If it’s Doable, it’s Affordable

Modern Monetary Theory (MMT) continues to make inroads into the mainstream discourse with the appearance of an article by Youssef El-Gingihy in The Independent Online. The article features MMT in connection with the new book by Bill Mitchell and Thomas Fazi, Reclaiming the State. At its recent rate of dissemination, MMT may transition from heterodox to mainstream ahead of expectations.

Although the finer points of MMT can get quite involved, the most basic takeaway is very simple. For societies with currency-issuing governments:

If something can be done, it is “affordable”.

If we have access to the raw materials, the labor power, the skills, the equipment and the facilities needed to produce something, then we can afford to produce it. The cost of doing so is not financial. The cost is a real cost: the exertion of human effort and know-how, the wear and tear on facilities and equipment, and the depletion of natural resources.

On one level, it is bizarre that this basic takeaway of MMT is not already mainstream. If the idea is heterodox, it is only because we are currently living in a very topsy-turvy world, in which up is presented to us as down, black as white, with everything reversed. In reality, it should be much harder to believe the opposite: that what we are capable of is impossible.

A kind of collective dementia has developed, so much so that, as the linked article observes, MMT initially strikes many of us as:

one of those Alice in Wonderland, down the wormhole kind of concepts that neutralises every received wisdom … prepare to be blown away and forget what you think you knew about money.

But what did most of us think we knew about money before encountering MMT or related ideas? Chances are, money seemed confusing, its basic mechanics hazy. In the mental fog, all kinds of superstition could take hold. Fantasies of a currency somehow arising spontaneously out of nature.

It is obvious, once freed from the mental fog, that somebody has to create the currency. It does not grow in the ground or answer to the cycles of the moon. For a currency to exist, it must be issued by its issuer.

It is so obvious, the concept must be heterodox.

But perhaps this will not be the case for much longer. We may be witnessing the early stages of the obvious going mainstream.

From the article:

It therefore appears that Theresa May’s oft-repeated refrain attacking Corbyn on the grounds that there is no such thing as a magic money tree is not exactly true. So if money can basically be created with the press of a button, then suddenly our world appears to be (pace Panglossian disciples) the craziest of all possible worlds.

It is not crazy, of course. It just seems that way to minds conditioned by forty years of neoliberal thinking. The craziest of all possible worlds would be one in which a currency did not originate from its issuer.

In effect, the usual dictum of “tax and spend” is inverted to “spend and tax” with spending stimulating jobs and growth, which can later be taxed. … Taxation is not therefore a way of raising revenue …

Since taxes are settled only in the government’s currency, the settlement of taxes cannot occur before the currency has been issued. Something cannot be destroyed (taxed) before it has been created (issued). Accordingly, taxes cannot be a revenue source for a currency-issuing government. Government spending (or lending) creates the currency that is needed for taxes to be paid.

This in no way implies a reduced significance for taxes. To the contrary, taxes are crucial.

At the most fundamental level, imposition of a tax that can only finally be settled in the currency ensures a willingness, within the community, to accept the currency in exchange for goods and services. This is what makes it possible for government to hire staff or purchase goods and services with its own currency.

The effect is most obvious in the case of taxes unrelated to income. For example, a simple head tax of a fixed amount would require everybody to obtain the currency in order to pay the tax.

But the effect also works when taxes are imposed on income. This is because, for tax purposes, income is assessed in terms of the government’s currency. Income received by members of the community will be assessed in the currency and, above a certain threshold, be subject to tax. Since most people need an income to survive, or depend upon somebody who has an income, the imposition of an income tax ensures demand for the currency in much the same way as the imposition of other taxes.

Taxes also play an important role in moderating the overall level of spending in the economy and can be used to influence behavior.

At this point, you might understandably be asking why on earth we do not just spend our way out of the current mess. And while we are at it – give the NHS more money, shelter the homeless and feed the poor of the world. This is where we come up against the ideological edifice of neoliberalism.

Yes, the obstacle is political, partly due to a collective failure to comprehend the capacities of a currency issuer.

It is not spending, as such, that gets us out of our mess. It is the actual doing of what needs to be done that gets us out of the mess. Running the NHS, sheltering the homeless and feeding the poor are achieved through the employment of appropriately trained staff and use of real resources. But, in a monetary economy, at least in the monetized sectors, the doing fails to occur in the absence of an expenditure of money. A refusal to spend prevents the doing. It is not that the doing is impossible. It can be done, provided the necessary workers and resources are available, as soon as the expenditure is made.

