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An introduction to CDM (Constraint-Driven Macroeconomics)

Author: Dave Broadway
Date: 9th February 2026

Modern economic debate is dominated by the question "How will we pay for it?" Constraint-Driven Macroeconomics (CDM) starts from a more practical and more important question:

"What is stopping us from producing more of what we need?"

CDM is a framework for understanding inflation, public spending, and economic capacity by focusing on real-world bottlenecks - labour shortages, energy limits, supply chains, skills, infrastructure, and institutional delays - rather than abstract financial limits.

It brings together two powerful but under-integrated ideas:

1) Monetary Sovereignty, which explains how governments that issue their own currency actually spend.

2) The Theory of Constraints, which explains how systems are limited by their tightest bottleneck.

Together, they lead to a simple but radical insight:

Inflation is not caused by "too much money", but by spending that pushes against unresolved constraints.

The core problem with conventional economics

Conventional macroeconomics treats the economy as if it were primarily constrained by finance. Budget deficits are seen as risky, public debt is treated as a burden, and inflation is framed as excess demand in general.

As a result, policy relies heavily on interest rates to suppress demand across the whole economy, regardless of where the real pressure lies.

This approach has three major flaws. It misdiagnoses inflation by treating it as a monetary problem rather than a capacity problem. It punishes the wrong actors, such as mortgage holders and productive firms. And it fails to expand supply, meaning inflation often returns later.

CDM replaces this with a system-based view of the economy.

The constraint-first view of the economy

Every real economy is a production system. At any moment, output is limited not by money, but by specific constraints.

These constraints may include shortages of skilled workers, delays in energy and grid connections, planning bottlenecks in housing, trade friction, energy volatility, or blockages in health and care systems.

These constraints determine how much additional spending the economy can absorb without causing inflation.

Spending that pushes against a constraint raises prices. Spending that removes a constraint expands capacity.

This distinction is the foundation of CDM.

Monetary sovereignty: how spending really works

In a monetarily sovereign country such as the UK, the government creates money when it spends and deletes money when it taxes. It does not need taxes or borrowing to fund spending.

This does not mean governments can spend without limit. It means the real limit on spending is not financial, but physical and institutional.

CDM accepts monetary sovereignty as a description of how the system works, but goes further by asking when sovereign spending becomes inflationary and when it does not.

The answer lies in constraints.

Inflation reframed: a constraint failure

Under CDM, inflation occurs when demand grows faster than the economy’s constrained capacity.

This can happen when spending increases without resolving a bottleneck, or when an external shock such as energy prices or import disruption tightens an existing constraint.

Cutting demand does not remove the constraint. It merely suppresses activity until the pressure returns.

By contrast, targeted public investment that removes a constraint increases output, reduces inflationary pressure, improves resilience, and raises living standards.

CDM treats inflation as a diagnostic signal, not a budgeting failure or moral lapse.

What makes CDM different

Constraint-Driven Macroeconomics is neither a case for unlimited spending nor a defence of austerity.

It is a discipline of targeted spending based on three principles. First, identify the binding constraint. Second, assess how that constraint feeds into wider inflation. Third, allocate spending to expand real capacity.

Spending is justified not by ideology, but by measurable capacity gains.

From theory to policy

CDM provides a practical framework for designing non-inflationary public investment, replacing blunt interest-rate policy with precision tools, and understanding why some spending fuels growth while other spending fuels prices.

It explains why some deficits stabilise the economy, some surpluses damage it, some affordable projects fail, and some supposedly unaffordable projects succeed.

Most importantly, it offers a way to manage inflation without sacrificing prosperity.

Why CDM matters now

The global economy is entering an era shaped by energy transition, demographic change, climate adaptation, fragile supply chains, and persistent labour shortages.

These are constraint-driven challenges. Treating them with financial myths and demand suppression guarantees stagnation. Treating them as solvable bottlenecks creates the possibility of sustained, non-inflationary growth.

Constraint-Driven Macroeconomics is a framework designed for that reality.

Want to know more? Take a look at our research paper here.

 

© 2025 AIMS UK — Advisory Initiative on Monetary Sovereignty

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