Modern Monetary Theory, or MMT, has burst onto the the political and economic scene over the last 4 to 5 years. Once an obscure area of heterodox economics, it has been steadily growing in popularity, especially among the left-wing of American politics.
Even the general public, generally unfamiliar with the goings-on of the economics world, have become more aware of MMT. Stephanie Kelton’s The Deficit Myth, which serves as an introductory text to the basics of MMT, released earlier this year and quickly became a New York Times Bestseller. Given how separated the layman tends to be from economic academia, this speaks volumes about the broad appeal of MMT.
Many economists, however, remain skeptical of MMT. The proverbial new kid on the block has yet to gain widespread acceptance among the academic establishment of the economic realm. Growing interest in MMT has prompted many well-known economists to write, largely critically, about MMT. This includes pieces by Paul Krugman, Greg Mankiw, and others. I am sure that an advocate of MMT would be quick to point out that no press is bad press, however.
Even as economists remain skeptical, MMT has found adoption in the political world. MMT and its core tenets have been espoused by Alexandria Ocasio-Cortez, Ilhan Omar, Bernie Sanders, and others. This has not yet translated to any tangible policy implemented based on the theories of MMT, but it is notable that a once irrelevant area of economic thought now has proponents sitting in Congress.
MMT’s sudden rise in popularity, especially its’ widespread appeal among those without formal education in economics, is a novel and interesting development for the world of monetary theory and policy. However, will this energy translate into any real change in the US monetary system?
Because of the general rejection, thus far, of MMT by the economic establishment, there would need to be a changing of the guard, so to speak, in order for MMT to implement it’s desired changes. MMT is incompatible with the current mindsets and beliefs of the establishment. The only path forward for MMT is the take over that system and kick out the previous tenets. Given this fact, is there a chance of this “revolution” in the monetary world actually formulating? Can MMT institute a monetary coup d’etat?
There are two elements that need to be understood to fully answer this question: The way that paradigms are formed and changed, and the underlying base of support that is driving MMT forward. We will examine both of these in turn and bring them together to build a potential view of the future trajectory of MMT.
First, what are paradigms and how are they changed? A paradigm is a system of thought adopted by a set of individuals. These systems of thought could be relating to almost anything: politics, science, economics, etc. People learn and study within these paradigms. These paradigms dictate the problems that one tries to solve, as well as the available solutions to answer them. They are the bounds within which the discipline conducts itself.
Individuals continue along in these paradigms until the paradigm is changed. When this occurs, there is a slow shift in the particular field of study from one paradigm to another paradigm. One of the best examples of a paradigm shift is the shift from a Geocentric View of the galaxy to a Heliocentric View of the galaxy.
The cause for a paradigm shift is a failure within the current paradigm that it is unable to explain. If a seemingly unsolvable problem arises, it triggers a crisis within that field of study. If the problem remains unsolved, it is only a matter of time before that paradigm is abandoned in favor of a new paradigm.
When the new paradigm is adopted, new students are trained and work within that new mode of thought. As such, the new normal is formed and everything moves along smoothly. At least, until a new unsolvable problem is found, and the cycle begins again.
(For more about paradigms and how they shift, I recommend The Structure of Scientific Revolution by Thomas Kuhn)
The second element to examine is the drive for the popularity of MMT in the first place. The rise of MMT has occurred simultaneously by the increasing support in the new Left-wing, “Democratic-Socialist” movement. This is not particularly surprising, as MMT would provide the economic groundwork for many left-wing policy proposals. There is a clear and direct relationship between the popularity of the Far Left and MMT.
Thus, the fate of MMT is not completely it’s own. If support for Far Left-leaning policies and ideas begins to wane over the coming years, MMT will likely follow. Conversely, if support for the Far Left grows, then MMT will likely come along with it. This is not to say that MMT has appeal only to that political demographic and has no support outside it, but there is a clear base that exists that it must build off of.
Now that we possess an understanding of the formation and shift of paradigms, as well as the foundational base of support for MMT, we can construct a picture, albeit a foggy and uncertain picture, of the future for MMT.
For MMT to ever become truly mainstream, there would need to be a paradigm shift within the world of economics and understandings of monetary theory. Economists working under the current paradigm have already shown that they largely reject MMT, so this current paradigm would have to be overthrown. Without this paradigm change, MMT will never be in a position to influence policy. It is simply incompatible with the current zeitgeist of monetary policy.
Is there a strong likelihood of a paradigm shift within the monetary world in the near future? The timing of any event like this is difficult to predict, but the stage does seem to be set for a potential changing of the guard in monetary policy sometime in the near future. Interest rates have been kept at near 0% by the Fed ever since 2008. This has led us into an unprecedented monetary situation where interest rates have been kept low for over a decade. Can the Fed target to raise rates to anything resembling a normal interest rate after such an extended era of cheap money? While we cannot dive into a full analysis of the monetary situation in the US, we can say for sure that we are outside of the normal state of affairs and into new territory. If the mismanagement by the Fed leads to a disastrous economic depression, which is certainly possible, a paradigm change could be in the works.
However, just because a paradigm shift may occur does not mean that MMT will be the system to replace the old paradigm of monetary policy. No paradigm is ever guaranteed to replace the discarded paradigm. Thus, the likelihood of MMT remaining in a state of relevance depends on its popularity and appeal. As mentioned above, MMT is dependent, at least in part, on the appeal of the Far Left in general.
If the Democratic-Socialist wing of the Democratic Party can continue to gain ground in the political world and increase its popularity among the general public, than MMT will be a beneficiary. This Far Left brand of politics has been popular among Millennials and Generation Z. If that trends continues, than MMT could be in a prime position to replace the current paradigm in the event of a crisis.
Stated plainly, the victory path for MMT requires that there be a crisis in the monetary world that shakes the field to the degree that a paradigm shift occurs. MMT must then be popular enough to be in a position to then replace the old paradigm with its own.
What is the probability that this scenario plays out? As we have mentioned above, a crisis is brewing in the monetary world. An economic disaster of this kind would likely trigger a paradigm shift. MMT has been growing in popularity and that trend will likely continue. Therefore, there is a good chance that some elements, if not most elements, of MMT will make their way into the paradigm of monetary theory.
Of course, it is impossible to know the future for certain. That being said, MMT will likely have the means and the opportunity to rise to replace the current economics establishment. Is MMT the future? Whether we like it or not, we may all be seeing much more of Modern Monetary Theory in the near future.
