"Every system that claims to be scientific is based on a formal system (algorithm). The algorithm is a set of tautologies that say nothing about the world. MMT is a macro theory so it begins with Y = C + I + G + (X-M), and transforms this using rules of formation and transformation into the sectoral balance equation, for instance.
The theoretical aspect of the science is the interpretation of the algorithm wrt causality. Macroeconomics needs a microfoundation that reveals the causal mechanisms in terms of individual and group behaviors. This connects the algorithm to reality and enables empirical verification, which is the criterion of truth of hypotheses in science. Explanations and prediction must not only exhibit correlation wrt date, but also be based on a theoretical causal mechanism that explains the why and how underlying observed correlation.
This is where it gets tricky. The big difference between MMT and other macro theories is the mechanism and direction of causation. For example, the ISLM model is base on loanable funds and changes in interest rates, which is basic to monetary policy. Supply side macro is based on investment and changes in taxes. Austrian economics is based on the real business cycle and changes in credit. Post Keynesianism is based on effective demand and changes in income and its distribution. MMT is a sub-school of Post Keynesianism that is based on offsetting changing propensity to consume/save from income with vertical (outside) money.
Different schools of thought attack each other on this basis. This debate reveals strengths and weaknesses in the respective theories. Through debate, often intense and partisan since economics has a normative component, agreement over “laws” is reached. These laws become the norms of the “normal” paradigm that dominates the scientific universe of discourse and doing “normal” science until enough anomalies arise to warrant a scientific revolution. This is basically the Kuhnian view. Hopefully, we are in the midst of such a revolution. When mainstream economists failed to predict and cannot explain a phenomenon like the global financial crisis, it is evident that something is amiss with the paradigm they are operating in terms of.
The normal paradigm in economics is largely the neoclassical (Walrasian) paradigm, with two different schools contending, the monetarist/neoliberal school following Milton Friedman, and the New Keynesian school, following Paul Samuelson, whose goal it was to combine Keynesianism with New Classicalism. Accepting general equilibrium, both schools base their theory on the theoretical concept of “natural rate.” Heterodox schools generally reject this, as did Keynes.
These theories as scientific explanations, as well as and their predictions that are often advanced as policy recommendations, are expressed as equations involving dependent and independent variables. Testing is done by applying data (factual) and hypotheses (counterfactual) to these equations using the relevant variables. Of course, empirical testing requires data, but this is not always possible in social and behavioral sciences, including economics, due to practical considerations.
Admittedly this is a picture painted with broad brush strokes, but I think it conveys the general idea of formalization in relation to scientific theory and how this relates to economics."
One of the things that really appealed to me about Mike's show was how Mike was not content to just simply accept or simply oppose the mainstream economic dogma. Mike would often "wax Philosophic" about not just what market participants were saying, but Mike would often seek to understand why the participants were were saying it. This is uncommon in the media and had a great appeal for me anyways.
Tom here investigates and breaks down some views as to economic causation (the "why") from the points of view of the different schools of economic thought.
This is a huge, deep, scholarly look into what is going on at a basic, human psychological level in the area of macro economics in and around MMT.
For those of us already within the MMT paradigm, understanding the true nature of macroeconomics comes easy to us (it's a gift imo). I'm afraid it does not come that easy to most others, we need to be aware of this. Tom's post here will help us to reach a deeper understanding of where many intellectual opponents of MMT are coming from in their thinking.
(Tom, no one else (literally in the world) is looking at these issues at this deep a level, Resp,)