Journal of Post Keynesian Economics

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Modern monetary theory: contributions and critics

James Juniper , Timothy P. Sharpe & Martin J. Watts

To cite this article: James Juniper , Timothy P. Sharpe & Martin J. Watts (2014) Modern monetary
theory: contributions and critics, Journal of Post Keynesian Economics, 37:2, 281-307

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James Juniper, Timothy P. Sharpe, and
Martin J. Watts

Modern monetary theory: contributions

and critics

Abstract: Over the past decade or so, a number of post Keynesians have been
critical of modern monetary theory (MMT) despite MMT being a part of the
post Keynesian tradition. In this paper we argue that the incorporation of MMT
principles enhances the post Keynesian theoretical and policy framework. We
substantiate this claim by (1) outlining the common theoretical elements that
unite post Keynesian and MMT advocates; (2) addressing post Keynesian claims
regarding the MMT interpretation of money and the monetary system; and
(3) examining the differing perspectives on the role of fiscal policy to achieve
sustained full employment.

Key words: Modern monetary theory, post Keynesian economics, Global Finan-
cial Crisis.

JEL classifications: E12, E42, E63.

Modern monetary theory (MMT) is part of the post Keynesian tradi-

tion, because it also draws on the seminal work(s) of, among others,
Innes, Knapp, Keynes, Lerner, Minsky, and Godley.1 MMT represents
an “accounting-consistent, operationally-sound theoretical approach
to understanding the way fiat monetary systems work and how policy
changes are likely to play out” (Mitchell, 2011a).

James Juniper is a research associate at the Centre of Full Employment and Equity
and Newcastle Business School at the University of Newcastle, Australia. Timothy
P. Sharpe is a lecturer at Nottingham Business School, Nottingham Trent University,
Nottingham, UK. Martin J. Watts is a research associate at the Centre of Full Employ-
ment and Equity and a professor of economics at Newcastle Business School, Univer-
sity of Newcastle, Australia. An earlier draft of this paper was presented at the First
World Keynes Conference in Izmir, Turkey, in June 2013, and at a Leeds University
Business School Seminar in July 2013. The authors thank attendees for their construc-
tive comments and the Journal of Post Keynesian Economics editors for their advice.
The authors are responsible for any remaining errors.
1 Influential MMT advocates include Matthew Forstater, Scott Fullwiler, Stephanie

Kelton, Bill Mitchell, Warren Mosler, and L. Randall Wray.

Journal of Post Keynesian Economics / Winter 2014–15, Vol. 37, No. 2  281

© 2015 M.E. Sharpe, Inc. All rights reserved. Permissions: www.copyright.com
ISSN 0160–3477 (print) / ISSN 1557–7821 (online)
DOI: 10.2753/PKE0160-3477370205
282  JOURNAL OF POST KEYNESIAN ECONOMICS

Over the past decade or so, however, a number of post Keynesians have
been critical of the MMT theoretical and policy framework (see, e.g.,
Febrero, 2009; Fiebiger, 2012; Gnos and Rochon, 2002; Lavoie, 2013;
Mehrling, 2000; Parguez and Seccareccia, 2000; Rochon and Vernengo,
2003; Rossi, 1999; Van Lear, 2002–3). The employer of last resort (ELR)
proposal to achieve full employment and price stability, as advocated and
developed by some MMT authors (see, e.g., Forstater, 1998; Mitchell,
1998; and Wray, 1998), has also attracted criticism from post Keynes-
ians (see, e.g., Aspromourgos 2000; Kadmos and O’Hara 2000; King
2001; Lopez-Gallardo 2000; Sawyer 2003, 2005). Palley (2013) offers
what we believe to be an ill-informed critique of MMT and the ELR (see
Tymoigne and Wray [2013] for a response).
Since the advent of the Global Financial Crisis (GFC), MMT appears
to have gained additional adherents, who include academics, business
economists, and lay people. The increased interest appears to be, in
part, due to MMT advocates’ particularly insightful analysis of policy
responses to the euro zone crisis that has been facilitated by their diligent
use of social media (see the New Economic Perspectives blog and billy
blog, in particular), which has included engagement with leading U.S.
economists (see, e.g., blog posts by Fullwiler, 2014; Kelton, 2013; and
Wray, 2012).2
Post Keynesians have responded to the policy issues arising from the
GFC with numerous journal articles, many within special issues (e.g.,
Cambridge Journal of Economics, 36 [1] and 37 [3]; International
Journal of Political Economy, 41 [2]; and Review of Keynesian Econom-
ics, 1 [1]), which have focused on a critique of mainstream economics,
particularly in the context of the austerity debate and the associated role
and conduct of fiscal policy. However, in this literature there has been
limited formal engagement with MMT principles.
In this paper we argue that the incorporation of MMT principles enhanc-
es the post Keynesian framework, principally with respect to recognizing
the distinction between an economy with a sovereign and nonsovereign
currency, the role of the payments system, and the implications for the
design of macroeconomic policy to achieve sustained full employment
and price stability. In particular, by understanding the implications of
full fiscal-monetary sovereignty, MMT strengthens post Keynesian argu-
ments in favor of fiscal measures to deal with the influence of the GFC
on unemployment and effective demand. Also, after a careful assessment
2  In this paper we do not canvass the causes of the GFC, but for an MMT-based

interpretation see Wray (2009) and Watts et al. (2014).

 Modern monetary theory: contributions and critics  283

of alternative policy proposals, we argue that the ELR offers the best
option for sustained full employment and price stability.

Broad consensus and specific departures: post Keynesianism and

MMT
We now briefly explore the common theoretical principles uniting post
Keynesian and MMT advocates, namely, the notion of uncertainty, the
principle of effective demand, endogeneity of the money supply, the
absence of self-correcting macroeconomic mechanisms, and the notions
of debt-deflation and financial instability. Post Keynesian and MMT
advocates reject some mainstream theoretical propositions, namely, the
marginal productivity theory of income distribution, crowding-out, and
Ricardian equivalence.
MMT and post Keynesian economists accept the distinction between
uncertainty and risk, and also recognize the time-varying influence of
“uncertainty aversion” over key macroeconomic parameters, including
the marginal propensity to consume, the marginal efficiency of capital,
and the preference for liquid over illiquid assets.
Both post Keynesians and MMT advocates acknowledge the crucial
importance of the point of effective demand in determining the level of
involuntary unemployment and rate of capacity utilization. This was first
set out in Keynes’s Z, D analysis in chapter 3 of The General Theory.
The point of effective demand represents a coincidence of the desired
and actual remuneration flowing to firms. It defines an equilibrium in
the sense that expectations are fulfilled and firms have no incentive to
vary their levels of employment and output.
Post Keynesian and MMT economists also agree that the money supply
is endogenous.3 In a modern credit-based economy, the money supply
expands or contracts automatically to meet the demand for money bal-
ances, unless there is credit rationing. Hence, mainstream (financial)
crowding-out theory is rejected.
These schools of thought share the view that there are, at best, negligible
self-correcting mechanisms (i.e., Pigou effects) at the macroeconomic
level that would be initiated by a fall in the general price level (cf. Palley,
2013, pp. 8–13). The Fisherian view that most contracts are denominated

