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The Modern Monetary Trick
The following article first appeared in print in Salvage #10: The Disorder of the Future, our Spring/Summer 2021 issue. Our back issues are available to buy individually here. Our poetry, fiction and art remains exclusive to the print edition, and our subscribers have exclusive access to some online content, including PDF versions of all issues, and all audio content. New subscriptions can be taken out here. They begin with the next print issue, and give instant access to all subscriber-exclusive content.
Modern monetary theory (MMT) has become the flavour of the time in many leftist circles in recent years. The left-wing Democrat Alexandria Ocasio-Cortez is apparently a supporter; Bernie Sanders’ former economic adviser Stephanie Kelton is a leading exponent and populariser of MMT. In the UK, too, MMT is widely expounded as the foundation of left-wing economic policy in opposition to neoclassical and ‘austerity’ economics. Indeed, as US President Biden applies his fiscal stimulus packages, the idea of funding these through direct central bank financing is no longer considered ‘crackpot’ by the likes of Jay Powell at the Federal Reserve, Gita Gopinath at the IMF, or even Christine Lagarde at the ECB. And some commentators have even argued that the Bank of Japan has, in effect, been adopting MMT for years through its various ‘quantitative easing’ programmes.
MMT has traction in left circles because it appears to offer theoretical support for policies of fiscal spending funded by central-bank money, so that governments can run up budget deficits and public debt without fear of crises. Since the Great Recession, leftist economists have tried to refute the theories of neoliberal mainstream economics that call for balanced government budgets and a reduction in the high levels of public debt. Austerity budgets have slashed welfare benefits and reduced public services, alongside real wage stagnation and a rise in unemployment. Naturally, the labour movement wants to reverse these policies that make working people pay for the failures of the banks and capitalism.
The usual alternative comes from traditional Keynesianism, according to which more government spending (by running deficits on annual budgets) can boost effective demand in the capitalist economy, create jobs and increase wages. And here is where MMT comes in. As leading MMTer Randall Wray puts it, what MMT adds to Keynesian fiscal stimulus policy is a theoretical argument that ‘a sovereign government cannot run out of its own currency’.
Because the state has a monopoly over fixing the unit of account (dollars or euros or pesos), it can create as much money as it needs, distribute it to ‘non-state’ entities, and so boost demand and deliver jobs and incomes. As Stephanie Kelton puts it, ‘the issuer of currency can never run out of money because it can always print or mint more dollars, pesos, roubles, yen, etc.’ So running state budget deficits (and hiking up public sector debt) is not a problem. And because there is nearly always ‘slack’ in capitalist economies, i.e. unemployment and underused resources, there is always room to boost demand, not just temporarily until the capitalist sector takes over again (as in Keynesian policies), but permanently. This, of course, sounds very attractive to the left in the labour movement.
Here, then, is a theoretical justification for unlimited government spending and budget deficits to achieve full employment without touching the sticky sides of the capitalist sector of the economy. All that is necessary is for politicians and governments to recognise the simple fact that the state cannot run out of money. MMT thus provides theoretical support for ‘New Deal’ policies of government spending on infrastructure projects, job creation and industry, in direct contrast to neoliberal mainstream policies of austerity and minimal government intervention.
There are three components to a critique of MMT. The first is theoretical: is MMT correct in its view of how money is created and circulated? The second is practical: is MMT correct to argue that because governments control the issuance of money, they can create as much money as is necessary without worrying about any deficit between government spending and taxes? And third, what is the problem that MMT wants to solve? Is the aim just to end unemployment and establish full employment? What does MMT have to offer in explaining and dealing with regular and recurring slumps in capitalist production; or in explaining the causes of rising inequality, global warming, technological unemployment and financial crashes?
The Theory and History of Money
First, the theory. What is the basis of MMT? What is modern about it, and what is monetary about it? MMT has its origins in the not-so-modern ideas of what is called ‘Chartalism’. Georg Friedrich Knapp, a German economist, coined the term Chartalism in his State Theory of Money, published in German in 1905 and translated into English in 1924. The name derives from the Latin charta, for a token or ticket.
