The Social Economy and the Potential Inherent in Currency Sovereignty

In any society, of whatever configuration, production at a given point in time is limited by certain ‘real’ (meaning non-monetary) factors. Notably, a society’s productive activity will always be limited by access to natural resources, the current state of its technology, and the skill, strength, size and imagination of its people. These and similar factors determine the absolute productive potential of a society. At a given point in time, these factors would apply even if, hypothetically, a society happened to be organized in a completely different way to its current form of existence.

But this refers only to the upper limit – the potential – of social production and reproduction, taken at a particular point in time and viewed in ahistorical and static terms. Under a particular societal form, production can easily run into barriers located well inside its real limits. This is certainly true of capitalism, a system in which nothing gets produced for exchange without an expectation of a monetary demand for the final product. The production may well be possible, and its product desired by a section of the community, but unless that desire is backed by both willingness and capacity to pay, the production will not take place.

Nor is the influence of ‘money’ (defined in the present context as currency plus deposits) confined to the short run. To the contrary, once we wish to consider more than society’s circumstances at a given point in time, divorced from social and historical factors, the influence of the monetary on the real can be long-lasting and far-reaching. The rate at which knowledge, technology and real productive assets can be developed from any given point in time will very much depend on the purposes for which money is created and the activities on which it is spent.

At the macro level, a lack of monetary demand in the present will result in unemployment or underemployment of workers who otherwise could be contributing to the development of technology and future productive capacity. At the micro level, a different composition of monetary demand results in different rates of development and types of development.

Because the levels of production in different parts of the economy adjust to meet monetary demand, and production in one sector entails a development of future capacity and consumption possibilities that differ from the development implications of production in another sector, a different composition of monetary expenditures influences the rate, direction and social nature of economic growth and development from now into the future. The division of demand into public and private expenditure, into consumption and investment, into investment in infrastructure and investment in technical development, into investment in this type of technical development or investment in that type of technical development, and so on, has long-term implications.

It is not just a matter of how much is produced, but of what, for whom, by whom, in what manner, and through which mechanisms these and related questions are decided upon.

Clearly, there are various social forms that could be developed. Currently, capitalism is the predominant system. This entails certain property relations, administered and enforced by the state through legal, police and, in the final instance, military means. Above all, a small minority own the means of production. A vast majority have little to sell but their capacity to work for a capitalist or capitalist government.

Historically, the system has been supported by smaller social units, especially the nuclear family, which has helped to reproduce – and, to a degree, has been reproduced by – capitalist social relations. By reinforcing a power imbalance between income recipients and their dependents, wage and salary recipients who are controlled by employers in the industrial sphere in turn are in a position to exert more or less control over dependents not included in the formal labor force. Work outside the labor force, being unpaid, is in one sense “priced” at zero. In another sense, it is “priced” indirectly, implicitly and inexactly as a component part of wage and salary income. The “pricing” is arbitrary, with the dependent of a wealthy person normally faring much better than the typical dependent.

Prevailing social conventions make it appear as if unpaid work is of zero worth and funded out of the pocket of waged and salaried workers. Few, presumably, actually believe this to be the case, and it is obviously not the case, but in accepting the prevailing social arrangement we in effect act as if it is the case.

The relation of dependents to income recipients is just one manifestation of the more general point that, under capitalism, nothing gets produced for exchange unless a capitalist expects an effective demand for the potential output. The likelihood of monetary demand being sufficient to justify production of a particular commodity will depend on many factors including the distribution of income and wealth. A highly equal distribution is likely to induce strong private consumption demand for mass produced commodities. Extreme inequality of income will limit demand for mass produced commodities while creating demand for luxury items for the affluent minority. In this way, distribution will influence the composition of demand and therefore the composition of output, and because of the enduring effects of expenditure decisions made now, the rate and direction of economic development into the future.

Government plays a central role in all this and underpins capitalist economies. Government’s role goes far beyond the foundational aspects pertaining to the creation and enforcement of property rights. Governmental decisions over the general direction of economic development, the construction of social infrastructure and policies pertaining to distribution of income and wealth all strongly influence the kinds of market and non-market activities that will occur and create context for those activities.

An emphasis on developing a road network, for example, favors a market for cars, both on the demand and supply sides. Expansion of a road network will make cars more useful to potential car owners, boosting demand. The expanded market for cars helps to justify their mass production, bringing economies of scale, lower unit costs and the profitable supply of a greater quantity of cars.

