Making It Easier to Understand MMT (1)

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My intuition is that (at least people like me — educated in the spirit of neoliberal economics) need to understand two themes before they will be better able to access the messages of MMT.

(1) Self-Regulating, Optimal Equilibrium Does Not Work

The balancing mechanisms that are supposed to ensure equilibrium within and between the main markets of a free market economy do not work in the way described in MSE (mainstream economics), in fact, they do not exist, and are kept alive in a theory that is makes false statements about the real economy. We should, therefore, take a look at the equilibrium vision underlying MSE and the equilibrating mechanisms that it postulates — the labour market, the market for salable goods and services, and the market interaction supposedly balancing savings and investment.

If the economy is in a healthy state, it is not because the equilibrating mechanisms described by MSE have been left to work as they naturally do. And it is not the disturbance of these mechanisms from without that explains an unhealthy state of the economy. They are irrelevant to understanding the state an economy is in.

(2) The Right Level of Aggregate Demand Matters — The Right Level of Government Spending Matters

Money as a store of value enables people to exercise discretion in spending their income such as to affect aggregate demand (AD) and thereby leave AD sufficient or insufficient to ensure full employment. In a system of fiat money, government has the ability to attune its level of spending so that full employment will be attained in the face of the private sector's need to pay taxes and its revealed preference for net savings. If government does not spend enough so that the private sector is left with enough to net save and pay taxes, the latter will make a diminishing contribution to AD.

So, the condition for an optimal state of the economy cannot be automatically attained by leaving impersonal self-regulating mechanisms to work out the desired equilibrium solution.

Man must interfere.

He must decide upon the values that he wants to support by his interference.

He may gear his interference toward low inflation at the expense of large numbers of unemployed. 

Or he may concentrate resources on achieving the objective of full employment, deciding that inflation can be kept at reasonable levels at which it is a condition of healthy growth, while its residual costs will be minute compared to the costs of unemployment.