Chartalism claims that money originated with state attempts to direct economic activity, rather than arising from the exchange of commodities between people and communities. It argues that, historically, generalised commodity exchange only came into being after the state created the need to use its sovereign currency by imposing taxes on the population. The use of money as a unit of account for debts/credits, the argument goes, predates the emergence of an economy based around the generalised exchange of commodities. Money first arose as a unit of account out of debt, not exchange. As Knapp puts it: ‘Money is a creature of the law.’
Keynes backed the Chartalist view. In his Treatise on Money, he wrote that:
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.
In a similar vein, leading MMT exponent Pavlina 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..
But is this right? It is true that, through its monopoly, the state may control the unit of account that is used for money. But does that mean it can decide the value of commodities being produced? In his recent Salvage piece on the sadly missed anarchist anthropologist David Graeber, James Meadway points out that in Graeber’s magisterial book, Debt: The First 5000 Years, he makes a different argument. According to Graeber, money emerges prior to the state, and money and debt emerge in the material practices of relationships between people, rather than in the relationship of the state to people. Indeed, Graeber quotes from Locke, summarising a key critique of Chartalism (and MMT). ‘Locke insisted that one can no more make a small piece of silver more by relabelling it a “shilling” than one can make a short man taller by declaring there are now fifteen inches in a foot.’
Joseph Schumpeter, the Austrian School economist and a contemporary of Knapp, got to the heart of a critique of Chartalism when he wrote in his History of Economic Analysis:
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.
In other words, Chartalism is either obvious and right; or interesting and wrong.
This gets to the centre of the difference between MMT’s explanation of the origins of money and that of Marx. 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 based on money as a physical commodity like gold or silver, whose value could be exchanged with other commodities. The price or value of gold anchored the monetary value of all commodities. 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 (as with the huge influx of gold extracted from the mines of Latin America by the conquistadores in the sixteenth century, which led to sharp rise in prices measured in gold) and vice versa.
The next historical stage was the use of paper or fiat currencies fixed to the price of gold, the gold exchange standard. Finally, money reached the stage of fiat currencies or ‘credit money’. Contrary to the view of MMT, this does not change the role or nature of money in a capitalist economy. Its value is still tied to the value as measured in labour time created in capitalist accumulation. In other words, commodity money (gold) represents the value
created in the production time of gold, and thus a unit of gold represents a certain value in labour time. Non-commodity money (paper notes, coin and bank reserves) also represents a certain value, but this time not the production time of gold units, but of the value of all commodities in production. Non-commodity money is fiat money; it represents the value of commodities as decided by the state and thus the value it commands depends on the trust in the state of the holders of that money.
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 it 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.
Indeed, this makes the value of state-backed money unstable, and this is acknowledged by MMT. According to its proponents, 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 as Randall Wray admits, 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 collapses and demand shifts to commodities such as gold as a genuine hoard for storing value.
For Marx, money emerges in society as a universal medium of exchange in trade within and between local communities. As he writes in the Grundrisse (from which all quotations in this paragraph are taken), ‘[t]he circulation of commodities is the original precondition of the circulation of money’). In capitalism, money takes on the role of capital as money buys labour power and means of production for exploitation and the production of value and surplus value. ‘Money itself can exist as a developed moment of production only where and when wage labour exists’. Money represents value created in an economy: ‘It is the comprehensive representation of commodities’. For Marx, money does not emerge from outside the process of exchange in markets or in accumulation of capital. It is not exogenous, coming from the state, as MMT claims; instead, it is deeply endogenous to the capitalist mode of production, the objective of which is to make (more) money. ‘Money does not arise by convention, any more than the state does. It arises out of exchange and arises naturally out of exchange: it is a product of the same’.
As in Capital, Marxist monetary theory reckons that ‘money necessarily crystallises out of the process of exchange, in which different products of labour are in fact equated 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’.
