Modern Monetary Theory (MMT) offers an understanding of sovereign (and non-sovereign) currencies that is applicable to a wide range of economic systems, including capitalist and socialist ones. Irrespective of the personal political preferences of its proponents, the theoretical framework in itself is neutral on the appropriate balance between public sector and private sector activity, or the relative merits of capitalism and socialism. In contrast to neoclassical theory, which starts from a general presumption in favor of private market-based activity except where the existence of market failure in excess of government failure can be explicitly established, MMT as a theory characterizes the appropriate mix of public and private activity as a social (or political) choice.
It is a social choice, in MMT, above all for societies with currency-issuing governments. A currency-issuing government faces no revenue constraint. If it voluntarily requires itself (a self-imposed constraint) to match its net spending with bond sales, it does so on its own terms. It cannot be cajoled by ‘bond vigilantes’ into paying high rates of interest on public debt against its will. Any interest it does pay is at its own discretion. This is in contrast to the weaker position of financially constrained currency-using governments, such as local, state and eurozone governments, who not only can be forced to pay higher rates of interest on their debt but must do so in a currency that they themselves do not issue. The absence of a revenue constraint in the case of a currency-issuing government means that it can initiate or encourage production along not-for-profit lines to the extent that this is feasible given resource constraints and political realities. In principle, sufficient grassroots pressure from the left could compel government to work toward socialism or be voted out of office, just as overwhelming political pressure from the right could compel a government to adopt capitalist-friendly measures or suffer the consequences at the next election.
The capacity of a currency-issuing government to initiate and foster activity that is not for profit opens the way for shaping the economy in whatever manner happens to reflect the collective will, at least as this is effectively expressed through unionism, activism, protest, voting behavior, lobbying and other means. Decisions over – and mechanisms for determining – what to produce, how to produce it, the mode of production, the kinds of enterprises in operation (public sector, corporate, small businesses, cooperatives, communes), the conditions under which production takes place (autocratic or democratic) and how to distribute the results of production are open to a democratic determination. MMT in itself is neutral on most such questions.
Even on questions where MMT does take a particular position – most notably, its emphasis on the job guarantee as a way of maintaining full employment alongside price stability – there is scope for widely diverging views on the appropriate design of the program. It is possible to see the job guarantee in a minimalist way, essentially as a means of keeping marginal workers job ready for capitalist employers when they are temporarily discarded from other employment. Someone of this view might prefer the job-guarantee wage to be set below the current minimum wage so as not to disrupt the existing wage structure. Others, in contrast, will want the job guarantee to provide a living wage plus defined benefits as part of a broader social wage so as to strengthen the position of workers relative to capitalists and force private-sector employers to improve pay and conditions or perish. And some also see a job guarantee as a mechanism for broadening, over time, the kinds of activities that are regarded as socially useful.
Irrespective of the choices a society makes, basic aspects of MMT will apply so long as a currency system remains in place. To list just some of these aspects:
Taxes drive the currency. Government ensures a level of demand for currency by imposing taxes and other obligations (such as fees and fines) in it and requiring that final settlement only be conducted in the currency. The imposition and enforcement of taxes and other obligations denominated in the currency ensure that government can spend its currency into existence in exchange for goods and services.
The value of the currency can be defined as what must be done to obtain it. The reciprocal of an economy’s minimum wage indicates the amount of simple (or ordinary) labor-power that workers must supply to obtain a unit of the currency. An hour of complex (or special) labor can be treated, analytically, as the equivalent of multiple hours of simple labor. At the aggregate level, this associates a unit of the currency with an amount of labor. Specifically, the value of the currency can be defined as the average amount of simple labor, or its equivalent, that workers need to perform to obtain a unit of the currency. To the extent that government sets the wages for some kinds of labor (a minimum wage as well as a public sector pay scale) it influences other wages and therefore the value of the currency. Government can exert more or less influence on currency value depending on how much authority it exercises over pay and conditions.
Government spending precedes tax payments. A currency-issuing government, whether capitalist or socialist, needs to issue the currency before non-government can use it to pay taxes or for other purposes. If the government issues bonds to match deficits, it must first provide the funds with which the bonds are to be purchased. Current practice somewhat obscures this, but the point is still clear on close inspection. Currently, the funds used to purchase newly issued bonds are created through central bank advances of reserves to primary dealers in so-called reverse repo operations. In exchange for the reserves, primary dealers must supply collateral in the form of already existing bonds, and these bonds required for collateral can only exist because of past government spending.
