I am struggling lately (in a good way) to keep up with all the great discussion in the various threads, but really appreciate the diverse commentary. Timezone differences can be a nuisance. Just as I was about to go to bed, brendan put up a critical though interesting comment in response to one of my recent posts concerning the democratic potential that I think is offered by fiat money. I decided to sleep before attempting a reply, only to wake up to find that additional interesting discussion had occurred while I was away from the computer. So, as I said, I am behind the eight ball. The comment by brendan included the opinion that MMT seems like a “theory of state capitalism”. I thought this topic deserved a post of its own.
For those who are unfamiliar with Marxist speak, “state capitalism” is blue language of a kind not usually seen here at heteconomist. (I kid.) I thought the fact that the notion had been raised in relation to MMT was as good an excuse as any to consider a little further why I think fiat money offers a path to a post-capitalist society. I apologize in advance to any regular readers who may not be remotely socialist, communist or even moderately left of center. I know we have all types in the MMT community. Just consider this post as pertaining to one kind of social possibility (yes, my personal favorite possibility) among many. It is an illustration of how I believe fiat money opens up possibilities.
I should mention before getting started that the brendan who left the comment is Brendan Cooney of the blog Kapitalism 101, which I highly recommend. It has a lot of excellent and accessible material on Marx, as well as links to the writings of leading Marxists. Having said that, Brendan and I seem to disagree completely when it comes to MMT, hence this post.
Brendan’s comment is as follows:
How is attempting to manage capitalism through monetary policy a road to socialism? When you talk about MMT exerting democratic control over the economy what exactly is the nature of this control? Isn’t it just the ability to stimulate growth through state spending? How is more capitalist growth a road to socialism? If anything MMT seems to be a theory of state capitalism…
This is by no means the first comment by a Marx influenced thinker that has been made along these lines in response to one of my posts, although it is perhaps the most dismissive of the possibilitiy that MMT could offer anything of relevance to the Marxist left.
In what follows, I will respond to the comment sentence by sentence, although far fewer words will be required in response to the later points raised. The reason for this is that, although each question follows more or less logically from the preceding one, in my opinion each is based on a set of misunderstandings which becomes apparent by the time the first couple of questions have been addressed.
How is attempting to manage capitalism through monetary policy a road to socialism?
I don’t know how familiar Brendan is with MMT (or “neo-chartalism” in the academic literature), but it has almost nothing to do with controlling the economy – capitalist or otherwise – through monetary policy. Perhaps he is referring to the zero-interest rate policy proposed by some MMTers. That is a policy option, according to MMT, but it is not the means for controlling the economy. Rather, it would be a distributive decision.
The core of MMT is an attempt to understand monetary operations, particularly in a flexible exchange-rate fiat currency system, and through a stock-flow consistent accounting framework (following the Post Keynesian Wynne Godley) identify implications of these operational aspects for the broader economy. Beyond this core, the leading MMT economists propose various policy prescriptions consistent with that understanding. Commonly, they suggest a job guarantee, functional finance, and strict financial and banking regulation, and some propose a zero interest rate policy. It is often noted that the public-private mix is open to social determination.
It is possible, though, to take the core understanding provided by MMT and explore different sets of policy proposals and, I am suggesting, the potential for different social systems that might make use of fiat money, at least initially. There are also some non-MMTers (for example, prominent Post Keynesian Marc Lavoie in academia, and JKH and Ramanan in the blogosphere) who have disagreements over MMT’s particular framing of the monetary operations. For current purposes, the basic point is that an understanding of the operations suggests what is already possible under the existing monetary system in many nations, such as the US, Japan, China, Canada, etc., though not the EMU as long as its common currency arrangement remains in place in its present form and in its present relationship to member national governments.
In terms of the MMT understanding of the differences between alternative monetary regimes, the following aspects of a flexible exchange-rate fiat currency system (or “modern monetary system” for short) seem particularly significant to me, whether thinking about policy or alternative economic systems:
1) The currency issuer in a modern monetary system can set the rate of interest on the government’s liabilities as a matter of policy. There is no ‘natural rate’ and markets cannot influence the currency issuer’s choice. This is very different from other monetary arrangements – for instance, the EMU – in which, although there is still no such thing as a natural rate, the markets very definitely can increase rates on sovereign debt, as we are seeing due to the ECB’s reluctance to play backstop. (For a good explanation of this point, see Bill Mitchell’s Who is in charge?)
2) The government in a modern monetary system is not financially constrained. The only constraints, other than those self-imposed for class-interested or political reasons, are real resources. There would actually be no need for the government to issue debt at all if it removed self-imposed constraints (such as the requirement to match debt issuance with deficit spending). Again, MMT suggests that this is very different from the situation under a common currency arrangement, a fixed exchange rate system, a commodity-backed monetary system or a gold standard. Under these other monetary arrangements, the government is financially constrained in varying degrees. (Bill Mitchell, again, has provided excellent explanations of this point in a series of posts, here, here and here.)
I should note, at this point, that there is some disagreement over how these differences should be presented – particularly because all monetary systems are human creations, and hence self-imposed constraints. Some of these differences are being discussed on this blog in recent threads. What matters for present purposes is that as long as a monetary arrangement is adhered to, including its intended self-imposed constraints, there are differences in policy freedom across the different monetary arrangements.