Many productive roles in our societies only exist to the extent that they do as a result of actions taken by government. A plumber or builder might resent being taxed to make way for non-inflationary government expenditures on hospitals, schools, public transport systems and other infrastructure as well as benefit payments and pensions, but without prior governmental decisions to green-light the formation of suburbs and development of a wide array of public infrastructure, the capacity of the plumber and builder to profit from their trades would be severely curtailed. The same would go for teachers and doctors if access to education and medical treatment had remained limited to individuals who could pay out of their own pockets. And the same could be said for pretty much any occupation or line of business we might care to mention.

In the prevailing economic system, money matters. Not only will production for exchange fail to occur when demand for future output is expected to be weak, but production will typically not even take place until monetary expenditure has occurred. In most lines of business, capitalist firms need to pay wages before the production process is complete and output sold. Raw materials and necessary plant and equipment will likewise need to be purchased or rented prior to final sale.

It is not just that, by definition, spending equals income. It is that spending, logically, is the determiner of income and income the mere result. For spending to occur, finance must be available. Under capitalism, money comes in right from the start.

We know, of course, where the money comes from. There are essentially only two origins: lending (whether public or private) and government spending. The money, from inception, must be created ex nihilo for capitalist production actually to take place.

If businesses don’t think they will be able to sell what they could technically produce, they won’t seek to produce it in the first place. Nor will they seek a loan or draw on retained earnings (ultimately made possible by prior lending or government spending) to set that level of production in motion.

If businesses think the demand is there but banks differ in their assessment, loans may not be forthcoming on the terms necessary to make what is possible to produce profitable.

If at the same time governments refuse to spend sufficiently to maintain overall output at its potential level, society will fail to reach its productive potential.

Basically, this is why money holds such significance when considering capitalist economies, and why, in Modern Monetary Theory, so much weight is attached to currency sovereignty and whether a currency-issuing government acts in a sensible fashion both in terms of its own money creation/destruction and its oversight and regulation of the banking system.

Above all, a currency-issuing government’s capacity to override profit imperatives makes possible a broadening and enriching of social life, a reshaping of the workplace and resetting of economic priorities, but the potential can only be realized if the community is both informed of the significance of currency sovereignty and prepared to hold its elected representatives to democratic account.


10 thoughts on “The Social Economy and the Potential Inherent in Currency Sovereignty

  1. Hey Peter,
    Something came to mind this morning. I know it will sound laughable to just about everyone, but I wanted to ask it to see what results from an analysis of it as if it was implemented.

    What would happen if everyone was no longer allowed to save with the proviso that if any household or business was then on the brink of insolvency the govt bailed them out in order to get them back to solvency?

    Again, I know it will probably sound stupid, but if we think about why most people save, it is usually as insurance against insolvency.

    What do you think would be most peoples response and reason for saying that this idea is illogical?


  2. A fundamental assumption of capitalism, which operates on investment, is that investment (flow) be funded by savings (stock). Entrepreneurs and venture capitalists (“investors”) are supposed to “save up” to invest in new enterprise and expansion.

    This is based on the historical of reality of having to save seeds from a harvest for the next planting rather than consuming all the harvest.

    This was later interpreted as saving (flow) funding investment (flow) through bank intermediation out of a stock of “loanable funds.”

    This has little to nothing to do with capitalism n a modern monetary production economy such as described here, where money is created ex nihilo by government issuance and bank lending.

    There is no contradiction in capitalism of providing funding for social welfare or (inclusive) a social dividend that would reduce the need for average people to save “for a rainy day.”

    Doing so does not affect “loanable funds” as assumed, and government borrowing to fund deficits doesn’t “crowd out” private investment since government itself provides (issues) the funds borrowed.

    What actually happens is that issuance of public debt drains the monetary base of settlement balances created by government spending so that the central bank can hit its target with less open market operations. Public debt issuance also provides “safe assets” that reduce risk in the financial system that become a store of nongovernment wealth.

    Circular flow could operate just find, and investment would be funded by borrowing, out of firm profits, or from household savings directed to that purpose.

    Capitalism would actually work more smoothly and there would be less risk of boom-bust cycles if the assumptions were updated to reflect operational reality. And everyone would be happier excepting those that get off on asymmetries like inequality (relative disparity of distribution). The rich would not feel as rich, and that matters to some (many?) of them.

  3. Hi Dean. In principle, I think you could have essentially a no-saving regime through a combination of (1) ‘time-limited money’ (i.e. spend it or lose it) and (2) ‘socialized investment’.

    Investment, as an injection, creates an equal amount of leakage from the circular flow of income. Functionally, this prevents overheating in the consumption-goods sector, since spending capacity is reduced to make way for the investment-goods production. A no-saving regime would imply that the equivalent of the amount invested is taxed away (i.e. the leakage would occur through taxes rather than saving). (The mainstream would consider this “public saving”, but there is not really any sense in which a currency-issuing government can save in its own currency. It neither has more nor less capacity to spend as a consequence of tax payments.)