Therefore:

Public spending cannot be unlimited and must be commensurate to the capacity of the economy…

The limit to public spending is the amount of useful things we are capable of doing with the resources we have. Spending beyond that point – the point where we are fully employing our productive capabilities – would be useless, because it would add nothing to production, and would also create excessive inflationary pressure. This is true of any spending, whether public or private. But inside this real constraint, there are no limits other than our capacity for clutching defeat from the jaws of victory (political obstacles).

In other words, a currency-issuing government can always purchase what is available for sale in its own currency. It may or may not be in a position to purchase goods and services available in some other currency. And, of course, things that are currently impossible to supply cannot be purchased in any currency.

But in any case, if we can do it, it is “affordable”.

 
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9 thoughts on “If it’s Doable, it’s Affordable

  1. Good essay, Peter. Nice to see you talking about Functional Finance, which in a sane world would be the bedrock of MMT rather than the controversial JG.

  2. Dan: MMTland is a sane world. Understanding functional finance is the reason why MMTers support the JG and understand the illogic of all objections to the JG, as it is just FF applied to unemployment.

  3. Thanks for the interesting link, Magpie. I remember someone mentioning the book here in a comment, going way back.

    I think the real trick is getting people to believe that it is somehow legitimate for means of production and nature to be privately owned.

    Once it is believed that means of production and nature can be privately owned, I think the deed is done. The money trick (or the wage labor trick) is more disguised than slavery or serfdom, but for any of these systems to persist, it must either be that the private ownership of means of production and nature is widely accepted as legitimate or that the threat or use of brute force is sufficient to enforce it.

  4. I think the real trick is getting people to believe that it is somehow legitimate for means of production and nature to be privately owned.

    Right.

    Marx’s primitive accumulation makes short work of Locke’s just so story about property rights being natural rather than the result of might makes right. Which is why Marx is at the top of the list on the index of forbidden books.

    We have seen how money is changed into capital; how through capital surplus-value is made, and from surplus-value more capital. But the accumulation of capital presupposes surplus-value; surplus-value presupposes capitalistic production; capitalistic production presupposes the pre-existence of considerable masses of capital and of labour power in the hands of producers of commodities. The whole movement, therefore, seems to turn in a vicious circle, out of which we can only get by supposing a primitive accumulation (previous accumulation of Adam Smith) preceding capitalistic accumulation; an accumulation not the result of the capitalistic mode of production, but its starting point.

    This primitive accumulation plays in Political Economy about the same part as original sin in theology. Adam bit the apple, and thereupon sin fell on the human race. Its origin is supposed to be explained when it is told as an anecdote of the past. In times long gone by there were two sorts of people; one, the diligent, intelligent, and, above all, frugal elite; the other, lazy rascals, spending their substance, and more, in riotous living. The legend of theological original sin tells us certainly how man came to be condemned to eat his bread in the sweat of his brow; but the history of economic original sin reveals to us that there are people to whom this is by no means essential. Never mind! Thus it came to pass that the former sort accumulated wealth, and the latter sort had at last nothing to sell except their own skins. And from this original sin dates the poverty of the great majority that, despite all its labour, has up to now nothing to sell but itself, and the wealth of the few that increases constantly although they have long ceased to work. Such insipid childishness is every day preached to us in the defence of property. M. Thiers, e.g., had the assurance to repeat it with all the solemnity of a statesman to the French people, once so spirituel. But as soon as the question of property crops up, it becomes a sacred duty to proclaim the intellectual food of the infant as the one thing fit for all ages and for all stages of development. In actual history it is notorious that conquest, enslavement, robbery, murder, briefly force, play the great part. In the tender annals of Political Economy, the idyllic reigns from time immemorial. Right and “labour” were from all time the sole means of enrichment, the present year of course always excepted. As a matter of fact, the methods of primitive accumulation are anything but idyllic.

    nKarl Marx. Capital. Volume One, Part VIII: Primitive Accumulation, Chapter Twenty-Six: The Secret of Primitive Accumulation

  5. I think the real trick is getting people to believe that it is somehow legitimate for means of production and nature to be privately owned.

    Sure. There are things one could dispute, whether it is money or whatever. Tressell, it seems, was essentially a self-educated man.

    But personally, I think that those questionable things are not really that important, compared to the focus of the exposition: the trick. Imagine the situation as described by the character. As an MMTer did that remind you of somthing? Did it ring a bell?

