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Modern Monetary Theory: a very useful insight but not a fundamental solution

July 28, 2011

By any reasonably objective viewpoint, today’s debate on deficits and austerity is absolutely ludicrous.  What possible meaning can it have for society to be in debt to itself?  Simple accounting tells us it’s an impossibility, debits must equal credits, and the net balance is always zero.  All major currencies can be created by their governments at no cost and so the “crisis” can’t be seen as real, it’s completely contrived, artificial and “financial”.  Since society as a whole can’t be in debt, focusing on debt and deficits is trivial.  The fundamental issue is real societal wealth which can only include such things as security, food, clothing, shelter, infrastructure, leisure, education, health care, respectful working conditions, clean environment, technological knowledge, and so on.  And all we need do is open our eyes to see we have a severe deficit when it comes to the things that are real.  We don’t have a financial crisis, we have a real crisis.

Modern Monetary Theory is a line of economic thought that pierces the veil of superficial finance and clearly demonstrates the meaninglessness of the deficit fears.  All progressives need to know the true reality of money in fiat currency regimes and MMT is no doubt the place to go.

My thought for today, though, is to wonder to what extent MMT ideas are THE answer.  They certainly have a role, but I don’t think they should be as primary as many proponents lead us to think.  Other things are more important and excessive focus on our undoubted power to issue our own currency may lead us to forget that.

If we look at the world of 21st century capitalism, we see a system of massive concentration.  In the corporate sector, we don’t have a “market economy”, we have a near pure oligopoly.  This means that every major industry is controlled by just a handful of mega-corporations each of which have near monopoly pricing power.  On the individual level, wealth and income are correspondingly concentrated.  In the US, for example, the top 1% of the population control 42% of financial wealth and the bottom 80% a mere 7%.  This is a problem not just for social justice but also for the actual workings of the economy.

We’re undergoing massive rises in productivity and advances in labor saving technology that, coupled with corporate streamlining driven by global economies of scale are drastically reducing the very need for work.  Labor competition is driving down the wage component of global income and correspondingly raising the profit percentage to record levels.  But the gargantuan profits are not easily sustainable given the lack of worker demand.  Remember that profits can’t ultimately come from the worker since profit by definition is excess of price over the wage.  Profits can only arise from capitalist investment, capitalist consumption, or government spending.  Capitalist consumption can’t be a major factor given the extent of the hoards, so it comes down to investment or government spending.  The higher the profit component, the correspondingly higher the need for investment.  Whereas a high wage / low profit economy doesn’t demand extremely high levels of investment, our current structure will collapse without it.  And that’s essentially what’s happening as investment is simply not taking place on any important scale and it’s extremely difficult to see where significant profit opportunities can arise.  Who will buy the products produced by such investment given the suppression of wages?  Thus, instead of investment we see rampant speculation in hedge funds, agricultural commodities, gold, derivatives, and so on.  And, of course, in today’s misguided austerity drives, government spending is slated to decline.

Most MMT practitioners propose that society, through government, provide sufficient spending to guarantee full employment of resources.  This should be done through the printing press and taxes should be adjusted up or down to reduce or increase the money supply depending on the state of the economy.  Borrowings should be considered as well to increase or decrease the money supply and also to achieve a positive interest rate if desired.  The focus should be on the economy’s productive potential and policy adjusted accordingly.  In today’s environment, most say we should cut taxes and / or increase government spending in order to spur production of real resources.

This way of seeing things is certainly a great advance over the current right wing paradigm but it shouldn’t be mistaken for a real solution to our problems.  For starters, why should the government print additional money when such tremendous hoards are sitting in just a few hands doing nothing other than chasing speculative adventures in the global casino?  Before the government should consider creating additional purchasing power, shouldn’t it reasonably assure that the existing supply is productively used?

A policy designed to truly advance the position of the vast majority on this planet would start by regulating the profit margins and permissible executive pay of the oligopoly firms.  This would reduce the price of all products and provide a tremendous gain in real wages.  And it’s easily justifiable using the widely accepted economic thought that entities with pricing power should be regulated in the public interest.

Secondly, individuals with great wealth shouldn’t be permitted the “freedom” to hoard and speculate rather than productively invest.  Hoarding is antisocial behavior that directly harms all of society since it withholds the re-circulation of the currency.  A reasonable anti-hoarding policy could be instituted via a substantial tax on any non-productive investment.  This also isn’t particularly radical – it was recommended by Keynes himself.

So, in a world structured to benefit the vast majority, i.e. a democratic world, the first monetary actions to take shouldn’t be to print money, it should be to assure that existing money isn’t used against the public.  The results would be quite radical, especially the requirement to productively invest.  There wouldn’t be a great number of profitable investments to be found and continuous new investment would drive down prices and eventually bankrupt many wealth holders.  Hoarding of wealth is a necessary prop for the entire system and without it, profits can’t easily be maintained.  Concentrated capitalism is anti-social at its heart because it requires either hoarding or oligopoly to maintain profits.  Requiring wealth holders to productively invest is ultimately quite similar to taxing them at levels approaching 100% but it at least gives them an out if they have an idea beyond arbitrage in hedge funds or hoarding gold. What of corporations which can’t compete and risk going out of business?  Surely we could work out effective “bailouts” of productive enterprises which would then be managed in the public interest.  If we can do it however imperfectly with banks, why not with other firms?

