In my first post on Modern Monetary Theory (MMT), I offered a general analysis of the theory, its similarities and differences with Marx’s theory of money; and some of the policy implications of the MMT and its usefulness for the labour movement.
In this post, I want to delve deeper into the analytics of MMT. As I said in the first post, MMT is the child of what is called Chartalism, namely that money is historically the creation of the state and not, as mainstream neoclassical theory claims, an extension from barter trading; or in the Marxist view that money appears with the emergence of markets and commodity production (“Money necessarily crystallises out of the process of exchange, in which different products of labour are in fact equate with each other, and thus converted into commodities…. as the transformation of the products of labour into commodities is accomplished, one particular commodity is transformed into money.” – Marx Capital Vol 1).
I won’t tackle whether Chartalism is an accurate historical account of the emergence of money. Instead, let me refer you to an excellent short account of the history of money by Argentine Marxist economist, Rolando Astarita, here. Astarita has also analysed MMT in several posts on his blog, and I shall draw on some of his arguments. Suffice it to say that to argue that money only arose because the role of the state in pre-capitalist economies is not borne out by the facts.
Nevertheless, MMT starts with the conviction that it is the state (not capitalist commodity relations) that establishes the value of money. Leading MMTer Randall Wray argues the money takes its value not from merchandise “but rather from the will of the State to accept it for payment”. Chartalist founder Knapp says: “money is a creature of the law”; “The denomination of means of payment according to the new units of value is a free act of the authority of the State”; and “in modern monetary systems the proclamation [by the State] is always supreme”. Thus the modern monetary system “is an administrative phenomenon” and nothing more.
Keynes also backed this Chartalist view. In his Treatise on Money, Keynes says: “the Chartalist or state money was reached when the State assumed the right to declare which account money is to be considered money at a given moment”. So “the money of account, especially that in which debts, prices and general purchasing power are expressed, is the basic concept of the theory of money”. I don’t think it is correct to say that MMT bastardises Keynes (as one comment on my first post argues) – on the contrary, MMT and Keynes are in agreement that money is a product of state creation as the state decides the unit of account for all transactions.
But deciding the unit of account (eg whether dollars or euros) is not the same as deciding its value for transactions ie as a measure or store of value. MMT supposedly supports the ‘endogenous’ money approach, namely that money is created by the decisions of entrepreneurs to invest or households to spend, and from the loans that the banks grant them for that purpose. So banks make loans and so create money (as issued by the state). Money is deposited by the receivers of loans and then they pay taxes back to the state. According MMT, loans are created by banks and then deposits are destroyed by taxation, in that order. At a simple level, MMT merely describes the way things work with banking and money – and this is what many MMTers argue: ‘all we are doing is saying like it is’.
But MMT goes further. It argues that the state creates money in order to receive it for the payment of taxes. The state can force taxes out of citizens and can decide the nature of the legal tender that serves for money. So money is a product of the state. Thus MMT has a circuit of money that goes: state money – others (non-state entities) – taxes – state money. The state injects money into the private sector, and that money is then reabsorbed with the collection of taxes. According to MMT, contrary to what most of us simpletons think, issuing money and collecting taxes are not alternatives, but actions that merely occur at different times of the same circuit. So if a government runs a fiscal deficit and spends more than it receives in taxes, the non-state sector has a surplus which it can use to invest, spend and employ more. The state deficit can thus be financed by creating more money. Taxes are not needed to finance state spending, but to generate demand for money (to pay taxes!).
But the MMT circuit fails to show what happens with the money that capitalists and households have. In MMT, M (in value) can be increased to M’ purely by state dictat. For Marx, M can only be increased to M’ if capitalist production takes place to increase value in commodities that are sold for more money. This stage is ignored by MMT. The MTT circuit starts from the state to the non-state sectors and back to the state. But this is the wrong way round, causally. The capitalist circuit starts with the money capitalist and through accumulation and exploitation of labour back to the money capitalist, who then pays the state in taxes etc. MMT ignores this. But it shows that money is not exogenous to capitalist economic activity. Its value is not controlled by the state.
MMT creates the illusion that this whole process starts and ends with the government when it really starts within the capitalist sector including the banking system. Taxes cannot destroy money because taxes logically occur after some level of spending on private output occurs. Taxes are incurred when the private sector spends and governments decide to use those taxes to mobilize some resources for the state. Private incomes and spending on resources precede taxes.
Another Chartalist, Tcherneva writes: “Chartalists argue that, since money is a public monopoly, the government has at its disposal a direct way to determine its value. Remember that for Knapp the payments with currency measure a certain number of units of value. For example, if the State required that in order to obtain a high-powered money unit a person must provide one hour of work, then the money would be worth exactly one hour of work. As a monopoly issuer of the currency, the State can determine what the currency will be worth by establishing the terms in which the high-powered money is obtained“(page 18). Tcherneva’s policy of State ‘exogenous pricing’ is pretty similar to the views of 19th century utopian socialist John Gray who reckoned that by issuing bonds that were exogenously priced to represent working time, so economies could deliver growth and full employment – a view that Marx criticised.
Where MMT differs from Keynesian-type fiscal deficit spending is that its proponents see government deficits as permanent in order to drive the economy up and achieve full employment of resources. In this way, the state becomes the “employer of last resort”. Indeed, the MMT exponents claim that unemployment can indeed be solved within capitalism. So there is no need to change the social formations based on private capital. All that is needed is for politicians and economists to recognise that state spending ‘financed’ by money creation can sustain full employment.
MMT proponent Tcherneva writes: “Chartalists propose a policy of full employment in which the state exogenously establishes an important price for the economy, which in turn serves as an anchor for all other prices …. This proposal is based on the recognition that the State does not face operational financial constraints, that unemployment is a result of restricting the issuance of currency, and that the State can exercise an exogenous pricing (exogenous pricing)” This policy conclusion is rather ironic. It leads to a view that full employment can be achieved by the “exogenous” issuance of currency at a fixed price. And yet MMT is prominent in its rejection of the monetarist argument that an exogenous increase in the quantity of money will lead to a boost in economic activity. It seems that MMT also has an exogenous theory of money!
As Cullen Roche, an orthodox Keynesian, put it: “MMT tries to reinvent the wheel and argue that it is the government’s fault (and implicitly, the rest of society’s fault) that you can’t find a job… MMT gets the causality backwards here by starting with the state and working out.” Roche goes on: “The proper causality is that private resources necessarily precede taxes. Without a highly productive revenue generating private sector there is nothing special about the assets created by a government and it is literally impossible for these assets to remain valuable. We create equity when we produce real goods and services or increase the market value of our assets relative to their liabilities via productive output. It is completely illogical and beyond silly to argue that one can just “print” equity from thin air. Government debt is, logically, a liability of the society that creates it. In the aggregate government debt is a liability that must be financed by the productive output of that society.”
One comment on my first post queried my claim that MMT exponents reckon that money can be created out of thin air – this was a distortion of MMT, I was told. The real argument of MMT is that government spending can finance itself by raising economic activity and thus more taxes. I did cite some economists who talked about ‘thin air’ but apparently these were not true MMTers. Well, British tax expert/economist, Richard Murphy, is definitely a supporter of MMT. He expounded that MMT first says “governments can make money out of thin air, at will… MMT then says all government spending is in fact funded by money created in this way, created by central banks on the government’s behalf… MMT logically argues as a consequence that there is no such thing as tax and spend when considering the activity of the government in the economy; there can only be spend and tax.” Similarly, Stephanie Kelton is currently the most followed MMT economist. She argues that governments can expand spending to whatever level necessary to achieve full use of productive resources in an economy by state money because such spending is ‘self-financing’.
Money only has value because if there is value in production to back it. Government spending cannot create that value – indeed some government spending can destroy value (armaments etc). Productive value is what gives money credibility. A productive private sector generates the domestic product and income that gives government liabilities credibility in the first place. When that credibility is not there, then trust in the state’s currency can disappear fast, as we see in Venezuela or Zimbabwe, and even Turkey right now (I’ll come back to this in a future post).
To quote Cullen Roche again: “productive output MUST, by necessity, precede taxes. In this sense it is proper to say that productive output drives money. And if productive output collapses then there is no quantity of men with guns that can force people to pay taxes… So the important point here is that a government is indeed constrained in its spending. It is constrained by the quantity and quality of its private sector’s productive output. And the quantity and quality of income that the private sector can create is the amount of income that constrains the government’s ability to spend.” This is Keynesian terminology: but if we alter the word ‘income’ or ‘output’ to ‘value’, we can get the point in Marxist terms.
Marx’s theory of money concurs with the endogenous approach in so far that it is the capitalist sector that creates the demand for money; to act a means of exchange and a store of value. Banks make loans and create deposits, not vice versa. Indeed, Marx’s theory of money is more consistently endogenous than MMT because it recognises the primacy of the capitalist accumulation process (with banks and markets) in deciding the value of money, not any ‘exogenous’ role of the state. As Astarita puts it: “the fundamental difference between the Marxist approach to money and the Chartalist approach revolves around this single point. In Marx’s conception, money can only be understood as a social relation. In the Chartalist approach, it is an artifice in which essential social determinations are missing…..it “sweeps under the carpet” the centrality of productive work, and the exploitation of work, the true basis on which capitalist society is based.”
The state cannot establish at will the value of the money that is issued for the very simple reason is that, in a capitalist economy, it is not dominant and all-powerful. Capitalist companies, banks and institutions rule and they make decisions on the basis of profit and profitability. As a result, they endogenously drive the value of commodities and money. Marx’s law of value says value is anchored around the socially necessary labour time involved in the overall production of commodities (goods and services), ie by the average productivity of labour, the technologies and intensity of work. The state cannot overcome or ignore this reality.
And it is reality. Let me offer some simple empirical evidence (something MMTers do not do). Government spending in modern economies, particularly the ones that dominate MMT thinking (they don’t have much to say on so-called emerging economies – but I’ll come back to that in the next post), like the US or the UK or the G7, is around 30-50% of GDP. Government investment is only about 3-5% of GDP. This compares with capitalist sector investment of 15-25%, while household spending varies between 55-70% of GDP. The quantity of domestically held government bonds in the US is just 4% of private sector net worth.
I did a small empirical analysis of the relation between government expenditure and unemployment. According to MMT, you would expect that the higher the ratio of government spending in an economy, the lower the unemployment. Well, the evidence shows the opposite! Government spending in France is over 55% of GDP, while it is 39% in Japan and 38% in the US. But which of these three countries has the higher unemployment rate? France 9%; Japan 2.4% and the US 4%. Most advanced capitalist economies with higher government spending ratios had higher unemployment rates. This shows is that there are other reasons than the lack of state spending for the level of unemployment in capitalist economies.
So state issuance is hardly a key driving force of the economy and employment. Of course, MMT exponents sometimes argue that this is the problem – just expand government spending, particularly investment, fund it by ‘issuing money’ and then the state will exogenously overcome or bypass failing capitalist accumulation. But this response immediately begs the question, studiously ignored by MMT, that it is the capitalist sector that runs modern economies, for better or worse, not state money.
Is it realistic for MMT to claim that the only reason modern economies have unemployment is because politicians do not adopt MMT and so let governments spend as much as necessary, backed by issuance of state-controlled money? That is certainly not the view of Keynes or Marx. Keynes reckoned unemployment emerged because of the lack of investment by capitalists; Marx said the same (although the reserve army of labour was the result of capital-bias in capitalist accumulation). The difference between Marx and Keynes was what causes changes in investment. Marx said profitability; Keynes said ‘animal spirits’ or ‘business confidence’. Both saw the faultlines within capitalism: Keynes in the finance sector; Marx in capitalism as a whole. In contrast, MMT reckons it is only the failure to allow the state to expand the issuance of money!
But perhaps the most telling critique of MMT is that, because it has no recognition of the capitalist sector in its circuit of money and only the state and ‘the non-state’, it can tell us nothing about why and how there are regular slumps in production and investment in modern economies. On this issue, MMTers have the same position as orthodox Keynesians: that it may be due to a lack of ‘effective demand’ or ‘animal spirits’ and it is nothing to do with any contradictions in the capitalist mode of production itself. But for MMTers this issue is irrelevant. MMTers take the same view as orthodox Keynesian Paul Krugman, namely that it does not really matter what the cause of a depression is; the main thing is to get out of it with government spending – in the case of Krugman through judicious government spending through bond issuance; in the case of MMT by government spending financed by the issuance of money.
Call me old fashioned, but I think science works best by finding out what causes things to happen to better understand what actions can be usefully applied to prevent them (vaccination for diseases, for example). Blindly hoping that government spending will do the trick is hardly scientific. Indeed, much work has been done by Marxist economics to show that it is the faultlines in the profitability of capital that is the most compelling explanation of recurring crises, not lack of demand or even austerity in public spending. And that implies action to replace completely the profit-making monetary economy.
The answer to unemployment or the end of crises does not lie in the simple recourse of issuing money, as MMT claims. MMT relies on what Marx called “the tricks of circulation” – “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”.
MMT claims that it has an endogenous theory of money, but in reality it has an exogenous one, based on state issuance of money. It claims that government spending can be expanded to any level necessary to achieve full employment through money issuance, without any reference to the productive activity of the non-state economy, in particular the profitability of the capitalist sector. Indeed, according to MMT, capitalism can be saved and achieve harmonious growth and full employment by ‘tricks of circulation’. MMT ignores or hides the social relations of exploitation of labour for profit. And by selling ‘snake oil’ (MMT) instead, it misleads the labour movement away from fundamental change.