Question

Evaluate the protagonists argument against Modern Monetary theory. A review against the idea of Modern Monetary Theory For the 'con' case, the working paper by Sebastian Edwards, 'Modern Monetary Theory: Cautionary Tales from Latin America', published by the Hoover Institution, April 25, 2019. Thank you

Answer 1

The Modern Monetary Theory [MMT] refers to a macroeconomic theory describing the practical uses of fiat currency. It supports public monopoly practices and states that a government could utilise the fiscal policy measure to create as much money as they can and create employment opportunities also in an infinite manner. Although there is a risk of high inflation in a fully employed nation, the supporters of this policy states that it can also be addressed by raising taxes and issuing bonds so as to reduce the money flow in the economy. It advocated complete authority on the government to create and distribute as much money as it requires and control it at time on heavy inflations using suitable fiscal measures, Thus it differs from the mainstream economic theory in a way that MMT allows the opportunity for a nation to always remain insolvent by printing as much money as they need. Thus, implementation of MMT makes the economic system resistant to budget deficits and external debts.

                                          The Modern Monetary Theory has many differences with the classical and well-established monetary theories that have resulted in conflicts. The following are the major arguments against this theory

· MMT has disparities with the modern economic theories in the fact that it does not consider the basic concepts of taxation, importance of budget deficit etc.

· It does not consider the political complications and vested economic interests that may result in an economy that is free to create money and employment opportunities.

· It represents a fiscally irresponsible theory and its implementation would result in skyrocketing of debts and inflation in the economy.

· In the long run, this theory would make the economy unstable and uncontrollable and would finally lead to mismanagement of the society and people.

· The home nation currency would have no value and the whole concept of foreign exchange and international trade practices would be stalled.

· The mismanagement of money and employment opportunity would lead to the fall of economy and the nation.

                                                  The analysis of above arguments states the fact that an economic policy should have serious interpretations of basic economic theories. Unless due care is given to this, it would lead to failures of economy in the long run if not in the short run.