by Michael Roberts
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.
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