Government deficit equals non-government surplus. Basic accounting relationships apply irrespective of a society’s politics. Funds created through government spending that have not been taxed back are held as financial assets by non-government. If some publicly provided goods and services are positively priced, purchases of them will function as tax payments. In a purely socialist economy, prices of publicly produced consumer goods would be set high enough that supply was not exhausted by the workers engaged in consumption-goods production to ensure that workers in the investment-goods sector as well as people outside the labor force could also purchase them. As under capitalism, government spending in excess of taxes would result in a financial surplus for non-government. The same accounting relationship would also apply in a socialist society that replaced currency with (non-transferable) labor certificates. Any unspent labor certificates would remain in the non-government sector until used to purchase publicly supplied output, at which point they would essentially be taxed out of the economy. If desired, the labor certificates could be time limited, in which case the expiration of a certificate would function like a tax payment or purchase.
Vertical and horizontal transactions. In MMT, transactions between government and non-government are considered vertical. These transactions directly alter the net financial assets of non-government. For instance, when government buys labor services with its currency (or labor certificates), members of non-government receive a financial asset (currency or labor certificates) that are not offset by a corresponding liability within non-government. Rather, the offsetting liability is in the government sector (currency or labor certificates on issue are a liability of government). In contrast, transactions between members of non-government are considered horizontal. They do not directly alter net financial assets because any financial asset created within the non-government sector will be offset by a liability within the same sector. A private bank loan, for example, is an asset of the bank and liability of the borrower, while the deposit created through lending is a liability of the bank and asset of the borrower. Overall, the financial impact on non-government nets to zero.
Both net financial assets and private money (if applicable) are endogenous. The observation that vertical transactions directly alter net financial assets does not mean that the level of net financial assets is exogenous. To the contrary, the level of net financial assets will be endogenous so long as government allows freedom of choice over non-government spending decisions. Under capitalism, the spending and saving decisions of households and businesses will affect income and, for given tax rates, the level of tax payments. Consequently, the government’s fiscal balance will be endogenous, varying with economic activity. Accordingly, the net creation of financial assets will also be endogenous. Private credit creation, for its part, will also vary with activity. Strong activity and profit expectations will improve the creditworthiness of prospective borrowers, encouraging private bank lending and the endogenous expansion of deposits (bank money). To the extent that private bank loans are used to finance spending, the result will be new income and extra tax payments, impacting on the government’s fiscal balance. For given policy settings, the effect of growth financed by private lending will be to narrow the government’s deficit (or move it into surplus) and, correspondingly, to narrow the non-government’s financial surplus (or move it into deficit). (Additional clarification of the vertical/horizontal and exogenous/endogenous distinctions can be found here.)
Monetary circuits. Under capitalism, the endogeneity of both net financial assets and private money means that the private monetary circuit M – C … P … C’ – M’ as conceived by Marx and later circuit theorists is fully consistent with MMT. A discussion of this point is provided in an earlier post. There will be two-way feedback between the private monetary circuit and public monetary circuit because private bank lending is influenced by the level of activity, which depends in part on exogenous fiscal policy settings, but also because the rate of reflux in the public monetary circuit (through payment of taxes) will vary endogenously as a result of private lending and spending decisions. Under socialism, with non-transferable labor certificates and no profit seeking, the situation would be modified. The government and non-government financial balances would still vary endogenously. But the monetary circuit would be much simplified, essentially beginning with government spending and perhaps public bank loans for social purposes, depending on institutional particularities, and ending with payment for publicly supplied goods and services, tax payments and, if applicable, expiry of time-limited labor certificates.
Job guarantee. As noted earlier, MMT indicates that full employment alongside price stability can be achieved through a job guarantee. In principle, it would be possible in either a capitalist or socialist society for government to maintain price stability through the use of direct wage and price controls (incomes policy), but even here full employment would most effectively be maintained through a job guarantee rather than reliance on trickle-down effects or hidden unemployment. For reasons of flexibility and efficiency, it might make sense for production levels in a socialist economy to be responsive to demand in much the same way as under capitalism. Unforeseeable or seasonal changes in the composition of demand would result in unforeseeable or seasonal changes in the need for various types of workers. Underemployed workers could transition temporarily to the job-guarantee sector. In a socialist system, this would not need to entail a pay cut.