The Real Battle Lines: Monetarism vs. MMT

      I am becoming more convinced that this is where the true battle lines are in economics. Only MMT-as today's version of Chartalism-can truly contest Monetarism-Market or other. While I think New Keynsianism has some value-Krugman argues as a way of checking your work if nothing else-the fact is that NK may except too much of the Monetarist baby in exchange for slightly fresher bath water.  Listen to Brad Delong, one of the most prominent New Keynesians of today:

      What Today's Keynesians Believe
      What do today's "new Keynesian" macroeconomists believe? Their research program is complex and hard to summarize briefly, but any list of its key ideas and premises would include the five propositions that:

--The key to understanding real fluctuations in employment and output is to understand the process by which business cycle-frequency shocks to nominal income and spending are divided into changes in real spending and changes in the price level.

-- Under normal circumstances, monetary policy is a more potent and useful tool for stabilization than is fiscal policy.

--Business cycle fluctuations in production are best analyzed from a starting point that sees them as fluctuations around the sustainable long-run trend (rather than as declines below some sustainable potential output level).

--The right way to analyze macroeconomic policy is to consider the implications for the economy of a policy rule, not to analyze each one- or two-year episode in isolation as requiring a unique and idiosyncratic policy response.

-- Any sound approach to stabilization policy must recognize the limits of stabilization policy—the long lags and low multipliers associated with fiscal policy; the long and variable lags and uncertain magnitude of the effects of monetary policy.
     Indeed the very word Keynesian is for Delong a misnomer. Yet it seems to me that what Monetarists can't forgive Keynes for is his questioning that monetary policy can be all sufficient, that a recession is wholly a monetary phenomenon.

    "the essence of the situation is to be found, nevertheless, in the collapse in the marginal efficiency of capital, particularly in the case of those types of capital which have been contributing most to the previous phase of heavy new investment. Liquidity-preference, except those manifestations of it which are associated with increasing trade and speculation, does not increase until after the collapse in the marginal efficiency of capital. It is this, indeed, which renders the slump so intractable. Later on, a decline in the rate of interest will be a great aid to recovery and, probably, a necessary condition of it. But, for the moment, the collapse in the marginal efficiency of capital may be so complete that no practicable reduction in the rate of interest will be enough. If a reduction in the rate of interest was capable of proving an effective remedy by itself, it might be possible to achieve a recovery without the elapse of any considerable interval of time and by means more or less directly under the control of the monetary authority. But, in fact, this is not usually the case…. It is the return of confidence, to speak in ordinary language, which is so insusceptible to control in an economy of individualistic capitalism. This is the aspect of the slump which bankers and business men have been right in emphasising, and which the economists who have put their faith in a “purely monetary” remedy have underestimated."

      I want to quote that again,

      "This is the aspect of the slump which bankers and business men have been right in emphasising, and which the economists who have put their faith in a “purely monetary” remedy have underestimated."     

     A few times Scott Sumner attempted to have a meeting of the minds of sorts with the MMTers. He attempted to criticize MMT based on its rejection of the Quantity Theory of Money-his case rested on the idea that without QMT there's no other way to explain changes in the price level. What Sumner missed is that MMT doesn't deny QMT as such.

    The real difference is to be sought elsewhere. What makes MMT so different is that it is a form of Chartalism-it denies some of the most basic assumptions of Monetarism and much mainstream economics. It denies that there was ever a barter economy. It denies the very money multiplier. When Sumner has tried to criticize MMT I doubt he understood this. If he did he would have gotten how difficult it is for these two schools to be able to speak the same language.

    Yet I am more and more convinced that Monetarism itself is wrong. It definitely has too much faith in a purely monetary remedy to all problems. Does Delong go too far in this direction too?