Archive for the ‘marxism’ Category

Keynes: socialist, liberal or conservative?

June 5, 2019

James Crotty is emeritus professor of economics at the University of Massachusetts Amherst.  Along with his colleague Sam Bowles, he is one of the few radical heterodox economists to gain tenure at a leading American university.

Crotty’s main contribution to economics has been to try and synthesise Marx and Keynes.  This ended up with Crotty arguing in his 1985 article “The Centrality of Money, Credit, and Financial Intermediation in Marx’s Crisis Theory”, “that Marx’s vision of capitalist crises cannot be understood except in terms of the development of the credit and the financial system, and that his discussion of these ideas anticipated the ideas on financial fragility later developed by Minsky and other Post Keynesians.” (quoted in an interview with JW Mason)  In other words, Marx was really a post-Keynesian Minskyite.

I won’t discuss the validity of that view here because Crotty has a new book out, entitled Keynes Against Capitalism: His Economic Case for Social Liberalism, in which he claims that, far from being a conservative Keynes was in fact a socialist, if not a revolutionary one like Marx.  “Keynes did not set out to save capitalism from itself as many think, but instead reckoned it needed to be replaced by a liberal form of socialism.”

Crotty argues that Keynes’s Liberal Socialism began to take shape in his mind in the mid-1920s, evolved into a more concrete institutional form over the next decade or so, and was laid out in detail in his work on postwar economic planning at Britain’s Treasury during WWII.

In Crotty’s reconstruction, the analysis goes something like this: “Keynes writes in many places that he’s a socialist. He gives speeches to the Labour Party saying ‘I’m a socialist.’ What does he mean? He thinks we need to organize capital investment decisions, bring them all under a board of national investment. And we have to bring together all the sources of savings that are in our economy in one place. And, he goes through all of these incredible, important things you can do with this capital if you can control it. In 1942 or 43, he says if the state can control two-thirds to three-quarters of large-scale capital investment through this national board of investment, we’ll be fine. The only way you can do this is if you drive the interest rate down towards zero, and that’s what you should do. So you have to have strict capital controls, otherwise, people will take their money out.”

Crotty interprets Keynes’ s policy ideas as socialist. “His socialist plan, means, we’re going to have to manage our trade, we should have industrial policies, we should have wage policies, we should have geographical location policies. And all of this to achieve not just full employment, but the creation of arts, the building of cities, the building of housing, and so on. In his socialism, there’s still private markets, but they are small. He keeps saying if we don’t have socialism, we’re going to have chaos, we’re going to have revolution.

But does this view of Keynes the ‘socialist’ really hold water? Crotty argues that it does because Keynes “decisively rejected the traditional theory of perfect competition, applauded the ongoing trend toward increased reliance on public corporations, and argued that the government should not only accept the current movement toward cartels, holding companies, trade associations, pools and other forms of monopoly power, but should proactively assist and accelerate this trend in order to regulate and control it. Keynes argued that an increasing part of the country’s largest and most important private companies were evolving toward a status that could make them as easy to regulate as public corporations.”

As Crotty puts it, Keynes’ central point was that the emerging importance of the system of public and semipublic corporations and associations combined with the evolution of collusive oligopolistic relations in the private sector already provided the foundation for a qualitative increase in state control of the economy.  Crotty concludes “Keynes was unabashedly corporatist.”  Indeed – I would add that his concept of corporatism was not dissimilar to that actually being implemented in fascist Germany and Italy at the time.

And who was to run this corporate capitalist/socialist state?  According to Keynes’ biographer, Robert Skidelsky, it would be “an interconnected elite of business managers, bankers, civil servants, economists and scientists, all trained at Oxford and Cambridge and imbued with a public service ethic, would come to run these organs of state, whether private or public, and make them hum to the same tune.” (Skidelsky 1992, 227-28).

Keynes rejected laissez-faire and “doctrinaire State Socialism” because what is “needed now is neither free-market competition nor quantitative central planning but “regulated competition” (19, 643).  Keynes goes on, “we must also be prepared to experiment with all kinds of new sorts of partnership between the state and private enterprise.  The solution lies neither with nationalisation nor with unregulated private competition; it lies in a variety of experiments, of attempts to get the best of both worlds. The Government must recognise the trend of soundly run business toward trusts and combines.  It must be prepared to recognise their existence as beneficent institutions in right conditions; and it must adopt an attitude towards them at the same time of encouragement and regulation.” (19, 645)  In this way, we “will get the best both of large units and of the advantages that might be expected of nationalisation, whilst maintaining the advantages of private enterprise and decentralised control.”(19, 649).

Keynes’s ‘socialism’ was really the so-called mixed economy of capitalist combines and government control, all run by “an elite of business managers, bankers, civil servants, economists and scientists, all trained at Oxford and Cambridge.”  This is what Crotty describes as ‘liberal socialism’.  For me, it is neither liberal nor socialist; but elitist and capitalist.

What were the practical economic policies of Keynes’ socialism, according to Crotty. Keynes proposed a National Investment Board that would have funds of between 4-8% of GDP to invest to ensure that economies moved in productive directions.  This proposal was part of the Liberal Party Manifesto in 1928 – and not accidentally is now part of the UK Labour Party’s in 2019 under Corbyn and McDonnell.  This apparently, according to Crotty, is what Keynes meant by his famous phrase, the “socialisation of investment”.

But just in case you think that Keynes wanted only his elite to run this corporate capitalist state, he also patronisingly advocated that “To make the worker feel that “he is treated as a partner and not as a mere tool,” (238), (he) proposed that every firm be legally required to form a “Works Council” to facilitate “permanent, regular, and established methods of consultation [between management and labor] in every factory and workshop of substantial size” (472).  Shades of the ‘social market economy’ with its workers councils of modern Germany!

That’s Crotty’s evidence that Keynes was against capitalism and for socialism.  For me, it merely shows that Keynes reckoned that capitalism was no longer a system of ‘perfect competition’ (it never was of course) but had evolved into ‘monopoly capitalism’. And this was a good (‘beneficent’) thing, requiring only the nudging and direction of a ‘wise educated elite (of men)’, dutifully supported by the workers, in order to deliver prosperity for all.

And there is plenty of evidence in Keynes’ writings that he really stood for ‘managed capitalism’, and not socialism by any reasonable definition.  As he wrote: “For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.”

The profit motive must remain: “The loss of profit may be due to all sorts of causes, but short of going over to communism there is no possibility of curing unemployment except by restoring to employers a proper margin of profit.” As Keynes argued that “Economic prosperity is…dependent on a political and social atmosphere which is congenial to the average businessman.” As  American economic historian, Bruce Bartlett explains: “He offered for the economy a hierarchical ideal.  The creative center of the system was the skilled entrepreneur and the goal of policy was to cultivate his skills and ensure his inducement to invest.”

In his later years, Keynes praised the very laissez-faire ‘liberal’ capitalism that he appeared to condemn in the 1920s. In 1944, he wrote to Friedrich Hayek, the leading ‘neo-liberal’ of his time and ideological mentor of Thatcherism, in praise of his book, The Road to Serfdom, which argues that economic planning inevitably leads to totalitarianism.  Keynes wrote: “morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement.”!

And did he stick to his view of ‘socialised investment’ as Crotty claims?  This is what Keynes said in his last years: “If our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards.” So once full employment is achieved, we can dispense with planning and ‘socialised investment’ and return to free markets and mainstream neoclassical economics and policy: “the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’ (‘free’ markets – MR), but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production.”

Keynes was a strong opponent of national economic planning, which was much in vogue after the Second World War. “The advantage to efficiency of the decentralization of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far,” he wrote.

Contrary to Crotty, Bartlett reckons that “Keynes was almost in every respect a conservative, both in philosophy and temperament, although he identifies himself as a liberal throughout his life. His conservatism was largely a function of his class.  When asked why he was not a member of the Labour Party, he replied; “to begin with it is a class party and that class in not my class.. and the class war will find me on the side of educated bourgeoisie.” Conservative icon Edmund Burke was one of his political heroes. Keynes expressed contempt for the British Labour Party, calling its members “sectarians of an outworn creed mumbling moss-grown demi-semi Fabian Marxism.”  He also termed the British Labour Party an “immense destructive force” that responded to “anti-communist rubbish with anti-capitalist rubbish.”

Keynes’ ‘socialism’ was openly designed as an alternative to the dangerous and erroneous ideas of what he thought was Marxism.  State socialism, he said, “is, in fact, little better than a dusty survival of a plan to meet the problems of fifty years ago, based on a misunderstanding of what someone said a hundred years ago.”  Keynes told George Bernard Shaw that the whole point of The General Theory was to knock away the ‘Ricardian’ foundations of Marxism and by that he meant the labour theory of value and its implication that capitalism was a system of the exploitation of labour for profit. He had little respect for Karl Marx, calling him “a poor thinker,” and Das Kapital “an obsolete economic textbook which I know to be not only scientifically erroneous but without interest or application for the modern world.”

John Kenneth Galbraith, the great heterodox economist of the Roosevelt and post-war years, and whose politics were well to the left of Keynes, reckoned, “The broad thrust of his efforts, like that of Roosevelt, was conservative; it was to ensure that the system would survive”.  Keynes’s friend and biographer Harrod tells us that underneath his veneer of trendy liberalism, “Keynes was always deeply conservative. He was not a Socialist. His regard for the middle-class, for artists, scientists and brain workers of all kinds made him dislike the class-conscious elements of Socialism. He had no egalitarian sentiment; if he wanted to improve the lot of the poor…that was not for the sake of equality, but in order to make their lives happier and better.” (without their involvement, we might add.)

It has always been difficult to be sure where Keynes stood on many issues as he changed and adapted his views continually.  Hayek criticised him for this and Keynes replied that “If the facts change, I change my views, don’t you?”  Even so, it seems that Professor Crotty may be on his own in thinking Keynes was an anti-capitalist socialist.

HM Athens: Greeks bearing gifts

May 6, 2019

The first Historical Materialism conference held in Athens was very well attended – making it the biggest of such events in southern Europe and with mostly younger attendees.  As is usual with HM conferences, there was a plethora of papers and sessions on all sorts of subjects around the theme of the conference, Rethinking Crisis, Resistance and Strategy.  It is not possible to review these in this post.  Indeed, I am not even able to consider some very interesting papers in the political economy sessions in this review.

I am going to concentrate on the issues raised in the plenary session where I spoke on the subject of Marx’s relevance to contemporary capitalism.  I was on the platform along with John Milios, Professor of Political Economy at the Technical University of Athens and the author of many books on Marxist economy theory; and Costas Lapavitsas, professor of political economy at SOAS, London.  Both John and Costas were also former Syriza MPs during the Greek debt crisis but broke with the Syriza leadership when the latter capitulated to the Troika.

The contributions from the platform and the floor emerged as a debate on the causes of crises in capitalism in the 21st century.  John Milios’ subject was Marx’s theory of finance in the light of the ‘financialisation’ of capitalism in the neoliberal period.  Costas Lapavitsas’ address was similar.  Both considered financialisation as the key to current crises in capitalism.  In contrast, I argued that the Marx’s law of the tendency of the rate of profit to fall lay at the heart of crises in capitalism and the new developments in finance capital and the global financial crash and the ensuing Great Recession were reactions to that law.

In my presentation (powerpoint here), I argued, in contrast to some Marxists, that Marx did have a coherent theory of crises under capitalism (by that I mean recurrent and regular collapses in investment, production and employment). It was based on Marx’s law of the tendency of the rate of profit to fall.  Moreover, I argued that it was not just enough to interpret Marx’s theory of crisis from his writings and ascertain their relevance; we had to be scientific and test the theory empirically.  I claimed that Marx’s law of profitability was empirically valid, with a host of statistical studies showing this to be the case.  The evidence from many authors showed that the profitability of capital did fall over time (not in a straight line as there were periods of rising profitability after major depressions or wars which had destroyed the value and use of ‘dead’ capital).  Indeed, this is what the recent book, World in Crisis, co-edited with G Carchedi, and containing the empirical work of authors from Europe, North and Latin America and Japan, shows.

Actually, Greek political economy has offered the most important gifts in this empirical confirmation of Marx’s law of profitability and theory of crises.  In World in Crisis, Maniatas and Passas conclude that: “the claims of certain Marxists that the present crisis is not a crisis of profitability seem to be unfounded.” Also, Economakis and Markaki:  “The Greek crisis resurfaced due to the low profitability of capital, a result of a rising OCC.” (from Mavroudeas); Mavroudeas and Paitaridis: “the 2007-8 economic crisis is a crisis a-la Marx (i.e. stemming from the tendency of the profit rate to fall – TRPF) and not a primarily financial crisis and this represents the ‘internal’ cause of the Greek crisis.”.  And even more recently, Tsoulfidis and Paitaridis: “The falling net rate of profit is responsible for this new phase change, the Great Recession.”

From the floor, Professor Michael Heinrich criticised my support for all these empirical gifts that show falling profitability of capital over time.  He reckoned that official statistics were so dubious that the results of these many authors could not be relied on.  Indeed, it may be impossible to use official statistics at all.  Professor Heinrich then argued, as he has done before, that Marx probably dropped his law of profitability in his later years as he never mentioned it in relation to the contradictions in capitalism after 1875.  Readers will know I dispute this claim here.  Heinrich also reckoned that just showing profitability falling did not prove that such a fall was based on Marx’s law (ie through a rising organic composition of capital overcoming any counteracting factors that might raise profitability like a rising rate of exploitation or a cheapening of machinery etc).

But anybody who has read my book, The Long Depression or my more recent book, Marx 200 will see that decomposing the causes of the fall in profitability is carried out in detail.  And in World in Crisis, there is a host of analyses doing the same for different countries.  And what is the conclusion: that the rate of profit falls because, over time, the organic composition of capital rises more than the rate of exploitation or the fall in the value of constant capital.  In a new book, the young Australian Marxist economist, Peter Jones, decomposes very carefully the forces affecting the rate of the profit in the US since the 1930s.  As the graph below from his book shows, it is the organic composition of capital (green bars) that is the main cause of falling profitability.

But most important, Marx’s law of profitability is not just a secular or long-term gradual thing that has no relevance to the cycle of crises in capitalism.  The law is both secular and cyclical.  When profitability falls to such a point that the mass of profit and even total new value stops rising, a collapse in investment and output ensues.  When capital has been reduced (closures, mergers, layoff of labour) sufficiently to restore profitability, then production recovers and the whole cycle begins again.  This is the cycle of profitability that explains regular booms and slumps in modern capitalist economies.

Capitalism is a profit-making economy so it is profit and profitability that decides investment, then output and employment.  The Keynesians say it is the other way round; investment leads profits. But this is back to front.  In my presentation, I offered causal empirical evidence (not just correlations) that profits lead investment, not vice versa.

I argued that Marx’s law of profitability is the underlying cause of recurrent and regular crises.  In his summary, Costa Lapavitsas exclaimed that how could anyone justify that “all the features of capitalist crises can be attributed causally to changes in the rate of profits with just 70 years of changes in profitability stats?”  This accusation of ‘monocausality’ has been levied before at the law of profitability as the foundation of crises – see my debate with Professor David Harvey here. But this accusation does not recognise that there are different levels of abstraction in any scientific analysis of empirical events.

There are proximate causes (at the surface, contingent at the time); but beneath that are ultimate causes (laws) that explain the recurrence of similar events.  Weather can vary from place to place, even within a few kilometres, but the recurrence of rain in an area can be explained by its longitude, the season, and whether it is near the sea or up a mountain.  There are laws for weather.  Weather varies but it keeps coming back!

Each crisis in capitalism may have a different trigger; eg the 1929 crisis was triggered by a stock market crash; 1974 by a hike in energy prices; the same with 1980-2; and of course, the Great Recession was triggered by the bursting of the housing bubble in the US and a credit crunch spread by the use of credit derivatives and other exotic instruments of financial mass destruction (Warren Buffet).  But the regularity and recurrence of these crises requires a more general explanation, a theory or law.

Indeed, it was the profitability crisis of the 1970s in all the major capitalist economies that led to the neoliberal period of deregulation of finance and cheap money to enable banks, financial institutions and non-financial companies to engage in speculation in financial assets so that profits from speculation in the stock and bond markets (what Marx called fictitious capital) was a counteracting factor to the low profitability in the productive (value-creating) sectors of the capitalist economies.  And as profitability still remains low despite the Great Recession, the advanced capitalist economies are now locked into a Long Depression of low investment, productivity and trade, while debt, particularly corporate debt, keeps mounting.

Such was my thesis in a nutshell.  But this was disputed by Milios and Lapavitsas.  John Milios argued that finance had always been at the centre of the circuit of capital.  Capital has a Janus head, namely one side was the capitalist as a functioning productive investor extracting value from labour power; and on the other side was the capitalist as a lender of money for investment.  But in the neoliberal period, the latter half of Janus had now become dominant or both sides had merged.  This has bred an instability, inherent in finance.  ‘Financialisation’ of capitalism in the neoliberal period since the early 1980s now creates the conditions for crises.  Indeed, “it was the financial crisis in the Great Recession that led to the fall in profitability”, not vice versa.

Costas Lapavitsas seemed to offer a similar conclusion.  For Costas, capitalism was now in a second phase of financialisation.  The first was in the late 19th century when German and Austrian banks provided the finance for Austro-German capitalist industry to emerge.  Then it was a capitalism dominated by the finance capital of the banks, as the Marxist Hilferding explained.  But now capitalism is in a second phase of financialisation, where non-financial corporations and non-bank institutions provide credit or raise debt through bond and equity issuance.

Costas showed that financial profits as a share of total profits (at least in the US) had rocketed to over 40% by 2007 and remained much higher than in the 1970s.  Debt had also risen dramatically, particularly public debt.  This had happened because of the deregulation of finance and the switch by banks and other entities from providing funding for productive capital to ‘secondary exploitation’ of the working class through loans and mortgages and control of workers’ savings in pension funds.  This secondary exploitation, if not the major, was the “crucial” form of profit now.  It was this financialisation and secondary exploitation that explains the global financial crash and Great Recession, not Marx’s law of profitability.

Now I have discussed both the theses of ‘financialisation’ and ‘secondary exploitation’ in several previous posts which I cite here. Please read these.  But the gist of my argument against the theses of Milios and Lapavitsas is that they have been mesmerised by the appearance of things on the surface and have ignored the underlying causes beneath. Yes, there has been a significant rise in financial profits and debt, not just public debt, but more important, corporate debt.

Indeed, in my earlier book, The Great Recession, I highlighted these very facts (rising financial profits) as indicators of the coming crash and slump (in 2006, I forecast a crash for 2009-10 – but I was wrong, it came in 2008-9).

Where I disagree with the financialisation thesis is when it wants to replace Marx’s law of profitability with the post-Keynesian theory of financial instability as the cause of crises.  But crises in capitalism predate the 1980s: was the late 19th century depression a result of financial instability for excessive speculation in financial assets?  No.  Was the Great Depression of the 1930s also?  No.  In a chapter in World in Crisis, G Carchedi shows that there have been increasing financial crises since the 1980s, but they did not lead to an investment and production collapse, unless they were accompanied by a fall in productive profits too.  It was the latter (still 60% of all profits at the height of the financial boom of the early 2000s) that was “crucial”, not vice versa.

As Carchedi points out, “the first 30 years of post WW2 Us capitalist development were free from financial crises”. Only when profitability in the productive sector fell in the 1970s, was there a migration of capital to the financial unproductive sphere that during the neo-liberal period delivered more financial crises. “The deterioration of the productive sector in the pre-crisis years is thus the common cause of both financial and non-financial crises… it follows that the productive sector determines the financial sector, contrary to the financialisation thesis.”

Marx’s law of profitability explains the role of credit and debt in a capitalist economy. Credit is clearly essential to investment and the accumulation of capital but, if expanded to compensate for falling profitability and to postpone a slump in production, it becomes a monster that can magnify the eventual collapse. Yes, financial fragility has increased in the last 30 years, but precisely because of the difficulties for global capital to sustain profitability in the productive sectors in the latter part of the 20th century.

Indeed, much of the rise in financial profits and credit in the period leading up to the global financial crash was based on fictitious capital and thus fictitious profits.  When Costas said in the plenary that “what was capital gains if it was not profit”, he breaks from Marx’s view that such gains are fictitious as they are really based on speculation, not exploitation.  And in the Great Recession, these gains disappeared like water in the desert of the collapse in the profits of productive capital.

Marx talked about ‘secondary exploitation’, namely the extraction from the value of labour power by gouging workers’ wages, through interest on loans, various commissions on savings etc.  But the key point is that this was not an alternative form of surplus value.  Value can only be created by labour power and surplus value (overall profit) can only be extracted from the labour power of workers in those sectors that add new value.  If then bankers and others extract for profit a portion of workers earnings by loans etc, or take a portion of capitalist profits through interest and speculation, that is not an extra creation of value, but a redistribution of value.  At least, that is Marx’s law of value.

For me, that banks and other financial institutions have got profits from this ‘secondary exploitation’ does not mean that there is some new stage in capitalism where profit from productive investment has been replaced as “crucial”. Similarly, the increase in financial profits as a share of total profits and the rise of corporate debt and speculation in fictitious capital does not mean that capitalism is in new stage of ‘financialisation’, replacing ‘old-style’ 19th century industrial capitalism. As I said in summarising my presentation: “‘Financialisation’ and/or rising inequality and/or debt are not alternative causes of crises but are themselves explained by Marx’s law of profitability. The Great Recession was a Marx, not a Minsky moment.”

In that sense, my Greek friends on the plenary platform were not delivering new gifts but a Trojan horse to Marxist economic theory.  By reckoning that it is the finance sector that causes instability and crises, and not the capitalist sector as a whole, particularly the productive value-creating sectors, supporters of ‘financialisation’ open the door to reformist policy solutions along Keynesian lines.  This version of Rethinking the Crisis leads to the wrong strategy, in my view.

Costas Lapavitsas courageously offered the meeting some policy solutions for ending financial crashes and ‘secondary exploitation’.  He said we needed to start at the level of ‘national state intervention’ through ‘popular sovereignty’ based on ‘democracy’.  Then we should introduce capital controls to stop the flight of capital and protect the value of the currency.  Then we should set up public banks and a national investment bank.

For me, this programme falls well short of taking control of any capitalist economy so that we can plan production and investment and reduce the power of the market and the law of value.  Ending or curbing ‘secondary exploitation’ and ‘financialisation’ by regulating capital flows and the finance sector is not going to be enough.  A socialist policy must go further than ‘popular sovereignty’ and ‘democracy’.  It means taking over the productive sectors of a capitalist economy from the owners of capital and breaking the law of profitability.  That would be real popular sovereignty.

Invisible Leviathan – Marx’s law of value in the twilight of capitalism

April 6, 2019

My foreword to Invisible Leviathan, by Professor Murray Smith of Brock University, Ontario, Canada, published by Brill in November 2018.   Relevant, I think, to my recent presentation on the contribution of Marx to economics made at the Rethinking Economics conference at Greenwich University, London.

The message of Murray Smith’s book is aptly portrayed by its title, Invisible Leviathan. The book sets out to explain why Marx’s law of value lurks invisibly behind the movement of markets in modern capitalism and yet ultimately explains the disruptive and regular recurrence of crises in production and investment that so damage the livelihoods (and lives) of the many globally.

This book is a profound defence (both theoretically and empirically) of Marx’s law of value and its corollary, Marx’s law of the tendency of the rate of profit to fall, against the criticisms of bourgeois, ‘mainstream’ economics, the sophistry of ‘academic’ Marxists, and the epigones of the classical school of David Ricardo and Adam Smith. As the author points out, even the great majority of ‘left’ commentators concur that the causes of the ‘Great Recession’ of 2007–09 and the ensuing global slump are not to be found in Marx’s theories, but rather in the excessive greed of corporate and financial elites, in Keynes’s theory of deficient effective demand, or in Minksy’s theory of financial fragility. When acknowledged at all, Marx’s value theory and his law of profitability are attacked, marginalised or dismissed as irrelevant.

None of this should be surprising given the main political implication of Marx’s laws: namely, that there can be no permanent policy solutions to economic crises that involve preserving the capitalist mode of production. I am reminded of the debate at the 2016 annual meeting of the American Economics Association between some Marxists (including myself) and leading Keynesian Brad DeLong, who seemed to characterise us as ‘waiting for Godot’ – that is to say, as passive utopians, waiting for collapse and revolution – while he stood for ‘doing something now’ about the deplorable state of capitalism. But as Smith explains so well, it is the ‘practical’ Keynesians who are the real utopians in imagining that actually existing, twenty-first-century capitalism – characterised by crises, war and ‘the avarice and irresponsibility of the rich’ – can still be given a more human and progressive face.

Against the many variants of ‘practical’ economics, Smith’s book sets out to:

uphold Marx’s original analysis of capitalism, not only as the most fruitfully scientific framework for understanding contemporary economic problems and trends, but also as the indispensable basis for sustaining a revolutionary socialist political project in our time. It does so by examining the crisis-inducing dynamics and deepening irrationality of the capitalist system through the lens of Marx’s ‘value theory’ – which, despite the many unfounded claims of its detractors, has never been effectively ‘refuted’ and which continues to generate insights into the pathologies of capitalism unmatched by any other critical theory.

Marxian value theory has been subject to ridicule, distortion and incessant rebuttal ever since it was first expounded by Marx 150 years ago. And the simple reason for this is that value theory is necessarily at the core of any truly effective indictment of capitalism – and essential to refuting its apologists. What truly motivates the ‘Marx critique’ of the bourgeois mainstream is graphically confirmed by the (in)famous argument of Paul Samuelson (the leading exponent of the ‘neoclassical synthesis’ in mainstream economics after World War II) according to which Marx’s value theory is ‘redundant’ as an explanation of the movement of prices in markets. The market, you see, reveals prices, and that is really all we need to know.

It is instructive to note that, shortly after Samuelson’s 1971 broadside against Marx, the (recently deceased) neoclassical economist William Baumol offered a trenchant response to Samuelson’s ‘crude propaganda’. In a paper from 1974, Baumol pointed out quite correctly that Samuelson had entirely misunderstood Marx’s purpose in his discussion of the so-called transformation of values into prices. Marx did not want to show that market prices were related directly to values measured in labour time. Quite the contrary:

The aim was to show that capitalism was a mode of production for profit and profits came from the exploitation of labour; but this fact was obscured by the market where things seemed to be exchanged on the basis of an equality of supply and demand. Profit first comes from the exploitation of labour and then is redistributed (transformed) among the branches of capital through competition and the market into prices of production.

The whole process reveals the ‘Invisible Leviathan’ at work.

Unfortunately, it is not just mainstream economics that has tried to rubbish Marx’s value theory. ‘Post-Keynesians’ like Joan Robinson and neo-Ricardian Marxists like Piero Sraffa and Ian Steedman have also done so. Like Samuelson, they resort to the argument that Marx’s value magnitude analysis is redundant, unnecessary and above all fallacious. As an alternative, Sraffa claimed that prices in capitalist markets can be derived directly from physical output.

Murray Smith demolishes these critiques and revisions, standing firmly on what he calls a ‘fundamentalist’ position that involves a return to both aspects of Marx’s fundamental theoretical programme: the analysis of the form and the magnitude of value, as well as a concern with the relationship of each to the social substance of value: abstract labour. I join him under this banner.

According to Smith:

Marx’s theory of value yields two postulates that are central to his critical analysis of capitalism: 1) living labour is the sole source of all new value (including surplus-value), and 2) value exists as a definite quantitative magnitude that establishes parametric limits on prices, profits, wages and all other expressions of the ‘money-form’. From this flows Marx’s fundamental law of capitalist accumulation: that the tendency of the social capital to increase its organic composition (that is, to replace ‘living labour’ with the ‘dead labour’ embodied in an increasingly sophisticated productive apparatus) must exert a downward pressure on the rate of profit, the decisive regulator of capitalist accumulation.

The book’s theory of capitalist crises rests firmly on Marx’s law of profitability. But, as Smith insists,

Marx’s law of value is merely a ‘necessary presupposition’ of this law of profitability, not a sufficient one. Yet, there is a sense in which the latter stands as a corollary to the former, even if not a theoretically ineluctable one. For capitalism is a mode of production in which the goal of ‘economic activity’ is only incidentally the production of particular things to satisfy particular human needs or wants, while its real, overriding goal is the reproduction of capitalist social relations through the production of value, that ‘social substance’ which is the flesh and blood of Adam Smith’s powerful yet also fallible ‘invisible hand’ – of our ‘Invisible Leviathan’.

And so:

[T]hese laws provide a compelling basis for the conclusion that capitalism is, at bottom, an ‘irrational’ and historically limited system, one that digs its own grave by seeking to assert its ‘independence’ from living labour even while remaining decisively dependent upon the exploitation of living wage-labour for the production of its very life-blood: the surplus-value that is the social substance of private profit.

Smith is by no means content with a purely theoretical defence of Marx’s analysis of capitalism’s Invisible Leviathan; he moves on to empirical verification of the ‘economic law of motion’ of capital as postulated by Marx. I share his view that this is essential. The contrary opinion of certain Marxists is that it is simply impossible to verify Marx’s laws, as the latter are about labour values and official bourgeois data can only detect movements in prices, not values. Moreover, according to this line of thought, statistical verification of Marx’s value-theoretic hypotheses is unnecessary, as the regular recurrence of crises under capitalism is a self-evident fact revealing its obsolescence.

But this is passing the buck. Any authentically scientific socialism demands rigorous scientific analysis and empirical evidence to verify or falsify its theoretical foundations; and Marx himself was the first Marxist to look at data in an effort to confirm his theories. In this connection, Smith writes:

Marxist analysis of the historical dynamics of the capitalist world economy ought not to dispense with serious attempts to measure such fundamental Marxian (value-theoretic) ratios as the average rate of profit, the rate of surplus-value, and the organic composition of capital. To be sure, such attempts can never offer much more than rough approximations. Even so, they are vitally important to charting and comprehending essential trends in the [capitalist mode of production] – trends that can usefully inform, if only in a very general sense, the political-programmatic perspectives and tasks of Marxist socialists in relation to the broader working-class movement.

Murray Smith’s own empirical analysis is original and somewhat controversial. He revives the approach of Shane Mage, whose pioneering empirical work of 1963 on the rate of profit treated the wages of ‘socially necessary unproductive labour’ (SNUL) as a systemic ‘overhead’ cost that should not be regarded as a ‘non-profit’ component of (or absolute ‘deduction’ from) the surplus-value created by productive labour, but rather as a special form of constant capital. In Smith’s view,

by conceptualising SNUL as a necessary systemic overhead cost, the constant-capital approach emphasises that capital’s room for manoeuvre with respect to [persistent problems of valorisation and profitability] is quite limited, giving Marx’s proposition that ‘the true barrier to capitalist production is capital itself’ a somewhat new twist.

And indeed, his analysis of the US capitalist economy (from 1950 to 2013) does reveal a long-term fall in the average rate of profit that is significantly correlated with a secular rise in the organic composition of capital, entirely in accordance with Marx’s view. This hugely important result has been replicated by many other Marxist studies in the last 20 years, several of which appear alongside Smith’s in The World in Crisis, a volume edited by Guglielmo Carchedi and myself. Many are also referenced in my own recent book The Long Depression.1 (It is noteworthy that Smith’s initial empirical study of Marx’s law of the tendency of the rate of profit to fall, employing data on the postwar Canadian economy, was first published in 1991, with an updated version appearing in 1996. The results of those studies, along with some others, are also to be found in the present volume.)

Theory and evidence should lead to practice – which means not ‘waiting for Godot’. At the end of the book, Smith refuses to evade the practical upshot of his theoretical and empirical investigations:

The essential programmatic conclusion emerging from Marx’s analysis is that capitalism is constitutionally incapable of a ‘progressive’, ‘crisis-free’ evolution that would render the socialist project ‘unnecessary’, and furthermore, that a socialist transformation cannot be brought about through a process of gradual, incremental reform. Capitalism must be destroyed root and branch before there can be any hope of social reconstruction on fundamentally different foundations – and such a reconstruction is vitally necessary to ensuring further human progress.

In this bicentennial year of his birth, I can’t help thinking Marx would be pleased. The enemies of his transformative, socialist vision will no doubt be disgruntled.

Michael Roberts


January 2018

Pluralism in economics: mainstream, heterodox and Marxist

April 3, 2019

Last weekend’s Rethinking Economics conference on Pluralism in Economics was excellent.  The organisers at Greenwich Rethinking Economics did a great job in getting together a range of top speakers on many aspects of modern economic ideas: money, inequality, imperialism and gender issues.  They even managed to persuade top economist, Michael Kumhoff at the Bank of England to speak on pluralist developments in economics.  And the turnout for the whole conference rivalled that of more well-known gatherings of radical economics.

But for me the most encouraging development was a separate session on the contribution of Marx to modern economics. Rethinking Economics national and internationally has aimed to widen the scope of economics beyond the mainstream neoclassical orthodoxy which has so signally failed to predict, explain or solve the global financial crash and the ensuing Great Recession.  But up to now, Rethinking’s alternative has been dominated by Keynesian and post-Keynesians with Marxian economics generally absent.

So it was great that I had been invited to present the case for the contribution of Marxist economics, along with Carolina Alves, the Joan Robinson fellow at Girton College, Cambridge. In my presentation (see my PP here The contribution of Marxian economics), I outlined the differences in theory and policy, both micro and macro between mainstream neoclassical economics, the heterodox alternatives (Keynesian, post-Keynesian, institutional and Austrian) and the Marxist.

I see this as three ‘schools’ of thought – something that some participants from the heterodox wing found strange.  Why was Marxian economics not subsumed within the heterodox?  For me, the answer was simple.  There was one thing that unites the mainstream and the heterodox (in every form) and one thing in which Marxian economics stood out: namely the labour theory of value and surplus value.  The neoclassical and all the heterodox from Keynes to Kalecki, Robinson, Minsky, Keen and the MMTers deny the validity and relevance of Marx’s key contribution to understanding the capitalist system: that is it is a system of production for profit; and profits emerge from the exploitation of labour power –  where value and surplus value arises.  Value does not come from marginal utility (individual satisfaction) or marginal productivity (return on factor input) but from exploitation, realised in the sale of commodities for a profit.

Capitalism is a monetary economy where production is for profit, not need.  This glaringly obvious reality is denied by the mainstream (where there is no profit “at the margin”) and also by the heterodox who either accept marginalism or reckon profit comes from ‘monopoly’ or ‘power’ or from ‘financialisation’ – but not from the exploitation of labour power.

For me, Marx’s explanation is not only correct in reality, it is also necessary in order to clarify the very process of accumulation and endemic crisis within capitalism – all other schools of economics fall short on this.  In the session on Marx, Carolina Alves also emphasised the other key aspect of Marx’s contribution to understanding society, namely the materialist conception of history.  ‘Social being determines consciousness’ not vice versa, and technology (the forces of production) and social relations (the ownership of the means of production) determine class struggle and forms of social organisation and ideology.  Contrary to Keynes’ idealist view that bad economics is held in the grip of some defunct economist’s idea, mainstream economics is reduced to an apologia for the status quo of capitalism because economists ultimately work for the material interests of capital, at expense of science.  Thus Marx’s main aim was a ‘critique of political economy’ – to use the subtitle of Capital.

Criticism of Marx’s theory of value, at least as expressed from the audience at the Marx session, was that Marx is outdated: he was okay in explaining the industrial economies of the 19th century and even the exploited labour of the emerging economies now, but he had no relevance to modern service hi-tech worker economies of the advanced capitalist economies.  My answer was: tell that to workers in Amazon.  More generally, exploitation rates in advanced economies are rising, not falling.  The other critique was that Marx could tell us little about what happened in the Soviet Union or China – that’s true to some extent, but then Capital is about capitalism and a critique of political economy, not post-capitalist economies.

That Marx’s value theory is ignored or rejected just as much by heterodox economics as by the mainstream was revealed in the session on the role of money and finance in modern economies.  Jo Michel, a post-Keynesian economist from the University of West of England, gave an excellent and clear account of the role of money. But when he was asked whether any theory of money and credit required the backing of a value theory, he replied (after some hesitation) “probably not”.

Thus money and finance are to be separated from value and commodities and have an autonomous (or even determining) role in capitalism rather than the production of value and surplus value.  This, of course, is exactly where modern monetary theory (MMT) also ends up – divorced from the anchor of value and profit and denying the social relations of capitalist production. The private ownership of the means of production and the exploitation of those who own noting but their labour power is ignored by heterodox, post-Keynesian-MMT analysis. As Jo Michell said, you cannot fix climate change or inequality through monetary action.  I would add, you cannot avoid regular crises in capitalism with just monetary or financial measures.

In the same session, Frances Coppola, a heterodox economics blogger, argued that crises were really the product of too little money chasing too many goods (referring to Irving Fisher’s comment during the Great Depression of the 1930s).  But she reckoned that monetary injections from central banks along the lines of quantitative easing after the Great Recession have failed to get capitalist economies going because banks won’t lend.  There is ‘fear and uncertainty’, which stops banks lending, companies investing and people spending.  This argument rings of the Keynesian idea of low ‘animal spirits’.  Crises and the long depression are the result of changes in the ‘psychology’ of investors and consumers and has nothing to do with the profitability of capital. When asked that, if crises were due to fear and uncertainty, what could we do to get rid of these fears?, she responded that we just have to wait until ‘confidence’ comes back!

Coppola too rejected the need for a theory of value or profit.  Instead Coppola reckoned money was controlled by ‘power structures’ (financial institutions?) and was not related to value.  Indeed, in a previous event organised by Rethinking Economics some years ago, Coppola did a session on value theory where she outrightly rejected Marx’s theory of value in favour of the marginal utility theory of the mainstream.  It seems to me that heterodox schools, in denying Marx’s value theory or the need for any theory of value, end up adopting neoclassical marginalism.

I also attended a session on dependency and imperialism where Ingrid Harvold from the University of York outlined all the variations of so-called dependency theory, namely that the peripheral ‘emerging’ economies are so dependent on the imperialist centre that they cannot develop and grow in any significant way.  There are many variations on the causes of this dependency from falling terms of trade due the different productivities, monopoly control of finance and technology by the imperialist economies, and lower wages and super-exploitation of the ‘south’.

Tony Norfield, author of The City, a book that I have reviewed before, presented his definition of imperialism as monopoly power by top states backed by international institutions like the IMF, World Bank and the UN.  This monopoly power gives the imperialists states better financial access and control of technology.  Norfield demonstrated with his ‘imperialist power index’ that there are really just ten or so countries that can be considered as imperialist with the rest just also-rans.  But he cautioned against the view that finance is all.  Financial power flows from productive and technological power.  Financial crises are a symptom of an underlying crisis in capitalism, when debt gets out of line with the production of value.

Yes, that was my key take-away from this excellent conference.  Marxist political economy stands separate from the mainstream and from heterodox theories because it is grounded on a theory of value based on the exploitation of labour power. This is the key, both to social relations of production and the role of money, but also to the causes of crises and imperialist domination.  Profit is the driving force of investment and production in a capitalist economy and so what happens to profits and the profitability of capital is the determining factor in crises.  Thus crises cannot be permanently expunged from modern economies until the profit-driven capitalist economy is replaced.  Trying to ‘fix’ finance through regulation; or slumps through fiscal or monetary stimulus, as the heterodox focus on, is doomed to failure.

Secular stagnation, monetary policy and John Law

March 16, 2019

Last week, the prestigious Brooking Institution held a conference on the efficacy of monetary policy in stimulating and sustaining economic growth.  At the conference, Larry Summers, former US Treasury secretary and professor at Harvard University and Lukasz Rachel of the Bank of England, presented a paper that aimed to revive, yet again, the idea that the major capitalist economies are locked into ‘secular stagnation’: Our findings support the idea that, absent offsetting policies, mature industrial economies are prone to secular stagnation.”

According this thesis, there is a long-term stagnation in the major capitalist economies.  Despite central banks pushing interest rates down to zero or even below (so that bankers and capitalists are paid to borrow!); and despite central banks printing huge amounts of money to buy bonds and other financial assets (quantitative easing), real GDP growth and investment remain weak.  Although unemployment rates are officially near cycle lows in many countries, inflation is equally low, confounding the traditional Keynesian view that there is a trade-off between employment and inflation (the so-called Phillips curve).

Central bank monetary stimulation has failed, except to promote ‘credit bubbles’ and speculation in financial assets and property. For example, here are the conclusions of a recent study on the impact of the monetary injections of the ECB in Europe: “the efforts of the ECB to hit its inflation target would be more credible if there was convincing empirical evidence that its balance sheet policies are effective at stimulating output and inflation. Our recent research shows that this macroeconomic evidence is still lacking.”

And there is every prospect of another economic slump approaching in which central banks will be powerless to do anything as interest rates are already near zero and the balance sheets of central banks are already at record highs. “Our findings support the idea that, absent offsetting policies, mature industrial economies are prone to secular stagnation. This raises profound questions about stabilization policy going forward.” (Summers and Rachel)

In the FT, Keynesian columnist Martin Wolf echoed the views of Summers and Rachel.  Interest rates are near all-time lows and if you follow the Fisher-Wicksell theory of a ‘natural’ rate of interest that enables full employment, then it now seems that the natural ‘private sector’ interest rate needed to achieve jobs for all who want them has be in negative territory.

Of course, this so-called natural rate is a dubious concept at best.  But even you accept the theory, as it seems many Keynesians want to do [“That is the root of our problem: the natural nominal rate of interest … today is less than zero, and so the Federal Reserve cannot push the market nominal rate of interest down low enough.” Brad DeLong], it just exposes the problem.  Monetary policy has not and will not work in restoring the capitalist economy to a pace of growth that delivers investment and thus sustains jobs at rising real wages.

Indeed, as I have pointed out before, Keynes also realised after the Great Depression continued deep into the 1930s, that his advocacy of low interest rates and even ‘unconventional’ monetary policy (buying government bonds and printing money) was not working: ““I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest… since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest”.  In other words, there is no natural rate of interest low enough to persuade capitalists to borrow and invest if they think the return on that investment would be too low.  You can take a horse to water, but you cannot make it drink.

This week the Bank of Japan monetary committee met and threw up its hands in despair.  After years of central bank ‘unconventional’ monetary easing (buying government bonds to the tune of 100% of GDP!) by printing money, the huge injection of credit into the banks has had no effect in lifting the economy.  As Darren Aw, Asia economist with Capital Economics, remarked: “There is a good chance that Japan’s economy will contract again in Q1 2019, for a third time in five quarters”… Given this, the key question for the Bank of Japan is no longer when it might retreat from its ultra-loose policy stance but whether it can do any more to support the economy.” Thus the first of the PM Abe’s three arrows of economic policy (monetary easing, fiscal stimulus and neoliberal de-regulation) has failed.

Now it’s true that per capita GDP growth in Japan since the end of the Great Recession ten years ago is actually faster than in most other major capitalist economies.  But that is simply because Japan has a sharply falling population.  Real and nominal (before inflation) GDP has been virtually static.  National output has remained more or less the same but there are less people that generate and consume it.  Japan has the lowest working population as ratio to total population in the top 12 economies of the world.

And yet monetary easing is still pushed by Keynesians, especially the more radical ones from the post-Keynesian school, including those following Modern Monetary Theory (MMT).  If the state and/or central bank prints money, it can use that money to stimulate the capitalist economy to get it going.  Money is not so much the root of all evil but the genesis of all that is good, it seems.  This sentiment reminds me of the earliest exponent of the magic of money – or the ‘money fetish’, namely John Law, who around 300 years ago had a unique opportunity to apply money printing to put an economy on its feet.

Ann Pettifor, the left Keynesian exponent of magic money, has called John Law a “much maligned genius whose 1705 account of the nature of money cannot be bettered”.  This proto-Keynesian was the son of a wealthy Scottish goldsmith and banker. Law was born in Edinburgh, proceeding to squander his father’s substantial inheritance on gambling and fast living. Convicted of killing a love rival in a duel in London in 1694, Law bribed his way out of prison and escaped to the Continent.  There Law concentrated on developing and publishing his monetary theory cum scheme, which he presented to the Scottish Parliament in 1705, publishing the memorandum the same year in a tract, Money and Trade Considered, with a Proposal for Supplying the Nation with Money (1705).

Law argued for a central bank to issue paper money backed by ‘the land of the nation’. Echoing the MMT (or is it the other way round?), Law proposed to “supply the nation” with a sufficiency of money. This would vivify trade and increase employment and production. Like MMT, Law stressed money is a mere government creation which had no intrinsic value. Its only function is to be a medium of exchange and not any store of value for the future.

Law was sure that any increased money supply and bank credit would not raise prices and expanding bank credit and bank money would push down the rate of interest (MMT again). To Law, as to Keynes after him, the main enemy of his scheme was the menace of “hoarding,” a practice that would defeat the purpose of greater spending.  So, like the late 19th-century German money fetisher Silvio Gesell, Law proposed a statute that would prohibit the hoarding of money.

Amazingly Law found a supporter for his theories in the regent of France. The regent, the Duke of Orléans, set up Law as head of the Banque Générale in 1716, a central bank with a grant of the monopoly of the issue of bank notes in France. He was made the head of the new Mississippi Company, as well as director-general of French finances. The Mississippi Company issued bonds that were allegedly “backed” by the vast, undeveloped land that the French government owned in the Louisiana territory in North America.

This scheme eventually led, not to a booming economy, but instead to a speculative financial bubble where bonds, bank credit, prices, and monetary values skyrocketed from 1717 to 1720.  Finally, in 1720, the bubble collapsed and Law ended up as a pauper heavily in debt, forced once again to flee the country.  Law was not so much a ‘much maligned genius’ but more “a pleasant character mixture of swindler and prophet” Karl Marx (1894: p.441).  What the Law debacle showed was that the state just issuing money cannot replace the ‘real economy’ of production and trade. Money alone does not create investment or production.

Of course, modern Keynesians (unless they are of the MMT variety) do not promote unending printing of money for governments and the private sector to spend.  That’s because they have been forced to recognise; as John Law found in 1719-20; and as Keynes found in 1933; and as Abe in Japan has found now; and the secular stagnationists also accept, printing money does not work if capitalists and bankers hoard that money or switch it into speculative investments in financial assets.

So what’s the answer?  Well, as Martin Wolf puts it: “The credibility of the “secular stagnation” thesis and our unhappy experience with the impact of monetary policy prove that we have come to rely far too heavily on central banks. But they cannot manage secular stagnation successfully. If anything, they make the problem worse, in the long run. We need other instruments. Fiscal policy is the place to start.”  Yes, it’s back to fiscal stimulus.  But will that work either?

Last year President Trump launched a fiscal stimulus of sorts by cutting taxes for the rich and the big corporations.  It boosted after-tax profits in 2017 sharply and real GDP growth ticked up a little towards 3% a year.  But that boost has been all too fleeting.  US real GDP growth is heading back down to below a 1% rate in this quarter and business investment is also turning down.

One of the policy arrows of Abenomics in Japan was fiscal stimulus.  Indeed, there is no major economy that can match Japan for its government running permanent budget deficits (MMT-style).

Japan: annual budget deficits to GDP (%)

This should be the policy dream of MMT and other post-Keynesians.  But it has not worked in Japan.  Japan has ‘full employment’, but at low wages and with temporary and part-time contracts for many (particularly women).  Real household consumption has risen at only 0.4% a year since 2007, less than half the rate before.  So fiscal stimulus has not worked in Japan which remains in ‘secular stagnation’.

And it did not work in the Great Depression of the 1930s.  After dropping monetary easing as the policy answer to the depression, in the Los Angeles Times on 31 December 1933, Keynes wrote: ‘Thus, as the prime mover in the first stage of the technique of recovery, I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by loans and is not merely a transfer through taxation from existing incomes. Nothing else counts in comparison with this.’   Deficit-financing was the answer.

The Roosevelt regime ran consistent budget deficits of around 5% of GDP from 1931 onwards, spending twice as much as tax revenue.  And the government took on lots more workers on jobs programmes (MMT-style) – but all to little effect.  The New Deal under Roosevelt did not end the Great Depression.  Keynes summed it up “It is, it seems, politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case — except in war conditions,” (from The New Republic (quoted from P. Renshaw, Journal of Contemporary History  1999 vol. 34 (3) p. 377 -364).

Wolf recognises that fiscal policy may also not work. “It is of course essential to ask how best to use those deficits productively. If the private sector does not wish to invest, the government should decide to do so.” So if the ‘private sector’ (ie the capitalist sector) won’t increase investment rates to boost growth despite negative interest rates and despite huge government money injections funded by money printing, the government will have to step in do the job itself, apparently.

Thus, the Keynesian/MMT answer is to act as a backstop to capitalist failure. But the capitalist sector dominates investment decisions and it makes those on the basis of potential profitability, not on the cost of borrowing. Keynes saw it as politically impossible to ensure sufficient investment through government spending – and he was right in a way. Only complete control of the capitalist sector could enable governments to ensure full employment at decent wages. At this point, I’m tempted to repeat the comment of left Keynesian Joan Robinson to MMT/Keynesians: “Any government which had both the power and will to remedy the major defects of the capitalist system would have the will and power to abolish it altogether”.

Macro modelling MMT

March 3, 2019

“The accounting identities equating aggregate expenditures to production and of both to incomes at market prices are inescapable, no matter which variety of Keynesian or classical economics you espouse. I tell students that respect for identities is the first piece of wisdom that distinguishes economists from others who expiate on economics. The second? … Identities say nothing about causation.” James Tobin, leftist Keynesian 1997

Money is ultimately a creation of government—but that doesn’t mean only government deficits determine the level of demand at any one time. The actions and beliefs of the private sector matter as well. And that in turn means you can have budget surpluses and excess demand at the same time, just as you can have budget deficits and deficient demand.”  Jonathan Portes (orthodox Keynesian).

The increasingly abstruse debate among economists (mainstream, heterodox and leftist) continues on the validity of Modern Monetary Theory (MMT) and its relevance for economic policy.  The debate among leftists went up another gear with the publication of leftist Doug Henwood’s fierce critique of MMT in Jacobin here. Leading MMTer Randall Wray angrily responded to Henwood’s attempted demolition here. And then from the heart of MMT land, Pavlina Tcherneva, program director and associate professor of economics at Bard College and a research associate at the Levy Economics Institute replied to Henwood in Jacobin.

In the mainstream, Paul Krugman had a go, with a response from Stephanie Kelton.  Kelton is a professor of public policy and economics at Stony Brook University, Long Island New York. She was the Democrats’ chief economist on the staff of the U.S. Senate Budget Committee and an economic adviser to the 2016 presidential campaign of Senator Bernie Sanders.

Although this debate is getting very arcane and even nasty, it is not irrelevant because many leftists in the labour movement have been attracted by MMT as theoretical support for opposing ‘austerity’ and for justifying significant government spending to obtain full employment and incomes.  In particular, the radical wing of the Democrat party in the US has used MMT to support their call for a Green New Deal – arguing that more government spending on the environment, climate change and health can easily be financed by the issuance of dollars, rather than by more taxes or more government bonds that would raise public debt.

I won’t pitch into the MMT debate as above as I have already spent some ink in three posts trying to critique the theory and policy of MMT from a Marxist viewpoint, with the aim of working out whether MMT offers a way forward to meeting ‘the needs of the many’ (labour) over the few (capital).  And for me, that is the ultimate purpose of such a debate.

All I would add on the current debate among Keynesian, Post-Keynesians and MMTers is that MMTers argue with orthodox Keynesians over whether government spending can create the money to finance it; or taxation and borrowing is needed to create the money to fund government spending.  But as post-Keynesian Thomas Palley puts it: “government spending and taxation occur simultaneously so creation of money via money financed deficits and destruction of money via taxation also occur simultaneously. It is a pointless exercise to try and determine which comes first.”  Marxist analysis would agree.

Instead, in this post I want to look at MMT’s macro model.  In the twitter debate that is viral (at least among economists and activists!), critics of MMT have sometimes argued that MMT is just a series of vague assertions without any rigorous model.  This riled Kelton.  She immediately posted a paper written in 2011 by Scott Fullwiler of Warburg College, another MMT leader (who also recently commented on one of my blog posts).  In this paper, Scott outlined the MMT macro model in some detail.

Basically, he starts off with a Keynes/Kalecki post-Keynesian macro model of aggregate demand.  This model is simply an identity.  There are two ways of looking at an economy, by total income or by total spending and they must equal each other.

Thus National Income (NI) = National Expenditure (NE).

Following the ‘Keynesian Marxist’ Michal Kalecki, we can break this down into:

(NI) Profits + Wages = (NE) Investment + Consumption.  Now there are two sorts of income and two sorts of spending.

If we assume that all Wages are spent then and all Profits are saved, we can delete Wages and Consumption from the identity.  So

Profits = Investment

In the MMT version from Scott, he puts the same macro identity differently, with Investment on the left side of the equality.  Thus.

Investment = Profits

Why?  Because, as we shall see, all post-Keynesian theory argues that it is Investment that leads Profits, not vice versa.

But Scott re-expands the parts on the right-hand side to look at flows, so that wages that are saved are added back with profits to get Private Saving (so assuming some household saving); and he also adds in Government saving (taxation less spending) and Foreign Saving (net imports or current account deficit).

Thus Profits as a separate category disappears into Private Savings and we get:

Investment = Private Saving + (Taxation – Government Spending) + (Imports – Exports)

But then Scott also dispenses with the separate category Investment and converts it into Private Saving less Investment or the Private Sector Surplus.  So now we have Private Sector Savings (Wages saved plus Profits less Investment).  So Scott continues:

Private Sector Surplus = Government Deficit + Current Account Balance


Private Sector Surplus – Current Account Balance = Government Deficit

This is the key MMT identity.  It argues that if the Government deficit rises, then assuming the Current Account balance does not change, the Private Sector Surplus (Wages saved +Profits less Investment) rises.  The MMT conclusion (assertion) is that increasing the Government deficit will increase the Private Sector Surplus . And if we exclude Wages saved (the MMT identity does not) and the Current Account balance, then we have:

Net Profits (ie Profits after Investment) = Government deficit

And we can conclude that Government deficits determine Net Profits ie Profits less Investment.

In the paper Scott then presents a time series graph comparing US Private Net Saving (remember this includes Household net saving) with Government deficits and concludes that “It shows how closely the private sector surplus and the government sector deficit have moved historically, which isn’t surprising given they are nearly the opposing sides of an accounting identity.”

But then Scott says: “What we notice (from these graphs) is that the current rise in the government’s deficit is creating net saving for the private sector.”  But is that how to view the causal direction of these macro identities?  The post-Keynesians reckon that the causal connection is that Investment creates Profits or in the MMT version Government deficits create net profits (private saving).  But in my view, the causal direction of this identity is in reality the opposite, namely that Marxian theory says that Profits create Investment, because Profits come from the exploitation of labour power.

Let us go back to the basic Kalecki identity, Profits = Investment, with Investment back on the right hand side.  Investment (which disappeared in Scott Fulwiller’s model) can be broken down to Capitalist investment and Government investment.

Profits = Capitalist investment + Government investment

Under the Kalecki causation, increasing government investment (by deficits, if you want) will raise Profits (and for that matter, wages too through more employment and wage rates – the post-Keynesian identities just refer to Private Saving and (importantly) do not break that out into Wages saved and Profits).

Thus Profits + Wages saved = Private investment + Government investment

But what if the Kalecki causation is back to front?  What if Profits lead Investment, not vice versa.  Then the identity is:

Profits (because Wages are spent) = Investment (comprising Capitalist investment and Government investment).  We can expand this to cover external flows so that:

Domestic Profits + Foreign Income = Capitalist investment + Government Investment + Foreign Inward Investment

Now assume both Domestic Profits and Foreign Income are fixed. What will happen if Government Investment rises?  Private Investment will fall unless foreign inward investment rockets.

How can government investment/spending be increased without Private (capitalist?) investment falling (being crowded out)?  By running budget deficits, say the post-Keynesians (and MMT).  Borrowing could be done by issuing government bonds (orthodox Keynesian) or by ‘printing money’ ie increasing cash reserves in banks (MMT).  Issuing bonds may reduce Private Investment to boost Government investment, but the credit created would stimulate overall Investment.  Printing Money (MMT) would raise Investment without reducing Private Investment (magic!). MMT/Keynesians will say if Government Investment is not funded by taxes on Domestic Profits but by borrowing with bonds or printing money, then it will not affect profits.  Marxists would say that this is ‘fictitious’ investment that must deliver higher profit at some point. 

All this is because identities do not reveal causation and it is causation that matters.  For the Keynesians, it is the right hand side of the equation (Investment) that causes the left hand side (Profits); namely, that it is capitalist investment and consumption that creates profit.  For MMTers, it is a variant of the same, but netted: Net government investment/spending (deficits after taxes) causes Net Private Savings (Profits and Saved wages after investment).

But in the real world of capitalist production, this is back to front.  Profits lead Investment, not vice versa; and Net Private Savings enable Government deficits not vice versa.  The graphs offered by Scott in his paper of the time series of deficits and net private surpluses can be interpreted with just that causality.  What I read from the first graph is not that the current rise in the government’s deficit is creating net saving for the private sector” (Fullwiler), but the opposite: higher net savings (profits after investment) will produce a higher government deficit or lower surplus.  In other words, when capitalists hoard/save and won’t invest, and that is particularly the case in recessions, then government deficits rise (through lower tax revenues and higher unemployment benefits).  And Scott’s graphs show that the US government deficits reach peaks in all the post-war US recessions and are at their lowest in boom times.

Indeed, if I do the correlations between the government balance and net private savings, there is indeed a very small inverse relation of 0.07; in other words, a larger government deficit is correlated (weakly) with a net private savings surplus.  But if I do the correlation between the government balance and GDP growth, there is a small positive correlation.  In other words, more government surplus/less deficit aligns with more GDP growth, the opposite of the Keynes/Kalecki causation, which suggests that it is growth that leads government balances, not vice versa (see the Portes quote above).

Any causation is also modified by the external account.  Scott’s second graph including the current account shows that a persistent current account deficit (net foreign inflows) from the 1980s helped to fund US government deficits, even though the private sector surplus disappeared in the 2000s.  So the main MMT causation argument is further muddied by foreign income.

We can only really better understand the causal connections if we have Investment isolated and Profits isolated. You see, contrary to the Keynesian/post-Keynesian/MMT view, the Marxist view is that “effective demand” (including government deficits) cannot precede production.  There is always demand in society for human needs.  But it can only be satisfied when human beings do work to produce things and services out of nature.  Production precedes demand in that sense and labour time determines the value of that production.  Profits are created by the exploitation of labour and then those profits are either invested or consumed by capitalists.  Thus, demand is only ‘effective’ because of the income that has been created, not vice versa.

Because the Keynesians/post-Keynesians have no theory of value, they do not recognise this and read their own identity the wrong way round. From a Marxist view, profits are the causal variable.  So if profits fall, then either investment, or capitalist hoarding or the government deficit must fall, or all three.

What is the evidence that profits lead investment and government deficits and not the other way round, as the Keynesians argue?  This blog has provided overwhelming empirical support to the Marxist causal direction. See my paper here which compiles all the compelling empirical research (including my own) that supports the Marxist view that, in a capitalist economy, profits lead investment, which in turn drives GDP growth and employment, while government deficits have little influence.

If the Keynes/Kalecki causation direction is right, then all that we need to do to keep a capitalist economy going is to have more government budget deficits.  If the MMTers are right, all we need to achieve permanent full employment is permanent government deficits (subject to some possible inflation constraint).  What the orthodox Keynesians and the MMTers disagree about is whether these deficits (of government spending over taxes) can and should be financed by issuing government bonds for banks to buy or by the central bank printing money.

The more important question, however, is what drives a capitalist economy.  It is the profitability of capitalist investment that drives growth and employment, not the size of a government deficit. The Keynes/Kalecki/MMT macro models hide behind identities and turn them into causes.  But identities “say nothing about causation” (Tobin).  It’s profits, not government spending, that call the tune.

MMT, Minsky, Marx and the money fetish

February 26, 2019

Recently the former deputy governor at the Bank of Japan Kikuo Iwata argued that Japan must ramp up fiscal spending with any increased public sector debt bankrolled by the central bank.  This ex-governor seems to have adopted Modern Monetary Theory (MMT), or at least a version of Keynesian-style deficit spending as a ‘radical’ (or is it desperate?) answer to the continued failure of the Japanese economy to grow anywhere near its pre-global crash rate.

The very latest data on the Japanese economy make dismal reading.  The best measure of activity in manufacturing, the Nikkei manufacturing PMI, declined to 48.5 in February 2019, the lowest reading since June 2016, as both output and new orders declined at faster rates.  Meanwhile, business confidence weakened for the ninth straight month.  In Q4 2018, Japan’s national output stagnated.  There has been zero growth compared to the end of 2017. That compares with average annual growth of 2% since the 1980s.

Iwata was originally the architect of the BOJ’s massive bond-buying programme dubbed “quantitative and qualitative easing” (QQE).  This was supposed to boost the economy through a massive injection of money supply.  But although the Japanese government continually ran annual government budget deficits, it was to no avail in reviving nominal GDP growth or real household incomes.

Japan’s per capita GDP has been rising, but that’s only because the population is declining and the workforce too.  Personal disposable income has not risen as fast as the economy as a whole in many years—at 1 percentage point less than average GNP growth in the late 1980s.  Japan may have ‘full employment’ but the percentage of the workforce employed on a temporary or part-time basis is up from 19% in 1996 to 34.5% in 2009, together with an increase in the number of Japanese living in poverty.  According to the OECD, the percentage of people in Japan living in relative poverty (defined as an income that is less than 50% of the median) from 12% of the total population in the mid-1980s to 15.3% in the 2000s.

Iwata’s answer to Japan’s ‘secular stagnation’ is to continue with government deficits and spending, but this time financed by just printing money, not issuing bonds. “Fiscal and monetary policies need to work as one, so that more money is spent on fiscal measures and the total money going out to the economy increases as a result,” That’s the only remaining policy option because “the BOJ’s current policy does not have a mechanism to heighten inflation expectations. We need a mechanism where money flows out to the economy directly and permanently.” BoJ bond purchases are just not working, because the banks are hoarding the cash in deposits and reserves and not lending.  They must be by-passed, says Iwata.

This proposal resembles the idea of “helicopter money” – a policy where the central bank directly finances government spending by underwriting bonds. Iwata’s solution to low growth and weak real incomes is just one more variant of the idea that demand must be stimulated to get a capitalist economy going, in this case by just printing more money.

Another variant now in the offing is to create a cashless economy.  You see, people keep hoarding their cash (under the mattress) and not spending while small companies get paid in cash and then hide it from their declared profits by hoarding.  So central banks and governments, in the world of digital and crypto-currencies, have now come up with the idea of abolishing or devaluing cash in favour of digital transactions.

The latest version of this comes from the IMF.  Having tried quantitative easing, as in Japan and elsewhere, and then ‘negative interest rates’ (ie people get paid to borrow money) to boost economies, the idea now is devalue cash.  This is how it goes: “In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.  One option to break through the zero lower bound would be to phase out cash”  How? Make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash.

The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money). E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money. Shops would start advertising prices in e-money and cash separately, just as shops in some small open economies already advertise prices both in domestic and in bordering foreign currencies. Cash would thereby be losing value both in terms of goods and in terms of e-money, and there would be no benefit to holding cash relative to bank deposits. “This dual local currency system would allow the central bank to implement as negative an interest rate as necessary for countering a recession, without triggering any large-scale substitutions into cash.”

This IMF idea comes hard on an actual attempt by a government to ‘devalue’ cash.  Two years ago, the Indian government under Modi overnight abolished high-denomination banknotes. The government claimed the aim was to flush out ill-gotten gains by rich Indians hiding their earnings in cash to avoid tax.  But it was the Hindu poor, in the rural areas particularly, who were most hit by this ‘demonetisation’. Two-thirds of Indian workers are employed in small businesses with less than ten workers – most are paid on a casual basis and in cash rupees The demonetisation was supposed to attack corruption and tax evasion, but it seems to have had little effect on that.  Indeed, lots of rich Indians made ‘private arrangements’ to obtain new bank notes and avoid having to declare monies into bank accounts..

Getting out of a recession or depression by printing money or reducing the value of holding cash has long been a Keynesian-style idea.  Keynes himself was very keen on the ideas of Silvio Gesell, a German merchant, who was minister of finance in the revolutionary government of Bavaria in 1919.  Gesell was convinced that the problems of capitalist depressions like the one in the late 19th century were due to the high interest rate on borrowing.  This encouraged ‘hoarding’.  If that could be stopped, then money would flow into spending and depressions would be overcome.  Keynes reckoned that Gesell’s work contained “flashes of deep insight and who only just failed to reach down to the essence of the matter.”  Keynes was particularly enamored of Gesell’s attempt to establish “an anti-Marxian socialism, a reaction against laissez-faire built on theoretical foundations totally unlike those of Marx in being based on a repudiation instead of on an acceptance of the classical hypotheses, and on an unfettering of competition instead of its abolition. I believe that the future will learn more from the spirit of Gesell than from that of Marx.”  (General Theory).

Gesell’s main policy proposal to end slumps was stamped money. According to this proposal currency notes (though it would clearly need to apply as well to some forms at least of bank-money) would only retain their value by being stamped each month, like an insurance card, with stamps purchased at a post office.  Keynes commented: “The idea behind stamped money is sound. It is, indeed, possible that means might be found to apply it in practice on a modest scale.”  The idea was to devalue cash and force people to spend and thus raise ‘effective demand’ by breaking the ‘liquidity trap’ of money hoarding.

Gesell’s idea has been widely acclaimed by many post-Keynesians.  But unlike them, although Keynes was keen on this ‘trick of circulation’ (to use Marx’s phrase), he saw deficiencies.  One was that Gesell did not realise that capitalist investment was not just governed by the rate of interest on borrowing but also by the rate of profit on investing (what Keynes called the ‘marginal efficiency of capital’).  So he “constructed only half a theory of the rate of interest.”  The other worry was that if cash notes were stamped, then those who wished to hoard would just keep money in bank deposits, gold or foreign currency.  So we were back to square one.  For more on the fundamental differences between Gesell and Marx on money, see here:

All these money theories of crises – the wider exponent of which is so-called financialisation – have one thing in common.  They ignore or deny the law of value, namely that all the things that we need or use in society are the product of human labour power and under a capitalist economy where production is for profit (ie for money over the costs of production), not need, then money represents the socially necessary labour time expended. We see only money, not value, but money is only the representation of value in its universal form, namely abstract labour as measured in socially necessary labour time. It is a fetish to think that money is something that is outside and separate from value.

As Marx puts it: “a particular commodity only becomes money because all other commodities express their value in it” BUT “it seems on the contrary, that all other commodities universally express their values in a particular commodity because it is money. The movement which mediated this process vanishes in its own result, leaving no trace behind. Without having to do anything to achieve it, the commodities find the form of their own value, in its finished shape, in the body of a commodity existing outside and alongside them…. Hence the magic of money. …The riddle of the money fetish is therefore merely the riddle of the commodity fetish, which has become visible and blinding the eyes.”

This is important and not metaphysical gobbledy gook. If Marx is right in his characterisation of money, then we can argue that capitalist production is production for more money (value and surplus value) through the exploitation of the labour force. That means unless more value is created by the labour force, money cannot make more money. Marx was always quick to oppose the fanciful notions that the contradictions which arise from the nature of commodities, and therefore come to the surface in their circulation, can be removed by increasing the amount of the medium of circulation.” (referring to the work of Physiocrat Jean-Daniel Herrenschwand).

It is precisely in the category of interest that Marx reckons the money fetish is strongest.  In interest-bearing capital the “fetish character of capital and the [conception] of this capital fetish [become] now complete“19 (CAP III, Penguin, p.516).  Then it appears that money can make money through interest accrual with no ‘exploitation’ or ‘production’ involved. It is “form without content” (CAP III, p.255). “In M–M’ we have the meaningless form of capital, the [inversion] and [reification] of production relations in their highest degree, the interest-bearing form, the simple form of capital, in which it antecedes its own process of reproduction; […] capacity of money, or of a commodity, to expand its own value independently of reproduction – which is a mystification of capital in its most flagrant form“(CAP III, p.256).

it is this money fetish that dominates the theories of post-Keynesian gurus like the American economist of the 1980s, Hyman Minsky. Minsky’s obsession with money and finance as the cause of crises has been brilliantly exposed in a recent article by Mike Beggs, a lecturer in political economy at the University of Sydney.  Beggs shows that Minsky started off as a socialist, following the ideas of ‘market socialism’ by Oscar Lange.  But he eventually retreated from seeing the need to replace capitalism with a new social organisation, to trying to resolve the contradictions of finance capital within capitalism.

In the 1970s, Minsky contrasted his position from Keynes.  Keynes had called for the “somewhat comprehensive socialization of investment” but went onto to modify that with the statement that “it is not the ownership of the instruments of production which it is important for the State to assume” — it was enough to “determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them.” In the 1970s, Minsky went further and called for the taking over of the “towering heights” of industry and in this way Keynesianism could be integrated with the ‘market socialism’ of Lange and Abba Lerner.

But by the 1980s, Minsky’s aim was not to expose the failings of capitalism but to explain how an unstable capitalism could be ‘stabilised’. Biggs: “His proposals are aimed, then, at the stability problem. ….The expansion of collective consumption is dropped entirely. Minsky supports what he calls “Big Government” mainly as a stabilizing macroeconomic force. The federal budget should be at least of the same order of magnitude as private investment, so that it can pick up the slack when the latter recedes — but it need be no bigger.”

This policy approach is not dissimilar from that of MMT supporters.  Minsky even proposed a sort of MMT job guarantee policy. The government would maintain an employment safety net, promising jobs to anyone who would otherwise be unemployed. But these must be sufficiently low-paid to restrain market wages at the bottom end. The low pay is regrettably necessary, said Minsky, because “constraints upon money wages and labor costs are corollaries of the commitment to maintain full employment.” The discipline of the labor market remains: working people may not fear unemployment, but would surely still fear a reduction to the minimum wage (Beggs).

Thus, by the 1980s, Minsky saw government policy as aiming to establish financial stability, in order to  support profitability and sustain private expenditure. “Once we achieve an institutional structure in which upward explosions from full employment are constrained even as profits are stabilised, then the details of the economy can be left to market processes.” (Minsky).

Minsky’s journey from socialism to stability for capitalist profitability comes about because he and the post-Keynesians deny and/or ignore Marx’s law of value, just as the ‘market socialists’, Lange and Lerner, did.  The post-Keynesians and MMTers deny that profit comes from surplus value extracted by exploitation from the capitalist production process and it is this that is the driving force for investment and employment.  Instead they all have a money fetish. With the money fetish, money replaces value, rather than representing it. They all see money as both causing crises and also as solving them by creating value!  That leads them to ignore the origin and role of profit, except as a residual of investment and consumer spending.

So much for theory.  What about reality?  The reality is that the late 19th century depression did not end because money was pumped into the economy.  But it did end, so why?  In my book, The Long Depression, I explain how Marx’s law of profitability operated and after several slumps, profitability in the major economies was restored to enable a recovery in investment in the 1890s (Chapter 2) followed by increased international rivalry in a period of globalisation (imperialism) that eventually exploded into a world war as profitability began to slip again in the 1910s

The Keynesians (including the MMTers) like to say that the Great Depression was resolved by Keynesian-style monetary easing and fiscal spending.  But the evidence is against this.  In the 1930s, monetary easing (QE etc) failed, something Keynes recognised at the time.  New Deal budget deficits were never applied much but, even so, the New Deal work programmes did not really reduce unemployment or get real incomes up until the war ‘boom’.  Again, see my book, The Long Depression, Chapter 3, where I show that the US economy only recovered once a war economy was imposed with government now dominating investment.

What is different about the Long Depression since 2009 is that, unlike the Great Depression of the 1930s, there are now very low (official) unemployment rates in the major economies. Instead, real incomes are stagnant, while productivity and investment growth is abysmal.  Financial markets are booming but the productive sectors of the economy are crawling along.  And yet the period since 2009 has been accompanied by all sorts of monetary tricks: zero or even negative interest rates, unconventional monetary policy (QE) and now proposals for ‘helicopter money’, unending MMT-style government deficits and a cashless economy (Gesell-style).

As Maria Ivanova has shown, there remains a blind belief that the crisis-prone nature of the latter can be managed by means of ‘money artistry’, that is, by the manipulation of money, credit and (government) debt.  Ivanova argues that the merits of a Marxian interpretation of the crisis surpass those of the Minskyan for at least two reasons. First, the structural causes of the Great Recession lie not in the financial sector but in the system of globalized production. Second, the belief that social problems have monetary or financial origins, and could be resolved by tinkering with money and financial institutions, is fundamentally flawed, for the very recurrence of crises attests to the limits of fiscal and monetary policies as means to ensure “balanced” accumulation.

None of the ‘money fetish’ schemes have worked or will work to get the capitalist economy going.  Instead such measures have just created financial bubbles to the benefit of the richest.  That’s because these “tricks of circulation” are not based on the reality of the law of value.

The Green New Deal and changing America

February 8, 2019

It seems now very opportune that I recently posted three times on my blog my views on Modern Monetary Theory (MMT), an increasingly attractive theory for the left to justify government spending to meet the ‘needs of the many’.  For just this week, left Democrats in the US Congress, led by the rising star Alexandria Ocasio-Cortez (AOC), a member of Democratic Socialists of America, launched what they call the Green New Deal (GND), an alternative programme for a future US government to adopt to provide proper public services in education and health and to deal with global warming and environmental pollution.  And the GND and AOC make clear that funding for these badly needed government programmes can be achieved if we follow the policy conclusions of MMT.

The GND is a welcome attempt to reset the agenda for economic and social policy in favour of labour in America, for the first time since the New Deal of the 1930s.  The GND wants to establish a national health service free to all at the point of use, as exists in most of Western Europe and other advanced capitalist economies.  It wants to introduce free college education and end the heavy burden of student loans placed on working-class people; and it wants to create jobs at decent wages for environmentally sound projects through government investment. Such a programme may be modest and it will bet bitterly opposed by American capital.

The GND preamble notes that “the Federal Government-led mobilizations during World War II and the New Deal era created the greatest middle class that the US has ever seen” and frames the GND as “a historic opportunity to create millions of good, high-wage jobs in the United States.”  Of the GND projects, investment in “community-defined projects and strategies” to increase resilience is the first; repairing and upgrading infrastructure is the second, along with “appropriate ownership stakes and returns on investment, adequate capital (including through community grants, public banks, and other public financing), technical expertise, supporting policies, and other forms of assistance to communities, organizations, Federal, State, and local government agencies, and businesses working on the Green New Deal mobilization.”  So this is a New Deal like the 1930s, but designed for the 21st century to revive public investment, with the returns going back to the public.  GND calls for the US to “meet 100 percent of our power demand through clean, renewable, and zero-emission energy sources.”

Also GND has what are called “aspirations” like “guaranteeing a job with a family-sustaining wage, adequate family and disability leave, paid vacations, and retirement security to all people of the United States.”   In other words, the Job Guarantee as promoted by MMT enthusiasts (see my post).  And more rights for trade unions to organise, “strengthening and protecting the right of all workers to organize, unionize, and collectively bargain free of coercion, intimidation, and harassment.”  Another key aspiration is in “providing all members of society with high-quality health care, affordable, safe and adequate housing, economic security, and access to clean water, air, healthy and affordable food, and nature.”

So the GND involves a federal job guarantee, the right to unionize, action against free trade and monopolies, and universal housing and health care.  In Europe and other advanced capitalist economies, these aspirations are not so radical(although in the neoliberal world, they are increasingly so), but in Trump’s America, where corporate interests are paramount and the main enemy is now ‘socialism’, the GND programme is an anathema.

But it is not just Trump and Wall Street who have thrown up their hands in horror at the GND proposals.  Some orthodox Keynesians have wrung their hands.  Noah Smith, the Keynesian economics blogger and Bloomberg columnist, let out a howl of anguish because he reckoned that GND, as promoted by AOC,”definitely seems to include: 1) universal health care paid for by MMT; 2) trillions of dollars in infrastructure spending paid for by MMT; 3) economic security for those “unwilling to work”, paid for by MMT and makes clear that it will ultimately rely on deficits to pay for the Green New Deal. As justification, it points to the basic ideas of MMT.”  Smith is horrified by this because he considers the ‘nonsense’ of MMT will completely undermine the objectives of the GND.  He wants the Democrat lefts to decide between work-based policies and redistributive policies.

It does seem that AOC and other promoters of the GND programme think that MMT can justify and explain where the money is going to come from to pay for all the aspirations and necessary public investment.  For example, leading MMTer, Stephanie Kelton was asked: “ Can we afford a #GreenNewDealShe replied: Yes. The federal government can afford to buy whatever is for sale in its own currency.”  So there it is. The financing of the GND will apparently be achieved by government spending the necessary money, which it gets by running deficits and ‘printing’ whatever amount of currency required.  Other means of revenue, like taxes, come later (if at all), and issuing government bonds for households or financial institutions to buy is not needed.

What is wrong with this?  Well, I have argued in previous posts that MMT is a novel ‘trick of circulation’ (Marx) that ignores the whole circuit of money that goes from money through capital investment into production for profit and more money.  The MMT argues that we can just start with the state printing money and then all will flow from that – more investment, more production, more incomes, more employment – as though the social relations of capitalism were irrelevant.  MMT will deliver full employment at decent wages, healthcare, education and other public services without interfering with the big banks, the multi-nationals, big pharma and Wall Street.  You see, because the state controls the money (the dollar), then it is all powerful over the likes of Goldman Sachs, Bank America, Boeing, Caterpillar, Amazon, WalMart etc.

Therein lies the danger of MMT as the theoretical and policy support for government spending and running deficits.  Actually, it is not necessary to adopt MMT to deliver the GND programme.  There are many ways to meet the bill.  First, there is the redistribution of existing federal and state spending in the US.  Military and defense spending in the US is nearly $700bn a year, or around 3.5% of current US GDP.  If this was diverted into civil investment projects for climate change and the environment, and those working in the armaments sector used their skills for such projects, then it would go a long way to meeting GND aspirations.  Of course, such a switch would incur the wrath of the military, financial and indsustrial complex and could not be implemented without curbing their political power.

Then there is the redistribution of income and wealth through progressive taxation to raise revenues for extra public spending on the needs of the many.  The Trump administration has made huge cuts in the tax burden for the very rich and the big corporations; and it has encouraged and allowed the salting away of profits into tax havens around the world equivalent to 1-3% of US GDP.  So the proposal by AOC and others to raise the top income tax rate to 70%, along with the idea of Elizabeth Warren to apply a wealth tax on the assets of the very rich, is another direction to go.  The latter could raise up to $275bn a year. Of course, these measures would only scratch at the surface of the grotesque income and wealth inequality in America.  Tax inequality expert Gabriel Zucman reckons that the Warren wealth tax would raise the total effective burden at the very top of the distribution from 3.2% of net worth to only 4.3%. This tax obligation would still be lower than the average burden of 7.2% of net worth paid by most other Americans.

The problem is that is the already high level of inequality in wealth and income before taxation:  the US and the UK have highest degree of inequality in the advanced economies.  The graph below shows inequality before and after tax and transfers.  The US and the UK have the highest inequality before and, although their tax and transfers reduce that inequality considerably, they still remain at the top.  The Scandinavian economies have high inequalities, but redistribute most, to end up with the lowest inequality ratios.

But again, to change things fundamentally on inequality would require a change in very structure of the economy ie capitalism.  Warren, a supporter of capitalism, does not want to do that.  Instead she wants, like other leftists (Joe Stiglitz), just seek to end of the ‘rigging’ of the economy in favour of the rich and the big monopolies.

The real way to find the finance needed to carry out the GND programme would be to deliver more revenues through faster economic growth.  President Trump boasted that his administration would deliver 4% real GDP growth a year from his tax cuts and incentives to the stock market.  Of course, this was an idle boast.  At the end of 2018, US real GDP growth peaked at 3% in the last quarter and is now expected to slow fast (even if the economy avoids an outright recession).  The long-term forecast for US economic growth made by the US Congressional Board Office is just 1.7% a year.  That’s why Trump tax cuts for the rich have already created rising annual federal budget deficits – but something we need not worry about, according to him and to the MMTers.

I am indebted to Scott Fullwiler, a leading MMTer at the Levy Institute, for pointing out in a comment on my blog that MMT experts have simulated their own projections for the cost of delivering full employment at wages above $15 an hour and reckon that it would increase the federal deficit by 1.0-1.5% of GDP annually over the next ten years without incurring any significant rise in inflation. rpr_4_18

Let me be clear, Left Democrats and the supporters of MMT are rightly pushing for measures that really would help ‘the many’ in America.  But, in my view, it will be an illusion to think the GND can be implemented, even in just economic terms, simply by following MMT and printing the dollars required.  Yes, the state can print as much as it wants, but the value of each dollar in delivering productive assets is not in the control of the state where the capitalist mode of production dominates.  What happens when profits drop and a capitalist sector investment slump ensues? Growth and inflation still depends on the decisions of capital, not the state. If the former don’t invest (and they will require that it be profitable), then state spending will be insufficient.

And even accepting that the MMT/Levy projections could be achieved, they would not deliver nearly as much as a doubling of the sustainable US growth rate would generate, which would be over $750bn a year.  That would mean a tripling of investment growth. Over a decade, even a proportion of that would amply meet the financing requirements of the GND. But such a growth rate is impossible to achieve without a substantial change in the economic structure of the US economy. It is not going to happen when the 80% of all investment is done by the capitalist sector and depends on the profitability of capital.  That tells me that the GND is only possible to achieve if 80% of the productive sectors of the economy are socialised and incorporated into federal, state and local plans for investment and production.  That thorny question cannot and should not be ignored by MMTers.

MMT 2 – the tricks of circulation

February 3, 2019

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… “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.

Modern monetary theory – part 1: Chartalism and Marx

January 28, 2019

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.