MMT is, in fact, the antithesis of monetarism, arguing governments must spend in order to achieve full utilisation of an economy’s resources. In that sense, it’s closer to Keynesianism. Finally, it’s not really a "theory" – it’s actually a straight-up application of accounting rules to explain how money works in an economy where the government controls its own currency. In other words, an economy like Australia’s. It’s not unlike how the "theory" of gravity is simply an application of the rules of physics.

Critically, MMT is not a policy prescription and it's not politically aligned. It is absolutely indifferent as to who holds the purse strings, it simply explains the mechanics of what happens in the economy when they tighten or loosen them.

The first counter-intuitive point MMT makes is that government spending comes first and tax revenue flows from that. This can be tough to get your head around. But if you think about it, there has to be money already out in the economy before you can tax anything (remember, you don’t just go and issue a whole bunch of notes and coins to kick things off because they are a tiny fraction of the total amount of money in an economy). So a government creates money by paying things like pensions and unemployment benefits or spending on infrastructure.

If the government isn’t injecting newly created money into the economy, the only other way it can grow is by people borrowing. MMT recognised ages ago that as people borrow more and more, the only way growth would be supported is through lower and lower interest rates, courtesy of central banks. But at some point, people reach their borrowing limit and then it’s up to governments to create the growth.

Another of MMT’s most controversial insights is kind of in two parts. First, since it’s governments that create money they can never be insolvent, which means they are never financially constrained. Second, they are, however, very much constrained by the resources available in the economy.

This usually sends conventional economists into apoplexy. They get stuck on the first part, crying a government that thinks it can spend money at will is a recipe for fiscal disaster and a sure-fire way for an economy to end up crippled with inflation, like Venezuela or Zimbabwe. The problem is, those economists don’t stop to think through the second part.

MMT explicitly acknowledges the existence and risks of government deficits and inflation. What it says, though, in a very simplified example, is imagine the economy is like a giant department store where both the private sector and the government sector shop for the things they need, everything from hospitals to cars, workers or soldiers. If some of the stock is not being bought by the private sector, that means there’s excess capacity and you’d expect prices will not be rising. It follows the government is able to go to the store and keep buying things with the money it creates and once the thing it’s bidding for in the shop is sold out (which could be labourers or cement, or widgets) you’d expect its price to rise, indicating it’s time for the government to back off.


Probably the most important thing MMT teaches us is it doesn’t make sense to treat a government as if it’s a household. While it’s intuitively appealing to think a responsible government should live within its means, the reality is the government’s "means" are nothing like a household’s because a family can’t print its own money. Its means are limited by how much it earns and what it can afford to borrow, whereas a government’s means are limited by what’s available in the entire economy.

A third insight MMT offers that conventional economists struggle with is government deficits simply represent money the government has put into the economy that year which hasn’t been taken out by taxes. Deficits don’t actually accumulate to become a burden on future generations with crushing interest rates or catastrophically weak currencies. You just have to look at the US and Japan for confirmation of that.

When conventional thinking can’t explain something, it makes sense to think unconventionally. In many ways MMT sounds like stepping through the looking glass, but that’s because for almost 50 years we’ve become conditioned to think of our government as facing the same budget constraints we do. MMT not only provides a logical explanation of what’s happening in the world, but with Australian households up to their necks in debt, it offers a sobering perspective on the Morrison government’s insistence on balancing the budget.