    I think the simplest way to get an effect similar to time-limited money is to use “special accounts” (for want of an actual term for them) that are topped up periodically but are not permitted to have balances that accumulate beyond the top-up amount. Whatever was not spent out of the account during the period would remain, but less funds would be required to top up the account.

    I suspect the typical arguments you’ll face against the idea are “incentives”; “human nature” and “moral hazard”.

    Moral hazard refers to the potential for agents who know they will be bailed out to act more recklessly.

    My own view is that a combination of (1) and (2) has potential.

    Regarding “incentives”, profit is not a direct motivator for workers, since they receive wage income, not profit income. Profit is only a motivator for private owners of the means of production. But if investment were socialized, then profit would no longer be required to incentivize private investment.

    This would not necessarily preclude some or all investment goods being produced in the private sector. But it would mean that the financing of the investment would be public and that the enterprises producing the investment goods would not be doing so for profit. There might (or might not) be other rewards, such as higher salaries for managers and workers of enterprises that successfully won contracts to produce investment goods.

    It would also not preclude markets playing a role in the determination of investment priorities. For instance, demand for consumer goods would help to indicate which lines of production required expansion of capacity.

    The “human nature” claims appear largely to fall under the “incentives” argument. To that extent they are addressed in the above two paragraphs. To the extent they are not addressed by those paragraphs, I would suggest that so-called human nature is malleable and in any case not so narrow as to focus exclusively on profit making or even money making through higher wages or salaries. To the extent people are motivated by external rewards, these can take the form not only of higher salaries but also of more sought-after roles or greater recognition. In any case, (1) and (2) would not rule out income differentials if the continued existence of these happened to remain the political will.

    “Moral hazard”, to the extent it is an issue, would be due to the guaranteed bailouts, rather than the time-limited money (or “special accounts”) and socialized investment. However, I don’t think there would be much need for bailouts if (1) and (2) were in place.

    Just my two cents.

  4. Good thoughts, Tom. Hadn’t seen your reply before contributing mine. The suggestions in my comment would imply a transition to socialized investment and no saving (so perhaps a form of socialism), whereas Tom’s suggestion would apply under capitalism, with private investment and profits (and saving out of profit) remaining.

  5. Modified capitalism could work in a welfare-based state rather than a strictly market-based state. There are no market-based states and modern society essentially precludes the market-based state of pure laissez-faire liberalism that many economists hold up as the ideal based on reasoning at the micro scale.

    But it is clear that the macro scale of society is not the micro scale scaled up proportionately, owing to fallacies of composition resulting from emergence. Neoliberalism recognizes this and attempts to direct government toward capital formation and rent extraction for “growth,” which becomes the fundamental criterion of performance.

    A liberal system is possible as an alternative that combines markets and social welfare (now called “social well-being” to avoid the stigma the right associated with”welfare”), Thatcher’s TINA not withstanding.

    To avoid utopianism, it is necessary to inquire now to get from here (neoliberal order) to there (ideal society). Achieving ideal society is a process that involves iteration and incremental development.

    Trying to rush directly to socialism without going through a developmental transformative process has not worked so well in the cases it has been tried. Safer to back into it.

  6. Thx Peter and Tom,


    Great responses.

    “Moral hazard refers to the potential for agents who know they will be bailed out to act more recklessly.”

    My wife works as a director/child care worker in a small childcare center which is privately owned. The owner tried to take on a second center but it only lasted a couple of years and she had to downscale as she couldn’t make it profitable. Listening to my wife talk about her boss and how she runs the business over the years, her boss is obviously a hard worker, and I have to give her credit for taking on such a risk. The interesting thing is that lately she has been researching the possibility of turning it into a non-profit organization. I was very intrigued by this because one of her primary reasons for starting the business to begin with was so that she could fund her lifestyle. But anyway, the more I listened regarding this the more it dawned on me how much a government is willing to step in if you are willing to abandon the profit motive. Her boss will be guaranteed an income by the government, however she has to give up her control of the business, and it will be run by a board so to speak which would include parents. I just found this very fascinating. Of course, I’d never expect a government to assist a Mcdonald’s or fish and chip shop which wanted to turn into a non-profit, and so it would probably only be the case for things which actually lessen the burdens of government. I also felt that some of the things she mentioned about the non-profit model mirrored the model I have been working on.