3 Recent Bank of England Quarterly Bulletin articles (McLeay et al., 2014a, 2014b)
offer particularly lucid discussions of money creation in the modern economy (i.e.,
endogenous money). The authors also address some misconceptions about money
creation, including the so-called money multiplier, and clearly identify the limits to
money creation by the banking system.
284  JOURNAL OF POST KEYNESIAN ECONOMICS

in nominal rather than real terms, has major distributional consequences

that are ignored by the real balance effect, which is predicated on a
general fall in prices raising real levels of wealth in general, and money
balances, in particular. Minsky emphasizes the process of debt-deflation
and generalizes it to situations in which economic growth and stability
are endogenously undermined by rising financial fragility due to a loss
of diversification, a deferment of (present value) break-even times, and
increasing reliance on external rather than internal sources of finance,
by corporations and/or households.
MMT advocates, in particular, and post Keynesians, in general, agree
that government debt represents a net financial asset for the nongovern-
ment sector rather than a future tax obligation, as is argued by conservative
upholders of the Ricardian equivalence doctrine.
Notwithstanding the broad theoretical consensus, many post Keynes-
ians have reservations about MMT views and policy prescriptions,
which surprises some MMT advocates (see, e.g., Fullwiler et al., 2012,
p. 17). Lavoie (2013, p. 5) suggests that this uneasiness “may, in part,
be attributed to their [post Keynesians’] unwillingness to entertain the
mechanics of the clearing and settlement system as well as the horizon-
talist position,” even though he argues that more transparent Central
Bank procedures have vindicated the horizontalist position, and also
improved our understanding of the clearing and settlement mechanics
(see, e.g., BoE, 2013).
MMT proponents make the distinction between an economy with a
sovereign and nonsovereign currency. Full fiscal-monetary sovereignty
exists when the consolidated government sector (Treasury and Central
Bank) of a country issues a fiat, nonconvertible currency and operates
with a flexible exchange rate (e.g., Australia, United States, UK, and
Japan).4 A flexible exchange regime allows for discretion regarding any
foreign exchange market interventions (i.e., monetary independence).
As the issuer of currency, the consolidated government sector can al-
ways meet national currency–denominated debt obligations (Watts and
Sharpe, 2013).
By contrast, a government that pegs its currency or dollarizes must
cover both the relevant overseas interest rate(s) plus any risk premia
that may be imposed by the market due to fears of default or a delay in
repayment. Thus, nations with pegged or fixed currencies can end up in

4 The use of the technical term, nonconvertibility, highlights the fact that an econo-

my with a pegged convertible currency must hold adequate foreign exchange reserves
to defend the chosen exchange rate.
 Modern monetary theory: contributions and critics  285

a Ponzi situation where they must borrow to pay the interest on their
lending and have little or no prospect of repaying any principal in the
face of escalating borrowing rates.5
MMT advocates depart from some of their post Keynesian colleagues
by: (1) advocating the consolidation of Treasury and Central Bank func-
tions for purposes of exposition to highlight the intrinsic features of a
modern monetary system; (2) introducing a distinction between vertical
transactions (between government and nongovernment sectors) and hori-
zontal transactions (between banks, households, and firms); (3) arguing
that unemployment arises because the government has failed to create
enough net financial assets (through deficit spending) to meet the nongov-
ernment sector’s desire to net save;6 (4) suggesting that concerns about
the rising levels of government debt denominated in the national currency
are misplaced for those governments that enjoy full fiscal-monetary sov-
ereignty (defined above); and consequently, they have greater scope for
effective macroeconomic policy interventions; (5) eschewing sole reli-
ance on traditional Keynesian policies of pump-priming and large-scale
public investment, which typically run into inflationary bottlenecks before
full labor utilization has been achieved; and (6) advocating the adoption
of a targeted employment program, often referred to as employer of last
resort (ELR), job guarantee, or public service employment. An ELR acts
as an effective anti-inflationary mechanism and, as a means for eliminat-
ing lags in the conduct of active fiscal policy. We return to these areas
of debate throughout the paper when we consider the arguments of post
Keynesian critics of MMT principles and, in particular, the ELR.

Money and the monetary system

The origin and nature of money has, for centuries, proved to be a con-
troversial and difficult topic. The term chartalism is attributed to Knapp,
whose State Theory of Money was translated into English in 1924. He
opposed the “metalist” view of money as a means of exchange valued
in terms of its substance. Instead he viewed it as a state-backed unit of

5 A country that chooses to abandon a pegged exchange rate system could, in prin-
ciple, provide compensation (denominated in the government’s new currency) to
domestic banks or private corporations with high levels of exposure to debts denomi-
nated in foreign currencies.
6 Juniper and Mitchell (2008) show that the creation of sufficient net financial as-

sets to meet the nongovernment sector’s desire to net save is simply the “other side of
the coin” to creating sufficient effective demand to achieve full employment through
deficit spending.
286  JOURNAL OF POST KEYNESIAN ECONOMICS

account, a “creature of law,” which predated markets and derived its value
from its acceptance in settling debt at state pay offices. Keynes (1930, p.
11) is clear: “Chartalism begins when the State designates the objective
standard which shall correspond to the money-of- account” (see also
the overview of chartalist concepts by Wray [2014]). Post Keynesians
accept that money is endogenous and so the creation of bank money
(demand deposits) is not constrained by state money (reserves) (Nesiba
2013; Parguez and Seccareccia 2000). Further, Mehrling (2000, p. 404)
notes that “practical chartalism is fairly universally accepted economic
doctrine these days.”
However, Nesiba (2013) suggests that disagreement remains among
post Keynesians (and institutionalists) and MMT advocates regarding the
degree to which chartalism is applicable to the contemporary financial
system. In particular, there has been some criticism regarding the use of
the term leverage, the reference to a hierarchy of money and the value of
money within MMT analysis. Furthermore, the MMT consolidation of
the Treasury and Central Bank, termed the “state,” has been criticized.
These issues are dealt with in the subsequent sections.
Hierarchy of modern money
Parguez and Seccareccia (2000, p.120) are critical of suggestions by some
MMT authors that “bank money is hierarchically inferior or subordinate
to state money” and “[b]anks’ credit activity is a leverage on the existing
stock of state money.” Febrero (2009, p. 532) suggests that “neo-chartalists
use the term leverage to mean that (1) fiat money logically precedes bank
credit money and/or that (2) private banks can create money if they have
previously collected a certain amount of state money.”
For Febrero (2009, p. 532), the first assertion has an incorrect chrono-
logical basis, namely, that bank money predates state money.7 Here it is
important to distinguish between the money-thing (e.g., reserves) and
the money of account (e.g., dollars). In particular, the “dollar” must
exist as the money of account, chosen virtually without exception by
the state, before a bank can issue a liability in that money of account.
Further, modern banks always clear using the state’s “dollars” so those
must exist before “bank dollars” can be created.
In modern economies, very few commercial banks can issue their own
private banknotes. Some commercial banks in Scotland and Northern
Ireland are an exception, but the Banking Act 2009 requires that these
7 The MMT interpretation of the origins of money has also been criticized (see Wray

[2012] for the MMT view).