Assuming the prices charged by oligopoly firms were adjusted downward to incorporate only wages and productive investment needs and those with wealth were required to productively invest, would there be a need for government deficit spending other than minor tweaks?  I would think so.  Purchasing power, i.e. “demand”, in our system is based on the wage and as productivity improves there’s no reason to think the wage will provide sufficient purchasing power to assure the standard of living our technology permits.  This is where MMT comes in, I would think.  After we assure existing power is no longer used against the population, then we step up with the knowledge that purchasing power, i.e. money, is always in the hands of society.

I’m not against using MMT in the way it’s being proposed today but I do think it’s critical to realize it’s only a tweak of a fundamentally unsound and unjust system.  It treats the surface wound but ignores the internal infection.

From → Dynamics, Suppression

  1. Dave permalink

    Let me see if I can tackle this one a bit. I don’t necessarily disagree, but I think you put the cart before the horse, so to speak. Also let me say, I love MMT, but not sure I qualify as an MMT’er.

    “Before the Government issues additional purchasing power, shouldn’t it ensure that the existing supply is productively used?” This is somewhat of a fair critique, although there’s nothing about MMT’ers which suggest that they think distributional issues aren’t a problem.

    So, yes and no. I completely agree with your 2nd point but disagree with the 1st: better to tax more of that unproductive savings away than putting limits on profit margins. I’m not a fan of this.

    If you limit profit margins, you are asking for trouble the next time a cyclical downturn hits. Because you are artificially making the enterprise cost more than it would, employees earning more wages than they are worth will end up axed. A better option in that regard would be ensuring somehow that workers are better represented on Corporate boards so that it is more difficult for executives to run away with an unfair proportion of wages and let profit margins run where they may.

    In any event, limiting profit margins is almost assuredly a non-starter. If you think MMT’ers are ignored by the mainstream, this idea is certain to go over like a Led Zeppelin. Rather than being “widely accepted” in the case of public monopolies, I see that more as “widely tolerated.”

    Furthermore, I don’t see a tax on excess savings (as well as limiting profit margins) as a complete remedy to the situation. First of all, if the tax is “substantial” as you suggest, again you are talking about a non-starter. It should be just high enough to provide safe regulation, but not so high as to stifle innovation. All those excess savings do provide a significant amount of wages for support. It is not completely idle. In a world of increased productivity, we should be at least appreciative of savings ability to provide service positions.

    Finally, as part of the circuit, some of the money is necessarily still going to leak through to savings and some of it is still going to be destroyed by taxation, meaning there is still a spending gap albeit smaller. This spending gap ensures there is still unemployment. Ultimately, a job guarantee is the only way to go to completely fill the gap. Which brings you back to MMT.

  2. Hey Dave,

    “there’s nothing about MMT’ers which suggest that they think distributional issues aren’t a problem.”

    I think many MMT’ers see distributional issues as a problem but I do think that their proposed solutions minimize them and focus instead on government spending, guaranteed jobs (at not too great a wage), and even reducing the income tax from where it is now.

    “you are artificially making the enterprise cost more than it would”

    Is not the consolidated power of these oligopolies altering their true worth? Are not they making more income than they should because of their consolidated power?

    “A better option in that regard would be ensuring somehow that workers are better represented on Corporate boards so that it is more difficult for executives to run away with an unfair proportion of wages and let profit margins run where they may. ”

    I think you’re missing the importance of the need to regulate profit margins when corporations have pricing power. Does not the entire justification of capitalism in a democratic society demand that all players are 100% subject to the forces of competition? If you permit virtually the entire economy to bypass the laws of competition due to consolidated power, then you no longer have a market economy. The system then operates under the logic of power and not “economics”. To say you don’t want to interfere in such a system seems absurd since the market economy’s already been interfered with. Placing a few workers on the board seems very lame – look at how easily today’s unions are co-opted. As long as the companies have pricing power, even if the workers on the board achieve higher wages for the decreasing number of employees, why wouldn’t prices rise to offset that. And, if they bargained for higher wages than exist in China, what keeps the corporation from moving operations? What’s your answer to how public utility monopolies should be regulated? Put a few workers on their board and leave it at that? The interests go beyond just the workers who are employed at the companies. I think democracy demands public regulation of prices when they aren’t limited by competition.

