MMT 01 Intro

Chapter 1: Introduction - 1.1 What is Economics? 1.2 What is Macroeconomics? 1.3 Macro & Public Purpose

Modern Monetary Theory and Practice:: An Introductory Text

William Mitchell, L. Randall Wray and Martin Watts

Important Critique of MMT by Palley: MMT vs Structured Keynesianism

Final Exam Questions: In each of the following areas, there are huge differences between conventional neoclassical economics and MMT. For each of the topics below, explain the neoclassical point of view, and how the MMT perspective is very different, and then look at the empirical evidence against neoclassical and in favor of MMT

1. Human Behavior

2. The Role of Government

3. The role of money within an economy.

· Student Answers

Human behavior in context of neoclassical and MMT correct

Economics is a social science deals with the human behavior. Human behavior is too complex varies person to person. What we designate the word “economy” is the name of human behavior in social sphere which is difficult to delineate from other spheres of social interaction. According to neoclassical or orthodox school of thought, natural Human nature is presumed that individuals are rational and they maximize utility with given constraint and avoid disutility. Mutually beneficial exchange system distributes resources according to both parties’ preferences. Market clearing set of relative prices signal the consumer to maximize his utility. Everyone gets an allocation of resources according to their contribution in market. According to MMT, human nature is not natural but it is shaped by institutions, society and culture. There is nothing natural about self-interested nor such behavior would be rational. Humans are social animal and selfish behavior is punished. Humans survival requires cooperation. Human behavior varies across society depends on economic system. The rational behavior by neoclassical economists is the description for early British capitalists. MMT tells human is not rational because he is not certain about future even they have no idea about past and present event that what happened or happening. Decisions and behaviors depend on uncertainty, power, discrimination and segregation. Wants and resources are socially created rather they are not unlimited and scarce. Markets prices are administered by monopoly power. Wages are not set to clear market but outcome of conflicted bargaining process.

· Role of Government in context of neoclassical and MMT correct

Orthodox economists refers the set of relative price as market clearing prices which means there is no need of any authority to make markets clear. Adam smith used the term invisible hand for that price mechanism. They are just in favor for a little interference of government i.e. ruling enforcement, defense and social security purpose. Recent neoclassical economists showed their support to the conservative backlash against economics and social reforms done in western after world war. Downsizing government and reducing social safety net is consistent with the view that Govt. only needs to “get the incentives right” and free market would maximize individual welfare. MMT tells that the early British capitalists who were accumulating wealth for themselves had hostile political environment that’s why they didn’t favor Govt. MMT explains that market prices are administered by firms with market power so Govt. interference is must to avoid the monopolies or discrimination. The Govt. interferes to avoid the exploitation of labor as it happens in capitalism also supported by Marx school of thought. MMT favors the excess spending by printing money while orthodox economists don’t support deficit budget they are in favor of balanced budget.

· Role of Money in context of neoclassical and MMT correct

Money is veil for neoclassical economists mean there is no impact of money on real variables in the long run what is known the money neutrality. On the other hand, MMT treats money as major factor playing important role in resolving macroeconomic issues like inflation, unemployment and real output. Neoclassical economists’ treat Government budget like household budget means as household budget can’t go for deficit, government also faces same but MMT tells both are totally different. Govt has monopoly in fiat currency as much as they can print to do expenditures before collecting taxes or borrowing. After 1971 event, convertibility of currency into Gold ended and fiat currency began to circulate worldwide. MMT explains money can play important role with no constraint of backing against issued currency. Whereas orthodox economists claim that printing or issuing of currency may bring inflation in the economy.