 Modern monetary theory: contributions and critics  287

liabilities are asset-backed (perhaps by pound-denominated Treasuries,

i.e., a form of state money). Wray (2007, p. 6) makes the point that
this and other examples do not challenge “the argument that the most
common and important arrangement in modern capitalist countries
today follows the model described by Innes and Knapp [i.e., chartal
money].”
Febrero’s (2009, p. 532) second assertion has a transactional basis.
Here, the temptation is to interpret “leverage” in the usual finance sense.
For example, Rochon and Vernengo (2003, p. 61) deduce that “[f]or
chartalists, state money is exogenous, and credit money is a multiple
of the former.” Febrero’s (2009, p. 533n14) comment suggests he also
had the “money multiplier” in mind: “[S]ome countries, such as Canada
and New Zealand, for instance, have zero reserve requirements. How
can we explain the working of these monetary systems out of leverage
on fiat currency?”
MMT advocates emphatically reject the standard money multiplier
model (see, e.g., Watts and Sharpe, 2013), which is a view also shared by
practitioners (Constancio [2011], who is vice president of the European
Central Bank, and the Bank of England; see McLeay et al., [2014a]).
Leverage denotes the positional advantage of state money in what is
referred to as a “debt pyramid” or “hierarchy of money” (see Bell, 2001;
Tymoigne and Wray, 2013). The hierarchy of money describes the rela-
tionship between state money, bank money, and other privately issued
IOUs. Wray is clear:
When a private party issues a liability there is a clear “hierarchy of
monies” . . . one must retire one’s liability by delivering another liability—
usually, one issued by an agent higher in the hierarchy. Liabilities of firms
are mostly extinguished by delivering liabilities of banks; and banks ex-
tinguish their liabilities by delivering liabilities of the central bank. (Wray
2003, p. 87)
MMT maintains that state liabilities (reserves) are positioned at the top
of the hierarchy, since “[n]o other economic agent can issue liabilities
that represent final means of payment for itself” (Wray, 2003, p. 98).
While “state” often refers to government/Treasury (e.g., Parguez and
Seccareccia 2000), MMT often consolidates the government/Treasury
and Central Bank, which is referred to as the “state,” for purposes of
exposition (see below).
Gnos and Rochon’s (2002, p. 48) argument that “contrary to what
chartalists claim, the public in no way has to worry about obtaining state
money in order to pay taxes. They just have to pay with bank money and
288  JOURNAL OF POST KEYNESIAN ECONOMICS

the central bank will then do its job,” is in fact consistent with MMT
analysis.
When one uses a bank liability to pay “the State,” it is really the bank that
provides the payment services, delivering the State’s fiat money which
results in a debit of the bank’s reserves. When the State spends, it provides
a check which once deposited in a bank leads to a credit to the bank’s
reserves [vertical transaction]. . . . Note that payments using bank money
within the private sector merely cause reserves to shift pockets from one
bank to another [horizontal transaction]. (Wray, 2003, p. 91)
The MMT distinction between vertical (between government and
nongovernment sectors) and horizontal (within the nongovernment
sector) transactions is used to illustrate the hierarchy. While the hori-
zontal dimension is consistent with circuit theory, MMT emphasizes
the importance of the state to capture the role of vertical transactions
(see Mitchell, 2009).8 To avoid unwarranted conclusions, however, this
terminology should not be confused with verticalism and horizontalism
along the lines of Moore (1988).
Finally, as Wray (2014) points out, both Innes (1913) and Ingham
(2013) were important contributors to the chartalist tradition. Innes (1913,
1914) was the most influential on MMT with respect to the nature of
money. Ingham (2013) claims that money is a social relation based on
impersonal trust: it “constitutes the means of final payment throughout
the entire space defined by the money of account” (Wray, 2014, p. 26).
Citing Amato and Fantacci (2012, p. 236), he argues that there is “no
liquidity without a lender of last resort, no lender of last resort without
an irredeemable consolidated debt, and no irredeemable debt without an
immortal state” (Ingham, 2013, p. 23).
Value of modern money
The MMT perspective on the value of money has also been criticized. Febrero
(2009, p. 523) interprets the MMT view along the lines that “money has value
because it is what the state accepts for tax discharge” and “the state has the
ability to determine the value of money.” Mehrling (2000, p. 402) concludes:
“the [MMT] argument that the power to tax is the source of money’s value
does not seem very compelling” (see also Palley, 2013, pp. 2–3).
Wray (2003, p. 89) follows Knapp insisting that “the State is liable only
to accept its fiat money in payments made to itself.” These payments consist

8 Lavoie (2013, pp. 6–7) highlights the extent of agreement between MMT ad-
vocates and horizontalist post Keynesians and circuitists, with respect to monetary
theory (see also Parguez and Seccareccia, 2000, pp. 110–111).
 Modern monetary theory: contributions and critics  289

of taxes, fees, fines, and interest, but taxes are the most significant. Wray
(2003) is critical of acceptance by social convention since it relies on an
infinite regress, so it is not clear how the convention was established.
Acceptance based on legal tender laws along the lines of Schumpeter
(1954) is also dismissed (see Tcherneva, 2006).9
For MMT advocates, “it is the acceptance of the paper money in pay-
ment of taxes and the restriction of the issue in relation to the total tax
liability that gives value [purchasing power] to the paper money” (Wray,
1998, p. 23; emphasis added). But precise value depends on “the difficulty
of obtaining that which is necessary for payment of taxes” (Tcherneva,
2006, p. 80). The state, as the monopoly currency issuer, can set the rate
at which the currency exchanges for, say, an hour of work (Tcherneva,
2006). Thus, the state can determine what money will be worth by set-
ting “unilaterally the terms of exchange that it will offer to those seeking
its currency” (Mosler and Forstater, 1999, p. 174, quoted in Tcherneva,
2006, p. 80).
Thus Mehrling’s (2000, p. 402) understanding of the MMT position
and Febrero’s (2009, p. 523) first assertion are incomplete. This may arise
from a simple misinterpretation. For example, arguing that “[money’s]
value stems from the powers of the money-issuing authority” (Tcherneva,
2006, p. 75) is different from arguing “the power to tax is the source of
money’s value” (Mehrling, 2000, p. 402).
Notwithstanding this, Mehrling (2000, p. 403) argues “[t]he fact that
the state is the issuer of the ultimate domestic money does not mean
that it has the ability to set the price level or the rate of interest as an
exogenous policy datum.” First, the Central Bank can and does set the
rate of interest (e.g., the interbank rate) as an exogenous policy datum.
Further, a sovereign economy has an inherent ability to set the interest
rates on all national currency–denominated government debt via a com-
mitment to purchase unlimited quantities at the desired price (Fullwiler
and Wray, 2010). Second, “the ability to set the price level” should not be

