Back in 2010 I came across Modern Monetary Theory (MMT) for the first time and found it somewhat appealing. This is the theory that Alexandria Ocasio-Cortez promoted along the way to her meteoric rise to Congress. MMT is a theory of economics that says some pretty controversial stuff – the government has a real budget constraint unlike a household, monetary policy is very ineffective and the government should run large scale Job Guarantee programs to ensure full employment. I like a lot of what MMT says, especially on the banking side of things so I’ve always been somewhat sympathetic to it. But I remember the moment where red flags started shooting up.¹

I was talking to Warren Mosler, the founder of MMT, sometime in 2011 asking him how he thinks unemployment results. And he told me a story about how he thinks of the monetary system like a room full of people where he forces everyone to use his business cards as money. The room is locked with armed guards at the door forcing us to use those business cards as money. And if you can’t obtain business cards then you’re effectively “unemployed”. Kinda creepy, but also kinda logical. The government creates a monetary system, we all have to use it, they impose rules on us requiring us to do things like pay taxes in that money so you’re kinda screwed if you can’t get money. So, in essence, involuntary unemployment is caused by the government. It seems intuitive. Except I’d argue it’s wrong and largely inconsistent with how a capitalist system is naturally designed to work.

You see, in a capitalist system, the natural buffer stock is unemployed people. Capitalists manage their risks by employing as many people as needed but no more than needed. And if people can’t get business cards (money) then it is primarily the result of their inability to sell their skills to capitalists or other market participants. In other words, unemployment isn’t really caused by the government in a capitalist economy. It is, as most economists agree, caused by a lack of investment. Some unemployment is the natural result of capitalism because capitalists retain profits to manage risks and they manage those risks by not investing their retained earnings in more employment than they believe is prudent. This results in a persistent shortage of investment. So, the MMT narrative is inconsistent with capitalism and arguably wrong in an empirical sense.

Now, this doesn’t “debunk” MMT. MMT cannot be debunked because MMT has never been implemented anywhere. Yes, some people think MMT has been in place for decades because they advocate persistent deficits, but persistent deficits are not MMT. MMT is specifically a macro theory for full employment and price stability using a Job Guarantee as a policy tool to achieve those goals. A large scale Job Guarantee used as a price anchor and full employment tool has never been implemented in any developed economy.

I will readily admit that there’s a chance that the optimal implementation of this tool could result in a more balanced and better-performing type of capitalist economy than what we have now. I am not closed-minded about something like this. But we really don’t know. I think there are huge potential risks to letting the government become the employer of last resort offering somewhat phony jobs at a living wage with full benefits. But this doesn’t debunk MMT because MMT, as its adherents promote it, has never really been tried.

¹ – I’ve written about some of the pieces of MMT that I like here as well as some of the pieces of MMT that I think are more confused.