L. Randall Wray on MMT, Heterodox Economics, and the Future of Economics

Class Unity spoke with economist L. Randall Wray about Modern Money Theory, heterodox macroeconomics, and the future of economics education. The discussion takes as its point of departure Macroeconomics, the 2019 textbook Wray coauthored with William Mitchell and Martin Watts, and Class Unity’s related “Approaches to Macroeconomics” reading course. Wray explains why realistic macroeconomics must begin with government, money, banking, accounting identities, social classes, and institutions rather than the optimizing individuals of neoclassical theory. The conversation also addresses Keynes, Marx, Veblen, Minsky, the global financial crisis, taxation, inflation, the job guarantee, financialization, inequality, monetary sovereignty, and political resistance to MMT. You can find the original Class Unity episode, more from L. Randall Wray, and the textbook from Bloomsbury online.

Class Unity: Hello, everyone. Welcome to another Class Unity event. Please like, share, and subscribe. Also, consider joining Class Unity and making a donation today. And make sure to let us know what you think in the comments. Today we’ll be discussing the topic of economics, heterodox economics, and money. And we’re very happy to be joined by Professor L. Randall Wray, who is Professor of Economics at the Levy Economics Institute of Bard College and emeritus professor at the University of Missouri–Kansas City. He’s one of the principal developers of Modern Money Theory. So, thank you very much for joining us today, professor, and welcome back.

Randall Wray: Thanks.

Class Unity: We’re especially happy to talk to you today because this discussion is a preparation for an upcoming course that Class Unity is holding. We’re calling it Approaches to Macroeconomics and we’ll be studying the 2019 textbook Macroeconomics, which you’ve written with Bill Mitchell and Martin Watts. We discovered the book through the positive and negative attention MMT was receiving from both the left and the right and from Michael Hudson who’s also been a frequent guest. In fact, we’ve already held a study group on this book and read it in 2021. So, we’re very happy to be reading it again with a new group. Everyone watching at home, you’re welcome to join us. This course will be meeting virtually and it starts on Sunday, March 1 at 2 p.m. Eastern. To sign up, go to our website classunity.org and you’ll find it under education. So our first question is a big-picture question about the background and the motivation for your book. So you’ve written a really excellent book on economics here. It is accessible as an introductory textbook to people with no background in economics. But it is also written in a way that is interesting and has plenty to think about for people with a background in economic thought, and it focuses on understanding the economy in the real world. Sowe’re wondering if we could hear some of your big-picture reflections.

What are some of the difficulties that one faces when trying to learn economics today? What are some of the difficulties that one faces when trying to teach people about economics today? Are any of those difficulties that you tried to address in your book and what motivated you ultimately to write this book?

Randall Wray: Yes. Well, I think if I remember right, Bill and I started this in 2007, I’m pretty sure. And our goal was to write a macro textbook that was applicable to the real world rather than the fantasy world described by virtually all other macroeconomics textbooks. And so, the first thing we decided we needed to do was to put the government front and center because in all the capitalist economies, the government is by far the biggest entity, far bigger than any firm. 25 percent to 50 percent of the economy is the government. And of course it has laws and regulations and all of that. And the funny thing is all the other macro textbooks maybe put the government in chapter 7. So you present the way the world works with no mention of the government whatsoever until about chapter 7. So we actually started off calling it Macroeconomics: A Government-Centered Approach. I think that was our original title. And then this is reasonably early in MMT. I mean there was a following but it was getting bigger and bigger because of the global financial crisis. And then I think we were going to have an MMT approach in there somewhere. And then finally we decided what we did was we wrote a textbook on macroeconomics. So we should just call it Macroeconomics. Our book is Macroeconomics. Virtually none of the others are.

Now there are some heterodox textbooks that are sort of in the line of ours but all of the ones that are commonly used have nothing to do with macroeconomics. You won’t learn anything about the way the economy actually works by reading those textbooks. So we decided, no, Macroeconomics is the right title because for the first time there’s a book here that actually is doing that. That puts government front and center. And, as you mentioned, it is real-world macroeconomics. So it has to be applicable to the world we actually live in and the world in which we live. In almost all countries, and increasingly around the world, that system is capitalist. That’s the world we live in. And so our macroeconomics is not a general theory of economics. My professor Hyman Minsky used to always say any general theory has to be wrong. Most of the time, a theory has to be specific. So ours is specific to the capitalist economies of the major developed countries in the world. That’s the kind of economy that we’re studying. It is not necessarily because we think these are good economies, but we’re trying to accurately describe the way that these things work. And I think the third thing is that we take an interdisciplinary approach. So the history of thought helps us see where we came from and where we have ended up and all the other social sciences can help us understand the world.

Anthropology helps us to understand where money may have come from and what makes capitalism a very different kind of system than the systems that existed in the past that might have used money but money was not fundamental to the operation of the economy. And so we want to include that. We need to include some history and know where we came from. We know where we came from, but we cannot know where we are going. That’s the nature of evolution. So, we have to be aware of these other fields of study. And then finally, and you have questions later on, so I won’t go deeply into this. We have to start with macroeconomics. We’re not going to do what the mainstream does. The typical mainstream economist sits in their office at their desk and imagines what an economy would be like that is made up of individuals who maximize utility and have perfect foresight. That’s how they do macroeconomics. That’s where they start with an individual. We’re not starting with an individual. We’re starting with the economy as a whole. And we can get into why we believe you have to do that later. So that’s a big difference from the way that it’s done. And then the final point, the difficulties that you face trying to teach people economics. My oldest daughter is somewhere around 30 years old now.

I remember when she was in first grade, she came home and she told me the barter story of money’s origins. I listened and then gently tried to tell her, “But this isn’t true. This is not where money came from.” She said, “Yes, it is, Daddy. My teacher told us.” And David Graeber, who wrote the fantastic book Debt: The First 5,000 Years, I think, did his dissertation onMadagascar and he said that he heard the barter story in Madagascar from the people there. This story is so widespread. It’s indoctrination. It is everywhere. It’s where everyone starts. Okay, you have to overcome that. It’s extremely difficult. Everyone on Earth has learned this story—well, no, let me back off. Everyone in America is brought up believing that humans are naturally selfish. They only care about themselves. And in the neoclassical approach they are rational utility maximizers. This is another huge barrier that we have to overcome. Especially if any student has actually had an economics course which is increasingly common. My daughter got some in first grade, but typically in high school now, the students do have an economics course and they are taught this and studies have shown that students who have studied economics—mainstream economics, because that is what you get almost everywhere—become more selfish. Studying economics makes you selfish; it produces the kind of people that it purports are natural, but they’re not natural.

They’re created by economists. Okay? And so you’re faced with students who have had a little bit of economics probably in high school, maybe even earlier, and you get them in your principles class. Okay? They’ve already learned these things. They have already learned the barter story of money, the medium-of-exchange conception of money, and the assumption of selfishness. You have to overcome all of that. It’s very hard.