    Anyway, I wanted to share that the reason I asked the question was because I had asked some people where the spending that exceeds productive capacity (which is supposed to create inflation) comes from, and other than disruptions to supply, it was suggested it can occur when people dip into savings, so I immediately thought, from a technical aspect, what would happen if no one was allowed to save. I was trying to ask the question from the perspective of ‘do we really need to have constant economic growth?’ But anyway, I am not here to go into that question.

    “To the extent people are motivated by external rewards, these can take the form not only of higher salaries but also of more sought-after roles or greater recognition. ”

    This is an excellent point, and it reminds me of a maxim my 4th way teacher always said “only those who can manage others property well will have their own”.


    ” Entrepreneurs and venture capitalists (“investors”) are supposed to “save up” to invest in new enterprise and expansion. This is based on the historical of reality of having to save seeds from a harvest for the next planting rather than consuming all the harvest.”

    I agree, and I think what stifles them is an overcrowding of the economic space. Unlike 200-500 years ago, everyone today is required to treat everything as a commodity now under the legal mandate of ‘full employment’, but this law is in conflict with the common law principle of ‘individual autonomy’, on two counts; it reduces the entrepreneurs scope of risk taking and hence vision and inventiveness, and it eliminates free-choice for the non-entrepreneurs who are forced to become active traders of their time under legal obligation. But anyway, the seed analogy reminded me of a conversation I had with an economist from Iran.

    He wrote a paper on the historical meaning of usury and I asked him to explain it to me using tomatoes and tomato seeds. It went like this.

    Two neighbours eat and grow tomatoes. Lefty’s tomato crop and his seeds were destroyed by some external natural event. He heads over to his neighbour, Righty, and says, I am without food and seed, my I have some tomatoes and some tomato seeds? Righty obliges under the following arrangements.

    1st – Righty gives tomatoes to Lefty so he can feed his family with no conditions attached whatsoever.
    2nd – Righty gives seeds to Lefty under a profit share arrangement where he says, if your crop succeeds and once you have harvested this crop, save X% of the harvest as seed and give me back Y% of those seeds.

    I realized at this point that although we don’t (at least not westerners) call it usury today, by placing conditions on outcomes before the outcome has even resulted will always have an inherent risk which can’t be insured against, at least not in the aggregate.

    Correct me if I am wrong, but I think the jist of what you have said is that we place conditions on each other from an economic perspective that need not really exist.


  7. “Correct me if I am wrong, but I think the jist of what you have said is that we place conditions on each other from an economic perspective that need not really exist.”

    This is exactly right, but it is not without reason.

    Marx explains, I think correctly:

    “The general conclusion at which I arrived and which, once reached, became the guiding principle of my studies can be summarised as follows.

    In the social production of their existence, men inevitably enter into definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the development of their material forces of production. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the general process of social, political and intellectual life. It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness. At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an era of social revolution. The changes in the economic foundation lead sooner or later to the transformation of the whole immense superstructure.…”

    What this means is that there no natural state of economic relations as liberalism assumes, but rather a series of historically determined ones. Humans are prisoners of their history. While things could be different potentially, a historical dialectic determines the background against which change happens.

    While things could be different, utopian thinking is a waste of time, when the issue is how to get from here to the next step and the step after it, and so on, in the direction of a more ideal society.

    We don’t put conditions on ourselves and each other by accident but rather in a way that is historically determined. But humans are not atoms either and they can exert some control over their lives within the boundaries they find themselves limited by. When those boundaries conditions shift over time, new choices become possible that would have been difficult to impossible previously.

    The question is where we are now and what choices are possible collectively trough democratically determined action. In a democracy, government policy is public policy and public policy is collective policy. This depends on the level of collective consciousness of a population at various points in time. We are the agents that choose the conditions within which we operate, given prevailing conditions that are continuously changing at different rates.

    As humanity enters the digital age, it may well be that the material forces of production change significantly enough to shift the relations of production, setting new boundary conditions based on more enlightened principles. This will depend on the level of collective consciousness. There is interplay between the material forces of production that are determined historically and the relations of production over which human exert considerable control.

    For example, the output of digital technology is essentially costless in volume. There is almost no marginal cost to producing more content once developed. Many people that share digital content that is someone else’s intellectual property don’t see anything wrong with doing so owing to this change in boundary conditions regarding scarcity and cost. Digital consumers now expect the Internet to be essentially free.

  8. I think there is a distinction perhaps missing from the analysis. Teachers and other workers don’t wield the same profit motive as the private holders of big block capital who may either wait with their capital or throw it into enterprises attempting to create economies of scale, paying workers in the hope of a profit. Teachers may aim to have a home, fun and savings, but their aim is not to employ others and grow their fortune or business empire.