9 Tcherneva (2006, p. 77) argues that “Legal code is only a manifestation of state

powers. Lack of legal tender laws does not mean that state money is unacceptable—
such is the case in the European Union, for example, where no formal legal tender
laws exist, yet the euro circulates widely.” The majority of the Euro Legal Tender Ex-
pert Group (ELTEG) members concur with this view, arguing that “there is currently
some legal uncertainty at the euro area level with regards to a common interpretation
and definition of legal tender and the consequences flowing there from: according to
the same majority, the EU has the exclusive competence to regulate this matter but has
not yet done so” (ELTEG, 2009). Legal tender laws determine what will be accept-
able, as deemed by the courts, in the discharge of contractual obligations (see David-
son, 2002, p. 75; McLeay et al., 2014b).
290  JOURNAL OF POST KEYNESIAN ECONOMICS

interpreted as setting the general price level, but it relates to setting the
nominal anchor for the general price level (i.e., the minimum wage).
On determining the value of money, circuitists argue that “consequen-
tial to the value of money is primarily the ability of state [government]
expenditure to increase the real wealth of society either directly, through
the production of public goods, or indirectly, through their capacity to
foster private investment expenditures” (Parguez and Seccareccia, 2000,
p. 120).
MMT authors would agree that the government can influence the value
of money via its expenditure decisions, but its taxing decisions can
also influence this value. “Taxation, in a sense, is a vehicle for moving
resources from the private to the public domain” (Tcherneva, 2006, p.
77; Lerner, 1943). Thus government taxing and spending decisions can
determine/influence both directly and indirectly the value of money by
affecting the nongovernment sector’s capacity to generate future real
wealth. In this sense, circuitist theory (Parguez and Seccareccia, 2000)
and MMT views on the value of money are similar.
Consolidation of Central Bank and Treasury
The MMT characterization of the nexus between fiscal and monetary
operations has been challenged by some post Keynesians. By consoli-
dating the Treasury and Central Bank, MMT advocates are alleged to
misrepresent the capacity of governments to conduct fiscal policy in
sovereign economies that have voluntarily adopted particular institutional
arrangements, sometimes in the form of legislation (see, e.g., Gnos and
Rochon, 2002, p. 48; Van Lear, 2002–3, p. 254). On the other hand,
Parguez and Seccareccia (2000, p. 106) argue that the Central Bank as
“the ultimate purveyor of liquidity . . . empowers commercial banks to
lend their own debt to credit worthy borrowers without constraint. At
the same time, the [government] is now entitled to finance its desired
expenditures by credits granted by the central bank.” The essence of the
consolidation issue is how these credits are first obtained.
Lavoie (2013) offers a coherent analysis of the consolidated Treasury
and Central Bank within MMT. Using a balance sheet illustration, he
highlights the prevailing institutional arrangements in the United States.
Both Fiebeger (2012) and Lavoie argue that the level of Treasury de-
posits at the Federal Reserve limits the Treasury’s capacity to net spend
unless more borrowing is undertaken. While the Federal Reserve has
the capacity to create credit, it is explicitly precluded from operating
in the primary market for Treasury bonds. The need to obtain finance
from issuing bonds to the nongovernment sector is alleged to rebut the
 Modern monetary theory: contributions and critics  291

MMT claim that bond sales are principally an interest rate maintenance
mechanism.
Hence, the consolidation of the Treasury and Central Bank would
hide the reality that, in the United States at least, the government is
said to borrow from the nongovernment sector when it deficit spends.
But despite the initial need to sell Treasury Bills to the nongovernment
sector, the balance sheet outcomes are the same because the Central
Bank subsequently purchases Treasury Bills from the commercial banks
on the secondary market.10 Lavoie (2013, p. 17) then chastises MMT
advocates for “presenting counter-intuitive stories, based on abstract
consolidation, and an abstract sequential logic, deprived of operational
and legal realism.”
MMT proponents acknowledge that sovereign economies, such as Japan
and the United States, have adopted measures to prevent their Treasuries
from obtaining credits to their deposit accounts at the Central Bank by
selling debt to the Central Bank on the primary market.
Sovereign economies, such as Australia, New Zealand, Canada, and the
UK, are not subject to legal restrictions on their Central Banks partici-
pating in the primary market for government debt (Jácome et al., 2012),
but in practice, the Central Banks in those countries, except for Canada,
have limited engagement in the primary market. Lavoie (2013, p. 16)
acknowledges that Canada has the highest degree of currency sovereignty
since its Central Bank is unregulated, its debt is denominated in Canadian
dollars and there is a pure currency float. The Bank of Canada has also
been an active participant in Treasury Bill auctions.
It is instructive to examine the debt management arrangements in the
UK. HM Treasury, via the Debt Management Office, chooses to fully
fund its financing requirement by selling debt in line with a preannounced
schedule, which can be revised. The following rationale is provided:
[T]he Government believes that the principles of transparency and predict-
ability are best met by full funding of its financing requirement; and to
avoid the perception that financial transactions of the public sector could
affect monetary conditions, consistent with the institutional separation
between monetary policy and debt management policy. (HM Treasury,
2012, p. 8; emphasis added)
The irony is that, at the time of this writing, there is no interest rate
corridor in either the United States or the UK interbank markets, so
the target (official) rate and the rate paid on reserves are equal. Thus
10 It is important to note that this exercise is balance sheet accounting not theory

(Tymoigne and Wray, 2013, p. 27).