Class Unity: Your book definitely presents a particular view of economics, a very complete view of macroeconomics. But one thing we love about it is it covers the range of major frameworks and theories about macroeconomics including the orthodox neoclassical view because we have to be aware of it and where it goes right, where it goes wrong, and how it compares to heterodox views. So I’d like to cover these basic frameworks just starting with the definitions and get your thoughts on them. So first I’m going to read the orthodox neoclassical definition of economics which everybody has learned about in school. “Economics is the study of the allocation of scarce resources among unlimited wants.” And I’m just going to repeat that because it’s important. Economics is the study of the allocation of scarce resources among unlimited wants. Professor, what does it mean to study economics defined in this way? What value or use does it have for somebody trying to understand economic phenomena? And what forces either intellectual or political have made it so that this definition of economics is the most popular and dominant one today.

Randall Wray: So it sets it all up. In a typical textbook, the introductory chapter—chapter one—doesn’t really tell you much. We’re going to do this and this. Chapter two. What’s the title of chapter 2 in every mainstream textbook? The economic problem. What’s the problem? Resources are scarce. Wants are unlimited. You cannot get what you want. Scarcity versus unlimited wants. And then the third important word is the word “allocation” in the definition. Economics is the study of the allocation of scarce resources among unlimited competing wants. So it’s about allocating them. There’s nothing here about creating them. It’s allocating them. They exist, but they’re scarce. What does the market do? The market allocates these scarce resources among unlimited wants. Okay? Some people will get more, some people will get less. All right? And then we’ll explain, why do some get more and why do some get less? But some are going to have to go without because the resources are scarce. And so I would ask my students, what is wrong with this definition? What’s the most important resource there is in any economy including capitalism? And once in a while someone will give the right answer and say human labor. It is the most important resource there is. Is it scarce? When you think about it, sometimes someone will say there always seem to be unemployed people. Labor is not scarce: so much of it is unemployed, underemployed, or misemployed.

We could easily produce more with the labor we have; it is the most important resource there is. Are resources scarce? Well, not really. We make the resources. Resources don’t exist. We make them. And so some people say, well, oil. Well, we’ve had a series of energy crises and we’ve always overcome them. The first one was the whale oil. Kill all the whales and suddenly we have no oil. Okay? Then you find it in the ground. You find it everywhere. We’re swimming in oil. We’ve got enough oil to completely bake the planet so that no life form will survive. It’s not scarce. Okay? And we could find and have found better alternatives already, right? We have much better alternatives than oil. So resources aren’t scarce. They’re created by human effort and thought, okay, and innovations and science. So it’s blatantly false is the point. Why would they tell us this story? And then that would get us into the particular way they explain how the resources get allocated. They’re completely ignoring that we create them and we can create more if we want to. Okay, but let’s stick to the question of resources. So, we have to allocate them. How do we allocate them? Well, they use marginal productivity theory. You get what you deserve. Everyone gets rewarded according to their contribution to the production process.

People who contribute more will get more. Now the most rigorous models actually don’t have any production in them. The most rigorous orthodox neoclassical models contain no production. We all come to the market with some resources. We have a resource endowment. How do we get it? Who knows? Don’t try to explain it. But we all come to the market. You’ve got bananas and he’s got coconuts. How’d you get them? We don’t know. You come to the market and you trade them and the amount you can trade is given. You have a given resource endowment and then you trade and get the best deals you possibly can and then you walk away. In the less rigorous ones because I mean that one is so nonsensical it’s hard to sell it. Solet’s allow for production. So you have some production processand we have various factors of production. We have labor as a factor of production. We have capital as a factor of productionand we have land as a factor of production. And some of you might have labor, some of you might have land, some of you might have capital. Again, we cannot explain how you got it, but you’ve got that. And you can contribute to the production process. Your reward will be based on your contribution to production. If you contribute a lot to production then your reward is much bigger.

So now we can explain the allocation. Okay, you get what you deserve. How much did you contribute to the production process? That determines how much reward you get. All right? And so it’s fair. The allocation is a fair allocation. Are you poor, homeless, starving? Your fault. It’s your fault. It is a justification for the distribution of output. There is no one to blame but yourself. And what’s the procedure of a neoclassical economist to develop economic theory? Well, do you go out and observe the real world, okay, and try to see how it operates and figure out how capitalism works? No, that’s not how you do it. You sit at your desk and you put forward a proposition. Well, humans are rational and they will take all the information available and they will maximize their own utility and they don’t care about anybody else. They get no dissatisfaction from seeing someone else suffer. Doesn’t bother them at all. Doesn’t impact them. They also get no joy from someone else doing well. Okay? They’re completely isolated individuals unaffected by what happens to anyone else. They only care about their own individual utility. Okay? So we propose that and then we imagine the way an economy comprised of people like this would operate and that gives us neoclassical theory. It’s not that they’ve gone out and studied how people actually behave.

They could fairly easily have asked a psychologist or maybe an anthropologist who studies different kinds of societies, how do humans function? And they might have found out, actually humans are social animals. They are the most social of all animals. You can find a few individuals who behave somewhat close to the neoclassical model, but all of us would say there’s something wrong with them. They’re antisocial, right? That is not what humans are like. Okay? So, it’s from the very beginning, obvious that this has nothing to do with the real world. They’re sitting at a desk imagining something. Okay, it’s bizarre. It’s truly bizarre. Okay, why would they do it? Because they don’t want to talk about society. They don’t want to talk about the real world and how it functions and how it leaves some people behind and turns others into trillionaires. Anyway, that is probably long enough.

Class Unity: And I don’t want to get sidetracked either, but there’s a question in the chat that I think is relevant, so I’ll read it out. So justification is substituted for explanation. So is there any explanation in the normal sense of the word at all? That is, is there any explanation of causes in neoclassical theory?

Randall Wray: I think there is. In science, the aim is to see what causes a real-world phenomenon. But neoclassical theory as set out in the textbooks is complete fantasy. So there’s no attempt to connect to the real world. Robert Lucas got the Nobel Prize. I do not remember when—perhaps a couple of decades ago. And he’s famous for rational expectations. He made mainstream neoclassical economics in a sense even more neoclassical. Rational expectations basically says not only are people rational, they try to maximize their utility and they have to predict the future. They have to because they’re behaving in a way and they need to know what’s going to happen in the future. And he says, “So they form expectations about the future and their expectations are correct with a random error.” Okay? Sothey are godlike in the sense that they know what’s going to unfold tomorrow and on into the future with a random error term. Well, he was asked why were people standing in bread lines during the Great Depression? Were they maximizing utility? Was that really the best thing they could do is stand in a bread line rather than getting a job and earning and having a better life? He said that they were maximizing utility. They had decided that the real wage they could get from working was too low for them to give up their leisure time and so they stood in bread lines instead.

