It's an Integrated Operational Framework
Derek McDaniel recently appeared on the Applied MMT podcast to discuss his perspectives on modern monetary theory. While Derek clearly understands many MMT concepts, his framing of MMT as "three independent propositions" misses a crucial aspect of what makes MMT so powerful as a descriptive framework.
Derek suggested we should separate MMT into:
Endogenous Money: "Credit runs the economy"
Consolidated View of Government Finance
Price Anchoring: "The fiscal bidding theory of the price level"
At first glance, this might seem like a useful pedagogical approach. In fact, looking at my own MMT axioms, we can find direct parallels:
My 12 MMT Axioms - A Comprehensive Framework
Before diving deeper, let me lay out my 12 axioms that provide a more integrated understanding of MMT:
MMT is founded upon and analyzes financial flows between government, foreign, business, and household sectors based on the accounting identity that the government's deficit/surplus must equal the combined deficit/surplus of other sectors.
Real and ecological limits constrain government spending, not financial limits. Inflation and resources matter, not deficits or debt.
Monetary sovereign governments with flexible exchange rates create and spend money electronically via treasury-central bank operations, unconstrained by financial limitations but constrained by institutional arrangements. Fixed exchange rates introduce potential external constraints.
The government's deficit is the private sector's surplus. Government debt is money yet to be taxed, not a burden.
Unemployment shows spending is too low. Increase spending until full employment.
Control inflation through multiple channels, including taxes, spending adjustments, automatic stabilizers, and regulatory approaches. Different tools address demand-pull versus cost-push inflation.
A nation's balance of payments position does not inherently constrain the fiscal policy choices of a monetarily sovereign government.
A fixed-wage job guarantee serves as an automatic stabilizer, price anchor, and employed labor buffer stock to achieve full employment with price stability.
The government influences the price level through its spending decisions and the prices it pays for goods and services.
Real economic factors drive price levels, with endogenous money supply growing through bank lending and government operations, not central bank quantity controls, to accommodate these changes, economic activity, and savings desires. Central banks influence spending indirectly via interest rates. Insufficient accommodation constrains activity.
Government spending initiates the currency circuit, but currency value derives from tax obligations, institutional arrangements, and ongoing economic activity across all sectors.
Fiscal policy should advance public purpose, not target financial flows or balances. However, sectoral balances can serve as useful signposts when pursuing public purpose goals.
The Surface-Level Matches
Looking at Derek's three propositions, we can find corresponding axioms in my framework:
Endogenous Money aligns with my Axiom 10: "Real economic factors drive price levels, with endogenous money supply growing through bank lending and government operations, not central bank quantity controls..."
Consolidated Government Finance corresponds to Axiom 3: "Monetary sovereign governments with flexible exchange rates create and spend money electronically via treasury-central bank operations..."
Price Anchoring maps perfectly to Axiom 9: "The government influences the price level through its spending decisions and the prices it pays for goods and services."
So far, so good, right? Not so fast.
Why "Independent Propositions" Gets MMT Wrong
Treating these as independent propositions fundamentally mischaracterizes how monetary systems actually operate. These aren't theoretical constructs that can be mixed and matched—they describe different aspects of the same operational reality.
Consider how these concepts flow into one another:
Government spending (Axiom 3) initiates the currency circuit (Axiom 11) while directly influencing price levels (Axiom 9) through its purchasing decisions.
Endogenous money creation (Axiom 10) accommodates economic activity, which directly affects sectoral balances (Axiom 1) and interacts with government spending operations.
The Job Guarantee (Axiom 8) functions simultaneously as a price anchor and an automatic stabilizer, creating a direct operational link between price formation and employment dynamics.
Think about it: How can you understand price anchoring without understanding the government's operational capacity to spend? How can you understand endogenous money without seeing how government operations interact with private credit creation?
The Adaptive Harmony of Monetary Systems
Derek introduces an interesting concept he calls "adaptive equilibrium" – a notion that economic patterns can emerge without requiring traditional equilibrium feedback mechanisms. I prefer to think of this as "harmony" rather than equilibrium, but the basic insight is sound.
However, this harmony emerges precisely because these aspects of monetary systems are interconnected, not because they're independent. The sectoral balances, price anchoring mechanisms, and endogenous money creation all dance together in complex patterns.
When we artificially separate these concepts, we lose sight of how they function together in practice. This is exactly why mainstream economics keeps getting things wrong—it analyses components in isolation rather than understanding systems holistically.
Why This Matters Beyond Academic Debates
This isn't just semantic nitpicking. When we misunderstand MMT as separate propositions rather than an integrated framework, we end up with confused policy prescriptions.
Take inflation management: If you don't understand how government spending, price anchoring, and endogenous money creation interact, you might think raising interest rates is the primary tool for fighting inflation (hello, Fed!). However, MMT shows us why that approach is fundamentally limited—it attacks one aspect of an interconnected system while ignoring the others.
Similarly, understanding the Job Guarantee as both an automatic stabiliser and price anchor means recognizing it's not just a "nice to have" employment program—it's a core operational component for managing price stability. This insight only emerges when you see MMT as an integrated framework.
A Call for Integrated Understanding
I appreciate Derek's efforts to make MMT more accessible. Breaking complex topics into manageable chunks has pedagogical value. However, we must be careful not to suggest these chunks exist independently in the real world.
MMT offers something rare in economics—a comprehensive, operationally grounded description of how modern monetary systems actually function. Its power comes precisely from its integrated nature.
So the next time someone tries to pick and choose "parts" of MMT they like while rejecting others, remind them: These aren't independent propositions. They're interconnected aspects of our monetary reality. Understanding them together is the only way to truly grasp how our economy works.
What do you think? Have you encountered others trying to segment MMT into independent pieces?
Let me know in the comments.
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A very thorough and well written article and I appreciate the critique. I think having independent propositions is use for comparing viewpoints between different academics, but you raise a good point that you need a broader understanding.
In systems theory, a force at one point in that system affects all other characteristics of that system. IMO, where national banks governors make a mistake is in misattributing the cause of inflation for example. I suspect this comes from their idea that interest rates are the be-all and end-all for inflation control.