Taxation, Money, Freedom and Economy

Modern Monetary Theory (MMT) implies some interesting connections between money, taxes, social cooperation, freedom and different economic systems. In particular, it brings to light some of the social possibilities opened up by fiat money.

It seems clear that under any social system it will be necessary to impose at least minimal constraints on social activity until and unless we can evolve to a level where all cooperation is spontaneous and voluntary. Personally, I am on the side of keeping those constraints, in their overall effect on personal freedoms, as minimal as possible.

I think economic libertarians do have a point when they identify tax obligations as one form of social constraint on individual behavior. In addition to underpinning demand for the national currency, taxation serves various roles under capitalism – a measure of business-cycle stabilization, a degree of income redistribution, and an opening up of space for public-sector activity. For governments who are not the monopoly issuers of their own fiat currency under a flexible exchange-rate regime – such as state governments in federal systems, and national governments with fixed or pegged exchange rates or ties to a common currency arrangement – taxation also serves a funding role. There is plenty of room for legitimate disagreement on the appropriate extent of these roles. But it seems clear that these roles are required to at least some extent under capitalism to preserve the system itself (to avoid social breakdown, rioting, etc). It is precisely because capitalism entails greater personal freedom than, say, a police state, that social cohesion must be sought through non-violent means as much as possible. To the extent this is not possible, personal freedom suffers.

Although I agree that taxation in some sense modifies individual behavior and freedom, I don’t think its freedom-reducing effects should be overstated. There are many other aspects of capitalism that impinge on personal freedoms to a much greater extent. At its core, the system is based on capital (and its flip side, wage labor). This social relation relies on the existence of a large class of people who, not owning means of production, are compelled to sell their labor power to capitalists. There is a compulsion in this relation for the majority who must sell their labor power. For example, when peasant farmers in developing countries are expelled from land and essentially forced by circumstances to enter the capitalist ‘free’ labor exchange, they suffer a significant loss of personal freedom. But there is compulsion even for the owners of the means of production – the capitalists. They are compelled to exploit workers (in Marx’s technical sense of maximizing the rate of surplus value) to the full extent allowed under the law. If there were no child labor laws, for example, capitalists would have no choice (if they are to remain as capitalists) but to hire child labor. We know this from history and the experiences of some developing countries today. The introduction of child labor laws was in one sense a restriction on the freedom of capitalists, but it also gave them more freedom in another sense: they were now free to behave more humanely and yet remain capitalists. In my view, taxation has much less impact on personal freedom than the social relation capital.

Another consideration is that taxation under capitalism is modifying a distribution of income and wealth that is not just some unbiased outcome of nature. The determination of personal incomes, as well as profit, rent and interest incomes, is social. It is social because it is grounded in a social relation (capital), because it derives from historically shaped and enforced property rights, because it is determined through a socially constructed activity (the marketplace), because competition is delimited by a social (regulatory) framework, and because the determination of income is socially contestable. The determination of wage and salary incomes, for instance, reflects the relative power of counteracting social classes. There is no single, technically or naturally determined pay level for each job. The marginal-productivity theory of wages died in the capital debates, but even if that theory were valid, all it would mean is that wage and salary incomes reflected marginal productivities that alter with every alteration in technology and demand. A market distribution of income does not seem to be grounded in anything more obviously rational or just than some other – democratically determined – redistribution of that market income, and the implications for personal freedom are not obvious. To the extent that a person is free to choose one job over another, s/he is equally free to alter that choice, taking in to account the legislative and taxation environment that delimits productive activity and market competition. To the extent that relative prices of goods and services are altered by taxation, there is an impact on consumer choice, but by the same token, the determination of prices is impervious to externalities and social justice, and the result of a social process that is not obviously more grounded in justice and rationality than a democratically determined alteration of those relative prices.

