Modern monetary theory – part 1: Chartalism and Marx

Modern monetary theory (MMT) has become flavour of the time among many leftist economic views in recent years.  The new left-wing Democrat Alexandria Ocasio-Cortez is apparently a supporter; and a leading MMT exponent recently discussed the theory and its policy implications with UK Labour’s left-wing economics and finance leader, John McDonnell.

MMT has some traction in the left as it appears to offer theoretical support for policies of fiscal spending funded by central bank money and running up budget deficits and public debt without fear of crises – and thus backing policies of government spending on infrastructure projects, job creation and industry in direct contrast to neoliberal mainstream policies of austerity and minimal government intervention.

So, in this post and in other posts to follow, I shall offer my view on the worth of MMT and its policy implications for the labour movement.  First, I’ll try and give broad outline to bring out the similarities and difference with Marx’s monetary theory.

MMT has its base in the ideas of what is called Chartalism.  Georg Friedrich Knapp, a German economist, coined the term Chartalism in his State Theory of Money, which was published in German in 1905 and translated into English in 1924. The name derives from the Latin charta, in the sense of a token or ticket. Chartalism argues that money originated with state attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenize debt.

Chartalism argues that generalised commodity exchange historically only came into being after the state was able to create the need to use its sovereign currency by imposing taxes on the population. For the Chartalist, the ability of money to act as a unit of account for credit/debt depends fundamentally on trust in the sovereign or the power of the sovereign to impose its will on the population.  The use of money as a unit of account for debts/credits pre-dates the emergence of an economy based around the generalised exchange of commodities.  So Chartalism argues that money first arose as a unit of account out of debt and not out of exchange. Keynes was very much a fan of Chartalism, but it is clearly opposed to Marx’s view that money is analytically inconceivable without understanding commodity exchange.

Can the Chartalist/Modern Monetary Theory (MMT) and Marxist theory of money be made compatible or complementary or is one of them wrong? My short answers would be: 1) money predates capitalism but not because of the state; 2) yes, the state can create money but it does not control its price. So confidence in its money can disappear; and 3) a strict Chartalist position is not compatible with Marxist money theory, but MMT has complementary features.

Let me now try to expand those arguments.

Modern monetary theory and the Marxist theory of money are complementary in that both are endogenous theories of money. They both reject the quantity theory of money, namely that inflation or deflation is dependent on the decisions of central banks to pump in credit money or not. On the contrary, it is the demand for money that drives the supply: i.e. banks make loans and as a result deposits and debt are created to fund the loans, not vice versa. In that sense, both MMT and Marxist theory recognise that money is not a veil over the real economy, but that the modern (capitalist) economy is a monetary one through and through.

Both Marx and the MMT guys agree that the so-called quantity theory of money as expounded in the past by Chicago economist Milton Friedman and others, which dominated the policy of governments in the early 1980s, is wrong.  Governments and central banks cannot ameliorate the booms and slumps in capitalism by trying to control the money supply.   The dismal record of the current quantitative easing (QE) programmes adopted by major central banks to try and boost the economy confirms that.   Central bank balance sheets have rocketed since the crisis in 2008, but bank credit growth has not; and neither has real GDP growth.

But the Marxist theory of money makes an important distinction from the MMT guys.  Capitalism is a monetary economy. Capitalists start with money capital to invest in production and commodity capital, which in turn, through the expending of labour power (and its exploitation), eventually delivers new value that is realised in more money capital.  Thus the demand for money capital drives the demand for credit.  Banks create money or credit as part of this process of capitalist accumulation, but not as something that makes finance capital separate from capitalist production.  MMT/Chartalists argue that the demand for money is driven by the “animal spirits‟ of individual agents (Keynesian) or by the state needing credit (Chartalist). In contrast, the Marxist theory of money reckons that the demand for money and thus its price is ultimately set by the pace of accumulation of capital and capitalist consumption.

The theory and history of money

That raises the underlying issue between Modern Monetary Theory, its Chartalist origins and the Marxist theory of money. Marx’s theory of money is specific to capitalism as a mode of production while MMT and Chartalism is ahistorical. For Marx under capitalism money is the representation of value and thus of surplus value. In M-C-P-C’-M’, M can exchange with C because M represents C and M’ represents C’. Money could not make exchange possible if exchangeability were not already inherent in commodity production, if it were not a representation of socially necessary abstract labour and thus of value. In that sense, money does not arise in exchange but instead is the monetary representation of exchange value (MELT), or socially necessary labour time (SNLT).

Marx’s theory analyses the functions of money in a capitalist-commodity economy. It is a historically specific theory, not a general theory of money throughout history, nor a theory of money in pre-capitalist economies. So if it is true that money arose first in history as a unit of account for taxes and debt payments (as the Chartalists and Keynes argue), that would not contradict Marx’s theory of money in capitalism.