292  JOURNAL OF POST KEYNESIAN ECONOMICS

budget deficits only affect monetary conditions through the buildup of

(excess) reserves in the banking system. In other words, the interbank
rate does not deviate from its target rate, unless reserves are scarce, and
hence there is no imperative for the Bank of England to mop up excess
reserves via bond sales as part of its monetary management (Watts and
Sharpe, 2013).
Palley (2013, p. 17) appears to think that the Treasury makes an ex
ante choice regarding the mix of high-powered money and bonds to
finance a fiscal expansion. In the absence of an interest rate corridor
and/or constraints on fiscal policy, this is true subject to the Commercial
Banks’ desired holdings of reserves. More generally in the presence of an
interest rate corridor (e.g., Australia), the ex post mix of additional high-
powered money and government securities held by the nongovernment
sector, following a fiscal expansion, is the outcome of Commercial Bank
preferences for reserves, otherwise monetary policy is compromised (see
also Tymoigne and Wray, 2013).
Palley (2013, pp. 8–9) also alleges that in a no-growth economy, a bal-
anced budget must be achieved to maintain the value of fiat money. He
claims that if Treasury runs “persistent money financed deficits” then the
money supply would increase relative to gross domestic product (GDP),
in turn causing inflation. If the interest rate paid on reserves is set equal to
the official (announced) rate, however, then Treasury would not strictly
need to sell debt to the nongovernment sector. Commercial banks may
then hold excess reserves that are not inflationary.
Central bank reserves are held by banks and are not part of money held by
the non-financial sector, hence not, per se, an inflationary type of liquidity.
There is no acceptable theory linking in a necessary way the monetary
base created by central banks to inflation. (Constancio, 2011, p. 5)
Specifically, the level of (excess) reserves does not drive bank lend-
ing, as is argued by reference to the money multiplier, because causation
runs from loans made by banks based on the perceived creditworthiness
of customers to deposits rather than the reverse. This argument is now
accepted by the Bank of England (see McLeay et al., 2014a).
Post Keynesian economists and advocates of MMT would acknowl-
edge that no single model can capture the different institutional ar-
rangements prevailing in these economies. But, the relevant question
to ask is whether the MMT depiction of the operation of fiscal policy
misrepresents the intrinsic features of a modern monetary system within
a sovereign economy.
 Modern monetary theory: contributions and critics  293

In fact, the MMT academic position has always been more nuanced
than the discussion found in blogs to a different target audience (see Bell,
2000; Bell and Wray 2002–3). Bell (2000) argues that Treasury may co-
ordinate spending, taxing, and bond sales to reduce fluctuations in bank
reserves within the private banking system, and hence reduce the need for
more extreme monetary management. However, it is not evident why it is
necessary to avoid the “perception that financial transactions of the public
sector could affect monetary conditions” unless it is considered appropriate
to mislead the public as to the fiscal capacity of a government with full
fiscal-monetary sovereignty.
Notwithstanding prevailing institutional arrangements, a Treasury
within a sovereign economy is not budget constrained if it sells govern-
ment securities denominated in its own currency.11 “[T]he only limit on
sovereign government expenditure lies in the productive capacity of the
economy in the context of planned private sector spending” (Watts and
Sharpe, 2013, p. 78).
The assumption of a consolidated Treasury and Central Bank, however,
cuts through a lot of complexity within the MMT discourse to reveal the
underlying features of a modern monetary economy (see also Tymoigne
and Wray, 2013, pp. 13–14). In so doing, MMT advocates “raise fun-
damental questions about the role of government in advanced capitalist
economies” (Pilkington, 2011). By reframing the terms of the debate,
MMT advocates have been successful in attracting many nonacademic
supporters.
While MMT advocates “have no say in obscure institutional practices
between certain Treasuries and their Central Banks,” their failure to
pose these profound questions would be a major error, equivalent to
“Friedman fleeing from his prescriptions for controlling the money
supply because central bankers were then not adopting this approach”
(Pilkington, 2011).
MMT supporters would acknowledge the distinction between MMT as
rhetoric and as scholarly practice in which, for example, the distinction
should be clearly made between a government with full fiscal-monetary
sovereignty that chooses to engage in debt management practices, osten-

11 First,the Central Bank sets the official (“overnight”) rate, which affects the rate
of interest on assets of longer maturity due to arbitrage; and second the Central Bank
is unlimited in its capacity to buy national currency denominated debt on the second-
ary market. The latter has been illustrated by both the Central Banks of sovereign
countries engaging in different forms of quantitative easing and by the preparedness
of the European Central Bank, under the Outright Monetary Transactions program, to
buy debt of those euro zone countries that were subject to bailouts.
294  JOURNAL OF POST KEYNESIAN ECONOMICS

sibly due to the need for accountability, transparency, and to reduce the
scale of monetary management, and a euro zone economy that does not
enjoy full policy sovereignty and faces the possibility of insolvency.
In conclusion, Lavoie advises:
[T]he so-called modern monetary theory is a result of an in-depth study by
some neo-chartalist Post-Keynesian authors of how the payment system
operates. While one may not agree with all the implications that are drawn
by neo-chartalists [see Lavoie, 2013], their detailed institutional analysis
reinforces Post-Keynesian monetary theory and our comprehension of
policy failures. (Lavoie, 2012, p. 332)

Fiscal policy and full employment

In this section, the relevance of MMT insights for the development
of a coherent post Keynesian macroeconomic policy framework is
demonstrated via a critical review of recent post Keynesian analysis of
post-GFC macroeconomic policy. We highlight the significance of full
fiscal-monetary sovereignty in providing a meaningful choice about the
conduct of fiscal policy. We then explore the debate about the merits of
an employer of last resort or job guarantee scheme to achieve sustained
full employment and price stability.
Postcrisis fiscal policy
King et al. (2012, p. 2) fail to differentiate between sovereign and nons-
overeign economies, by arguing that “[r]egardless of the fact that the high
level of sovereign debt was, to a large extent, attributable to bank bailouts
and their economic consequences; the financial markets soon resumed
speculation against nation states, creating a growing ‘sovereign debt
crisis.’” Also, “risk premia on the sovereign debt of weaker countries”
have contributed to rising fiscal deficits (King et al., 2012, p. 9; see also
Rochon and Vernengo, 2003, p. 66). “Weaker” is undefined, so it could
refer to a country with a large debt to GDP ratio, such as Japan, which
continues to experience ten-year bond rates of under 2 percent.12 Arestis
and Sawyer (2012, p. 148) acknowledge that “appropriate government
deficits do not present financial risks,” but are unclear in this and other
published work as to what “appropriate” is (see, e.g., Sawyer 2003,
2010). Sawyer (2012) does agree with functional finance principles so