In light of 1) and 2), MMTers would say the choice, in principle, is ours whether we want an economy dominated by private sector activity or public sector activity. The latter will require higher taxes to make space for the larger public sector use of resources, the former will involve lower taxes and spending. In other words, MMTers would say that, although they have their own policy prescriptions, society in a modern monetary system could opt for any policy mix (and I would add organization of economic activity) consistent with what is possible under the current monetary arrangement. For example, if the maintenance of full employment and price stability under capitalism is the goal, this could be achieved through a job guarantee alongside either a large private sector or a large public sector. Right libertarians might prefer the former, liberals the latter.
But, in my view, the possibilities extend beyond such variations of capitalism. In considering the ramifications of a government with no financial constraint and totally in control of the terms on which it spends (e.g. low interest rates on debt or no debt issuance at all), it becomes clear that non-capitalistic modes of production and exchange become possible, if that is what we want and we organize effectively to bring it about. Reasons for this openness include:
A) There is no compulsion that productive activity be enabled only (or even at all) in accordance with the logic of capital and the profit motive. The decision over whether something is produced can, in principle, be democratic rather than based on narrower capitalistic criteria. (I have briefly considered aspects of this point in What is ‘productive’?.)
B) There is no compulsion that production be carried out on the basis of wage labor. It would be possible for income and labor time to be separated completely, if that was the social will. Access to goods and services (no longer produced as commodities) could be free whenever feasible and otherwise rationed either on monetary or non-monetary criteria (e.g. need, proficiency, considerations of equality, etc.) as deemed appropriate. Either a minimum labor time requirement or a basic income guarantee (whether in money form or as access to some minimum basket of goods and services) could be introduced, depending on the social will. (I have explored some aspects of this in Full Employment and the Environment and Implications of a Purely Mechanized Economy. I consider the discussion following the latter post to be especially interesting.)
In relation to B), ultimately there might be no need for money at all, but my suggestion is that fiat money opens up a path to economic activity organized along non-capitalistic and eventually non-monetary lines. There would be some mix of monetary and non-monetary activity in the meantime. If such a path is rejected (e.g. as “reformist”), then we are left with the dilemma of how to jump directly from what we have now to a non-monetary communist society.
Again, the reason, in my view, that fiat money opens up this path is that it can free economic activity from the dictates of capital, if we bring this about. This is not the case under the other monetary arrangements mentioned. Under those alternative arrangements, capitalists will not only oppose the attempted transformation to socialism, as they of course will also in a flexible exchange-rate fiat currency system, but they can and will be effective in blocking such a path because capitalist investment strikes, bond vigilantism, etc., are effective under those alternative monetary arrangements. They need not be effective under a flexible exchange-rate fiat currency system. Capitalists can propagandize through media, lock out workers, go on an investment strike, pay off politicians, etc., but they cannot affect the terms on which money is issued and financially cripple any non-capitalistic uses to which it is put.
This is very different to the situation under other monetary arrangements. In a modern monetary system, if capitalists go on an investment strike, the rest of us can say, “Go ahead. We’ll do other stuff, enabled by government spending.” Under the other arrangements mentioned, this is not a credible threat to capitalists. If we try to do other stuff, capitalists will sabotage those efforts through their power to influence the terms on which the government spends. The government will find itself financially constrained, and this “other stuff” will be “unaffordable”.
An implication that I think is critical in explaining why social possibilities are more open under a flexible exchange-rate fiat currency system is that even to the extent society retains a function for capital, this function can be placed strictly on society’s terms, not capitalists’. But here I am considering the possibilities of socialism, so there need not be any role in such a society for capital.
When you talk about MMT exerting democratic control over the economy what exactly is the nature of this control?
MMT, at its core, is an understanding of monetary operations under various monetary arrangements and a stock-flow consistent framework. It does not exert control – democratic or otherwise – on anything. It is a framework for understanding policy options and, I think, the potential for moving from one economic system to another.
As for the nature of any potential economic democracy, that is an open question. MMT does not dictate a position on this matter. For instance, the degree to which economic decision making is centralized or decentralized is open for debate. It may be that a lot of democratic decision making is local, and the currency issuer merely enables the democratically determined course of action through the appropriate level of currency issuance.
Isn’t it just the ability to stimulate growth through state spending?
It is hopefully clear by now that, no, it need not be purely, or even at all, about stimulating capitalist growth through state spending. The possibilities are much broader than that. If we want, and can swing it, by mounting a broad-based opposition to capitalists, it can be about the ability to enable whatever activities – including any number of creative or recreational activities not currently regarded as ‘economic’ – we like, confined only by the limits imposed by real resources and the need to undertake a minimum of activities to meet physical subsistence. Beyond that, the social possibilities and the scope provided for individuals to choose freely what they want to do with their time, are entirely open.
How is more capitalist growth a road to socialism?
It may not be. I never suggested it was. MMT makes no such claim.
If anything MMT seems to be a theory of state capitalism…
Not at all. Or, at least, not unless that’s the use to which fiat money is put.