Headline of the Day

If MMT Is Wrong, Why Is It So Much Better at Predicting the Economy - And Economic Disaster?

—Dougald Lamont’s Substack

This is at the center of the dispute between classical monetarism and Modern Monetary Theory (MMT).

It's not that you can contort your theory to match the facts ex pos facto, it is that your theory should have predictive value.

In 2016, Paul Romer, who was then Chief Economist at the World Bank wrote “The Trouble with Macroeconomics” in which he eviscerated the current state of macroeconomics in the U.S. and around the world, writing that orthodox macroeconomics had been in “30 years of intellectual regress,” and was so disconnected from reality that it was “post-real”. Romer wrote his paper, inspired by a similar critique of “string theory” in physics. 

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The reason for this, Romer argues, is that orthodox economics - the formulas used by government budget offices, political parties, central banks and business, are based on a series of assumptions that are not backed up by facts. 

Yeah, this sounds a lot like string theory.

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By this, Romer means that economists are inserting what he calls “facts of unknown truth value” which is to say, they are breezily assuming something and putting it into a mathematical formula.

And as a model, it has continually failed to predict crises and inflation that other “heterodox” models of the economy have succeeded in doing.

Romer is making an assumption here, which is that orthodox economic theory is actually an honest attempt to understand and predict our economy.

Lamont, on the other hand, is not making the same assumptions:

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The opposition to MMT is not about theory: it is about control, and who controls what. MMT recognizes that money is a creature, and monopoly of the state - not the private sector.  

Above all, MMT is not a policy prescription. It is not saying “we should try doing it this way.”

MMT is a different, and arguably more accurate way of modelling the economy and financial system we have right now. It is “we should try seeing the economy this way, and when you do, you’ll see that we have different options.”

This is a very good read on the sad state of affairs of conventional economics, and I recommend that you read the whole thing.