They were maximizing utility. And I’m sure the reporter looked at him like he must be insane. And so he said, “Look, I didn’t say they’re happy standing in the bread line. They are not necessarily happy doing this, but given the real wage they could get, and given the marginal productivity of their labor, it was the best they could do.” That is their causal explanation. Why were people in bread lines, right? Well, because the real wage, reflecting how unproductive they were, was so low that it was better to stand in the bread line than go get a job. So that’s the way they do causation. It’s a thought process. It does not involve interviewing people. Why are you standing in a bread line rather than working? They might tell you, “Well, there aren’t any jobs.” So that’s the kind of causation.

Class Unity: Right. Right. So let’s talk about the heterodox definition of economics. So the heterodox schools of thought are a number of different schools including the Keynesian, Marxist, and institutionalist traditions and your textbook offers a definition of economics that they all share which I’ll read out: “Economics is the study of social creation and social distribution of society’s resources.” I’ll read this again just for emphasis. “Economics is the study of social creation and social distribution of society’s resources.” So, professor, what does it mean to study economics in this way? What value does this definition have over the orthodox neoclassical one?

Randall Wray: So you notice that the word social is there twice. So, it’s emphasizing social and also creation. So it’s social creation of resources. Resources are not scarce and they’re not given. We create them. Okay? So humans create all the resources. I mean of course there are trees that are growing. That’s not a resource. Okay? We chop it down. We turn it into lumber. Who did that? Labor. Okay? We created lumber out of a natural resource. And individuals don’t create anything in isolation. Okay? There’s no such thing as an individual creating something. They’re always socially created. At a bare minimum, they’ve got the knowledge that’s been passed down through many millions of years of human experience. That knowledge is passed down. And usually they’re also using all sorts of tools and complicated equipment and so on that obviously is socially created in factories with workers together. You think about the iPhone. How many people in how many countries have contributed something to the iPhone you’ve got in your hand. There are thousands of people spread out all over the world doing little tiny parts of the iPhone. And then we’ve also got all of the apps and everything that make the iPhone useful. It’s socially created. You remember the Tom Hanks film Cast Away: he is marooned on an island and he figures out how to survive at a very low level of life.

And it seems like, well, isn’t he creating some resources to survive? Well, of course, he had knowledge of fire already, okay? And he had some basic idea of how he could try to start a fire. So he had the knowledge but also this shows something about the neoclassical marginal productivity theory because remember in the beginning of the movie he is a highly paid manager working for a delivery service. He earns a high salary and is very productive in that society and now he’s cast away on an island and he can barely produce enough to survive and he goes insane doing it. So that tells you the context. His high productivity was because of the society that he lived in, right? And now he’s on an island. He is then taken out of that societyand he cannot survive nearly as well as someone who had grown up on an island would be able to survive. So clearly the social relations make a big difference. So it’s social creation and it’s social distribution. It’s not according to marginal products. Think about the iPhone. How could you possibly calculate a marginal productivity for every worker who contributed something to the iPhone? Cannot be done. Now I know that Amazon is trying to extremely carefully watch employees so they can try to get really close to the neoclassical ideal of paying them according to their contribution to the production process.

But it’s extremely difficult to do. That is not what determines the distribution of output. It is not marginal productivity. It’s impossible usually to calculate what the marginal productivity of an individual is. So we cannot allocate the rewards that way. And more generally the problem with orthodoxy is that they’re not trying to study the real world while all the heterodox traditions are trying to study the real world, explain it, and examine causation: what causes poverty, and what causes unemployment. That is what they are trying to study.

Class Unity: One question about macroeconomics and microeconomics: we’ve typically heard the subject of economics being divided in this way. So your book is about macroeconomics, and you talk about thinking in a macroeconomic way. What makes a view distinctively macroeconomic and how does it differ from a microeconomic view of things?

Randall Wray: So rigorous neoclassical theory starts with the individual and then they aggregate up. And they’ve had some deviations from this and they’ve had debates within orthodoxy itself. So if we go back to the 1920s, neoclassical economics had this utility maximization. It had marginal productivity theory, all the things that I’ve been explaining. And it really could not explain the Great Depression. It couldn’t explain why unemployment is rising. Pigou, who was one of the best knowneconomists of the time and made extremely important contributions to neoclassical theory, wrote a book saying the problem is the wage is too high. If we lowered the wage firms would hire more workers and we would solve the unemployment problem. So that was the answer to the unemployment problem. Well, the wages were falling and unemployment was going up, okay, in the depression. And soKeynes offered an alternative explanation, okay, I won’t go through it now, but theory of effective demand. And it appeared that he could explain that. And so orthodoxy was in a crisis because they didn’t have an answer to it except to reduce wages, but falling wages was increasing unemployment. And so they sort of compromised and produced a version of Keynes that they were willing to accept. In this version, effective demand could play a role. Their compromise was: look, our story about the markets working and always generating full employment and distribution according to your contribution works in the long run but in the short run you could have a shock to your economy; something happens and you end up with some unemployment and then Keynes’s story provides a guide to how we get out of the depression or the deep recession.

We might need to stimulate demand. So they allowed for that. And so we go in the post-war period and maybe we can talk more about the post-war period, but governments get a lot bigger and governments actively try to influence economic outcome. Okay? And this is in line with their version of what Keynes was all about. And the economies do reasonably well. Okay, it’s the golden age for U.S. capitalism by many different measures. The first generation after World War II, we don’t have depressions anymore. Everyone knows of the Great Depression, but they don’t know we had six depressions before that, right? Depressions came every generation. They’re normal. We didn’t have them anymore. And even our recessions weren’t that bad until 1974. And so, the argument was, we can set Keynes aside because the markets do seem to work. And then they said that Keynesian theory is not consistent with our neoclassical economics. The micro foundations of Keynes are either completely unknown or they’re not consistent with ours because our micro foundations tell us the market works. And you just need to leave the market alone. And so the argument was we can’t have a macro that tells us the market doesn’t work, but a micro that tells us the market does work. So either we have to change the micro or we have to get rid of the macro.

And they decided let’s get rid of the macro. So they threw Keynes away. And that’s when Lucas comes along. Rational expectations. So they become even more neoclassical than Pigou had been in the 1920s. A more ridiculous version where the market always clears continually. So that becomes the new mainstream. So how did we resolve the difference between macro and micro? We got rid of the macro. And now what they do is they just have a perfectly rational individual agent and then how do we get to the macro? We just add them up. You add up from the individuals or the most rigorous ones only have one individual. Believe it or not, all the major central banks in the world are using DSGE, dynamic stochastic general equilibrium models that have one person in them. Their model of the economy has one person. Their model of the economy has no money. Why would one person use money? Okay, there are no debts. There’s no chance of default. There are no banks. This is the model used by central banks to model the capitalist economy. And you wonder why they never get anything right? Because this is their model. So that’s how they resolve the disconnect between macro and micro. They simply reduced macroeconomics to microeconomics. It is just an individual maximizing utility through time. Okay, that’s dynamic stochastic general equilibrium modeling.