  6. Sorry to miss your point, Magpie.

    Do you mean it resembles the business-card analogy of how currency acceptance is assured by government coercing non-government into supplying labor power in exchange for the currency? If so, I agree with your point.

  7. Do you mean it resembles the business-card analogy of how currency acceptance is assured by government coercing non-government into supplying labor power in exchange for the currency? If so, I agree with your point.

    Indeed. This could be meaningful.

  8. “currency acceptance is assured by government coercing non-government into supplying labor power in exchange for the currency?”

    This is the only part of MMT that seems counter-intuitive and which history does not seem to support. If it was the desire of government to ‘co-erce’ labour to work for ‘it’ (i.e. government) then why is it that most people actually work for capitalists? Government itself does not benefit from business (or from capitalism) it is a manifestation of it, i.e. the bigger business gets the bigger government must get to counter its effects. If the government wanted people working for it then it would jump on programs like the JG program, although in reality, it provides far more support to the non-profit sector than most people realize and there is much to learn from this because non-profit organizations are the only way by which means of production is diverted away from the private sector.

    I have tried to create some language which I hope economists etc will be able to understand which conveys what I see from my own perspective.

    The first I call the PI:AI ratio, which is the ratio of passive income (passive income includes capitalists etc and pensioners and welfare recipients etc) to active income in any given period. Means of production (MOP) ratio is the privately owned means of production to the available means of production, which is essentially the ‘stock’ version of the PI:AI ratio which is a flow. Means of production also includes labour. Following from this is required productivity (RPy) which is what is required of active workers based on the available MOP less the fee for the use of the privately owned MOP, as a ratio of the needs of the total population.

    An active worker (and unemployed etc) who owns no property, is essentially only required to consume what is necessary to upkeep (maintain) the body etc. Those who own property must also consume what is necessary to upkeep (maintain) the property. Land, housing, vehicles, expensive possessions all require taxes, rates, insurances, registration, etc, so property ownership, like human beings, needs its own economic food to keep going.

    As soon as any person must produce both, needs for the body and economic food for property ownership, the RPy immediately is larger than 1. Added to this is any fees for the use of private MOP. Because private owners of MOP are always seeking a yield above inflation, the need for PI is always increasing, even if ‘all’ the active workers chose not to own property, and as such RPy must also be increasing.

    However as soon as the envy factor enters into the picture active workers will start to desire to own property and passive income. As the desire for PI increases (which is inevitable), the available MOP will decrease (this is evident by how much debt households are in, as privately owned means of production includes claims against labour a result of debt), and the RPy must increase at an even faster rate than before.

    As it stands today in Australia, workers can only purchase half of what they produce with the wage they receive:
    https://d3n8a8pro7vhmx.cloudfront.net/theausinstitute/pages/1500/attachments/original/1497298286/Labour_Share_Hits_Record_Low.pdf?1497298286

    As a result, the PI:AI ratio stands at 1:1 and the RPy rate stands at 2. This means, all active workers are producing for two people. In addition, the household debt to income ratio is above 200%, the age of retirement is under pressure to be raised, people are being forced into paid work at a younger age, households can’t operate without at least two incomes (one may be from the govt such as family tax benefit). In other words, the sheer level of RPy is showing up in many ways not just because of capitalists, but because of the envy of them and the desire for people to move away from AI into PI, which is decreasing available MOP at an alarming rate – hence the reason I am seeing that non-profit ideals need to be included in any sustainable model.

    If a farmer operated a farm under a non-profit alliance with the government (meaning the govt purchases the MOP from the private sector and supports the farmer in whatever he or she needs), he would immediately be stripped of the need to operate at a RPy which includes a fee for the use of privately held MOP (including bank interest). His RPy would immediately drop from around 2 to about 1.3-1.4 or thereabouts. This could then be reduced again if he is able to find like minded people to work with him under mutual arrangements. No money would enter the picture except what the government needs to purchase from the private sector to keep both the farm and the farmers operating, which it would do using central bank issued money (which it then destroys when it receives it back in taxes). When and if the farmer produces, he takes what he (or his group) needs to live, and the rest goes to the government to do with what it deems ideal. If the farmers crop fails, nothing happens – it is just like the true islamic business model where the capital is the tomato seed and the profit is the crop of tomatoes and the investor agrees to a % of any successful crops, but does not default the farmer if the crop fails. If it fails it fails – so what, there’s always next season.

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