12 Van Lear (2002–3, p. 261, n. 11) does not recognize Japan to be a sovereign

economy, suggesting “[t]he sustainability of government budget deficits is prompting

bondholders to sell government bonds, raising the state’s financing costs.”
 Modern monetary theory: contributions and critics  295

that, in contrast to say Greece, the UK government can always service

its sterling-denominated debt (see also Sawyer, 2010).
Taylor et al. (2012, p. 189) note that in 2010, U.S. economic debate
was obsessed with the effect of fiscal policy on economic performance.
They fail to make the distinction between sovereign and nonsovereign
economies, noting that “with historically low interest rates in mid-2011,
no vigilantes could be seen on the horizon of the US economy” (Taylor
et al., 2012, p. 190). A countercyclical response of the primary deficit to
growth is found, with higher deficits stimulating faster growth, particu-
larly during recessions, but with minimal effect on interest rates. Given
the political aversion to raising primary deficits, Taylor et al. (2012, p.
204) advocate the exploitation of the balanced budget multiplier, which
can only sustain positive net private sector saving if the United States
runs a current account surplus. Further a balanced budget strategy may
well entail a high tax and government expenditure share of GDP.
Crotty (2012, p. 91) argues that “[t]o address the [U.S.] deficit prob-
lem over the coming decade, we need to restrain expenditure as well as
raise tax revenue, but other than in defence spending and health care,
the gains from sensible spending cuts are limited.” Further, “[b]y raising
rates and cutting loopholes we could generate much greater tax revenue
from both the individual and corporate income taxes to lower the deficit
and finance essential government programmes” (Crotty, 2012, p. 92).
Also in reference to the United States, Pollin (2012a, p. 74) argues that
“[t]he reality of low interest rates, in particular, also greatly alleviates
concerns about worsening long term debt burdens.” He outlines a longer
term deficit reduction strategy, which is designed to balance the operating
component of the budget (see also Pollin, 2012b).
Boyer fails to make a clear distinction between sovereign and nonsov-
ereign economies: “This does not mean that many countries do not need
to consolidate their public finances; however, such a strategy has to be
planned over a sufficiently long time horizon” (Boyer, 2012, p. 307).
King et al. (2012, p. 6) concur, arguing that when the recovery is fully
under way, national debt as a proportion of GDP would decline.
From these articles, it appears that (1) bond vigilantes can and will
drive up interest rates of any nation-state; and (2) long-term deficit/debt
reduction is an appropriate policy objective. However Ireland, Greece,
Portugal, and Spain, all recipients of International Monetary Fund (IMF),
European Central Bank (ECB), and European Commission (EC) sup-
ported (bailout) loans, experienced a significant decline in their ten-year
government bond rates following an announcement of Outright Monetary
Transactions by the ECB in September 2012. Thus, a sovereign Central
296  JOURNAL OF POST KEYNESIAN ECONOMICS

Bank has the capacity to manipulate yields on long-term government

debt, notwithstanding the sentiment of international investors.
In a recent special issue of the Cambridge Journal of Economics (2013,
37 [3]), the economic prospects for the euro zone countries are assessed.
The contributors note the deeply flawed institutional and governance
structure of the euro zone, particularly as it relates to the conduct and
powers of the ECB and the imperative for fiscal austerity measures for
most countries, which are reinforced in the Treaty on Stability, Coordina-
tion and Governance (2013) (Blankenburg et al., 2013).
Mazier and Petit (2013, p. 521) maintain that “[t]he present crisis
arises from structural disequilibria linked to the heterogeneity of member
countries and permanently asymmetric patterns of development” (see
also Simonazzi et al., 2013, p. 653). The inference is that a monetary
union is a viable model if members are homogeneous and remain so.
However, while euro zone countries each need to run current account
surpluses to stimulate their economies, in the absence of a medium-term
private sector recovery, sustained full employment is unlikely, since
the euro zone architecture does not encompass fiscal union, which is
a necessary, but not sufficient condition for sustained full employment
(Watts et al., 2014).
Both Toporowski (2013) and Bellofiore (2013) briefly explore the
economics of a euro zone breakup, with currency sovereignty restored
to the departing euro zone member. Toporowski (2013, p. 582) argues
that “there exists no ‘optimal’ exchange rate that would satisfy both the
needs of trade and the maintenance of stable balance sheets.” Bellofiore
(2013, p. 509) is equally pessimistic, maintaining that a devaluation, after
leaving the euro zone, would generate an untenable debt burden, in the
absence of ongoing primary budget surpluses.
Neither author recognizes the consequences of fiscal-monetary sov-
ereignty being restored to the departing country. The government could
facilitate the refinancing of euro-denominated debt, by offering a con-
version of these liabilities into its new (floating) currency, without any
solvency issues. Creditors could then choose to convert the new currency
back into euros (Mitchell, 2011b). Some domestic banks in the departing
country would suffer major euro losses, but they could be recapitalized
in the new currency to prevent ongoing losses. Government could also
offer low-interest loans denominated in its new currency.
Primary budget surpluses would not be required for fiscal sustainability
once fiscal-monetary sovereignty is restored (Watts and Sharpe, 2013).
Careful use of (wage) income and consumption-based tax cuts could
 Modern monetary theory: contributions and critics  297

encourage domestic consumption without promoting inflation (Watts

et al., 2014).
Attempts to restore the euro-equivalent value of wages, however, would
promote high inflation of both a cost-push and demand-pull variety, with
the latter likely due to capacity constraints from the enforced recession.
Capacity constraints can be alleviated by new investment and an ELR
program, which would underpin domestic demand (see Mitchell and
Watts, 2013). Independent monetary policy can also be restored.
A key contribution of MMT is its recognition of the policy freedoms of
sovereign economies as distinct from the policy constraints of euro zone
membership, and what this implies for macroeconomic stability and the
achievement of sustained full employment (Watts et al., 2014). Thus, a com-
prehensive analysis and critique of post-GFC macroeconomic policy for
sovereign and nonsovereign economies is informed by MMT principles.
Pump-priming to achieve full employment
(Post) Keynesians generally advocate an unspecified amount of aggre-
gate demand stimulus (pump-priming) to stimulate employment and,
in some instances, achieve full employment (see Arestis and Sawyer,
2012; Aspromourgos, 2000; Kadmos and O’Hara, 2000; O’Hara and
Kadmos, 2001; Sawyer, 2003; and U.S. policies devised by Pollin,
2012a, 2012b). MMT/ELR advocates claim that even when a program
of, say, public investment is supplemented by training to improve job
matching, inflationary bottlenecks will be encountered well before full
labor utilization has been achieved. This results from the unevenness of
patterns of regional underemployment and unemployment.
For example, Arestis and Sawyer (2012, p. 151) rely on pump-priming
by arguing that macroeconomic policy should ensure a level of aggregate
demand consistent with full employment of labor, which in turn requires
sufficient productive capacity in terms of quantity, quality, and geographi-
cal distribution. “In this sense, industrial and regional policies are required
to enhance supply. Public expenditure, particularly investment, can also
be structured to ease supply constraints; changes in relevant taxes could
also help” (see also Ramsay, 2002–3; Sawyer 2010). Palley (2013, p. 27)
lucidly explains that discretionary fiscal policy is blighted by the presence
of well-known inside and outside lags (Friedman, 1948), which would
normally frustrate the achievement of sustained full employment.
Kadmos and O’Hara (2000) appear to appreciate the arguments for an
ELR, and the absence of a budget constraint for a government operating
with its own sovereign currency but express concern that, despite the pro-
298  JOURNAL OF POST KEYNESIAN ECONOMICS

