Modern Monetary Theory is no Magic Money Tree

New paper by neoliberal think tank the Adam Smith Institute breaks down the case for Modern Monetary Theory:

  • Modern Monetary Theory advocates are driven by Utopian thinking, by those who want massive unaffordable public spending programmes.

  • MMT adherents claim that government spending can activate substantial unused economic capacity is false, and practice shows impact is inflationary and hyperinflationary.

  • From the Green New Deal to Corbyn’s People’s Quantitative Easing, MMT is gaining ground in mainstream political activism while still being a fringe economic theory

  • Venezuela’s economic collapse following years of deficit spending shows again Hyperinflation marks the end point of thinking that suggests deficits don’t matter

  • MMT deserves critical thinking and debunking before it influences government policy in a major Western state

John Maynard Keynes said that economic ideas are powerful “both when they are right and when they are wrong”. The Adam Smith Institute today argues that an idea that is gaining ground among heterodox economists and left wing politicians in the USA and the UK is powerfully wrong.

Modern Monetary Theory hinges on the claim that since government issues its own currency it cannot go bust, and it is possible to use printing money to fund substantial government spending with the goal to deliver full employment.

It is this belief that leads author of the report, Professor Antony P. Mueller, to say that “Modern Monetary Theory is to economics what the flat earth movement is to geography.”

Despite gaining ground among political activists, Modern Monetary Theory remains rejected by mainstream economists. In a poll of 50 elite economists the University of Chicago’s Booth School of Business found not a single one believed that countries that borrow in their own currency need not worry about deficits. None found it possible to fund as much real government spending as desired simply by creating money.

MMT asserts, with limited evidence, that there is substantial unused economic capacity that government spending can activate. In practice, when government excessively expands the monetary supply (prints money) the impact is inflationary, if not hyperinflationary — as historically seen in the Weimar Republic, Zimbabwe, and today in Venezuela.

Dependent on government knowing precisely the natural rate of unemployment, and therefore when spending and taxing is needed to drain the excessive inflationary impact of creating money, MMT ignores ignorance on the part of politicians and government actors with no price incentive or competition to counterbalance political prejudice.

Instead of a serious theory about the role of money, the free market Adam Smith Institute stresses we should view increase support for Modern Monetary Theory as a sign of the growing tolerance for debt and deficits in political debate.

If there is no fiscal restraint for public spending, the report argues, opposition to huge public expenditure programs loses its legitimacy. Projects like the ‘Green New Deal’, ‘free’ university education, renationalisations, and massive increases in infrastructure spending can be launched with gusto.

There is no Magic Money Tree to be found in the annals of Modern Monetary Theory, the think tank argues, just a new justification for the same historic mistakes of printing money to finance government spending beyond its means.

Matthew Lesh, the ASI’s Head of Research said:

“MMT promises politicians almost limitless cash to spend on their pet projects. But if something sounds too good to be true it probably is. The state cannot print money without risking crippling inflation. More cash chasing the same amount of goods inevitably leads to sellers increasing their prices.

"When inflation spirals out of control it has disasterous consequences from the Weimar Republic to Zimbabwe to now Venezuela. MMT may just be wishful thinking today - the danger is that tomorrow a politician is stupid enough to follow its prescriptions."

Professor Antony P. Mueller, the paper author, said:

“Old wine in new bottles is a recurring phenomenon in economics, particularly if it is the bad wine of economic ideas that failed in the past. Modern Monetary Theory (MMT) is neither modern nor a theory - it is the attempt to sell something as new which is spoiled and rotten. While promising to cure all kinds of economic woes, MMT is the poisonous elixir that will ruin those who take it as it has happened before.”

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07904 099599.

ASI condemns British Steel corporate bailout

News has emerged that the Government is considering providing British Steel with a £75 million loan to prevent the company from becoming insolvent. The ASI has consistently opposed corporate bailouts on the basis that taxpayer money should not chase failing businesses.