In contrast, MMT starts with the conviction that it is the state, not capitalist commodity relations, that establishes money. Wray argues the money takes its value not from merchandise ‘but rather from the will of the State to accept it for payment’. He echoes Knapp when he says that ‘the denomination of means of payment according to the new units of value is a free act of the authority of the State’; and that ‘in modern monetary systems the proclamation [by the State] is always supreme’. Thus, the modern monetary system ‘is an administrative phenomenon’ and nothing more.
Seemingly contradictory to the Chartalist view that the state creates money, though, MMT supposedly supports an ‘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. 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 to 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 it like it is’.
But MMT actually 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. Thus according to MMT, the circuit of money is: 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, then, creating money and collecting taxes are not alternatives, but merely actions that occur at different moments of the same circuit. In this way, 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 be financed by creating more money. Taxes are not needed to finance state spending, but to generate demand for money (to pay taxes!).
But this MMT circuit fails to show what happens with the money that capitalists and households have. In MMT, money, M, can be increased in value to M’ purely by state dictat. For Marx, by contrast, M can only be increased to M’ if capitalist production takes place to increase value embodied in commodities that are sold on the market for more money. This stage is ignored by MMT. The MMT circuit starts from the state to the non-state sectors and goes back to the state. But, causally, this is the wrong way round,. The capitalist circuit starts with the money capitalist, goes through accumulation and exploitation of labour back to the money capitalist, who then pays the state in taxes, etcetera. This Marxist view is the proper endogenous theory of money, unlike MMT.
MMT creates the illusion – and it is an 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 earns income (profits and wages), and governments decide to tax this income to mobilise some resources for the state. Private incomes and spending on resources precede taxes. Keynesian economist Cullen Roche explains:
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 arrive at the same point in Marxist terms.
The Tricks of Circulation
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. Marx’s theorisation of money as a measure of value derives from his labour theory of value; and this is the main difference between Marx and the Chartalists/MMT supporters, who have no theory of value whatsoever. In effect, for MMT exponents, value is ignored for the primacy of money in social and economic relations. Take this explanation by Scott Ferguson, 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, you can take this to mean that MMT differs from Marx’s theory of money in saying that money is not tied to any law of value that drags it into place like ‘gravity’; instead, it has the freedom to expand and indeed change value itself. Money is the primary causal force on value, not vice versa!
This echoes the ideas of French socialist Pierre Proudhon in the 1840s. He 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, MMTers enter a fictitious economic world – one 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. British tax expert and economist, Richard Murphy, a supporter of MMT, expounds this fiction when he 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.
Keynesian economist, Frances Coppola responds to Murphy thus:
It is entirely incorrect to say that money is ‘spirited from thin air’. It is not … [W]hen banks create a new loan asset, they must also create an equal and opposite liability, in the form of a new demand deposit. This demand deposit, like all other customer deposits, is included in central banks’ measures of broad money. In this sense, therefore, when banks lend, they create money. But this money has in no sense been ‘spirited from thin air’. It is fully backed by a new asset – a loan … [I]n theory a central bank could literally ‘spirit money from thin air’ without asset purchases or lending to banks. This is Milton Friedman’s famous ‘helicopter drop’. The central bank would become technically insolvent as a result, but provided the government is able to tax the population, that wouldn’t matter … the ability of the government to tax the population depends on the credibility of the government and the productive capacity of the economy … So faith in money is, in reality, faith in the government that guarantees it. That in turn requires faith in the future productive capacity of the economy. As the productive capacity of any economy ultimately comes from the work of people, we could therefore say that faith in money is faith in people, both those now on the earth and those who will inhabit it in future. The ‘magic money tree’ is made of people, not banks.
Money only has value if there is value in production to back it. Government spending cannot create that value – indeed some government spending can destroy value (consider the case of armaments, for example). 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 have seen in Venezuela, Zimbabwe and Argentina.
The state cannot establish at will the value of the money that is issued, for the very simple reason 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), that is, by the average productivity of labour, the technologies and intensity of work. The state cannot overcome or ignore this reality.