Anyway, I have considerable doubts that, historically, state debt was the reason for the appearance of money (I’ll return to that in a future post). David Graeber, the anarchist anthropologist, appears to argue this in his book, 5000 years of debt. But it does not wash well with me. Marx argues that money emerges naturally as commodity production is generalised. The state merely validates the money form – it doesn’t invent it.  Indeed, I think Graeber’s quote from Locke on p.340 in his book summarises the argument well. “Locke insisted that one can no more make a small piece of silver more by relabeling it a ‘shilling’ than one can make a short man taller by declaring there are now fifteen inches in a foot.”

In the classic statement of chartalism, Knapp argued that states have historically nominated the unit of account, and by demanding that taxes be paid in a particular form, ensured that this form would circulate as means of payment. Every taxpayer would have to get their hands on enough of the arbitrarily defined money and so would be embroiled in monetary exchange.  Joseph Schumpeter refuted this approach when he said: “Had Knapp merely asserted that the state may declare an object or warrant or token (bearing a sign) to be lawful money and that a proclamation to this effect that a certain pay-token or ticket will be accepted in discharge of taxes must go a long way toward imparting some value to that pay-token or ticket, he would have asserted a truth but a platitudinous one. Had he asserted that such action of the state will determine the value of that pay-token or ticket, he would have asserted an interesting but false proposition.” [History of Economic Analysis, 1954].  In other words, Chartalism is either obvious and right OR interesting and wrong.

Money as a commodity or out of thin air

Marx argued that money in capitalism has three main functions: as a measure of value, as a means of exchange, and “money as money” which includes debt payments. The function of measure of value follows from Marx’s labour theory of value and this is the main difference with the Chartalists/MMT, who (so far as I can tell) have no theory of value at all and thus no theory of surplus-value.

In effect, for MMT exponents, value is ignored for the primacy of money in social and economic relations.  Take this explanation by one supporter of MMT of its relation to Marx’s value theory: “Money is not a mere “expression” or “representation” of aggregate private value creation. Instead, MMT supposes that money’s fiscal backbone and macro-economic cascade together actualize a shared material horizon of production and distribution…Like Marxism, MMT grounds value in the construction and maintenance of a collective material reality. It accordingly rejects neoclassical utility theory, which roots value in the play of individual preferences. Only, in contrast to Marxism, MMT argues that the production of value is conditioned by money’s abstract fiscal capacity and the hierarchy of mediation it supports. MMT hardly dismisses the pull of physical gravitation on human reality. Rather, it implicitly de-prioritizes gravity’s causality in political and economic processes, showing how the ideal conditions the real via money’s distributed pyramidal structure.”

If you can work through this scholastic jargon, I think you can take this to mean that MMT differs from Marx’s theory of money by saying that money is not tied to any law of value that drags it into place like ‘gravity’ but has the freedom to expand and indeed change value itself.  Money is the primary causal force on value, not vice versa!

In my view, this is nonsense.  It echoes the ideas of French socialist Pierre Proudhon in the 1840s who argued that what was wrong with capitalism was the monetary system itself, not the exploitation of labour and the capitalist mode of production. Here is what Marx had to say about Proudhon’s view in his Chapter on Money in the Grundrisse: “can the existing relations of production and the relations of distribution which correspond to them be revolutionised by a change in the instrument of circulation?” For Marx, “the doctrine that proposes tricks of circulation as a way of , on the one hand, avoiding the violent character of these social changes and on the other, of making these changes appear not to be a presupposition but gradual result of these transformations in circulation” would be a fundamental error and misunderstanding of the reality of capitalism.

In other words, separating money from value and indeed making money the primary force for change in capitalism fails to recognise the reality of social relations under capitalism and production for profit. Without a theory of value, the MMTers enter a fictitious economic world, where the state can issue debt and have it converted into credits on the state account by a central bank at will and with no limit or repercussions in the real world of productive capital, although it is never as simple as it seems.

For Marx, money makes money through the exploitation of labour in the capitalist production process.  The new value created is embodied in commodities for sale; the value realised is represented by an amount of money. Marx started his theory of money as a commodity like gold or silver, whose value could be exchanged with other commodities. So the price or value of gold anchored the monetary value of all commodities. But, if the value or price of gold changed because of a change in the labour time taken for gold production, then so did the value of money as priced in other commodities. A sharp fall in gold’s production time and thus a fall in its value would lead to a sharp rise in the prices of other commodities (Spain’s gold from Latin America in the 16th century) – and vice versa.

The next stage in the nature of money was the use of paper or fiat currencies fixed to the price of gold, the gold exchange standard and then finally to the stage of fiat currencies or ‘credit money’. But, contrary to the view of MMT or the Chartalists, this does not change the role or nature of money in a capitalist economy. Its value is still tied to the SNLT in capitalist accumulation. In other words, commodity money has/contains value while non-commodity money represents/reflects value, and because of this both can measure the value of any other commodities and express it in price-form.

