After more than four decades of dominance, free market capitalism is facing a challenge.

Its rival, the blandly named modern monetary theory (MMT), has entered the ring promising to return economic planning to a less ideological footing.

It's also keen to strike a blow against the "surplus fetish" that many economists now blame for declining public services and growing inequality.

The rise of MMT has received little attention in Australia, but it's increasingly gaining exposure in the United States ahead of the 2020 presidential election.

In its corner are Australian-based economist Bill Mitchell and Stephanie Kelton, the senior economic advisor to Democratic contender Bernie Sanders.

But free market capitalism is unlikely to go down without a fight; former US Treasury secretary Larry Summers has dismissed MMT as "voodoo economics".

Here's how the contenders shape up.

The title-holder

Whether we like to acknowledge it or not, free market capitalism — often disparagingly referred to as "Neoliberalism" — dominates current thinking on both the centre-right of politics and the centre-left.

Once considered radical, it was legitimised in the late 1970s and early 1980s by political heavyweights Ronald Reagan and Margaret Thatcher.

Reagan gave it an emblematic war cry: "Government is not the solution to our problem," he famously intoned, "government IS the problem".

And Thatcher set fast its legitimacy with her uncompromising declaration: "There is no alternative!"

Ronald Reagan and Margaret Thatcher championed free market capitalism. ( Getty: Bettmann )

At the heart of the free-market model is the mantra of smaller government, less taxation, and less regulation.

Over the decades this has led to:

The privatisation of many government functions and agencies;

The privatisation of many government functions and agencies; a rejection of progressive taxation policies in favour of cutting tax levels for the wealthy (referred to by critics as "trickle-down economics");

a rejection of progressive taxation policies in favour of cutting tax levels for the wealthy (referred to by critics as "trickle-down economics"); and the re-badging of virtually all forms of economic regulation as a burden — "red-tape".

Crucially, as part of the smaller government approach, free-market capitalism embraced the idea that elected representatives should be limited in their powers to manage and stimulate the economy.

That role was given over to central banks using "monetary policy" — essentially raising and lowering interest rates to effect change.

There was also an emphasis on limiting public spending in order to achieve or maintain a surplus budget.

Deficits were not just undesirable, but irresponsible.

The contender

MMT, on the other hand, points an accusing finger at Neoliberalism, blaming it for rising economic inequality and corresponding reductions in the quality and scope of essential services — both public and privatised.

MMT's proponents argue that the current "surplus obsession" is at best misconceived and at worst ideological — a deception to justify reductions in government spending in order to fund taxation cuts for the wealthy.

They argue that governments shouldn't be afraid of pushing the economy into deficit if that deficit helps fund further economic growth.

Budget deficits have come to be seen as irresponsible, but not everyone agrees. ( Getty: Hiroshi Watanabe )

Traditional monetary policy, they say, no longer makes sense in an era of record low interest rates — or, in the case of Japan, negative interest rates.

And they believe there is a democratic as well as economic benefit to be had in once again having elected politicians more directly involved in efforts to stimulate and manage the economy.

Handing responsibility for economic stimulus over to central banks was simply another example of Neoliberal-inspired outsourcing, they argue.

What's needed instead is a raft of stimulus measures, including a greater emphasis on what's called "fiscal" policy — the use of tax rates as a control lever.

Light-weight or heavy-weight?

The major critique of MMT by conventional economic theorists is that it's built on wishful thinking, and treats the economy as a "magic pudding".

They deride MMT as unsophisticated, as little more than a call for governments to simply "print more money" to fund their programs.

Going into deficit to fund government spending, free-market economists say, can only ever lead to hyperinflation and risk sending the economy into recession (usually defined as general economic decline over at least two consecutive quarters). Hence the need to prioritise surpluses over deficits.

Unlimited government spending? That's the idea at the heart of the fight over MMT. ( Getty: Bjorn Forenius )

Economist Steven Hail, a supporter of MMT, rejects that characterisation as deliberately misleading.

"What we are saying is that when there is a lack of spending in the economy, when there is already a lot of people with precarious employment or people who are underemployed, and when nobody in the medium term is forecasting any significant inflation, then under those circumstances the appropriate thing for the government to do is to stop talking about balancing its budget," he says.

"The appropriate thing to do at that moment is to run a deficit deliberately to support the economy."

In other words, all government borrowing that's spent on infrastructure or services helps to create consumer demand and further commercial opportunity, which then helps grow the size of the overall economy.