The Deficit Myth: the Epiphany
That brings us to the second question that I posed: that of practicality. Can governments run permanent budget deficits without any consequences? In her best-selling book The Deficit Myth, Stephanie Kelton explains MMT’s most important conclusion – namely, that it is a myth that if the government runs large budget deficits (i.e. spending more than it gets in tax revenues) and borrows the difference, public sector debt will eventually become unsustainable (i.e. debt repayments and interest will become too much for the government to deal with), leading to sharp increases in taxation or cuts in public spending, and possibly a run on the national currency by foreign creditors.
Kelton argues that ‘governments in nations that maintain control of their own currencies – like Japan, Britain and the United States, and unlike Greece, Spain and Italy – can increase spending without needing to raise taxes or borrow currency from other countries or investors’. The state – national government – controls the unit of currency accepted and used by the public, so it can create any amount of that currency to spend. For Kelton, the state need not issue bonds to borrow from the private sector: it can just digitally ‘print’ the money. Indeed, that is what is happening right now during the Covid-19 pandemic, the argument goes. The US administration and others are spending trillions on paying workers to stay at home, and businesses to go into hibernation. And while it is financing some of this spending by issuing bonds, the Federal Reserve or the Bank of England are still the main purchasers of these bonds and, in effect, printing the money they are spending.
Kelton makes the claim that all MMT supporters make: ‘MMT simply describes how our monetary system actually works. Its explanatory power doesn’t depend on ideology or political party’. Apparently, MMT is just as useful to right-wing Republicans as it is to Marxists. Indeed, the idea that governments can run deficits as they please appeals to both left and right in the capitalist spectrum. As Dick Cheney, the extreme right-wing Vice President under George W Bush, put it when military spending rocketed to fund the invasion of Iraq: ‘Deficits don’t matter.’ Clearly, this supposedly ‘new and modern’ way of looking at public finances and monetary policy isn’t so new at all.
But for Marx, neither the state nor money is exogenous or neutral to the capitalist mode of production. So unlike Kelton’s version of Modern Monetary Theory, Marxist Monetary Theory is ‘ideological’, in this sense, and stands firmly on the side of labour. In recognising that the law of value and the exploitation of labour power determine the value of money, Marxist Monetary Theory explains precisely what MMT obscures: that production is for profit not social need; that it is for exchange value, not use value; and that the monetary system is based on exploitation in production, not the creation of money for taxation. But profit does not touch the MMT.
In her book, Kelton tells readers of her conversion to MMT. The epiphany happened when she visited the ‘father of MMT’, former hedge-fund manager Warren Mosler, at his beach house in the tax-haven US Virgin Islands. Mosler explained that he got his children to do their chores by insisting that they must be taxed, and if they could not pay, then all their privileges would be withdrawn. His tax took the form of his business cards (this was the unit of currency created by Mosler, representing ‘the state’). In order to get these business cards, the children had to carry out tasks. Thus the ‘Mosler state’ created money which the people needed in order to pay taxes. Kelton was overwhelmed by this proof of ‘how the monetary system works’ and became an overnight convert – and, as has been well-observed, converts can be even more fervent than the original prophets. Kelton is now the loudest supporter of MMT, at least in the US.
What Kelton failed to recognise in the Mosler example is that there were chores to be done anyway. Things had to be produced and human labour had to be exerted. The children had to work or the household would go downhill, taxes or no taxes. Moreover, the Mosler household was not producing for exchange with other households, but for consumption within the household. If they were producing for exchange, then the Mosler business cards would have to represent some exchange-value, not just some labour time involved within the Mosler household. The cards would have to be acceptable as a representation of labour time in other households. The Mosler ‘state’ could not decide that.
In Grundrisse, Marx explains why labour chits (like business cards) are not money and cannot operate as money in a capitalist economy, where production (work) is for exchange not for consumption. Take a topical example: during the Covid-19 lockdowns, many airlines cancelling flights tried to avoid refunding customers with money and instead offered vouchers for future travel. Anybody can see that these vouchers are not money, not a universal representation of the exchange value of all flights and other commodities, merely tickets for a particular airline, and so worth only the dollar price of trips with that airline alone. Inside that one airline house, these vouchers are ‘money’ – but nowhere else.