    “In any event, limiting profit margins is almost assuredly a non-starter. If you think MMT’ers are ignored by the mainstream, this idea is certain to go over like a Led Zeppelin. ”

    That’s the sad state of discourse today, certainly. But, properly explained, I’d think the public would be very open to the proposition that oligopoly pricing power is a true problem that should be addressed through regulation. It was a huge issue pre-WW2. It’s also an argument that fits well with mainstream economic logic – that pricing power should be regulated. I don’t believe at all that the left should limit its ideas to what current mainstream economics currently accepts. This is not to say that MMT economists can’t continue to focus on the theory of money and that deficits don’t really matter – it’s a critically important point. My focus in this post is that it’s not at all the major point and the left should incorporate the MMT ideas of money into a wider critique.

    We’re operating in a world with consolidated pricing power in all industries and ever declining opportunities for profitable investment. This looks almost certain to continue. If the vast majority has any chance of living anywhere close to our technological capacity, we need to curtail the ability to price at levels above what competition would permit and we need to assure that the currency we have is not just dumped into idle speculation. These ideas were near consensus pre-WW2 and are not very different from original Keynesianism. I don’t think MMT’ers should be very afraid of them.


  3. Dave permalink

    Hey Jim,

    Interesting discussion you had with Rep. Polis.

    Anyway, I’ve been thinking about this and I thought I would throw out my critique of MMT here for the hell of it. Maybe you’ve got some thoughts on it.

    #1. Modern Monetary theorists ignore the complete reality of the economic system when they suggest that Government is the monopoly issuer of the currency. Obviously this issue is conflated by the existence of the central bank as a public/private institution. I suppose one could consider this is a strength of MMT because they take the mainstream paradigm here and flip it on its head. But the reality is, despite the fact that the central bank may remit income to the Treasury and operate at the pleasure of the legislature, so long as there is no overdraft capabilities by the Treasury, the central bank maintains as much resemblance to a private institution as a public one. Furthermore, given a private bank’s ability to create deposits which trade at par with the national currency, the claim that the government is the monopoly issuer of the currency is dubious at best.

    #2. Similar to #1, I hesitate to accept the idea that the Government must 1st spend money into the economy in order for people to have it. this is a bit more of a dubious claim than #1, but it is possible that the government could tax solely on the basis of credit money existing within the economy. Bank loans also force the creation of reserves by the central bank, so it’s seemingly possible that credit money could exist prior to government money. Clearly the presence of capital requirements on banks makes this claim weak, but reality in my eyes suggests that its not absolutely critical for a government to spend 1st.

    #3. MMT maintains that the mainstream theory of “crowding out” is a myth. I certainly find this to be true at a small level. The existence of government debt as “near money” allows any investor who so desires to trade in their bonds for cash with which to make a more lucrative investment; or, an entrepreneur seeing opportunity for profit should always be able to attain bank credit to make the investment. But on a much larger scale, it becomes obvious that crowding out must exist. Just because investors choose to purchase bonds and accept the guaranteed return, doesn’t mean that there aren’t other investments which would benefit from those funds. If we imagined a world where government didn’t offer risk-free returns to investors, it’s extremely implausible that all the investors would simply accept their cash with no return. In fact, it seems more likely that in absence of government bonds, investors would take those funds and seek higher yield–QEII is the perfect example of this. This to me makes a great argument for eliminating government bonds in their entirety and forcing savers to invest in more productive ventures.

  4. Dave,

    Interesting but it’s always frustrating talking with representatives – they’re not so much people as institutions.

    Don’t have too much time tonight but here’s a few quick thoughts.

    1) The differentiation between public / political and private / economic within the capitalist system is an interesting subject with quite a bit written on it. A basic critical viewpoint is that there’s really only one political system but it’s divided into 2 components: the political / public / democratic and the economic / private / undemocratic. The political must never “interfere” with the private.

    Under past societies, the 2 weren’t separated and the separation is one of the key features of capitalism. So, monetary policy under capitalism requires “private” limitations on the ability of the political side to print money. If there were no limitations, then the system would barely be capitalism since the democratic side would control to a great degree the economic. MMT claims the government as a consolidated entity has the power to print money and that’s certainly correct. But to do so it would have to eliminate the “private” controls and essentially change the entire system.

    The banks are a private means to “print money” and I agree with you that ultimately banks print money in much the same way as the government would under MMT. Except that the bank goes under if it’s not paid back – a rather major difference. Even so, I think it may emphasize my previous point that under capitalism – defined as the “private” ownership of the means of production (and money) – the “political” government must be tightly checked and all economic decisions left with the “private” side.

    2) I’d probably agree with you here. I don’t see bank reserve requirements playing much of a role though because the private economy would be making profits which could be rolled into additional bank reserves and therefore be self sustaining. I don’t see any internal limitation to bank expansion except ultimately that the economy wouldn’t be sufficiently profitable. I don’t think a high investment economy can be long term sustainable per my post today but of course in the long run …

    3) I agree we should eliminate government bonds and the outrageous subsidy of a risk free return. I think the only ultimate crowding out would be when you have full employment of resources.

    Interesting thoughts…


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