MMTed - Home Page of Public Education in Modern Monetary Theory

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So today I'm speaking to Professor Martin Watts, who's from the University of Newcastle in Australia. He's also a Senior Research Associate at the Centre of Full Employment, otherwise known as CoFE and Martin's had a long, challenging period, developing teaching methods and teaching curricula in Modern Monetary Theory at the university and a standard economics program. And he's also one of the co-authors of our macroeconomics textbook. So welcome, Martin. Thanks for joining me.

Thank you.

And I just wondered whether you'd like to share your experiences on what the challenges are, what the issues, the problems, the difficulties in teaching a new way of thinking about economics, that is, Modern Monetary Theory in a standard economics program.

OK, yes,

I taught at a third year level courses, drawing on a course - drawing on Modern Monetary Theory. But in 2012, I started with a colleague teaching first year Macro at the university, drawing more fully on Modern Monetary Theory.

Now, when thinking of how Macro should be taught, I think the first point is that it has to be acknowledged - that Macroeconomics is contested and secondly, that it is no use simply hiding that until the last week of the semester or the last of four week course or whatever, it has got to be front and centre that the discipline is contested, you're not going to be able to sit back and learn a set of ideas.

You're going to be challenged.

Now, the mainstream textbooks are very poor, and I would argue the way the Macroeconomics is taught is typically very poor.

There's minimal or no acknowledgement of competing views. Now, the textbook is the first textbook that examines modern monetary theory in an appropriate way for teaching purposes, but also, it is not a monist course. It doesn't just focus on Modern Monetary Theory. It also points out the deficiencies of the mainstream approach.

So it is challenging the student from from the beginning.

Now, the key to any course being taught is to ensure that it's relevant and in terms of Economics courses, one might be talking to lay people, one may be talking to Economics students in first year or Art students.

So there's a variety of backgrounds but the key point is relevance to their day to day understanding of the world, which may not be very refined. The textbook emphasises the centrality of government in the economy, and that is of fundamental importance.

Mainstream textbooks don't and they may introduce it later on and something that I've been increasingly aware of is the fact that in explaining the role of government, one can get a lot of insight from seeing how those important institutions, Reserve Bank and Central Bank - reserves, sorry - Central Bank and Treasury say they operate.

So grounding the course in institutional practice, in other words, how these entities operate is absolutely crucial and very early on in a course, it seems to me - some very counterintuitive ideas can be presented, and one such idea is that government spending is not financially constrained.

It's constrained by the overall spending in the economy relative to the fiscal capacity of the economy.

In terms of the design of a textbook, it's important to recognise that, at least with respect to our textbook, we are trying to appeal to a relatively diverse market base of Economics students, Business students, Art students but also lay people as well.

And to devise say a first year or introductory course, that is going to be acceptable to everybody is really pretty much impossible to do. Now, the textbook itself, of course, covers two years. Now, that is a challenge in itself for somebody teaching the course is a first year or introductory course in terms of what to include, but certainly the emphasis should be on the operation of a Modern Monetary economy - talking about the expenditure system, the monetary system, the - having an understanding of institutional practice.

And really important I think is a focus on policy, because what is necessary is whether a student or lay person is going to study further or is merely satisfying some requirement that they have to do a semester of Macroeconomics.

They want to take away something about the macroeconomy and have some understanding at a level that you find in the serious media. So understanding of policy, which is obviously integral to the institutional practice of the key bodies, Treasury and Central Bank, and understanding of policy is really important.

This enables students to listen to when the Central Bank Governor explains the latest monetary policy decision. So at the very least, there is some ability to understand contemporary debate, and this means in terms of students who go on to further Macroeconomics, they have a very good grounding in how the economy works. They don't have a lot of refined theory that can be developed later.

OK, thanks very much for joining me, Martin and all the best.

End of Transcript

Study Notes:

This is a summary of a recent paper published in the International Review of Economics Education.

The paper - Orthodox Macroeconomic Textbooks: A Critical Evaluation using Institutional Practice as a Benchmark - and the authors are all from the University of Newcastle - James Juniper, Andrew Nadolny, George Pantelopoulos and Martin Watts.