Matthew Lesh, Head of Research at free market think tank the Adam Smith Institute, says:

“This massive loan is as good as shovelling taxpayer cash into a furnace. The British public should not be forced to subsidise failing, heavily polluting businesses like British Steel. Just like any other company, if you cannot convince enough people to buy your product to cover the costs then you shouldn’t exist. Too big to fail is a myth. The proposed £75 million loan comes after £100m of taxpayer cash was bunged over to the company just two weeks ago, amounting to a whopping £43,000 per employee.

“The Conservative Government should not adopt Labor’s socialist policy agenda. The British people are sick of massive corporations, who have close connections with the government, getting huge handouts at the taxpayer’s expense. It is time to leave the era of taxpayers propping up failing businesses where it belongs: in the past."

If you have any questions or wish to arrange an interview with Matthew Lesh please contact ASI media line on 07584778207 or via info@adamsmith.org.

End socialism for the banks: ASI report

A new volume from the free market, neoliberal think tank the Adam Smith Institute, What a Capital Idea!: How to make Britain’s banks more competitive, innovative, and safer, is calling for a radical rethink of banking regulation:

  • UK banks that issue high levels of capital should be freed of other cumbersome prudential regulation, such as the mandatory deposit insurance scheme

  • Banks are more leveraged now than in the lead-up to the Great Financial Crisis of 2008, when market-value leverage ratios were just over 7% — they now stand at just 4%

  • The ‘Great Capital Rebuild’ that banks undertook in the past decade is ‘as real as the Wizard of Oz’ says Professor Kevin Dowd

  • Higher capital requirements and less other prudential regulation would help restore public faith in banking, make banks safer and less prone to causing financial crashes, and reduce the barriers to entry of new banks that would increase competition and customer service

  • This is similar to the regime in the United States’ CHOICE Act, which was passed by the Republican-controlled House of Representatives in the last Congress

Banks are not trusted. A poll last year found that two-thirds of the public do not trust banks to work in the interest of society and 63% are worried that banks may cause another financial crisis. They are broadly blamed for the global financial crisis, and prone to excessive risk.

The failure of the banking sector is not, however, a failure of the free market left to its worst impulses. Banking is highly regulated and directed by the state from the Bank of England’s control of interest rates to the Financial Services Act’s thousands of pages and the Financial Conduct Authority’s thousands of regulators.

The Adam Smith Institute report, written by Professors Kevin Dowd and John Cochrane, argues that the existing regulatory regime creates a moral hazard: the public deposit insurance scheme and expected taxpayer bailouts in a time of crisis encourage banks to take excessively risky behaviour and issue limited capital.

The growth of banking regulation does little to make banks less risky but it does increase compliance costs and create substantial barriers to entry for competitor banks. The lack of new entrants reduces customer service quality and innovation.

Professor Kevin Dowd argues that banks are considerably more leveraged now than they were going into the Great Financial Crisis. He says that the banks’ ‘Great Capital Rebuild’ in the wake of the crash is as real as the Wizard of Oz.

He argues that with banks more heavily leveraged that the next financial crisis will be bigger than the last, warning that there is a “good chance the next round of bailouts and stimulus will be beyond even our governments’ fiscal resources” and that “our fiscal firehouse is not infinite.”

Instead of following the same script of bailing out creditors to stop a run on a bank in any future crisis, and expanding asset and anti-competitive regulation, the free market think tank suggests that we should require banks to issue immense amounts of capital (and long-term debt) so that their remaining run-prone liabilities are not in question.


Banks should be required to issue immense amounts of capital, the free market think tank suggests, so much that their remaining run-prone liabilities are never in question. The issuing of more higher capital may mean banks can take fewer risks and are therefore less profitable, however current profits are dependent on an unfair taxpayer subsidy.

The United States’ CHOICE Act, passed by the US House of Representatives, offers banks a choice to either continue with the existing system that requires low levels of capital or if a bank operates with a higher level of capital it can be exempt from swaths of regulation. Britain should introduce a similar regulatory option for banks.

In the UK, the Adam Smith Institute argues that banks that issue more capital could be able to opt out of regulation stemming from Basel III and Solvency II (for insurance companies) and the Financial Services Compensation Scheme (i.e. deposit insurance).  Banks would be free to walk away from normal PRA supervision and new banks that wanted to set up on with high capital requirements (above 20%) would get automatic approval to do so.