The claim that governments can spend money and run deficits without the constraint of the burden of rising debt is not really new, or radical. Keynesian economic theory has always argued that government deficits and rising public sector debt need not become ‘unsustainable’, as long as the extra spending produced faster economic growth. If real GDP growth is higher than the interest cost on the debt (g>r), then (public) debt can be sustainable. Indeed, this is the argument put forward by mainstream Keynesians, and now even the likes of the IMF and the Fed. All MMT seems to be adding is the claim that governments don’t even need to increase debt in the form of government bonds, as the central bank/state can ‘print’ money to fund spending.
But there are constraints on government spending, that MMT admits to. According to Kelton, ‘the only economic constraints currency-issuing states face are inﬂation and the availability of labor and other material resources in the real economy’. Those are two big constraints, it seems to me. According to MMT, inflation arises after unused capacity in an economy is used up, so that there is full employment of the workforce for given technology. When there is no extra capacity, and supply has reached its limit, more government spending financed by printing money will be inflationary and prices will rise. The state may control and issue the currency, and governments may never run out of it, but the capitalist sector controls technology, labour conditions and the level of skills and intensity of the workforce. In other words, the state does not control the productivity of labour – real value – with its dollar printing. An economy is limited by productivity and the size of the labour force when fully employed, so if the government goes on pumping money in when output cannot be raised further, inflation of commodity prices and/or in speculative financial assets will follow.
And MMT supporters are well aware of this risk. In the words of the leading MMT academic, Bill Mitchell:
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.
He goes on to say that ‘when the level of private sector activity is such that wage-price pressures form as the precursor to an inflationary episode, the government can manipulate fiscal and monetary policy settings (preferably fiscal policy) to reduce the level of private sector demand’.
In other words, the government will cut spending or raise taxes and/or interest rates in traditional mainstream style. As Randall Wray puts it: ‘The solution is to avoid spending more once full employment is reached; and to carefully target spending even before full employment to avoid bottlenecks.’ So we are back to traditional Keynesian macro management, which failed abysmally in the 1970s, when capitalist economies experienced stagflation, that is, simultaneously rising inflation and unemployment. The reason for this failure was that inflation and employment are not under the state’s control in a capitalist economy, but depend on the profitability of capital and the investment decisions of capitalists.
Kelton claims that this is how ‘the British Empire before it was able to effectively rule: conquer, erase the legitimacy of a given people’s original currency, imposed British currency on the colonised, then watched how the entire local economy began to revolve around British currency, interests and power.’ Do we really think that British imperialism worked because it controlled the currency of other nations? Would it not be more accurate to say that because British imperialism imposed its control over many nations through force and conquest, it could exploit a nation’s people and then control their currency? Does the US rule the world because it has the international reserve currency, the dollar; or did the dollar become the international reserve currency because US imperialism dominated the world in trade, technology, finance and military power?
Kelton quotes Mosler that ‘since the U.S. government is the sole issuer of the currency … it was silly to think of Uncle Sam as needing to get dollars from the rest of us.’ That may work for Uncle Sam, but many countries exploited by imperialism do not control their own currencies and are heavily dependent on the decisions of foreign multinationals and financial institutions. Can those governments print money without constraint to spend and tax? Ask Argentina and other emerging economies in the current Covid-19 crisis. Their ‘fiscal space’ is very much constrained by international capital. MMT is no use to them.
If domestic inflation curbs a country’s exports, the MMTers propose to float the currency, which would mean the removal of capital controls and no interference in currency markets. (As Randall Wray says: ‘I’d let the dollar float.’) Again, this might work for the US, where the currency, the dollar, is the international reserve currency, and has to be held by foreign states and companies to do business. But that isn’t the case for smaller capitalist economies, particularly so-called emerging economies. If inflation takes hold because the government is printing pesos, lira or bolivaros without stopping to try and maintain full employment while capitalist production is collapsing, the result will be hyperinflation. And if those currencies are floating without any controls, then the value of the currencies will plummet – as in Argentina and Venezuela.