Modern states are clearly crucial to the reproduction of money and the system in which it circulates. But their power over money is quite limited – and as Schumpeter said (and Marx would have said), the limits are clearest in determining the value of money. The mint can print any numbers on its bills and coins, but cannot decide what those numbers refer to. That is determined by countless price-setting decisions by mainly private firms, reacting strategically to the structure of costs and demand they face, in competition with other firms.

This makes the value of state-backed money unstable. Actually, this is acknowledged by the Chartalist theory. According to it, the main mechanism by which the state provides value to fiat money is by imposing tax liabilities on its citizenry and proclaiming that it will accept only a certain thing (whatever that may be) as money to settle those tax liabilities. But Randall Wray, one of most active writers in this tradition, admits that if the tax system breaks down “the value of money would quickly fall toward zero.”  Indeed, when the creditworthiness of the state is seriously questioned, the value of national currencies collapse and demand shifts to real commodities such as gold as a genuine hoard for storing value. The gold price skyrocketed with the start of the current financial crisis in 2007 and another rise of larger scale was propelled in early 2010 when the debt crisis of the southern Euro countries aggravated the situation.

The policy conclusions

I often hear various MMTers saying that “money can be created out of nothing‟. ‘Bank money does not exist as a result of economic activity. Instead, bank money creates economic activity.’ Or this: ‘The money for a bank loan does not exist until we, the customers, apply for credit.’ (Ann Pettifor).  The short reply to this slogan is that “yes, the state can create money, but it cannot set its price”, or value. The price of money will eventually be decided by the movement of capital as fixed by socially necessary labour time.  If a central bank ‘prints’ money or deposits credits with the state accounts, that gives the state the money it needs to launch programmes for jobs, infrastructure etc without taxation or issuing bonds. This is the policy conclusion of the MMT. It is the ‘way out’ of the capitalist crisis caused by a slump in private sector production.

The MMT and Chartalists propose that private sector investment is replaced or added to by government investment ‘paid for’ by the ‘creation of money out of thin air’. But this money will lose its value if it does not bear any relation to value created by the productive sectors of the capitalist economy, which determine the SNLT and still dominate the economy. Instead, the result will be rising prices and/or falling profitability that will eventually choke off production in the private sector. Unless the MMT proponents are then prepared to move to a Marxist policy conclusion: namely the appropriation of the finance sector and the ‘commanding heights’ of the productive sector through public ownership and a plan of production, thus curbing or ending the law of value in the economy, the policy of government spending through unlimited money creation will fail.  As far as I can tell, MMT exponents studiously avoid and ignore such a policy conclusion – perhaps because like Proudhon they misunderstand the reality of capitalism, preferring ‘tricks of circulation’; or perhaps because they actually oppose the abolition of the capitalist mode of production.

Of course, none of this has been tested in real life, as MMT policy has never been implemented (nor for that matter, has Marxist policy in a modern economy).  So we don’t know if inflation would explode from creating money indefinitely to fund investment programmes. MMT people say ‘monetising the deficit’ would be ended once full employment is reached. But that begs the question of whether the private sector in an economy can be subjected to the fine manipulation of central bank and state policy. History has shown that it is not and there is no way governments can control the capitalist production process and prices of production ‟in such a finely managed” way.

Even leading MMT man Bill Mitchell is aware of this risk. As he put it in his blog, “Think about an economy that is returning from a recession and growing strongly. Budget deficits could still be expanding in this situation, which would make them obviously pro-cyclical, but we would still conclude the fiscal strategy was sound because the growth in net public spending was driving growth and the economy towards full employment. Even when non-government spending growth is positive, budget deficits are appropriate if they are supporting the move towards full employment. However, once the economy reached full employment, it would be inappropriate for the government to push nominal aggregate demand more by expanding discretionary spending, as it would risk inflation.” (my emphasis).

It seems that MMT eventually just boils down to offering a theory to justify unrestricted government spending to sustain and/or restore full employment. That’s its task, no other. This is why it attracts support in the left of the labour movement.  But this apparent virtue of MMT hides its much greater vice as an obstacle for real change.  MMT says nothing about why there are convulsions in capitalist accumulation, except that the state can reduce or avoid cycles of boom and slump by a judicious use of government spending within a capitalist-dominated accumulation process. So it has no policy for radical change in the social structure.

The Marxist explanation is the most comprehensive as it integrates money and credit into the capitalist mode of production but also shows that money is not the decisive flaw in the capitalist mode of production and that sorting out finance is not enough.  Thus it can explain why the Keynesian solutions do not work either to sustain economic prosperity.

In future posts. I’ll look more closely at the history of money and monetary theory; and at the international implications of MMT, particularly in the so-called emerging economies.