Steve Baker MP, said about the report:

“Socialism for the banks — extensive regulation, state direction and taxpayer bailouts — is a disaster there as it is everywhere. In the public interest, it must be brought to an end. I congratulate Cochrane and Dowd on setting out how it might be done.”

John Cochrane, Senior Fellow at Hoover Institution at Stanford University and chapter author:

“We have the chance to end financial crises forever. If banks got most of the money they use to make risky investments by selling stock, as other companies do, we would not have crises when banks lose money. Modern financial, communications and computation technology allow such equity-financed banking to take over. This volume describes just how we can end financial crises forever in this way – and how the continuing effort to subsidize and regulate banks will not work.”

Kevin Dowd, Professor of Finance and Economics at Durham University and chapter author:

“Most people don’t realise that in market-value terms, banks are more leveraged now than they were before the crisis. This high leverage means that banks are vulnerable to a downturn and are being subsidised by the taxpayer to take excessive risks. It is therefore essential that minimum capital standards be much higher than they currently are.”


Matthew Lesh, the ASI’s Head of Research said:

“Banking as it stands is not the free market at work, but crony corporatism at its absolute worst. The time for tinkering around the edges is over. Taxpayers should not be on the line to pay the costs of excessive risk-taking from banks. It’s time to recreate an actual free market in banking, secured by proper capitalisation and limited prudential regulation that reduces risks while encouraging competition and innovation.”

-ENDS-

Notes to editors:  

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07904 099599.

ASI slams porn laws announcement

The Adam Smith Institute has responded to the announcement that the Porn Laws, the government’s age verification scheme for adult content, will be delayed until July 15.

The Adam Smith Institute is currently running a campaign calling for the government to Repeal the Porn Laws.

Matthew Lesh, Head of Research at free market think tank the Adam Smith Institute, says:

“It is disappointing that the Government is steaming ahead with its ill-thought-out plan to block porn sites and require age verification.

“This scheme, that requires linking of people’s identity to their online adult viewing habits, will seriously threaten our privacy, be a massive gift to scammers, and won’t even work.

“Young people will just get around it, and end up being exposed to more hardcore material.

“The Government should Repeal the Porn Laws.

If you have any questions or wish to arrange an interview with Matthew Lesh please contact ASI media line on 07584778207 or via info@adamsmith.org.

ASI responds to ICO's Age-appropriate design code

Today the Information Commissioner’s Office announced a consultation on a draft ‘Code of Practice to help protect children online’.

The code forbids the creation of profiles on children, and bans data sharing and ‘nudges’ of children. Importantly, the code also requires everyone be treated like a child unless they undertake ‘robust age-verification’.

The ASI believes that this code will entangle start-ups in red tape, and inevitably end up with everyone being treated like children, or face undermining user privacy by requiring the collection of credit card details or passports for every user.

Matthew Lesh, Head of Research at free market think tank the Adam Smith Institute, says:

“This is an unelected quango introducing draconian limitations on the internet with the threat of massive fines.

“This code requires all of us to be treated like children.

“An internet-wide age verification scheme, as required by the code, would seriously undermine user privacy. It would require the likes of Facebook, Google and thousands of other sites to repeatedly collect credit card and passport details from millions of users. This data collection risks our personal information and online habits being tracked, hacked and exploited.

“There are many potential unintended consequences. The media could be forced to censor swathes of stories not appropriate for young people. Websites that cannot afford to develop ‘children-friendly’ services could just block children. It could force start-ups to move to other countries that don’t have such stringent laws.

“This plan would seriously undermine the business model of online news and many other free services by making it difficult to target advertising to viewer interests. This would be both worse for users, who are less likely to get relevant advertisements, and journalism, which is increasingly dependent on the revenues from targeted online advertising.

“The Government should take a step back. It is really up to parents to keep their children safe online.

If you have any questions or wish to arrange an interview with Matthew Lesh please contact ASI media line on 07584778207 or via info@adamsmith.org.

ASI warning on online harms white paper heeded

The Adam Smith Institute’s warning on the government’s Online Harms White paper has been heeded by newspapers and blogs across the world.

