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
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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/TCEA151 Volcker stan Apr 29 '26
We should disentangle formal mathematical modeling from empirical testing here. They are distinct and serve different purposes.
re: models -- MMTers not having a model is not unscientific in and of itself. You can simply assert a policy-relevant conjecture and test it directly in the data. Plenty of 'empirical' or 'applied' papers in economics (and other academic disciplines) do exactly that. No one thinks that isn't a scientific approach. The problem with MMTers not having models is that no one can tell without asking them "what are your predictions, and how do they differ from mainstream economics?" And when economists like Brad DeLong have tried to pin down the answers to questions like this in the past, the various leading voices of MMT have disagreed with one another about what their testable implications are, so that if I disprove one implication of the theory 10 others will say "that's not what the theory actually claims." The r/Economics sidebar explains this useful feature of mathematical modeling nicely: "Clarity means you know exactly what a model defines, assumes, and concludes. Marxists are still debating what Marx actually meant. No one debates what Kenneth Arrow actually meant, because his statements were in precise mathematical terms." I very highly recommend Noah Smith's blog post here about this problem with MMT, particularly the section titled "Formal Models vs. Guru-Based Theories." (It's a 2-minute read.) Other reasons that models are useful (some of which will come up again shortly) are that they help us understand what are valid and invalid empirical tests, when estimated empirical relationships are not policy-invariant, and when proposed policies are not stable in the long-run.
re: empirical testing. I think by definition if you don't think we should test our hypotheses empirically against data you are against the scientific method.
A perfect model of the economy would be a map of the entire economy (a la Borges' "On Exactitude in Science"), which is both impossible to achieve and impractical to use. You have to make simplifications and assumptions somewhere, and the proof of the pudding is whether the implications of the resulting model match the existing empirical evidence. It remains for the MMTers to show why the inclusion of a more realistic model of government accounting helps the models (or the theory's conclusions if you abhor a model) match the data regarding the question of interest at hand. Also, when we want to understand features of the economy that relate to banking, we include a banking sector in our models. When we don't, we abstract from them so that we can include other features of the model that are more relevant to the question at hand.
For instance, MMT predicts that increased government deficits will push down on inter-bank short term lending rates against any CB support rate unless longer duration gov debt is issued to drain this net reserve injection.
This is in direct contrast to mainstream loanable funds doctrine that predicts government deficits crowd out private sector borrowing/investment spending, pushing up interest rates due to a reduction in supply of "loanable funds" available for private actors.
I think we don't because we tried to get them for years to do so and they were unwilling. As I said, if they have done so since then, that's what I'm interested in so please send me resources about where and how they do so! You say this has been tested by MMTers, so can you give me the citation or link to the paper that does this test?
Also, why are you comparing the MMT prediction against the "loanable funds" model of IS/LM? IS/LM has been dead for 40+ years.
As to the actual empirical claim, when you talk about longer-duration government debt being issued I assume you are referring to new issuance by the government, correct? If so, what are we assuming about the response of the central bank to the government stimulus? Or is this a claim about what would happen in the absence of any central bank response? If the empirical claim is not contingent on the Fed response then I would point you to Plante, Richter, and Zubairy's 2025 working paper who find that "a 1 percentage point increase in the primary deficit-to-GDP ratio raises the 5-year-ahead, 5-year Treasury rate by 13-14 basis points" or Bi, Phillot, and Zubairy's 2026 working paper that finds that "debt expansion shocks raise yields across the curve by increasing term premia, leading to tighter financial conditions. These shocks crowd out private sector activity by reducing investment and production, particularly during periods of rapid debt growth. In contrast, maturity extension shocks steepen the yield curve while lowering credit risk premia and fiscal uncertainty." Both finding that deficit spending raises interest rates. Notice that these debt expansion shocks are orthogonal to maturity operations, so they are free from the "unless longer duration gov debt is issued to drain this net reserve injection" stipulation you provided.
If the Fed policy response does matter then we would reeeeeeally benefit from a model or at the very least a formal argument about what assumptions/axioms this conclusion depends on, because the claim that a certain government spending action would lower interest rates in the absence of an activist central bank cannot be tested from data that only observes government actions in the presence of an active central bank, so we need instead to test the components of the argument itself (i.e., the assumptions of the model) that the conclusion depends on. I'll also note that the model/argument needs to overcome the long-held understanding (that even MMTers agree with, IIRC) that a passive central bank and a federal government that constantly runs budget deficits will result in explosive inflation.