All right. So basically there is no macro anymore. Now what about heterodox? All the heterodox traditions and those are Marx, Veblen and Keynes. So Marxists, institutionalists, and followers of Keynes—not Keynesians, but Post-Keynesians—because the Keynesians were the bastard version that I talked about before that tried to keep the neoclassical micro and have shocks to the system. Those are mostly gone now. The followers of Keynes are called Post-Keynesians. All of them share this view that you cannot start with microeconomics, you have to start with macro. You start with macroeconomics. How does the economy work? And then when you talk about the micro level, you’re talking about people who are living in an economy that operates according to certain macroeconomic principles and what that means is that they face constraints that come from the macro level. So let me just give a concrete example to make it obvious what I’m saying. In a capitalist economy, capitalists are the important decision-makers. By contrast, neoclassical economists talk about consumer sovereignty. The consumer makes the decisions and then the firms react to their decisions. Consumers call the tune. Okay? The firms don’t have power. They’re perfectly competitive. Okay? And they have to respond to consumers. Okay? The heterodox approach is exactly the opposite. Obviously, the capitalists make the decisions, the important ones. They decide first how many people to employ. It’s the most important decision there is.

Okay? All right. And why would they employ anyone? Because they want to make money. Capitalists don’t want to make goods. They don’t want to provide services. They want to make money. Okay? The goal of all capitalist production is to make money. So, they hire the number of workers they think they’ll need to produce the amount of output they think they can sell at a profit. Okay, that’s the decision-making process. And if you want to know what Keynes’s general theory is, that one sentence is the summary. Capitalists hire the number of workers they think they need to produce the amount of output they think they can sell at a profit. Why are people unemployed? Because no capitalist thinks that he can make a profit by employing them. That’s why they’re unemployed. It has nothing to do with the wage. Okay? It’s that the capitalist doesn’t believe they can sell the output at a profit. So people end up unemployed. All right? And what that means is the person who’s unemployed is not unemployed because they are necessarily lazy. I mean, some of them might be lazy, but that’s not the cause of unemployment in general. The problem is capitalists don’t think they can make a profit by hiring them. Okay? And what that means is the solution can’t be to lower wages because if we lower wages, what’s going to happen?

Sales are going to go down. Okay? So, this is Keynes’s explanation of why wages were falling in the Great Depression. They fell by 25 percent. And unemployment was going up. Well, because if workers don’t have wages, they can’t buy output. And so, the solution can’t be to lower wages. So, you need macro foundations of micro. Decision-making is affected by what is happening at the macro level. We talk about the economy as if it were a person. If the economy is doing well or if the economy is doing poorly, if the economy is doing well, then there will be more opportunities for capitalists to hire workers and so unemployment is going to go down. If the economy is doing poorly, then capitalists’ expectations are going to be falling and they’re going to be reducing employment, not hiring. So that’s the macro foundations of your microeconomics. The micro has to be consistent with the macro. Okay? So the decision-making is by the capitalists not by the consumers. Capitalists are only concerned with one thing which is ending up with more money than they started with. Then there are many other differences between heterodox micro and orthodox micro because orthodoxy starts with the assumption that capitalists operating markets are all perfectly competitive. They have no ability to influence price. All right. Now, you look at the real world and obviously this is false.

It’s extremely hard to find any sector of the economy that even comes close to perfectly competitive or even imperfectly competitive. The fact is that virtually any market you look at, there will be two or three dominant firms. Consistently across the economy. Even if you go down to the service sector, say chimney sweeps in some town in Ohio, there will be three firms that dominate and one of them is going to have costs that are half of the costs of the second best firm. Okay, this is what studies show. So it’s always oligopolized or monopolized. They have pricing power. So then the question is how do they set their price? They do not set prices to clear the market; that market-clearing assumption is the neoclassical view. Actual firms pursue a variety of goals. Obviously they want to cover their costs. Obviously they want to end up with profit. But my colleague Fred Lee at UMKC was a microeconomist and he said firms are also going concerns: they want to stay in business. And so that will also condition the way that they operate. They don’t maximize profits. Neoclassical economists say they try to maximize profits. They don’t maximize profits, okay? Because they want their firms to remain going concerns. So they do care about market share and things like that. So you tackle it that way.

What would firms do given macroeconomic constraints but also given market power?

Class Unity: We have a question. I think you’ve answered parts of this about economic theory and economic policy, or politics. Theory is supposed to explain the way the world is while policy is about trying to make it the way we want it to be. And sometimes it is hard for people to keep these things apart. So our question to you is could you say something about the relationship between economic theory and policy—that is, what the state and state actors do— For instance, how could the choice of theory one holds impact the policy decisions one might take or the outcomes of those policies? And on the other hand, how might one’s values or desires about practical outcomes influence the theoretical positions people hold whether innocently or illegitimately?

Randall Wray: Probably most heterodox economists would agree that we study the economic aspect of the world we live in. The reason we study it is to change it. So we want to understand how it works so that we can use policy to change it. I come especially from the institutionalist tradition. For institutionalists, policymaking is problem-solving. So you identify a problem. Unemployment is a problem. Poverty is a problem. You identify the problem. We need to understand how the economic system works and then try to come up with a policy that can alleviate the problem. Many institutionalists focus on the institutions that create the problem. Okay? You identify what Veblen called imbecile institutions. Okay? Institutions that maybe played a positive role in the distant past, but the economy has evolved to the point where these institutions are now in the way. Consider the institutionalized treatment of women: as the economy evolves, it becomes a barrier to moving forward and so we try to resolve those problems. And so problem solving is a process of institutional adjustment. Get rid of the ones that don’t work. Create new ones to solve the problems. And J. Fagg Foster who was a well-known institutionalist especially focused on problem-solving put forward the proposition that you want minimal dislocation in institutional adjustment. So you get rid of the institutions that are really harmful, but you try to avoid really radical changes in order to minimize the disruption to the economy.

You want to keep it evolving through gradual change rather than revolution. Now not all heterodox economists share this view but that is probably a fairly common view among institutionalists. My professor Hyman Minsky started out studying at Chicago, which today is known as a bastion of people like Lucas. It was an institutionalist department when Minsky was there, just before World War II. He was drafted. He served in Germany, came back, and then went to Harvard. But anyway, he studied with institutionalists at the time and he always said policy only works by changing behavior. We need to change behavior in order to change the outcome. Okay? And this is consistent if you think of what are institutions. Well, they’re patterns of behavior. Okay? So, he doesn’t use exactly the same terminology and the institutionalists he studied with were somewhat different from the dominant institutionalist approach today. Another thing institutionalists argue is that the means and the ends need to be consistent. I think this is also part of the notion of minimal dislocation. So you want a democratic society. The means to getting there need to be democratic. You need to persuade people to come along and make those kinds of institutional adjustments that are necessary. I think that is the relationship. We can contrast it with the orthodox which is that the free market is best.