What this shows is that MMT is very much a US/Australia-oriented theory. Like Keynesian theory and policy, it has no viable application to most economies globally. The state may control the issuance of its currency, but it cannot control its value relative to other currencies or to gold, the world money. If trust in a currency’s value is lost by the holders or potential buyers of that currency, then its value will collapse, heightening inflation.
For Kelton, the inflation constraint allows us to concentrate on the real issue.
MMT asks us to focus on the limits that matter. At any point in time, every economy faces a sort of speed limit, regulated by the availability of its real productive resources – the state of technology and the quantity and quality of its land, workers, factories, machines and other materials. If any government tries to spend too much into an economy that’s already running at full speed, inflation will accelerate.
Exactly! And here the real issue is exposed. How does a capitalist economy expand capacity, investment and production? There are limits on its ability to do that. But MMT does not focus on these ‘limits that matter’, only on the ones that do not matter (so much) – deficits and debt. More important to understand is why there is unused capacity in capitalist economies, and why there are growth stops and regular and recurring slumps. These questions are not dealt with or answered by MMT. Again, according to Kelton, ‘MMT simply describes how our monetary system actually works’. Even if that were true, which I have cast doubt on above, that does not take us very far.
As Cullen Roche, an orthodox Keynesian, puts 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 continues:
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.
It is the profitability of capitalist investment that drives growth and employment, not the size of a government deficit. As the Keynesian Michael Pettis puts it, ‘[t]he bottom line is this: if the government can spend these additional funds in ways that make GDP grow faster than debt, politicians don’t have to worry about runaway inflation or the piling up of debt. But if this money isn’t used productively, the opposite is true.’ So
creating or borrowing money does not increase a country’s wealth unless doing so results directly or indirectly in an increase in productive investment … If US companies are reluctant to invest not because the cost of capital is high but rather because expected profitability is low, they are unlikely to respond … by investing more.
Permanent Deficits and Full employment
This brings me to the third question: what is the aim of MMT? MMT does not touch on the important issues of the failure of capitalism to deliver social needs and the underlying exploitation of the many by the few. On these questions, MMT has nothing to say, and indeed different MMTers have different views. Most, if not all MMTers (like traditional Keynesians), want governments to intervene to meet social needs. Some even support socialist measures to replace the law of value and the capitalist mode of production; others (like Kelton) don’t. Kelton even insists that is not the point of MMT. She simply wants to show that it is a myth that the state cannot run up deficits without consequences. Again, this does not seem very new or radical – nor even correct in all circumstances.
Where MMT does differ 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 be solved within capitalism. So there is no need to change the social formations based on private capital. Politicians and economists only need only realise that state spending ‘financed’ by money creation can sustain full employment.
The key policy that MMTers put forward from that premise is what they call a government job guarantee. Everybody will be guaranteed a job if they want or need it; the government will employ them on projects, or pay for them to get a job. Most people work for capitalist companies or the government, but unemployment remains and can engulf a sizeable section of the workforce. So the government should act as an ‘employer of last resort’. It won’t replace capitalist companies, but instead sweep up those of working age that capital has failed to employ. As Randall Wray puts it: ‘I’d just operate a buffer stock program for labor.’ You could call it a government backstop for capitalism.
Bill Mitchell, the leading MMT economist from Australia, has campaigned tirelessly for the government job guarantee. He describes it as
[a]n open-ended public employment program that offers a job at a living (minimum) wage to anyone who wants to work but cannot find employment … The Job Guarantee jobs would ‘hire off the bottom’, in the sense that the minimum wage would not be in competition with the market-sector wage structure. By not competing with the private market, the Job Guarantee would avoid the inflationary tendencies of old-fashioned Keynesianism, which attempted to maintain full capacity utilisation by ‘hiring off the top’.
Guaranteeing a job for all sounds great. But apparently, it will not be a job paying a ‘living wage’ (a wage that people can live on). No, it will only be a ‘minimum wage’, to make sure that it is not ‘in competition with the market-sector wage structure’. In other words, the likes of Amazon or WalMart, or small retail and leisure businesses, will still be able to go on paying their workers very low wages (at or near the minimum) without interference by any Job Guarantee, because such jobs will be paying less.
