So, Tom Palley has a new criticism out of MMT. Frankly, I’m not hugely concerned with the critique itself. The criticisms are old and I don’t think that Palley will convince anyone of the ills of MMT that are not already convinced (it’s that type of paper…).
What I have been wondering, however, is what to make of the substance of the paper itself. What I mean is: is this a Post-Keynesian critique of MMT? Or is it something else? I’m not sure that I want to answer that question just yet. For now I’m content to raise it.
What might this something else be? Well, let’s just peruse some of the features of the paper that stood out to me. First is the implied assertion that any economic work that does not use “simultaneous equation models with dynamic adjustment mechanisms attached” are not doing “professional” economic work.
For the last seventy years the language of macroeconomics has been small scale simultaneous equation models with dynamic adjustment mechanisms attached to explore issues of stability. Proponents of MMT have a professional obligation to provide such a model to help understand and assess the logic and originality of their claims. (p2)
Well, that seems to me to disqualify a good deal of Post Keynesian work to the dustbin of history. I suppose the General Theory itself does not fall under Palley’s criteria, given that it is over 70 years old, but certainly most of the work done by the Cambridge Keynesians would not meet Palley’s “professional” standards. Indeed, Joan Robinson and Nicholas Kaldor — both of whom severely criticised static equilibrium based modelling, which is exactly what Palley is referring to — would be seen as having attacked basic professional standards in economics.
That, of course, raises the question of the place of historical time and uncertainty in Palley’s critique. Since the “professional” criteria he requires obviously eliminate historical time and uncertainty any Post Keynesian writing that integrates these — to my mind this encompasses all true Post Keynesian writing — also falls to this critique.
Honestly, I wouldn’t have even bothered making this point if it weren’t for the content of the rest of the paper. I probably would have chalked it up to an unthought remark made in the midst of a heated critique. But what the rest of the paper pushes raises even more questions about from what standpoint it is criticising MMT.
Throughout the paper Palley seems extremely sympathetic to the ISLM framework. This will appear strange to Post Keynesians who are aware how unpopular this framework is among their kin. Joan Robinson provided extensive critiques of the IS-curve, endogenous money theory indicates that the LM-curve should be flat (although Palley seems to indicate that all the old Keynesians knew this anyway) and John Hicks famously rejected the framework because it didn’t incorporate time and uncertainty. To me, one of the defining features of Post Keynesian economics is the rejection of the ISLM curve.
Next Palley introduces his theory of inflation and it is… the Phillips Curve. According to Wikipedia the two defining features of neo-Keynesianism or the neoclassical-synthesis — the foes of the Cambridge Keynesians from the 1950s through to the 1970s — are, you guessed it, the ISLM and the Phillips Curve. I think that’s a fairly accurate representation too.
In his discussion of the Phillips Curve, which he supports, Palley claims that leading MMT economist Bill Mitchell “is… a strong advocate of the traditional Phillips curve” (p13). As evidence of this he links to this blog Mitchell wrote in response to Palley’s last critique. But in this blog Mitchell explicitly states that MMT seeks to circumvent the Phillips Curve. He writes that the MMT framework is “a way of interrupting the dynamics that underpin the Phillips curve”. So, there is some contradiction here. Clearly Mitchel is not the “strong advocate” of the Phillips Curve that Palley thinks.
But the real confusion comes when Palley claims that he and the other MMT critics are “adopting traditional Phillips curve theory” and that this theory indicates that “lower equilibrium unemployment is always associated with higher equilibrium inflation” (p13). However, in the paper that he wrote in 1994 which he cites to buttress his claims that the Phillips Curve is correct Palley wrote:
[T]he model showed that inflation is determined by the rate of aggregate nominal demand growth, and not by the rate of unemployment as claimed in the neo-Keynesian Phillips Curve literature. (p116)
So, which is it? Is this a trade-off between inflation and unemployment that Palley is referring to? Or is it a trade-off between inflation and aggregate nominal demand growth? Because it seems to me that there is a very large difference indeed.