And so if you’ve got a problem there must be some kind of intervention—something that’s preventing the market from working. Probably it’s the government interfering. So the government interferes in markets. Now there could be other problems too, but government interference is the one they mostly focus on. The government is the problem. Maybe none of you are old enough. Ronald Reagan said, “Government is the problem. We’re going to get government off our backs.” And that has been the mantra ever since. So now we’re going on almost fifty years of reducing the role of the government in the economy perfectly consistent with neoclassical economics because the government is interfering with the market mechanism and the market always knows best. Friedman also claimed the market is democratic. Much more democratic than our politics are. Why? Because it is one dollar, one vote. That’s true democracy. You vote with your dollars and every vote counts the same. Every dollar has the same weight. Okay? So, you get pure democracy if you let the market decide as much as possible. And he was very serious about this. If you’ve read him, he said we should not be licensing doctors. It’s interfering with the market mechanism. It prevents many potentially great surgeons from practicing medicine because they got to get a license first. They work in their garage. They’re pretty good with tools, hammers, and chisels.

Why can’t they do brain surgery? You think I’m joking? He says this, right? He says it’s okay to make them register. They have to register their name locally and then people can find out, okay, that’s a practicing doctor and they can gather information from the market. Well, this guy seems to have killed 50 people so far. I think I won’t go to that one. I’ll go to a different one. This is what he says. Anyway, the market is always best. That is the orthodox fallback. In 1926—ten years before The General Theory, and ten years before he had figured out what the problem was—he wrote a book The End of Laissez-Faire. Laissez-faire is this notion that the market always works best. He wrote this book, The End of Laissez-Faire. And he said that no one really believes this. And he said this actually was not an idea that came from economics. It’s not our fault. This came from political science. He said this is just politics. Okay? They don’t want a government that can interfere in anything. No one really believes the invisible hand works. Now, he didn’t know why it didn’t work. He didn’t have his theory of effective demand. But he knew that the neoclassical view of the free market was false. But anyway, what Friedman did after World War II was to try to bring back the market.

Class Unity: Last prepared question, then we’ll go into audience questions about money. One hotly contested question in economics is what money is and how it works. People think all sorts of things about it and have a lot of wild ideas about it. Some make sense, while others are myths, and there are a lot of misconceptions out there specifically about what Modern Money Theory is. So in order to clear some things up for our members and our viewers, could you tell us what, in your view, is the most important thing a layperson needs to understand about money and the kind of money system we live in today? And how would you say as simply as possible what money really is and where do people go wrong about trying to understand what it is?

Randall Wray: Yep. So, going back to the barter story, the focus of the barter story is on a medium of exchange. So, Robinson Crusoe and Friday are bartering fish for coconuts. And the problem is that you need what is called a double coincidence of wants. So Friday has fish, but he wants coconuts. Or Crusoe has, let’s say, Crusoe has fish, but wants coconuts. Friday has coconuts but wants fish. Great: we have a double coincidence of wants. They can trade. But what if Friday does not want the fish? Then Crusoe can’t get the coconuts. So, they say, “Well, why don’t we have a medium of exchange and I can pay you and you can hold that and maybe later you’ll decide that you want to buy something.” And they hit on using seashells. And then gradually there’s this evolution to gold and then finally to today’s paper money which is completely illegitimate because it doesn’t have any real value and the government is always trying to cause inflation. And so we end up with the value of our money is always declining and all of this story. The story focuses on money as a medium of exchange. Now this history is completely false. Money almost certainly came out of recordkeeping. The history of writing and the history of money are closely intertwined because writing was invented to keep track of debits and credits.

So anyway we need to move away from the idea that money was created to solve this problem in a market. I could spend a lot of time talking about the problems with a story in which, for some reason, people start specializing to produce for a market before there is any money. It doesn’t make any sense at all and there’s no evidence for it. There’s no evidence of any economies ever based on barter outside trivial cases like prisoner-of-war camps where people already knew how to use money. So the history, the archaeology, the anthropology are all unanimous in rejecting the story. Money was much more likely created for recordkeeping. You have hosted Michael Hudson, who is probably the leading authority on the origins of money in Mesopotamia where it involved recordkeeping and keeping track of credits and debts. That’s what money is all about. So rather than thinking of money as something that changes hands, goes from from hand to hand. Think of money as nothing more than a scoreboard. So very soon we’re going to have the Super Bowl with a scoreboard that keeps track of points. But rather than the football scoreboard keeping track, the bankers keep track. The bankers keep track of the credits and debits. Most young people have never used cash. They’ve never written a check. They’ve never held money in their hand.

Okay? All the money that they’ve ever used is in this. They may not even know how to use cash, but every payment they have ever made or received has been in their iPhone. Okay? They never touched money. So, we need to get, out of this historical view that money is something you can feel. It’s real. You can touch it. It goes hand to hand. It allows you to buy stuff. You use it in markets. No—it is accounting. It is a system of accounting records that keeps track of your debts and your credits. That’s what it’s all about. And in capitalism, as I said, the purpose of production is to end up with more money than you started with. And that additional money is in the form of digital records. You start with digital records, you purchase the inputs, you hire the laborer, you sell the output for digital records, and you hope at the end you end up with a higher level of digital records. That’s what capitalism is all about. That’s what money is. So MMT has been emphasizing what is called the chartalist view of money. When Knapp wrote his book The State Theory of Money in which he explains the chartalist view, he tends to emphasize money as a token. And he uses the cloakroom at a museum as an example. You deposit your cloak and you get a token that’s worth one coat, hopefully yours.

You submit that token and you get your coat back. While you’re holding it, the token is a credit. It’s worth a coat. It’s a debt of the cloakroom. They owe you a coat. Okay? And you deliver the token and you get your coat back. And that’s what coins, tally sticks, and paper money are all examples of tokens. They were worth whatever they could be redeemed for. So if the government issued a coin and said, “You can use this coin to pay $1 worth of taxes that you owe us, the coin is worth a dollar.” And Innes is the one I like best. A. Mitchell Innes wrote two papers that explained both the state theory and the credit theory of money. I think he does a better job than Knapp in explaining these things. So I always say they’re the two best papers ever written on money. He talks about the even a gold coin is only worth or its worth is determined by what it will be accepted for. Okay? Its value is not determined by the gold content. And so that’s always been true. A dollar gold coin is worth a dollar because that’s what it’s accepted for, not because it has a dollar’s worth of gold in it. So anyway, these early works, they are typically talking about physical records that you could touch, but today those are pretty irrelevant.

Today it’s all digital entries and we keep track. It is like a big game keeping track of the winners and the losers. The winners get credits to their accounts and the losers get debits to their accounts. So that’s what money is and it’s just recordkeeping. Now I think MMT has emphasized a little bit too much the “taxes drive money” claim and there has been some oversimplification. So some of the criticism of MMT and confusion of what MMT says I think is our fault and I’m trying to resolve those problems. You can tell a nice story about how taxes can drive money. So, you’ve got the colonist who goes to Africa. The colonist has a gun and says, “You owe me taxes and if you don’t pay them, I have the gun and I’m going to shoot you.” They say, “Well, how can I pay my tax?” Well, you can work hard over here building a road for me. Taxes drive money. You created a demand for money. Fine. And that really happened sometimes. Okay, it’s a true story. Or we can talk about the American colonies. So, we’ve used that example a lot. The American colonies could not issue coins. England would not allow it. The colonies had to use the British coin, which means they had to earn it by exporting. Why did Britain want a colony?

