The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy

Modern monetary theory represents a significant departure from mainstream macroeconomic thought, emerging in the 1990s as a theoretical framework that fundamentally reconceptualizes the relationship between government spending, taxation, and monetary policy. While The Deficit Myth presents MMT’s core principles for a general audience, the theory itself evolved through decades of academic research and practical observation of monetary operations.

MMT’s intellectual foundations draw from several economic traditions. It builds upon Georg Friedrich Knapp’s state theory of money, which emphasizes the role of government in establishing currency value through its power to impose tax obligations. The theory also incorporates insights from post-Keynesian economics, particularly regarding the endogenous nature of money creation and the importance of aggregate demand management. Additionally, MMT draws from Abba Lerner’s functional finance approach, which argues that government fiscal decisions should be evaluated based on their economic outcomes rather than arbitrary financial rules.

The theory’s development coincided with significant changes in global monetary systems. The 1971 abandonment of the gold standard marked a crucial transition to fiat currency systems, though MMT theorists argue that mainstream economics failed to fully appreciate the implications of this shift. In a fiat system, they contend, government spending constraints become fundamentally political rather than financial, as governments can always create more of their own currency.

MMT challenges several core assumptions of conventional economics. While mainstream theory treats money as emerging from private market transactions, MMT views money as a creation of state power, established and maintained through tax obligations. This perspective leads to a dramatic reframing of fiscal policy. Rather than seeing taxes as funding government spending, MMT argues that taxes serve to create demand for currency, manage inflation, and address wealth inequality.

The theory’s approach to inflation differs markedly from conventional monetarist views. While monetarists focus on controlling the money supply through interest rates, MMT advocates emphasize the importance of real resource constraints and argue for using fiscal policy as the primary tool for managing inflation. This perspective suggests that inflation occurs when government spending pushes the economy beyond its productive capacity, not simply from increasing the money supply.

MMT’s policy prescriptions often align with progressive economic goals, though its proponents argue this connection stems from operational reality rather than ideological preference. The theory supports extensive government involvement in achieving full employment, typically through a jobs guarantee program. It also suggests that public investment in education, healthcare, and infrastructure need not be constrained by tax revenue or government borrowing capacity.

Critics of MMT raise several objections. Mainstream economists argue that the theory understates inflation risks and oversimplifies the relationship between government spending and price stability. Some suggest that MMT’s prescriptions might work for the United States, which benefits from the dollar’s global reserve currency status, but would prove dangerous for other nations. Political scientists question whether MMT’s technical insights about monetary operations can translate into practical policy given existing institutional arrangements and political constraints.

Despite these criticisms, MMT has gained increased attention following the 2008 financial crisis and the COVID-19 pandemic. Both events prompted massive government spending and monetary intervention. These experiences lent credibility to MMT’s core assertions about government fiscal capacity, though debates continue about the broader applicability of its policy recommendations.

Within this theoretical context, The Deficit Myth serves as an exposition and application of MMT principles. The book translates complex monetary operations into accessible concepts while demonstrating their relevance to contemporary policy challenges. It represents MMT’s evolution from an academic theory to a framework for addressing pressing social and economic issues, from unemployment to climate change.

Understanding MMT’s theoretical foundations helps explain why its conclusions differ so dramatically from conventional wisdom about government finance. The theory doesn’t merely suggest technical adjustments to existing economic models but proposes a fundamental reconceptualization of money, state power, and economic policy. This radical departure from orthodox economics explains both the enthusiasm of its supporters and the intensity of its critics’ objections.