they are a profitable way of increasing domestic aggregate demand.

None of this denies the basic ideas of MMT (which I have also seen recently referred to as Neo Chartalism) but it does mean that the balance of payments matters, particularly for a country such as the UK importing 40% of its food, and that imports are not simply a welcome benefit without meaningful consequence.



  1. Graham -

    Craig Dalzell of Common Weal has pointed out one of the weaknesses of the Scottish Growth Commission’s recommendation that an Independent Scotland should continue to use Sterling which is that if Scotland was in deficit in trade with the rest of the Sterling zone £££’s would leave Scotland every year we would be unable to print more.

    1. Sean Danaher -

      I know prof Richard Murphy, who is one of our editorial board, is very keen on a Scottish Pound for very sound MMT reasons

      The problem is that the general public has been so brain washed by nearly 40 years of neoliberalism that it is a very hard political sell

      Ireland linked with Sterling on independence which lasted for about 60 years but MMT was not in existence then.

      I truly fee sorry for the Scots. We had a referendum today and I’m celebrating tonight!

      1. Graham -

        I think he has also said that Ireland’s link with Sterling was not to its advantage.

  2. Peter May -

    I take the view that federalism provides a compromise with each federal state able to issue its own currency, exchangeable 1 for 1 with sterling, which it would accept in payment for government services and taxes. Like the Bristol £ but bigger and more widespread. Of course England is easily the largest country so it would have to be regionally federalised…Needs exploring – I fear a blog coming on…

    1. Sean Danaher -

      Ireland was the fastest growing country in these islands during the period but it was the poorest initially prof Kevin O Rourke has done some analysis, a bit that appears in my Why is Ireland so pro EU blog
      The Punt period showed Celtic Tiger growth but most analysts put that down to the formation of the single market

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