Comments by Matthew Lesh, the Head of Research at the Adam Smith Institute, were included in stories on the issue by the BBC, the Washington Post, Radio New Zealand, Talk Radio, The Week, The Herald, and Forbes.

If Britain adopts the measures, our country will lead the developed world in internet censorship.

Today is a dark day for liberty and we urge everyone to contribute to the government’s consultation and halt the illiberal attempt to introduce censorship through the back door.

Government harms free speech and free press with online harms white paper

In light of the government's release of the online harms white paper, the Adam Smith Institute has released the following statement. We worry that this attempt at controlling the Internet will entrench big tech players, stymie innovation, and lead to press censorship through the back door.

Matthew Lesh, Head of Research at free market think tank the Adam Smith Institute, says:

“The Government should be ashamed of themselves for leading the Western world in internet censorship.

“The proposals are a historic attack on freedom of speech and the free press, the very core of Britain's liberal democratic foundations. At a time when Britain is criticising violations of freedom of expression in states like Iran, China and Russia, we should not be undermining our freedom at home. Britain will no longer be called a free society if her citizens and her press are directed by Government as to what they can view, think and say.

“The Government aren’t just targeting illegal material, they explicitly want to censor ‘Harms with a less clear legal definition,’ that is, otherwise completely legal speech. It’s not hard to imagine an overly zealous government regulator and risk adverse tech sites, who want to avoid fines and going to jail, removing swaths of lawful speech.

“The scope of this censorship will include ‘any company that allows users to share or discover user generated content or interact with each other online,’ basically the entity of the internet – not just the tech giants. This covers web forums like Mumsnet, online retailers like Amazon, travel websites like TripAdvisor, and even news websites.

“If Britain wants to have a thriving tech and start-up sector, regulating them into oblivion is probably not the right approach.

“These measures will entrench the market position of the tech giants like Facebook – because they can afford to comply with the massive new costs of this red tape. Mark Zuckerberg gleefully called for more regulation last week. It’ll be start-ups and smaller sites which will suffer under the heavy hand of this regime."

If you have any questions or wish to arrange an interview with Matthew Lesh please contact ASI media line on 07904099599 or via matt@adamsmith.org.

White paper will harm free speech and the press online

In light of the government’s online harm white paper deatils being leaked to the Guardian yesterday, Matthew Lesh speaks out on what makes it such a chilling report for free speech, our free press and competition in tech:

“The proposals are a historic attack on freedom of speech and the free press, the very core of Britain's liberal democratic foundations. At a time when Britain is criticising violations of freedom of expression in states like Iran, China and Russia, we should not be undermining our freedom at home.

"Britain will no longer be called a free society if her citizens and her press are directed by Government as to what they can view, think and say.

“Websites must already remove illegal content, and are careful to do in a timely manner. This new regulatory system, by placing legal liability on platforms, will force platforms to censor a wide array of new material.

“This will turn into a form of press regulation by the back door. This isn’t just about big social media players. It’ll impact any website with user comments, including web forums like Mumsnet, online retailers like Amazon, travel websites like TripAdvisor, and even news websites.

“These new regulations will mean no new competitors challenging the social media giants. Large companies like Facebook have the scale and monetary resources to implement automated censorship systems and employ thousands of moderators. It’s the newer, small to medium size websites that will struggle to handle the red tape.”

These comments will be updated in due course when the full paper is released on Monday. In the meantime if you would like to arrange an interview with Matthew Lesh or another member of the Adam Smith Institute please contact Matt Kilcoyne on 07904099599 or email matt@adamsmith.org

ASI Plan Unites MPs From Across Parliament

A new Adam Smith Institute report, Room for improvement: How drug consumption rooms save lives, has received cross-party support:

  • MPs from the Conservative, Labour, SNP, Liberal Democrat, and Green Parties back ASI paper calling for Drug Consumption Rooms to be introduced in the UK

  • Use of Drug Consumption Rooms in 10 OECD countries has been shown to reduce drug-related deaths and the spread of syringe transmitted diseases

  • A large majority (89%) of drug users are willing to use a drug consumption room.