This is how the Job Guarantee acts as a backstop for the private sector. It does not replace it. Here is Bill Mitchell again.
The Government operates a buffer stock of jobs to absorb workers who are unable to find employment in the private sector. The pool expands (declines) when private sector activity declines (expands). The JG fulfils this absorption function to minimise the costs associated with the flux of the economy. So the government continuously absorbs into employment workers displaced from the private sector. The ‘buffer stock’ employees would be paid the minimum wage, which defines a wage floor for the economy.
As Mitchell says, ‘[t]o avoid disturbing the private sector wage structure and to ensure the JG is consistent with stable inflation, the JG wage rate is best set at the minimum wage level.’
Back in 1997, when Randall Wray first proposed the policy of a Job Guarantee (‘Government as Employer of Last Resort: Full Employment Without Inflation’), he wrote:
Just as workers have the alternative … [of the JG], so do employers have the opportunity of hiring from the … [JG] pool. This is the primary ‘price stabilisation’ feature of the … [JG] program. If the wage demands of workers in the private sector exceed by too great a margin, the employer’s calculations of their productivity, the alternative is to obtain … [JG] workers at a mark-up over the … [minimum wage]. This will help to offset the wage pressures caused by elimination of the fear of unemployment.
In other words, Wray saw the policy as preserving what Marx would call a reserve army of labour that companies could dip into without the fear of wage-rise demands. ‘It must be remembered that the … [JG] workers are not “lost” as a reserve army of potential employees; rather, they can always be obtained at a mark-up’. Wray even argues that the JG will be better at holding down wage demands than ordinary unemployment benefits are. So back in 1997, the JG was seen as a way of curbing wage rises!
That reminds us of the notorious Hartz labour ‘reforms’ in Germany in the early 2000s that created programmes for the unemployed at the barest minimum wage. The unemployment rate fell but real wages stagnated. While unemployment is at its lowest since German reunification in 1990, some 9.7 per cent of Germans in work still live below the poverty line – defined as income of around €940 per month or less. Indeed, that working-poor figure has grown from 7.5 per cent in 2006 and even surpasses the EU average of 9.5 per cent, according to Eurostat data.
And what sort of jobs will there be in the JG? By definition, they won’t be skilled jobs, as the government will be ‘hiring off the bottom’. But they will be in useful non-profit projects like building roads, bridges or, as Mitchell puts it, ‘socially useful activities, including urban renewal projects and other environmental and construction schemes (reforestation, sand dune stabilisation, river valley erosion control, and the like), personal assistance to pensioners, and other community schemes. For example, creative artists could contribute to public education as peripatetic performers.’
What’s Missing from MMT
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, and no other. This is why it attracts support in the reformist 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. It has no policy for radical change in the social structure.
This is the most telling critique of MMT: that, because it fails to recognise the capitalist sector in its macro model of the circuit of money and instead only focuses on ‘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 these may be due to a lack of ‘effective demand’ or ‘animal spirits’ and have nothing to do with any contradictions in the capitalist mode of production itself. 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. For Krugman, this is through judicious government spending through bond issuance; for MMT, through government spending financed by the issuance of money.
MMT 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 through what Marx calls ‘tricks of circulation’. It is thus, to quote the Grundrisse, ‘a 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’.
But the answer to unemployment or the end of crises does not lie in the simple recourse of issuing money, as MMT claims. MMT ignores or hides the social relations of exploitation of labour for profit. And by selling the snake oil of MMT instead, it misleads the labour movement away from fundamental change.
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 like Covid-19, for example). Blindly hoping that government spending will do the trick is hardly scientific. In contrast, much work has been done by Marxist economics to show that it is the faultlines in the profitability of capital accumulation that are the most compelling explanation of recurring crises, not lack of demand or even austerity in public spending. And this conclusion implies that action must be taken to completely replace the profit-making monetary economy.
Michael Roberts is an economist who worked in the City of London for over 40 years. He is author of several books: The Great Recession: a Marxist View (2009); The Long Depression (2016); and co-editor of World in Crisis (2018). He blogs at: thenextrecession.wordpress.com