vision of training opportunities under an ELR, there is a focus on low-skill

employment, rather than measures to address structural unemployment.
The latter necessitates the encouragement of private sector investment
and innovation through public sector investment. “This would require
the building of knowledge, communications, infrastructural, social and
corporate network capitals.” (Kadmos and O’Hara, 2000, p. 16; see also
O’Hara and Kadmos, 2001). However, O’Hara and Kadmos (2001) fail to
recognize that while an expansion of public investment can be justified,
the sole reliance on the generation of additional employment at market
wages to achieve full employment means that any counterinflation policy
would threaten sustained full employment.
Sawyer (2012) is critical of the fiscal austerity measures conducted in the
UK since the GFC (see also Fontana and Sawyer, 2012). He argues that
automatic stabilizers should be strengthened through a more progressive
tax regime and investment is necessary to shift out the inflation barrier, but
the mechanism by which it is correctly provisioned is not spelled out.
Arestis and Sawyer (2013) reject inflation targeting via the conduct of
monetary policy, and argue that the Central Bank should focus on the
achievement of financial stability (see also Sawyer, 2012). Tymoigne and
Wray (2013) concur with the latter. Arestis and Sawyer (2013) imply that
sole reliance on an incomes policy based on a target inflation rate would
impose a sufficient sanction on the inflationary process, when all workers
are paid market wages in a fully employed economy. However they need
to provide a convincing justification of its effectiveness.
Pump-priming also causes a more inequitable income distribution be-
cause it typically favors rentier incomes, profits, and high-wage workers,
and fails to “trickle down” to address low-wage employment or structural
unemployment of low-skilled workers (Tcherneva, 2011).
While Keynes’s approach to full employment is often framed in terms
of closing Okun’s output gap, the issue is deficient demand for labor
(Tcherneva, 2012). “Keynes specifically endorsed labor-demand target-
ing policies in the form of direct job creation for the unemployed that
would be implemented irrespective of the phase of the business cycle”
(Tcherneva, 2012, p. 58; Keynes, 1980). Targeted policies are typically
not found in the post Keynesian (non-MMT) literature. The ELR, to
which we now turn, presents a contemporary approach to sustained full
employment, which is consistent with Keynes’s recommendations.
Employer of Last Resort and full employment
MMT advocates, including Mitchell (1998), Wray (1998), Forstater
(1998), and Mosler (1997–98) argue that, by exploiting the policy
 Modern monetary theory: contributions and critics  299

freedoms of a sovereign economy, an ELR or job guarantee offers the

best option for sustained full employment and price stability. We briefly
summarize the key properties of an ELR before addressing some of the
criticisms.
The ELR offers a job at a fixed money wage (including a benefits pack-
age) to any individual ready, willing, and able to work. ELR employees
can undertake up to say thirty-five hours of work per week or less if
preferred, so that job creation is perfectly calibrated to the degree of
labor underutilization. The buffer stock of ELR jobs expands (declines)
when private sector activity declines (expands). A smooth transfer of
labor between sectors occurs, because (1) ELR workers are paid the
minimum wage (the numéraire) to avoid upsetting the private sector wage
structure (cf. Palley, 2013), and (2) ELR workers are job ready, which
reduces hiring and on-the-job training costs and skill atrophy, and hence
the hysteretic inertia embodied in the long-term unemployed. Thus, the
ELR addresses uneven and persistent labor underutilization and hence
minimizes the personal/social costs from unemployment or fewer than
desired work hours. Private sector employers paying minimum wages
are likely to face greater competition for workers, which may promote
job restructuring and higher productivity. Policy lags can be largely
eliminated through the rapid creation of employment opportunities (see
below). Also, it would be unnecessary to “subsidize” vulnerable firms
when ELR opportunities are readily available.
The ELR has an inbuilt anti-inflationary framework because wage
differentials serve to discipline the inflationary process. In contrast to
the unemployed, ELR workers are a credible threat to current private
sector employees since they represent a pool of available workers from
which employers can recruit. Thus, employers are more likely to resist
inflationary wage demands from current employees. If inflation does
exceed the government’s announced target, tighter macroeconomic
policy would lead to workers being displaced from the inflating private
sector to the fixed price ELR sector, which imposes a sanction, in the
form of income loss.13 The ability of government to control these wage
13 A referee noted that in the United States, the level of unemployment insurance
significantly exceeds the minimum wage. Thus, if unemployment insurance were
still available, despite there being sufficient jobs to achieve full employment under an
ELR, a worker who was displaced from employment may seek the more remunerative
option of unemployment insurance in the first instance, noting that it is time limited.
This example highlights, in part, the irrationality of infrequent minimum wage adjust-
ment (Watts, 2010). By contrast, in Australia, the minimum wage is adjusted annually
and is approximately double the level of unemployment benefit for a single person
(Newstart Allowance), which is not contribution-based.
300  JOURNAL OF POST KEYNESIAN ECONOMICS

differentials, through both the setting of a minimum/livable wage and

the adoption of solidaristic incomes policies, thus provides a superior
mechanism for the control of inflation.
There are a number of post Keynesian critiques of the ELR, including
Aspromourgos (2000), Lopez-Gallardo (2000), Kadmos and O’Hara
(2000), King (2001), Ramsey (2002–3), Sawyer (2003, 2005), and Pal-
ley (2013).
The design of ELR jobs is often criticized because (1) in the absence
of benefits, the unemployed are forced to take ELR jobs even if the po-
sitions do not accord with their preferences and skills, which raises the
specter of invisible underemployment (Sawyer, 2003, pp. 894–897), or
there may be insufficient low-skilled ELR jobs (Sawyer, 2003, p. 891)
and there may be a delay before they are provided (Sawyer, 2003); (2)
the ELR wage is not “market” determined due to its function as a nu-
méraire; (3) wages in public sector jobs can be undercut by ELR wages
(Sawyer, 2003, p. 893); and (4) the flux in the number of ELR jobs can
undermine the ongoing provision of important (social) services (Sawyer,
2003, 2005). We now address each criticism.
No realistic job creation scheme can match jobs to the preferences and
specific skills possessed by the labor force. ELR advocates acknowledge
that delays in the provision of ELR employment could occur. First,
employees displaced from market wage jobs typically have a notice
period to serve. Second, more skilled workers who are displaced from
employment may choose to engage in wait-unemployment, supported
by redundancy payments, rather than taking up a low-skilled (ELR) job
(cf. Sawyer, 2003, p. 884).
Nesiba (2013, p. 55) incorrectly interprets the ELR as a “work-for-the-
dole scheme,” which he claims would be repugnant to many on the left
(see also Ramsay 2002–3, p. 283). The ELR provides ongoing employ-
ment at the minimum wage and attracts the usual working conditions,
including annual leave and superannuation. The “left” has every right
to complain about the imposition of compliance regimes such as work
for the dole, in an environment of insufficient jobs. The “left” has not
devised a coherent strategy by which to generate an adequate supply of
jobs to match the desires of the working-age population in an environment
of stable inflation. The distinctive feature of an ELR is that all work-
ers enjoy employment security which is a quid pro quo for earning the
minimum/livable wage for an indeterminate period, as opposed to being
unemployed. King (2001) considers different forms of employment and
income support, but considers all of them impractical and settles on the
ELR as the “last resort” (see also Nesiba, 2013).
 Modern monetary theory: contributions and critics  301