Martin kindly agreed to provide a précis of the paper for this course.

Introduction

Macroeconomic theory and policy analysis has long been contested. Yet competing perspectives are typically not presented in an introductory course. Ignoring alternative approaches is significant, particularly when most universities emphasise their graduates’ capacity to engage in critical thinking.

University teachers usually rely on orthodox first year textbooks, which makes it difficult to incorporate conceptual, modelling and policy-related material based on other perspectives while maintaining a coherent narrative.

The Global Financial Crisis (GFC), which most orthodox economists failed to anticipate, and its recessionary aftermath, should have heralded a reassessment of macroeconomic principles. The acknowledgements about the operation of the monetary system and the conduct of monetary and fiscal policy made before and since the GFC by significant organisations, including the Bank of England, Bank for International Settlements, European Central Bank and International Monetary Fund, reinforce the need to re-examine teaching content.

Our study explores how a sample of four introductory Australian textbooks responded to the challenges to orthodox macroeconomic thinking outlined by these organisations in their analyses of what we refer to as Institutional Practice (IP), that is how key institutions, notably the Central Bank, Treasury and commercial banks, say they operate. The justification for this focus is that Policy practitioners understand the day-to-day practices of these institutions, the role of specific policy instruments, and their transmission mechanisms.

Institutional Practice

We first draw on their depictions of IP and discuss topics including: The causes of the GFC. The causes of the GFC.

The operation of the monetary system with a fiat currency: the role of banks in credit creation and the payment and settlement system. The issues of the exogeneity of the money supply, the money multiplier, the loanable funds model and the quantity theory of money.
The conduct of monetary policy based on a target interest rate and actions by the Central Bank to achieve this market determined rate.
The operation of fiscal policy and whether so-called profligate Treasuries can be punished by international investors. The relationship between government spending and inflation.
The causes of the GFC.

Review of Textbooks

Each text was co-authored by an internationally recognised economist (Mankiw, Bernanke, Stiglitz and Taylor), but none discarded its monetarist principles. Thus, while acknowledging that Central Banks in developed economies conduct monetary policy by targeting a short-term interest rate, they still argue that Central Banks control the money supply. Also, the money multiplier, loanable funds model and the quantity theory of money are all maintained as truth, despite being rejected by these major organisations.

The Government is not viewed as central to the operation of the macroeconomy and fiscal policy as an important component of the policy mix. The texts point to the likelihood of inflation and even hyperinflation if fiscal stimulus measures are adopted, and the need for future generations to pay back accumulated public debt. One text explains the GFC by reference to the excessive debt of households, banks and governments and the prospect of advanced countries facing public debt crises if they failed to adopt austerity measures.

In summary, the narratives in these textbooks are incoherent. Monetarist principles cannot be reconciled with Institutional Practice.

Teaching First Year Macroeconomics

A curriculum in which competing perspectives are critically assessed enhances students’ ability to analyse, criticise and integrate new material into their thinking. Even students who study one macroeconomics course should have the analytical tools to be able to make informed judgments about current policy debates.

Modern Monetary Theory (MMT) combines the principles of Chartalism and Functional Finance and is grounded in IP, but recognises that, while IP exhibits common features, there are differences across economies.

MMT has attracted considerable interest in the media, policy circles and amongst the public, particularly since the GFC, but often commentary is superficial. This interest has intensified since the Covid-19 pandemic emerged with the necessity of a sustained fiscal response, which challenged conventional thinking about deficits and debt.

However, replacing orthodox macroeconomics by MMT would not reveal to students that macroeconomics perspectives are contested. Also, orthodoxy remains the dominant narrative, so understanding orthodox macroeconomic principles is important. However, none of the four textbooks provides a coherent narrative.

The ideal learning experience for first year students is that they are exposed to the MMT framework, but orthodox macroeconomic thinking should also be outlined so that competing theoretical and policy positions can be critically assessed (see, for example, Mitchell et al., Macroeconomics, Macmillan, 2019).

2.16 Interview with Professor Martin Watts

Study Notes: