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.