Because they wanted the exports. So the American colonists had to export to Britain to get the coins that they needed to circulate in America to finance the market but also finance the colonial governments. Colonial governments couldn’t raise enough tax revenue because there weren’t enough coins in circulation. Sothey came up with the idea we can use paper money. So this was the first large-scale use of paper money in the West. The Chinese had been doing it for a couple hundred years, but it was the first such use in the West and Farley Grubb has studied thisand all thirteen American colonies did this. They would pass a law imposing a new tax that was expected to raise, say, 100,000 Virginia pounds and then they would issue paper money in the amount of 100,000 pounds. They called the tax a redemption tax. So it’s very clear they knew exactly what they were doing. They’re going to impose a tax payable in this paper money that will create a demand for the paper money. It will be redeemed in taxation and they burned all the tax revenue. This happened; it is true. All right. But that doesn’t mean it’s so simple. As I discuss in the book, the first country to have a modern monetary system was Britain. It took them 400 years. 400 years to do it.

It was not easy to just impose a tax and enforce it and get your currency accepted. People didn’t want the king’s currency. Because the king was notorious for defaulting on his debts. Okay? You had to build trust. They had to take the power of the purse away from the king and give it to Parliament which was more trustworthy. They had to create the Bank of England which was a private bank that could finance Parliament and the king. They put a private bank between the government and the people. They trusted the private bank more than the government. Sowhat I’m saying is it wasn’t a simple thing to get to the point where we are today. Just saying, “Oh, you just impose a tax and that will create a demand for your currency.” It was much harder than that historically to build that kind of trust to get to the point where you could do that. And then the other critique that often is made, people say, I mean, if you talk to average people, when I accept a dollar, I’m never thinking of the tax I have to pay. I accept the dollar because I want to buy an ice cream cone. I’m never thinking of the tax. And of course, that’s true. The tax is there, but the reason that people want credits in terms of money is because our system is based on the dollar.

The whole economy is based on the dollar. And it’s a very complex economy and building that trust in the dollar is also very complex. China is now the largest economy in the world. The U.S. economy is vastly overrated because of differences in prices between the two countries; the Chinese economy is much larger than ours. And people are talking about the RMB replacing the dollar because you would think well biggest economy in the world and a huge exporter right why the RMB has not replaced the dollar. But it is not that simple: there is a lot of trust in U.S. institutions that stand behind that dollar as an international reserve currency and China doesn’t have those yet. So, it’s going to be a while.

Class Unity: I’d like to ask a minor question, but I’m very curious about where you would place the Austrian school of thought. I know your book focuses on the mainstream neoclassical. Definitely the Austrian school is opposed to most heterodox schools or at least MMT. It treats money as a commodity or a kind of commodity. But I’m just wondering what your thoughts are. Would you consider it fundamentally a variant of neoclassical economics or is it just a separate, marginal heterodox school of thought in itself?

Randall Wray: I don’t include it as heterodox. Some of my heterodox friends do because it does have two elements that neoclassical economics does not have but that heterodox does. One is uncertainty and the other is time. So they treat time as, there’s a past that can’t be changed and a future that we don’t know. Orthodoxy does not have that. So that makes them different. They’re in a different category. However, otherwise they are otherwise consistently neoclassical: extremely pro-free-market and anti-government and yes they view inflation as a fraud perpetrated perhaps deliberately by the government defrauding people and that a free market system should be based on commodity money, probably gold on the theory that this would solve our inflation problem. Well, I think this is just completely wrong. Gold standards were fairly rare. Now I said it took 400 years for Britain to create the modern monetary system. Ironically they had 400 years of pegged currency. They pegged their currency to gold or silver for 400 years. But that is unique and extremely rare. It it did help to build confidence in the currency. It helps to explain why they were the first to get there and then they went off it. Many countries went on and off gold in the nineteenth century. So during the nineteenth century countries were going on and off gold and silver. Attempts to return to gold after World War I helped create the Great Depression.

Then we got Bretton Woods and everyone was pegged to the dollar until Nixon and then we got rid of that system. So they like to believe that the nineteenth century was this utopian period of no inflation. If you compare the price level in 1800 with the price level at the end of the nineteenth century, it is the same. Does that mean there were stable prices over the nineteenth century? The answer is no. The price level fluctuated wildly. Prices declined in all the depressions. Remember I said we had six. Every depression prices went down. Every boom time which usually was a war period or often was a war period prices went up. And so it just happens at the endpoints you have the same price level but prices were not stable over the century when countries were on gold. Why is that? Because a peg makes it difficult. I mean if everyone plays by the rules it makes it difficult to expand the money supply. Capitalism is a system based on starting with money to make more money. You need the money supply to grow. Okay? In order to have more money at the end, it has to be growing. You need the money supply to grow in order to get more sales, in order to accumulate more money profits. So, it’s not consistent with capitalism.

So Austrians like most neoclassicals are very pro-capitalist but their proposition would kill capitalism and does kill capitalism. It’s what causes depressions. What have we decided to do? I don’t say that everyone intentionally decided to do this. We created a system that allows for relatively good growth and no depressions. That’s what we did with the New Deal. And then Europe had their own version of the New Deal. You have a big government that is always there that will not let you collapse into a depression. Okay? And because we have no depressions, prices never go down. Which means there’s only one direction prices can go. The only question is how fast are they going to rise? Okay? They’re always going to be going up. They never go down. And the trade-off is we don’t have depressions. Now, I think last time I was on, I talked about financial crisis and so on. We still have major problems to solve. Well, we solved one. We haven’t had a depression. We had the global financial crisis. It was very bad, but even that was not a great depression. We’re coming up against another one. We’ll see. Do we get a depression this next time because of AI collapsing? It may be, but we know how to prevent it. And preventing it, I think I talked about last time, it’s really ugly what they do to prevent it from happening.

But so far, we have decided that the trade-off is worthwhile. I do not think there’s any way to have this commodity money system now. Of course, crypto is supposedly the solution. Right. It’s really stable, right? You notice how stable crypto is. Either one is crazy. Crypto is nothing but a pure fraud. So, I think it’s far worse than the gold standard, but in terms of stability, obviously it’s not stable.

Class Unity: One last question here. Thank you very much for speaking with us again. It’s really a pleasure and honor. We’ve been following your work for a long time and everything you’ve said is very illuminating and helpful. In the course of your last comments, a question came up. So, I actually have two questions, if that is okay. One is about China, prompted by what you just said. We have thought about this and talked to Michael Hudson about the topic of de-dollarization. China, as you said, exports more than it imports. And if that’s true, then its currency isn’t going to flow out of China into other countries. Other countries’ currencies are going to flow into it. And as long as that remains the case, then its currency couldn’t serve as a global reserve currency, right? So if that is right, when people ask whether China might be the next one to provide the global reserve currency, they just seem to be assuming that it would be another country that gets a free lunch from a financial arrangement like that of the United States after August 15, 1971when the gold standard ended and it just became pure credit. Soit’d be the same thing with a different name. It wouldn’t really be de-dollarization. It would just be, a dollar system with Chinese characteristics or something like that, I feel that there’s a lot of confusion around de-dollarization because we have to understand the balance of trade and the directions of the flows and who’s accumulating surpluses and so forth.

Who is importing and who is exporting? So, any clarity, first of all, if I’ve butchered that, please set me straight. Any clarity you could provide on that would be greatly appreciated. Maybe I should just pause and if it’s okay, I’ll ask the second one.

Randall Wray: That’s fine with me. So yes the U.S. supplies dollars by importing and given a choice countries would rather sell output to get dollars in rather than going into debt to get dollars because that’s the alternative. You don’t have to sell anything to America to get dollars. You can borrow dollars. Okay, the U.K. system, the pound was dominant. U.K. was an exporter, but the U.K. financed the world. They lent pounds. All right? So, China could do that. They could still be an exporter. But they could become a lender to the world. They are already lending in parts of the developing world, so it is conceivable. I think it’s preferable that countries have the opportunity to earn the international reserve currency rather than borrowing it and going into debt. The history of developing countries and borrowing is not a pretty picture at all. They get overindebted, they have currency crises and the results are not good. My wife is Chinese and if you go to the Levy website, she and I have a paper perhaps ten years ago talking about China and efforts to increase the international use of the RMB. We have a paper on it. So I think that there’s a chance that the RMB will replace the dollar, but it’s not going to be for a very long time. The U.S. economy was bigger than the U.K. economy by the Civil War.

The pound remained the international reserve currency until World War II and then we took over. That just gives you an idea. It can take a very long time. Just because you’re the biggest economy in the world doesn’t mean that your currency is going to be the international reserve currency. You have to build trust in your institutions. Now Trump is doing everything he possibly can to destroy trust in America. So perhaps he can make it happen. I don’t know. When you sanction other countries and don’t allow them access to the international financial system for political reasons you start breaking down the trust. Can you really trust the United States? Do you really want to hold dollars when the U.S. can shut you out and effectively seize your dollar reserves? Okay, maybe you don’t want to trust the United States. So that could speed up the process of replacement. Many people think that maybe we will have a multipolar world with the U.S. dollar remaining one of the reserve currencies but more and more use of other currencies. And then some people fantasize that we could have another Bretton Woods meeting. I think there’s zero chance of this because it’s not going to be supported by the dominant players which are China and the U.S. They will not go for it. What you are describing, though, is the difficulty of obtaining the currency.

I think that also is a problem for the EU. That’s why the euro is not going to replace the dollar, not going to become a major currency because the eurozone is an exporter. It’s hard to get euros. And also they try to minimize their government debt. Not very successfully, but you want a country that issues a lot of government debt because that’s how you’re going to hold the currency. You want to hold government debt. Free lunch. I don’t agree that the United States gets a free lunch. If you buy a Toyota made in Japan, you’re an American. Is that a free lunch? No, of course not. You either had to use your income or you had to go into debt to buy the Toyota. Okay? There’s no free lunch for Americans from buying imports. It’s exactly the same as if they buy a domestically produced good. It uses their income or puts them into debt. Now, what about the U.S. government? What if the U.S. government buys a Toyota made in Japan? It’s a free lunch. But if it’s made in Georgia, it’s still a free lunch, right? The government just prints up the money and it buys it. The only one who gets a free lunch is the government. Now there is something though there is an advantage which is that if the rest of the world wants or needs your currency because its debts are denominated in that currency, you can run a net-export deficit—a trade deficit— without any impact on your exchange rate. 99 percent of the dollars in the world are not demanded for trade.

They’re financial assets. Okay? And so there’s a huge demand for dollars around the world. And our little tiny trade deficits have no impact on the exchange rate because that’s not what the dollar is held abroad for. People aren’t holding the dollar to buy U.S. output. They’re holding the dollar as part of a portfolio and to a lesser extent, Bill Mitchell argues that the same is true for Australia. Pension funds around the world said, “We ought to diversify our portfolio into Australia. Why? Because it’s a commodity producer. We want to diversify into commodities. How do you do that? Through Australian dollars.” That’s how you diversify. And so suddenly the Australian dollar is in demand and Australia can run a trade deficit forever without impacting its exchange rate very much. It affects it a little but not very much. The key is when financial markets decide to diversify into your currency then you obtain this so-called free lunch, or exorbitant privilege: there is little impact on your exchange rate. You don’t need to worry too much about it which is true. The United States does have that which could possibly mean that our central bank will let us enjoy a slightly lower interest rate. Unfortunately, our central bank doesn’t think that way. They keep the interest rate too high.

Class Unity: Thank you very much for that. That is very illuminating and clarifying. Point taken: Ordinary Americans don’t get a free lunch from this. I guess my suspicion was more sort of the creditor class gets something out of it. The second question was just about discussing so-called MMT. I have found in certain quarters you can’t even say it because brains just shut off instantly. Not only among right-wingers, but especially among a certain kind of leftist and then after opening my mouth, I regretted saying, “Well, come on: it is just Post-Keynesianeconomics plus the credit theory of money, or the state theory of money.” My first question is whether that is an accurate characterization but then I realize that might not have helped either because I had said the word “Keynesian,” and he is supposedly the bad one—the bourgeois figure who wanted to save capitalism. So I guess my question is like can you offer any insight? You have been doing this for a long time and I know you have experienced that. And I’m wondering, is there a better characterization which might land better? Especially I’d like to know if that was inaccurate. Because I mean like as you said, Kalecki, Joan Robinson, Minsky, and in terms of theory, forgetting the politics for a second, they seem pretty much on the same page as Marx on a lot of important questions.

Is that a fair characterization? And why so much hostility from the left? I can still remember that when I discovered your work and that of your colleagues, there was a big kerfuffle in Jacobinabout a hit piece Doug Henwood wrote and I wondered why he was saying this, and he’s repeating platitudes about government deficits—that the government’s balance sheet is the same as a household but it’s bigger and I just thought Pavlina Tcherneva comes out saying, “We don’t need to tax them for revenue. If you want to tax them, it’s because you don’t want them to be that powerful.” Every round it’s the same thing. If you say MMT, minds turn off on the left. And I just wonder why you think that is.

Randall Wray: Everything you said is true. Let me just start with the taxes thing. It’s not just heterodox. I would just say progressives who aren’t economists. The reason why they hate what we’re saying is because they love taxing the rich. Okay? If we say, “We don’t need taxes to provide a jobs-for-all program. We don’t need taxes to provide Medicare for all. Government can pay for it,” the response is, “But I want to tax the rich.” We say, “Yeah, tax the rich.” And don’t stop with a 3 percent wealth tax like Elizabeth Warren wanted. Take it all. Okay? A 120 percent tax rate. Send them the bill for the other 20 percent. Take all of it. We all support that. The government doesn’t need the revenue. They’re just going to burn it. I mean, metaphorically, they just wipe it off the balance sheet. It’s gone. It’s like the Super Bowl, the scorekeeper puts up a six and then the replay shows the guy didn’t quite make it. They take it away. Where did it go? It’s gone. Just take it all away. We completely support that. All right. Then what is the problem? I can tell you that I have been saying this since 1991. I have slides from my lectures to prove it except for the very last sentence. So what is the heterodox approach? First, we begin with the idea that capitalism is a monetary system: it is M–C–M′.