In the specific case under scrutiny it is clear that the MMT Job Guarantee program would certainly cause unemployment to fall. But it would not clearly cause aggregate nominal demand to grow. Certainly, there would be a once-off upward adjustment in aggregate nominal demand as people shifted from the dole onto the Job Guarantee but this demand would not continue to grow provided the JG wage remained stable.
But I feel that we are getting too far off track here into the specifics of the debate. What Palley seems to be offering in the paper is defence of the ISLM and the Phillips Curve against MMT. He also appears to be claiming that proper macroeconomic work should be done using static economic models and that any work that is not done in this way is not “professional”. So, the question that I wish to raise here is, given all of this, is Palley’s critique Post Keynesian or is it neo-Keynesian? I genuinely do not know.
It appears to be a fuzzy headed mix of neo-Keynesian and New Keynesian economics, but is clear not Post Keynesian. And it clearly egregiously misrepresents Bill Mitchell’s work on the Phillips curve, which includes what Paul Davidson would label hysteresis, for both sustained high unemployment and sustained low unemployment.
Perhaps a gross and unfair characterization, I realize, but Tom Palley appears to worship at James Tobin’s feet, and his economics appears to be not too far down the road from Tobin & the Old Keynesians circa 1976 or so. Unfortunately, Tobin only made it part of the way to anything resembling Post Keynesian economics. His stock flow macro, for example, is a pale shadow of Wynne Godley’s work, or even Lance Taylor’s work in this area. Tobin’s book on Money reveals his loanable funds bias, which he was never quite able to escape, and is one of the defining characteristics of the straitjacket known as the neoclassical synthesis, and its more contemporary New Keynesian ( a la Summers, Krugman, Mankiw, Yellen, Bernanke, etc.). Really sad, though, that a more constructive dialogue with Tom cannot seem to be found. I do think he raises some important points on zero policy rate, financial speculation, and exchange rates which deserve further consideration.
Yes, the speculation point is somewhat interesting. But I suspect that its more to do with regulation than interest rates. After all, gold went into a major bubble around 1980 and the S&L crisis wasn’t in a low interest rate era by any standards.
I wrote a piece on Kaldor a while back arguing that it is interest rate volatility that leads to speculation. I think that’s a better track to take. But I don’t think Palley wants to listen to this stuff.
It’s all very disappointing stuff.
When you read the old correspondence from the 1930s, what always stands out is generally how polite everybody is with people they disagree with.
We could do well to relearn that art.
I want to know what the substance of the problem is, not a load of mud slinging.
I haven’t used mathematics to model anything for decades. Because it is a really crap way of modelling in a descriptive fashion. Yet for some reason I’m still getting paid.
Re: “But in this blog Mitchell explicitly states that MMT seeks to circumvent the Phillips Curve. He writes that the MMT framework is “a way of interrupting the dynamics that underpin the Phillips curve”. So, there is some contradiction here. Clearly Mitchel is not the “strong advocate” of the Phillips Curve that Palley thinks.”
Yep. A hell of lot of time is wasted in life having to correct misinterpretations owing to sloppiness, superficial reading, knee-jerk reactions, ideological biases that distort perception, and so on.
Frankly Kevin, I could have spent the entire blog doing just that. But as I said at the start, those that are convinced by Palley’s paper are already convinced… it’s that type of paper.
Some of these guys are not prepared to accept that full employment does not require a prior redistribution of income and wealth, and that a monetary sovereign is always in a position to pursue tight full employment. It offends them, somehow. They react instinctively, defensively, because it questions and perhaps threatens long held views. Then the search for truth is eclipsed by a competitive game to defend cherished beliefs. This is why it is sometimes structuralist Post Keynesians who react with the greatest ferocity to MMT. Most neoclassicals just ignore it.
In respect to Palley’s piece it does not seem to me being related with distributional issues. Someone might agree with MMT approach to money and policies but think it is insufficient to explain gov behaviour and power relations itself. Most of other economic theories has similar difficulties, even the one provided by Palley. As Kevin exemplifies, Palley’s piece is only an unfortunate and groundless attack.
MMT, on line, seems to only talk about financial assets. Now, we all know that there exist tangible assets. When tangible assets are exchanged for financial assets. Then the transactions are not properly counted if one only looks at financial assets, excluding real assets.