By contrast, if you cut back on spending to ensure a budget surplus, all you will really do is restrict the opportunities for further economic growth.

At least that's the MMT argument.

"The question then is whether you deliberately run a fiscal deficit in order to support the economy and to support employment," Dr Hail says.

"Or whether you allow the economy to sink into a recession, in which case you will end up with a deficit anyway, but a bad one rather than a good one."

Professor Mitchell, a MMT pioneer from the University of Newcastle, argues the cap on the size of government stimulus spending, and therefore any deficit, should be determined by the productive capacity of a country.

That level will differ from country to country, he says, depending on an individual nation's potential for growth.

The second limiting factor is inflation. Once it becomes clear that inflation is likely to kick in, the government should then limit spending and therefore the size of the deficit.

He rejects criticism of MMT theory as "ideological" and hypocritical.

"There was never a question [about government spending] in 2008 when the world was about to collapse into financial ruin when governments around the world pumped billions of their currency into the banking system to bail out the banks," Professor Mitchell says.

"None of the bankers ever blinked. And then, as soon as their positions were safe, they started again, criticising governments for various things — welfare spending, unemployment benefits, pensions, all the rest of it."

A nod to past form

Leading financial commentator Peter Martin sees MMT as a modern iteration of the theory that dominated economics in the boom decades after WWII, before the advent of free market thinking.

"Modern Monetary Theory makes sense to me, perhaps it makes sense to me because I went to university and I learnt Keynesian economics."

He points out that the surplus-good/deficit bad mantra is a relatively recent manifestation.

Almost all Australian governments since federation ran budget deficits, not surpluses, he says, even governments that proudly considered themselves fiscally conservative.

"In 1961 Menzies noticed that unemployment was growing. It was growing from 2 per cent to 3 per cent. That doesn't sound a lot these days, but it was a big change, and Menzies decided to put the budget into deficit, big time," he says.

"As a result, he got unemployment down again.

"This was not regarded as controversial then. This was standard Keynesianism, the founder of modern macroeconomics. What mattered was employing people, and the accounting framework was unimportant."

Signs that Neoliberalism could be on the ropes

One area of unacknowledged agreement between supporters of MMT and conventional economic practitioners is over the failure of standard monetary policy as a tool of economic management; specifically, the manipulation of interest rates to slow or speed economic growth.

In October this year, Paul Keating declared conventional monetary policy had "run its race".

"There is no more that central banks can do," he said in an interview with News Corp.

Paul Keating believes stimulus spending is vital. ( News Video )

The former prime minister and treasurer then went further, calling on the current Australian Government to abandon its ongoing pursuit of a budget surplus and to focus instead on stimulus spending.

He hasn't been alone in adopting such a position.

"In the next recession, central banks will once again be back at zero interest rates and it will be very, very hard then for monetary policy to have the usual stimulative effect," says James Mackintosh, a senior columnist with the Wall Street Journal.

"Certainly, the central banks themselves are worrying about this. So, it seems reasonable that other people should too.

"Clearly even those who are strong believers in the idea of monetary policy, Mario Draghi, president of the European Central Bank, for example, or Bill Dudley who ran the New York Federal Reserve until recently, even these sorts of people are very much saying that governments need to come out and run big deficits because the central banks just can't cut interest rates enough."

Which sounds remarkably like an argument for MMT.

The view from outside the ring

The one sticking point though is trust in politicians. Or more precisely, trust in their ability to once again act as responsible economic managers.

Would the general public be happy with parliamentarians having a greater hands-on role in stimulating and managing the economy?

Mackintosh has doubts.

"It could, in principle, work that if governments focused on inflation they could, in principle, raise taxes and cut spending when inflation got out of hand," he says.

"But, history tells us that what governments do is they cut spending after elections and they raise spending just before elections so that they are more popular and likely to win.

"That, of course, is why democratically elected governments chose to outsource monetary policy to arm's-length central banks in the first place.

"It was precisely to try to overcome this boom/bust link to the electoral cycle."

And it seems many senior Australian financial experts feel the same way.

Mr Martin recently conducted a survey of 13 economists.

In response to the question of who was best placed to boost the economy, all 13 declared their preference for the Reserve Bank over the Federal Government.

Although — perhaps again with a nod to MMT — none suggested the Reserve Bank should be left to fight the current economic downturn on its own.