  • The estimated average lifetime cost of an HIV infection is around £360,000 per person; with significant NHS savings available from providing safer injecting practices

  • The Home Office should make a statement explicitly devolving the operation of DCRs to local authorities; specific rules could then be agreed by police forces, the Crown Prosecution Service (CPS), health bodies, and local authorities

  • Or, the UK Parliament could pass legislation that makes it explicitly legal to take controlled substances within such facilities in specified circumstances

In a marked departure from Brexit division a rare moment of unity has broken out as a coalition of MPs have today backed a new report by the free market Adam Smith Institute evaluating the case for Drug Consumption Rooms (DCRs) to be introduced in the UK.

Cross party backing from Conservative, Labour, SNP, Liberal Democrat, and Green MPs as well as crossbench Lords shows the breadth of support from across Parliament to introduce Drug Consumption Rooms and reduce the number of deaths from drug poisoning.

In an open letter published by The Telegraph, the MPs say that “Communities are being ripped apart, criminal networks are profiting, and thousands of people are dying every year,” before going on to say that “Drug consumption rooms are an evidence-based harm reduction intervention which allows people who use illicit drugs to do so within a medically supervised environment.”

The Adam Smith Institute says that the UK has fallen behind other western countries in harm-reduction drug policy with 10 OECD countries (including Denmark, Canada, and France) already extensively offering the service with dramatically positive effects.

DCRs are not aimed at the general public but primarily seek to attract hard-to-reach populations of users—including the homeless, those with severe mental health issues, and those most at risk of spreading diseases through needle use (such as HIV). Under systems used across the world there is usually a minimum age requirement, assessment of those using the service for need, sterile equipment, medically trained staff, consent and co-operation with local police services, and connections with council and social care services.

According to a 2017 survey of DCR operators, most employed nurses (80%) and/or social workers (78%) within facilities. Others employed health educators / rescue workers (35%), paid peer-workers (24%), psychologists (13%), case managers (11%) and students (11%). Just less than half required a doctor/clinician onsite (46%).

The need for DCRs in Scotland is particularly dire. The country saw 934 people die of drug poisoning in 2017, a fifth of the UK’s total drug-related deaths that year—a drug death rate nearly fifty times larger than Portugal’s. The cost to the NHS from unsupervised drug injections is enormous. If the 78 new cases of HIV caught from injection of drugs in Glasgow between 2015-16 had been prevented through use of DCRs, the NHS would’ve saved £28,080,000 over the course of their lifetime.

In Glasgow, moves to set up a drug consumption were blocked by the Lord Advocate under current rules. However he made clear that he could back them if Westminster could set out a legal framework for them to operate under.

There is significant evidence to suggest that it could be effective in the UK. A large majority (89%) of drug users have indicated that they are willing to use a drug consumption room.

The Adam Smith Institute suggests that an explicit statement by the Home Office devolving decisions over DCR operation to local authorities, health bodies, police and crime commissioners, and the Crown Prosecution Service could allow their implementation. Or, they argue, the UK Parliament passing legislation could explicitly provide a legal framework for the service.

Crispin Blunt MP (Conservative):

“Illicit drugs destroy communities, drive crime and cause deaths. Drug consumption rooms are a proven, evidence based approach to drug policy which minimises harm by providing a safe environment, clean needles, and access to healthcare and treatment services.

“As human beings we must do all we can to help others in a wretched state with serious addictions, not leave them to die on the streets. The international evidence is that drug consumption rooms reduce overdoses and save lives. They also reduce public drug use and associated nuisance to the benefit of victims of drug-users; drug-related infections, saving state health and criminal justice services millions of pounds; and the number of drug users by targeting often difficult and hard to reach individuals with treatment, advice and social services.

“To say that drug consumption rooms act as a ‘honeypot’ for drug users or incentivises drug use is once again the morally driven, unfounded opinion of those calling for a ‘tough on drugs’ policy which has created the dire situation we are in. They should instead focus on the reports from Europe and our Home Office which rather unsurprisingly proves them wrong with evidence.”

Lord Ramsbotham, crossbench Lord and the co-chair of the Drugs, Alcohol and Justice Cross Party Parliamentary Group:

“The Drugs, Alcohol and Justice Cross Party Parliamentary Group have discussed Drug Consumption Rooms and think that all the evidence, including the findings in support of a Glasgow pilot, supports their introduction.