It is possible to conceive of economic systems without taxation. For instance, a future socialist society could, in principle, operate without money. However, in the absence of taxation, there would need to be a high degree of spontaneous, voluntary cooperation for there not to emerge some other form of state compulsion (perhaps Stalinist police-state measures, state brutality, etc). Under capitalism, taxation creates space for public-sector activity – i.e. it enables a form of collective, social activity. It does this by restricting private-sector spending power, thereby freeing up resources for public-sector use. This is true even in a commodity-backed money system, although in such systems, taxation plays the additional role of funding the public-sector activity. Because resources are freed up through taxation and the (compulsory) withdrawal of some private-sector spending power, the government is in less need of other forms of state compulsion to maintain its control over these (now public-sector controlled) resources. In other words, taxation makes a limited form of social cooperation and public-sector production possible without, under normal circumstances, requiring more brutal forms of state compulsion.

This may provide part of the explanation for why the hope of progressing to a liberating and freeing socialism – a libertarian socialism – has appeared, at least until now, unattainable and utopian. By a libertarian socialism, I mean a system in which the means of production are owned in common, the social product is shared, and people are free to do as they please beyond some labor-time or other equivalent commitment – a commitment that should be becoming freer, more creative, and increasingly voluntary as technology advances. In its highest form, this libertarian socialism would entail “from each according to his ability, to each according to his need”, but it would also entail cooperation without compulsion, and maximal space for individual freedom. It seems that such an idea will always remain utopian unless and until we have evolved to a level where our cooperation is largely spontaneous and voluntary. Attempts at a libertarian socialism before that point is reached would seem likely to end in a regression back to capitalism or a degeneration into authoritarianism.

It is here that the social possibilities inherent in fiat money seem of special interest. Fiat money offers the possibility of progressing over time from our current system to a liberating and freeing socialism, if that is the political will. Fiat money seems especially conducive to the democratic selection of paths that are neither purely capitalistic nor purely socialistic. The fact that in our present system a sovereign government need not be financially constrained means that we can do things as a society that capitalists would never do following the dictates of profit. The result is something other than pure capitalism. And the more things we do that ignore the logic of capital and the profit motive, the less like capitalism the system will become. How far we choose to go down this path is up to us and future generations. One possibility – but only one – is that as we get a taste of freedom from the dictates of capital, we may increasingly opt for more such freedom.

In response to this argument, one objection might be that capital is what drives – and is most fundamental to – the existing system. But MMT shows, I think, that government and fiat money are logically prior to capital. Fiat money is apart from capital, and not contingent on the existence of capital. Following Marx, I do think capital drives – and is fundamental – to the sphere of private capitalist activity. In a commodity-money or commodity-backed money system, which is what Marx analyzed, this capitalist activity tends to encroach on all other activities, subsuming them into its logic or eliminating them. In these systems, although society can try to ignore the dictates of capital by expanding public-sector activities (and in fact did so in many areas), there will always be an unrelenting pressure for these activities to be re-subjected to the logic of capital (e.g. the pressure to privatize, roll back social gains, etc.). But fiat money is external to capital, and is not – or, rather, need not be – subject to the same pressures as capital, and so need not be subjected to its demands. The fact that governments have continued to operate as if fiat money is commodity-backed money (as if they are financially constrained) has meant that these pressures on public-sector activities to revert back to profit imperatives have remained in full force. But if we realize that the operation of fiat money allows us to do as we please and that capitalists can like it or lump it, things can be different.

I don’t mean to suggest that we are all on a smooth escalator ride to heaven. Far from it. Those with the most power have the biggest stake in the existing system. Social choices that go against elite interests will meet with stiff resistance. Any gains, however these are conceived, will only come through social struggle. Even so, the breakdown of commodity-backed money and the emergence of fiat money means that a key to positive change has been placed within our grasp.

At the same time, I think we face a serious threat to our liberty and freedom, and this is partly because of the social possibilities inherent in fiat money – partly because of the danger to elite interests that our recognition of these possibilities would pose. Commodity backed money systems involve an attempt to force government to behave like capital – to be constrained by the logic of capital (the profit motive). The breakdown of Bretton Woods and the adoption of fiat money with no convertibility into gold or some other commodity actually represented a significant concession on the part of the elites. It was a concession forced by circumstances and the inability of capitalism to resolve its own internal contradictions other than through crises and war. The tendency toward crisis and war is still with us, but fiat money has opened up a real possibility for positive change, and I think capitalists and capitalist governments know it, at least instinctively, and it unsettles them. This may go some way to explaining the intensity of the propaganda drive of the past thirty-five years, which has succeeded in creating the illusion of a government financial constraint and produced a general feeling that there is no alternative to the neoliberal policy agenda, even though, objectively, the breakdown of Bretton Woods has given us more policy freedom. It also may help to explain the increasing resort to authoritarian measures to quell unrest and the clawing back of previous gains in liberty, democracy and freedom. Once we see through the illusion, anything seems possible, and for the powers that be, brute force becomes the only recourse.