    If MMT’s implications were accepted governments could take a leading, evidence based approach prioritising full employment (or close to full employment with great adult education and a great safety net). The task would be to manage this with mutually beneficial works to make a sustained, secure, productive economy with reduced cost of living, more relief for the general population, more free time, more time for our inspired purposes. We need to develop more than enough resources, skills and access to get the homes we need built, the food on the plates, and all the purposeful work of sustaining a civilisation guaranteed and well done, without neglecting protection for all citizens against various perils. I can see the wasteful high peak of endeavour of government spending on projects that employ few people and run the majority of invested value offshore for the price. I can also see the perils of supporting idleness and indulgence by having in our economy great efforts expended to sustain people livig on useless unproductive luxury yachts, far above the realm where improved material conditions make you happier, where money beyond a point is personally to them as meaningless as a party trick. I could see it in a benefits system that pays people to luxuriate for nothing while full time workers get less income than them, but at the moment it isn’t even paying the unemployed enough to stop them becoming homeless and incurring injury. That sort of indulgence is not what we have now, it is not luxury but sustenance and the waste is not creating enough jobs to employ all capable people, letting their skills and confidence rot in the judgement, and the low minimum wage and rising cost of living ensuring the divisive insult.

    Surely paying all of these costs, making all these investments in productive works is conducive to the general good, as long as there is a vision of how these economies of scale and various industries relations can be used to sustain and have good leeway to cope with history’s nasty surprises, the ‘jouissance’ of the unknown unforeseeable developments.

    Issues are that it is untested. The orthodoxy is bizarre to me, claiming that in the light of the weight of the state’s endorsements – the national debt – the public sector must forever shrink to accomodate the continued functioning of the economy, and that for services or benefits to be raised or maintained taxes must be hiked, even in times of growth this being thought the only prudent thing. It neglects the collaborative investment role of the visionary collective. The orthodox equation leaves out questions about the wisdom of quantitative easing, and the potential to renegotiate our fiscal and banking system, and the impermanence of legislation around everything from mortgages to property. The struggle for decent wages can I understand decrease the profits of a company, halting the enterprise’s expansion, making them take losses, losing shareholder value. So be it. If its wages must be indecent for it to function then it has become not a productive industry but an excoriating endeavour, and it is not for the collective good to support these perpetuators of poverty and servitude. Executive pay and shareholder bonuses in corporations betray that the private sector’s demand for short term high profit is fundamentally exploitative.

    I can see how a government without imagination can close mines because the coal is cheaper to bring in from abroad and disregard the responsibility to defend and create employment as something parasitical and disruptive, creating ghost towns and poverty and waste and declaring ‘thems the rubs’. As if people shouldn’t have had the temerity to live in the first place if they are not the most productive. Its a fundamentalist Thatcher mindset. But what body politic do you care about if mass unemployment is something to ignore. We must die now so we won’t die later is an exciting premise of struggle and sacrifice that rather neglects there won’t be much to die with later. A bloated and centralised operation can ignore the unsustainable, can evade results and overvalue itself honestly in a way that some of the reductionist mindset of capitalism doesn’t do, but I’m not sure that’s any reason to give it authority.

    Arguably economics is a humanities subject not a science. With MMT applied there might be some capital flight from those with no faith in it. If they don’t like what they’d see as the business plan of the country, and they think on the international stage its all consumer no producer and an insecure market. Investors, big power brokers who do effect the value of the currency, can rip it out, though means to mitigate that are at hand.

    The rich don’t get poorer under MMT, and if it gets into work that ‘competes’ with what had been their domain, they must just hunker down and take their money elsewhere like good capitalists. Progressive taxation can plaster over this, but unless you are seizing the means of production this can create a large market for the private sector economy of such profit that it becomes a greater proportion of the economy compared to the public, and so its power grows… It will outbid the public sector’s sobre assessments in many instances because of projected profit, and with its self-interested tyrannies liking to pretend that its private profits are always deserved and in accordance with the only general good that can be, its actual effects, undervaluing the workforce, creating wealth inequality, damaging the environment, creating planned strategic obsolecence of people and things to aid in the continued expansion of the company… Wealth inequality becomes huge, and the private sector wanting an exploitable and submissive labour force will corrupt, collude, deceive and lie seeing their object in any step in any context to contribute to that situation of an unemployed ‘bank’ or ‘reserve army’ of labour. Neoliberalism right now just opens up more and more matters in life to commoditisation, in the ideal that this atomised hands off approach collectively will produce some bountiful dynamism for all, in the face of all the evidence.

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