MMT is NOT a Theory of State Capitalism (!)

Modern Monetary Theory (MMT) sometimes receives criticism from the left. The following short online critique (link no longer available) is a case in point. It is in reaction to the idea that MMT, though in itself largely apolitical, suggests a way forward for the left:

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…

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, 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?

MMT has nothing to do with controlling the economy – capitalist or otherwise – through monetary policy. Perhaps the critic is referring to the zero-interest rate policy proposed by some Modern Monetary Theorists. 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 sovereign 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 Modern Montary Theorists 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, beyond this, the potential for different social systems that might, at least initially, make use of sovereign currency. An understanding of monetary operations and institutions suggests what is already possible under existing monetary arrangements in China, the US, Japan, Russia, the UK, Canada, and many other countries, though not presently in member nations of the European Monetary Union.

In terms of the MMT understanding of the differences between alternative monetary regimes, the following aspects of a sovereign currency system are particularly significant, whether thinking about policy or different economic systems:

1. A currency-issuing government can set the rate of interest on its liabilities as a matter of policy. Even when it allows a bidding process at an auction, as presently occurs in many countries for spurious (and ideological) reasons, the central bank exerts decisive influence over the outcome of the auction through its actions in the secondary market, where it can commit to purchasing financial assets at prices of its choosing without limit. There is no ‘natural rate’ and markets cannot influence the currency issuer’s choice against the government’s will. This is very different from other monetary arrangements – most notably, the European Monetary Union – in which, although there is still no such thing as a natural rate, the markets very definitely can put upward pressure on the interest rates member governments pay on their debt. Even here the European Central Bank can always step in to neuter market influence, though undemocratic strings will generally be attached when member governments are protected in this fashion. (For an in-depth explanation of this point, see Bill Mitchell’s Who is in charge?)

2. A currency-issuing government faces no revenue constraint. 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 or a commodity-backed monetary system. Under these other monetary arrangements, the government is financially constrained in varying degrees. (Bill Mitchell, again, has provided in-depth explanations of this point in a series of posts, here, here and here.)

In light of 1 and 2, the choice is ours whether we want an economy dominated by the private sector or the public sector. 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, MMT suggests that societies with their own sovereign currencies can opt for any policy mix (and any organization of economic activity) consistent with what is possible under the current monetary arrangement.

The possibilities extend beyond mere variations of capitalism. In considering the ramifications of a government with no revenue constraint and totally in control of the terms on which it spends (e.g. low or no interest payments on debt or no debt issuance at all), it becomes clear that non-capitalist modes of production are feasible, 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 narrow capitalist criteria.

B. There is no imperative 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 were the social will. Access to goods and services (no longer produced as commodities) could be free at the point of access whenever feasible and otherwise rationed either on monetary or non-monetary criteria (need, proficiency or considerations of equality) as deemed appropriate. Either a minimum labor time requirement or a basic income (whether in monetary form or as access to some minimum basket of goods and services) could be introduced, depending on the social will.

In relation to B, ultimately there might be no need for money at all, but the suggestion is that sovereign currency opens up a path to economic activity organized along non-capitalist 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 that sovereign currency opens up this path is that it can be used to free economic activity from the dictates of capital. 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 sovereign currency system, but they can and will be effective in blocking such a path because capitalist investment strikes and bond vigilantism are effective under those alternative monetary arrangements. They need not be effective under a sovereign currency system. Capitalists can propagandize through media, lock out workers, go on an investment strike, pay off politicians, and so on, but they cannot affect the terms on which the currency is issued and financially cripple any not-for-profit uses to which it is put.

This is very different to the situation under other monetary arrangements. In a sovereign currency 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 monetary 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 revenue constrained, and this “other stuff” will be “unaffordable”.

An implication that is critical in explaining why social possibilities are more open under a sovereign 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 the focus is on the possibility of socialism, so there need not be any role 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, if desired, the potential for moving from one economic system to another.

As for the appropriate form of 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. 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 is the use to which sovereign currency is put.