Our only recourse – the only viable recourse of general populations around the world – is to assert our opposition to the brutality the elites have in store. Fiat money allows us to express our democratically determined collective desire independently of what capitalists demand. If this is so, the first true half-step away from pure capitalism may already have occurred without us realizing it. And because we haven’t realized it, we haven’t completed that first step. We have fiat money, but we haven’t made full use of it.

All this is still very far from socialism. But making full use of fiat money’s social potential may offer a non-utopian path to socialism. The path is non-utopian because the starting point is grounded in the existing system, and is therefore concrete and understandable. Fiat money has re-emerged after a failed attempt to chain society to a mere commodity (gold), in response to otherwise irresolvable crises endemic to capitalism, and offers a different logic. If we follow this different logic – which enables true independence of some activities from capital’s logic, rather than a strained separation of those activities, with capital always encroaching, always exerting pressure to conform to its demands – attempts at social cooperation may have a firmer footing. If we get a taste for this, we may want more of it. Capital might whither away slowly, or abruptly. But even if the process were only gradual, the qualitative change would be revolutionary. To the extent that capital survived for a time, it would be on our terms, not its own.

But the most crucial point is that fiat money opens up social possibilities. Although I have focused on the prospects for socialism – that being my political preference – fiat money, properly utilized, equally provides grounds for optimism for those interested in maintaining a mixed economy. That includes conservatives and economic libertarians who want to keep public-sector activities to a minimum, and liberals who may want the public sector to play a more expansive role. The crucial point is that fiat money – properly utilized – enables public-sector and non-market activities to be run on whatever principles society collectively desires. If society wants government to act like capital, with crises the only means of resolving capitalism’s internal contradictions, that is an option. We know it is an option, because we have been following it for thirty-five years. But there are other options, not all progressive. In these other options, a larger or smaller part of the economy could be free to run on non-profit principles, ignoring the logic of capital, if that is our preference. Meanwhile, the social relation capital could be left to operate on its own logic to the degree we deemed that appropriate.

4 thoughts on “Taxation, Money, Freedom and Economy

  1. Peter thanks for this. Very thought provoking….

    Many other great observations and thought here but this one is edifying:

    “But I now think modern monetary theory (MMT) shows that government and fiat money are logically prior to capital. Fiat money is apart from capital, and not contingent on the existence of capital.”

    good foundational thought, Resp,

  2. “but it would also entail cooperation without compulsion, and maximal space for individual freedom.”

    Individual freedom exists alongside everybody else’s individual freedom, which necessarily means that your freedom is limited due to the fact you have to take into account everybody else.

    Far too often I see freedom expressed in toddler terms, but toddler rules cannot apply in an adult human society. It’s more complex than that and requires you to take into account other people’s viewpoints, and also how your actions and behaviours are perceived by others.

    I’m not saying that is what is happening here, but I think it is important to point out that individual freedom is always going to be limited to something less than your inner toddler would prefer.

    The other problem is that competition is nearly the exact opposite of co-operation. Competitive behaviour is actually very wasteful, because of course it means you have to have losers.

    In the field of sport there is an increasing elevation of the rapid individual win (sprinting, cycle racing) over the slow team win (test cricket for example). That suggests to me that the evolution isn’t going in the right direction.

    Nice thought provoking article. Thanks for sharing.

  3. What I am getting at is that compulsion or coercion becomes less necessary the more we come to desire cooperation and find ourselves caring about the other person’s freedom as much as our own. In the meantime, the tax obligation seems to be one of the more ingenious mechanisms devised to facilitate cooperation in that although it does compel that cooperative behavior, it does so without, in normal circumstances, requiring brute force. Of course, it is still backed by the threat of brute force. And this is more or less undesirable depending on the legitimacy of the government exercising that authority.

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