ELR advocates are accused of political naivety.14 Yet it is drawing a

long bow to argue that, in the presence of sufficient jobs, political and
public opinion would support an unemployed person having the choice
of taking up a minimum wage job or receiving benefits or basic income
(see Cowling et al. 2006). Cook et al. (2008) surveyed council economic
development officers and found that a wide range of jobs, many with
low skill requirements, could be created under an Australian ELR. Thus,
rather than creating jobs to absorb the unemployed, “social priorities
decide the nature of the government’s spending programme” (Kalecki,
1944, p. 368, quoted in Sawyer, 2003, p. 883).
Sawyer (2003) raises the specter of public sector wages being undercut,
via jobs being transferred to the ELR sector. Under a more enlightened
public sector administration in which cost cutting and cost shifting were
not viewed as a badge of honor by senior management and politicians,
ELR jobs and standard public sector jobs would be distinguished. Also
public sector expansion at market wages and the establishment of an
ELR are not mutually incompatible (cf. Kadmos and O’Hara, 2000, p.
16; Sawyer, 2005, p. 259).
Sawyer (2003, 2005) expresses concern about the effect of private sector
flux on, say, the ongoing provision of assistance to the elderly. There are
many services that, subject to political choice, should be provided by the
public sector on an ongoing basis and/or require a critical mass of work-
ers. This justifies the provision of these services at market rates of pay.
With a commitment to full employment, however, which is driven by both
government employment at market wages and the ELR, nongovernment
employment at market wages is likely to exhibit less fluctuation. This will
reduce the incidence of low-wage employment and also the disruption
to the provision of services by ELR workers caused by fluctuations in
their employment, due to both the flux of nongovernment employment
and the imperative of stable inflation (Mitchell and Watts, 2013).
There is a consensus that a private sector expansion may be capacity
constrained when the economy has been in recession due to subdued
investment during the recession and private sector caution in the upturn
(see, e.g., Arestis and Sawyer, 2005; Malinvaud, 1980; Mitchell and
Muysken, 2002). This constraint on economic expansion does not ap-
ply to the introduction of an ELR program, which can be designed to
accommodate a range of viable capital–labor ratios. Subject to adequate

14 The claim that “organised labour” would not be prepared to accept an ELR (Ram-

say, 2002–3, p. 283) is convincingly rejected by Mitchell and Watts (2003, p. 10).
302  JOURNAL OF POST KEYNESIAN ECONOMICS

planning, particularly prior to the implementation of the scheme, the offer

of an ELR job would simultaneously create the extra productive capacity
required for the viability of this program (Mitchell and Watts, 2013).
By reference to the ex post “budget constraint,” Aspromourgos (2000,
pp. 149–151) provides a reasonably accurate account of the processes
involved in expansionary fiscal policy, notwithstanding his use of mis-
leading terminology including printing money and financing (see also
Palley, 2013). He considers the consequences when private agents decline
to take up the additional net financial assets (government securities and
high-powered money), in sufficient quantities, which he claims implies a
financing limit to government expenditure consistent with an ELR policy.
However, Mitchell and Mosler (2001, p. 18) point out that “[t]he private
sector can only dispense with unwanted cash balances in the absence of
government paper by increasing their consumption levels.”
For Aspromourgos (2000, pp. 151–152), the existence of a maximum
sustainable deficit necessarily requires a balanced budget multiplier to
generate sufficient employment. But this is alleged to strengthen con-
cerns of political sustainability due to the increased “size” of the public
sector. If there were no financial constraints on government expendi-
ture, Aspromourgos (2000) suggests expanding employment at market
wages. He concludes that the only reason for not doing so, aside from
the anti-inflationary role of the ELR, is that there are insufficient useful
activities.
The ELR is not an aggregate demand policy (Mitchell and Wray,
2005). If monetary policy is not employed to control inflation, given a
low interest rate policy, Treasury can raise taxes or cut expenditure so
that some market wage workers are redeployed to the ELR sector. King
(2001, quoted in Nesiba, 2013, p. 5) is critical of Kadmos and O’Hara
(2000, p. 7) for claiming that the ELR is a powerful “built-in stabiliser.”
This reveals an aggregate demand fetish on the part of some ELR critics,
rather than noting its focus on direct employment creation.

Conclusion
Since the GFC, the disastrous macroeconomic outcomes in many ad-
vanced economies have presented a unique challenge to policymakers.
The insights of MMT, principally with respect to the distinction between
sovereign and nonsovereign economies and the role of the payments system
and their implications for the conduct of macroeconomic policy, have been
particularly useful in understanding the different macroeconomic outcomes
among nonsovereign euro zone economies and sovereign economies and
 Modern monetary theory: contributions and critics  303

the ongoing policy challenges. These academic contributions, which are

grounded in institutional practices, have led to an increased interest in
MMT principles among both academic and lay people.
While MMT had been founded in the post Keynesian tradition, many
post Keynesians have been critical of the MMT theoretical and policy
framework and reluctant to draw on its insights in their framing of full
employment policy.
Tymoigne and Wray (2013, pp. 3–4) acknowledge the roots of MMT in
earlier work, but argue that many of the insights of MMT have been lost
in the postwar period. The unwillingness to engage with MMT largely
reflects: (1) misunderstandings and misrepresentations of MMT views and
policy prescriptions (see also Fullwiler et al., 2012); and (2) the failure to
embrace the mechanics of the payment system (see also Lavoie, 2013).
The latter is essential to understand the constraints on the conduct of fiscal
and monetary policy among sovereign and nonsovereign economies.
While we agree with Nesiba’s (2013, p. 56) claim that arguments in
favor of and against MMT are being made on the pages of leading het-
erodox journals, we remain surprised that many post Keynesian authors
have largely ignored fundamental MMT principles in their post-GFC
policy analysis.15 The formal incorporation of MMT principles would
enhance the post Keynesian framework.
There is also hostility to the imposition of an ELR by post Keynesians,
which appears to be based on an antipathy to minimum wage employ-
ment and the implied coercion of accepting an ELR job in the absence
of unemployment benefits. Yet post Keynesians who reject the ELR have
not devised a coherent alternative economic strategy to achieve sustained
full employment and price stability.

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