Because I consider I know enough about MMT to criticize it, I believe I'm writing a "fair critique". I hope that it's productive, contrary to the usual case. I may be proven wrong, but you know, that's life.
The most important issue that I see with MMT is the lack of a coherent and general theory of the price level or inflation rates (defined here as the percent change of the price level though time). I guess that MMT is one of the few economic theories capable of explaining the real world conceptually and empirically, but there still a vacuum when we talk about price level and inflation.
At least three of the most prominent MMTers have somehow conveyed conflicting views about price levels/inflation: Bill Mitchell, Warren Mosler and Randall Wray.
Bill Mitchell, in his blog entry called "Modern monetary theory and inflation – Part 2" (http://bilbo.economicoutlook.net/blog/?p=13035), sums up very well the core of his price level theory:
Demand-pull inflation refers to the situation where prices start accelerating continuously because nominal aggregate demand growth outstrip the capacity of the economy to respond by expanding real output.
(…) But if firms are not willing to absorb the squeeze on their real output claims then they will raise prices again and the beginnings of a wage-price spiral begins. If this process continues then you have a cost-push inflation.
Also, he has a hyper-inflation theory (http://bilbo.economicoutlook.net/blog/?p=10554):
Hyper-inflation is just inflation big-time!
He tells us that there are demand-pull and cost-push inflation. Usually, in his blog, he likes to focus on the demand-pull inflation: “Inflation occurs when there is chronic excess demand relative to the real capacity of the economy to produce” (http://bilbo.economicoutlook.net/blog/?p=10554).
So, summing up, Bill Mitchell claims that inflation is mainly caused by “chronic excess demand relative to the real capacity” and “wage-price spiral”. We can also infer about what he thinks that are things that do not relate to inflation – not directly at least. If you read Bill’s blog a lot, like I do, you know that he doesn’t accept most of the mainstream theory, so he doesn’t believe that price levels and inflation are caused by any sort of rational expectations of the economic agents. He also doesn’t believe that interest rates have necessarily any causal relationship to inflation. He doesn’t accept the NAIRU concept. He also doesn’t believe that the quantity of money in the economy is related to inflation. And he never talked about something like “the Baumol disease”.
Warren Mosler, another MMT champion, says the following in a blog entry called “There Is No Right Time for the Fed to Raise Rates!” at The Huffington Post (http://www.huffingtonpost.com/warren-mosler/there-is-no-right-time-fo_b_5995896.html):
First, with the currency itself a simple public monopoly, as a point of logic the price level is necessarily a function of prices paid by government when it spends (and/or collateral demanded when it lends), and not inflation expectations.
Although very direct and summarized, that’s a price level theory. Here we do not read words like “aggregate demand”, “excess demand”, “real capacity”, “demand relative to capacity”, “cost-push”, “wage-price spiral” etc. Instead, it’s an entire distinct price level theory, that doesn’t match to the one claimed by Bill Mitchell.
Warren focuses exclusively on “prices paid by government when it spends”. So he claims that the price level is a function of government prices only. He restricts inflation causes to the public sector, so he is removing the private sector from the story. He also claims that the price level depends only on the government prices, and not on the real capacity of the economy, or the unused capacity, or wage-price spirals, or rational expectations, or quantity of money in the economy, or “the Baumol disease”, etc.
An example of a government price is the wage of public employees, which is nothing more than the price of one week of work. If Warren’s claim is true, then, when the government steadily raises public wages, the economy will eventually face steady raises in the price level (inflation) – no matter the aggregate demand, “real capacity utilization” of the economy, etc. It’s clear that this theory actually conflicts with Bill Mitchell’s.
Randall Wray is another prominent MMTer, who has written the excellent “Modern Money Theory” book, which I strongly recommend to anyone interested in understanding the workings of modern economies. I have the opinion that he is one of the smartest economists alive today, and the book is filled with high quality material. But it’s all very confusing in the chapters that talk about inflation (pages 241 to 258 of the first edition of the book).
Wray seems to follow the cost-push inflation theory, conflated with another theory that I cannot identify, related to what he calls “Baumol disease” (page 243), summed up by the joke “blame the concert violinist for erosion of the value of the Dollar!” (also page 243).
Also, he wrote that “while aggregate demand is most likely not the cause of trend price increases, it is true that lack of depressions in the postwar period is a cause [of inflation]” (page 245). That part is somewhat confusing to me, but it seems to suggest that Wray doesn’t believe in demand-pulled inflation, like Bill Mitchell does – except in postwar periods, which doesn’t really seems to make sense (to me). And then it seems that he is contradicting himself when he says that “wars generally do generate inflation as government spending ramps up demand, causes shortages, and chases prices up” (page 254). Isn’t he describing a demand-pulled inflation theory?
Through the chapter (pages 241 to 258) Wray talks a lot about what does not cause inflation. That part is interesting, but it isn’t exactly what you could call a coherent and general price level theory.
Also, Randall Wray contradicts Bill Mitchell’s theory when he writes the following (page 242):
Instead, [since World War II] inflation has mostly occurred in positions of substantial unemployment. Indeed, economists came up with the word ‘stagflation’ to describe this typical position: inflation and unemployment.
Unemployment is an evidence of real capacity underutilization, so, in Bill Mitchell’s model, we should expect no inflation at all or even deflation. But here is Wray saying that inflation has mostly occurred in positions of substantial unemployment.
There is one more important sentence that I would like to emphasize: “I will not claim to fully understand the causes of hyperinflation, but the Monetarist explanation sheds almost no light on the experience” (page 248). Here Wray says that he doesn’t fully understand the causes of hyper-inflation. Well, if he follows the same view of Mitchell’s (“Hyper-inflation is just inflation big-time!”), if the he doesn’t understand hyper-inflation, then he doesn’t understand inflation too – it’s all the same, but in different sizes. Or maybe Wray believes that hyper-inflation is not the same phenomenon as inflation, which raises more questions than answers. If there is any difference, then what is it? Where is the line that separates hyper-inflation from inflation?
Conclusion
Wray puts a lot of weight in the cost-push inflation theory and in the so called “Baumol disease”, a concept never mentioned by Bill Mitchell or Warren Mosler. Also, Wray seems to have mixed feelings about demand-pulled inflation, while Bill Mitchell strongly believes in it. Warren Mosler doesn’t give importance to cost-push, demand-pulled or “Baumol disease” theories. Instead, he puts weight in government prices, as if it were the most important aspect of price level. Warren’s view is not ever mentioned by Wray or Mitchell. Also, Wray seems to contradict Mitchell’s “capacity utilization inflation theory” when he describes the ‘stagflation’ period.
What I want to show is that there are at least three different and conflicting theories of price level and inflation conveyed by three prominent MMTers: Bill Mitchell, Warren Mosler and Randall Wray.
Which one has more support from empirical evidence? I can’t tell.
But what I know is that this kind of contradictions is a sign that the MMT theory has not reached adequate maturity yet – although it is much more mature than the current mainstream theory. And I hope that one day I will be able to make my contribution to make it more mature...