Start with money to make more money. This is Marx and Veblen. They all said exactly the same thing. That’s what it is. Institutionalists add that money is all about power. If you have money, you have power. If you don’t have money, you don’t have power. So, they focus on that aspect of money. Post-Keynesians focus on the fact that you hold money because the future’s uncertain. This is Keynes, along with endogenous money. Endogenous money was also accepted by Keynes, Marx, Veblen, and MMT. Then there is Godley’s sectoral-balance approach. When I would come to my professor Hyman Minsky’s office with some crazy idea he would say, “Go home and put it in balance sheets. If you cannot show me the balance sheets, you do not know what you are talking about.” So there is the sectoral-balance approach and then the financial-instability hypothesis, which is Minsky. I think all of these approaches accept that there is something about the financial system of the capitalist economy that’s fundamentally unstable. Okay, it’s destabilizing. MMT accepts all of those. Okay, MMT is in exactly the same paradigm as all of the other approaches. Okay, what did we add? The functional finance approach of Abba Lerner. We also added the state-money approach of Knapp, Abba Lerner, and Minsky. It is the same paradigm; we share the same way of viewing the world, and theories have to work within that paradigm.

That is Kuhn’s account of scientific revolutions. I think all of these things are accepted by heterodoxy. So we’re in the same paradigm as them. We accept the same things that they accept. So whose fault is it? I think to some degree it’s our fault and some degree it’s their fault. I think that in the beginning probably there were two mistakes. One mistake was we were trying to package the ideas in a way that we could communicate to policymakers, politicians and the general public. And so we had what Bill calls heuristics. And I mean Bill Mitchell, we share the same ones. The “taxes drive money” claim is a heuristic. It’s a logical statement. Bond sales are a reserve drain. The ideas that government spends through keystrokes and does not need revenue before it can spend were simplifications and it’s true that from the beginning these formulations turned off some heterodox economists. And on the other hand, they spread among the population outside academia. And some heterodox economists have begrudgingly said MMT is the only successful heterodox approach so far. None of the others has been successful. None of the others has been adopted by policymakers. Now, not many have adopted MMT. Before COVID-19, MMT made headlines, always in a negative sense, right? But at least it was recognized. At the beginning of the COVID-19 pandemic, it was mentioned in a positive sense.

It is the only heterodox approach that has broken through in that way. I think this resulted partly from our strategy of using simple explanations and heuristics. I remember when Paul Krugman had his column and he would say stupid things about the government’s debt and deficit and then he would complain because he would get 1,000 comments immediately on his blog explaining to him why he was wrong. These were written by average people. There were probably a million people who could have debated Krugman about the deficit and won the debate. It drove him crazy. There is no other heterodox theory that is understood by the general population. What we wanted was that any time your member of Congress is giving a talk and says something stupid like the government has run out of money we wanted people in the audience to stand up and challenge them. That was the purpose, and I think we succeeded. Followers of MMT who are not academics—and may never have had an economics course—are now all over the world. So that was very successful. But the downside was that the heterodox critics never actually read anything that we wrote. What they read was Krugman’s summary of what MMT says or the simplest expositions. They didn’t bother to read anything and I know that because I’ve read their critiques and at most they might have one or two citations there.

There was one critique by a very well-known Post-Keynesian. It had citations, but not one single citation to an MMT proponent in a paper criticizing MMT. The editor of the Journal of Economic Issues also used our textbook to criticize MMT. No academic literature whatsoever. She used the textbook written for college students in order to write an academic critique of MMT. I think this laziness on their side is also a problem. But I’m willing to admit that we made a mistake and I’m trying to rectify it to say yeah you’re right the “taxes drive money” claim is too simple. We need to be more careful. And I think you will notice in the revised textbook that we’re a bit more careful. We still have to keep it simple but we’re a bit more careful. Finally, as I said, there are millions of proponents of MMT and most of those are not academics and a lot of people learn about MMT from them and that is a bit of a problem that they might oversimplify. The other mistake we made initially was that we didn’t really want to talk about the developing world because their situation is different from ours. And the problem was that the developing world is reading our stuff and they’re inviting us to come down and meet with the head of their treasury, the head of their central bank and we’re going down and we realized it was a mistake not to write about them and address them and recognize a hierarchy of monetary sovereignty.

Things are much more difficult in the developing world and now we have Fadhel and Yan, our former students, who are well known for writing about the situation in developing countries but there still are some statements being made by MMT proponents—I am not going to name names—that are a bit too simplistic to say that imports are always a benefit and exports are always a cost. That is far too simplistic and leads to lots of problems.

Class Unity: Well, thank you for being so generous with your time, professor. We really appreciate it. I enjoyed it. From the looks of it, I think we all enjoyed this.

Randall Wray: I have two new books. One is Understanding Modern Money Theory: Money and Credit in Capitalist Economies. It synthesizes my 1990 book which was mostly on the private money system and my 1998 book which marked the beginning of MMT. So it puts those two things together. It is for a more academic audience, let’s say. And the second book will come out with Princeton and it’s The Vision of Hyman Minskyand I think it would interest some of your listeners because what I try to do is put Minsky in a paradigm in which Marx is one of the paradigm’s main figures and so it will link up to Marx. And then finally, Bill, Martin, and I have been working on the new edition of our textbook. The new one is actually a bit shorter even though we’ve added two or three chapters. One is on institutional economics. We briefly discussed that in the edition that you have read but I’ve written a whole new chapter going into greater detail on the institutionalist approach and then a new chapter on business cycles and economic growth theory. So we have growth, but also cycles within growth and so that’s a new chapter. And then we reduced some other areas and tightened up some of the writing and we replaced the chapter near the end on contemporary debates, because it was written in 2017 and the debate has moved on.

We also decided rather than presenting the whole debate, we chose some policy issues and we provide an outline of how you might go about researching these and we’re leaving it up to the students or readers to research those areas rather than telling them what to think. And then finally we also are going to publish a shorter version of the textbook aimed at introductory macroeconomics. So it would be for first-year students and also for the general audience. For people who do not want to go more deeply into economic theory, the new version will be much shorter and simpler than the textbook you have read. So that will be available sometime in the future.

Class Unity: That’s it. Again, thank you so much, professor, and we hope we can do this again sometime. If you’re watching this at home, the Approaches to Macroeconomics course is held virtually over Zoom and starts March 1 at 2 p.m. Eastern time and you can sign up on our website classunity.org in the education section. Thank you so much.

1