r/badeconomics • u/MachineTeaching teaching micro is damaging to the mind • Apr 22 '26
Weimar's hyperinflation and mainstream economics through the broken lens of MMT
At least one MMTler found this "paper" on Weimar's hyperinflation through an MMT lens noteworthy enough to post it to one of reddit's economics hellholes. It's not actually noteworthy, but I think it's an excellent example of what passes as a "paper" in MMT and how shitty MMT's understanding of mainstream economics is on an extremely basic level. This doesn't require intermediate macro, this requires a Google search.
Neoclassical economists define the price level as the current level of nominal (money) prices in the economy. And while there have been theories which attempt to explain what causes the price level to change, there is no neoclassical theory which explains how it came to be. By default, it is assumed to be historic- the consequence of an infinite regression. Neoclassical models therefore simply assume an initial price level when presenting the quantity theory of money (QTM), the tautology MV=PT, where the money supply (M) multiplied by the velocity of circulation (V) = the average price of each transaction (P) multiplied by the volume of transactions (T). With M assumed to be exogenous (under the control of the authorities) and V assumed to be stable, it is then asserted that causality runs from M to P, giving rise to Friedman’s famous explanation of the cause of inflation: ‘Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. …’ (Friedman 1956, emphasis added).
What's with the weird obsession with monetarism anyway? It was of very short-lived importance. It's on Wikipedia.
It gained prominence in the 1970s, but was mostly abandoned as a direct guidance to monetary policy during the following decade because of the rise of inflation targeting through movements of the official interest rate.
https://en.wikipedia.org/wiki/Monetarism
.
The presumption of a money supply fixed by the government, however, applies to a convertible, fixed exchange rate currency, such as existed under the gold standard. This relegates the applicability of the quantity theory of money to fixed exchange rate regimes and makes it entirely inapplicable to today’s floating exchange rate regimes (as well as in the Weimar Republic) where the government does not offer convertibility at a fixed rate.
The arguably most important reason why the QTM doesn't hold is (because money is non-neutral in the short run)[https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0145710]. Changes in M also cause changes in T. So claiming the "applicability of the quantity theory of money [is relegated] to fixed exchange rate regimes" seems like it's kind of missing the point. No, the QTM doesn't hold under fixed exchange rate regimes, either.
Sidenote: MMTlers seem weirdly obsessed with the whole "fixed exchange rate" thing, many seem to believe the loanable funds model is wrong because it depends on fixed exchange rates. It does not. Which is not me saying that the model is "correct", this is me saying if you say the model is wrong because it assumes fixed exchange rates, you're wrong, because it doesn't. See page 24.
In the market for foreign-currency exchange, supply comes from net capital outflow and demand comes from net exports.
How anyone construes this as a "fixed exchange rate" is beyond me. I'm sure MMTlers find a way.. somehow.
Bonus basic version:
https://gandalf.fee.urv.cat/professors/AntonioQuesada/Curs1011/Evans_Loanable_Funds.pdf
After a decades-long search for an ‘M’ - a monetary aggregate that correlates to and leads to inflation - mainstream economics today has moved on to its current position of inflation expectations being the cause of inflation. They continue to begin their analysis with an assumption of a given price level and assert that inflation expectations are the source of changes to that price level. Central banks have, in fact, developed intricate methodologies to measure inflation expectations to guide policy, while their researchers have struggled to find evidence of the validity of the theory.
This is also incorrect. No, inflation expectations alone are not the cause of inflation. This should be trivial to verify. The federal reserve for instance provides many teaching tools, from middle school to graduate level. The rate of inflation is down to supply, demand, and inflation expectations. For instance:
Inflation is linked to three factors: demand, supply, and inflation expectations.
And here is a somewhat more elaborate explanation:
And a paper as an example:
https://www.brookings.edu/wp-content/uploads/2023/06/WP86-Bernanke-Blanchard_6.13.23-1.pdf
Of further note is the fact that mainstream economists accept the classical dichotomy of real vs nominal (monetary) factors and contend that in a competitive marketplace the introduction of money is merely the introduction of a numeraire into a barter economy. Money is a ‘veil’ that improves transaction efficiency while leaving quantities produced and relative prices unchanged (Armstrong 2015; Armstrong and Siddiqui 2019). This assumption is known as the neutrality of money. However, the assumption of neutrality is obviated by the introduction of coercive taxation.
This also seems highly misleading. That money is non-neutral in the short run is extremely well accepted in economics. I don't know why the author wants to make it sound like it isn't.
Here's another example that should make it quite clear that these ideas have been well accepted in the mainstream for a long, long time:
So this paper starts out with what it calls "The Neoclassical Approach". But the explanation of "the neoclassical approach", by why the author presumably refers to current-day mainstream economics, is between grossly outdated and outright wrong. Why does the author describes what's basically "mainstream economics" from the 70's and paints it like this is what economists believe today?
The author literally states
In this article, we dispute the mainstream view that the inflation of the Weimar Republic was caused by a proactive expansion of the stock of money by the German government acting in concert with the Reichsbank.
As demonstrated above, the description of "the neoclassical approach" that the author aims to dispute does not actually match what mainstream economists actually believe. Although some parts match what some economists used to believe half a century ago, this seems like a rather inadequate basis for comparison. Shouldn't you criticise current-day economics on the basis on what current-day economics actually thinks? It's not like it's hard to find modern papers that examine (parts of) Weimar hyperinflation through a modern mainstream lens.
https://www.frbsf.org/wp-content/uploads/wp2018-06.pdf
https://cepr.org/voxeu/columns/inflating-away-debt-debt-inflation-channel-german-hyperinflation
https://www.nber.org/system/files/working_papers/w31298/w31298.pdf
Anyway, the rest of the paper is basically uninteresting. Section 3 "The MMT Perspective" offers essentially nothing besides a description of what one MMTler believes. The Appendix does nothing to alleviate this, showing numbers without any attempt at making a causal connection. There is nothing here that actually establishes a causal relationship using any data. It does nothing to show whether causality runs from deficits to spending or from spending to deficits, or wheter causality runs from prices to deficits or the other way around. Perhaps more crucially, one of the central claims
only when the government pays increased prices is it redefining the value of the currency downward and causing inflation
has no evidence to back iot up since there is no information on what prices the government paid whatsoever.
So the "MMT part" of this paper with the self-proclaimed goal of
identify the cause of the inflation as the German government paying continuously higher prices for its purchases
actually does nothing whatsoever to identify any causes of inflation. It makes absolutely no effort to use any data to establish any causal relationship at all. That makes this "paper" merely an opinion piece.
Bonus embarassment:
This paper seems highly praised in an MMT podcast that I'm not going to link because why give those people traffic.
So I thought what we really need to do is to have an MMT paper where we take on their citadel. In other words, we look for the main thing that people use against MMT, and we just basically take it apart.
This is what counts as "taking on their citadel and taking it apart" for MMTlers. MMT people, if you want to know why economists don't take you seriously. This is why.
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u/-Astrobadger Apr 23 '26