“Many other countries have had success with DCRs, which have been shown to reduce overdose deaths and improve access to recovery services: especially for drug users who are more difficult to reach. Establishing a legal framework for their operation, or at the very least giving supportive local authorities the green light to trial DCRs, is sorely needed.

Jeff Smith MP (Labour):

“Drug consumption rooms are an important component of a harm reduction approach to addiction. They are a proven intervention to save lives, reduce syringe litter and public injection, and provide at-risk individuals with access to advice and recovery services. The Government must act to let drug consumption rooms be established where they are needed. We have to reduce the suffering and danger for addicts, and create a safer environment for the wider public.”

Dr Daniel Poulter MP (Conservative):

“There is considerable evidence that medically supervised drug consumption rooms help to reduce drug-related deaths and improve the ability of healthcare professionals to engage with people who are dependent on injectable opioids, including heroin.”

“It is important that people put aside their misconceived prejudices about opioid dependence and recognise the benefits that medically supervised drug consumption rooms can play in saving lives and reducing the financial costs of substance dependence upon wider society.”

Ronnie Cowan MP (SNP, vice-chair of APPG on drug policy reform) said;

“I find it hard to believe that anyone could read the Adam Smith Institute report on Drug Consumption Rooms and not come to the conclusion that the United Kingdom’s drug policy is deeply flawed and that Drug Consumption Rooms are not just desirable but necessary as a key component to tackle problematic drug use in our society. The report is evidence based and heavily referenced. I would implore all elected members to take the time required to read it.”

Matthew Lesh, Head of Research at the free market think tank the Adam Smith Institute, said:

Drug consumption rooms are a sensible, evidence-driven, moderate policy reform that will save lives. It’s time to completely rethink our approach to illicit drugs. It’s clear that the current approach is simply not working. The essential question should always be: what will cause the least harm? Across the world drug consumption rooms have been shown to work, it’s time Britain follows the likes of Germany, Canada, and Australia.

Jarryd Bartle, report author:

There is robust international evidence that demonstrates drug-consumption rooms decrease substance related harms and improve community amenity. Drug consumption rooms reduce drug-related deaths, reduce health burdens, decrease public injection and syringe litter as well as effectively target marginalised populations. On all indicators of concerns -  whether crime, syringe litter or public health - drug consumption rooms were of more of a benefit than the status quo. The UK's current approach to illicit drugs isn't working, it's time to follow the evidence on decreasing drug-related harms.

Notes to editors:  

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Half marks for tariff reductions

While the government's 'modest liberalisation of tariffs' (in their words) is a step in the right direction for consumers and producers, but in bowing to the agricultural lobby the government would penalise Brits that dare to buy food from overseas. We call on government to trust the quality and public appeal of British products, rather than the force of consumer taxes to sell them.

Matthew Lesh, Head of Research at the free market think tank the Adam Smith Institute, said:

“The Government’s announcement about reducing tariffs in case of a No Deal Brexit is a welcome shift toward free trade —but fails to go far enough. All tariffs should be phased out if not immediately abolished. Anyone who cares about Britain's poor, about child poverty and the proliferation of food banks, should be worried that we’ll be paying more for food than necessary.

“In case of a No Deal Brexit, consumers will get cheaper footwear and textiles and producers will pay less for inputs like machinery, base metals, plastics, rubber, and chemicals. These reductions are essential to ensure prices do not skyrocket after applying duties to European Union imports which are currently tariff-free.

“However, Brits are set to pay substantial import taxes on meat. We’ll be paying more for Spanish chorizo, New Zealand lamb and Danish pork. This is a disgrace. It’s economics 101: tariffs are a tax on British consumers that make food more expensive and industry less efficient, pushing down wages.

“I have faith that British farmers can compete with foreign producers on a level playing field by providing a high quality and high welfare product. The New Zealand and Australian experiences show that farmers thrive after the cutting of subsidies and tariffs.”

For further comment, or to arrange an interview please contact Matt Kilcoyne via email (matt@adamsmith.org), mobile (07904099599), or office phone (02072224995).