MMT: Modern Money Theory

In response to the Coronavirus pandemic, there’s been a dramatic increase in government spending. The big question is: ‘How are we going to pay for all this?’ To the economists who subscribe to Modern Monetary Theory (MMT), this seems an easy question.

For them, MMT represents a Copernican revolution in economics; a revolution which has the potential to liberate us from our imaginary fiscal chains.

However, to its detractors, MMT is, at best, wrong-headed. They see a very different potential: the potential to destroy any society unlucky enough to fall under its spell.

The stakes are very high.

The postulates of MMT include:

• There’s no need for governments to balance budgets;
• Taxation does not finance government expenditure. On the contrary: ‘taxpayers [don’t] fund government; government funds taxpayers’;
• Unemployment is unnecessary; money creation can stimulate aggregate demand.

In the next few articles, I’m going to look at each of these in detail. But first, I want to examine what is presented as a conceptual foundation of MMT: Chartalism. Chartalism is the idea that fiat money (money with no intrinsic value) was deliberately invented by the State.

If you stop to think about it, fiat money is an extraordinary thing: you can’t eat it, you can’t drink it, it won’t keep you warm, and it isn’t made from precious materials. So, how did we come to accept worthless tokens for our time and produce?

According to the traditional account, fiat money sits at the end of a long chain of innovations prompted by the frustrations of barter. Elementary barter requires the double coincidence of wants. That makes it wasteful and highly inefficient.

Imagine you’re a baker who wants new shoes. What happens if the cobbler doesn’t want bread? You’ll have to find out what he does want and then search for someone who has it and wants to trade for bread. The time you waste getting hold of stuff to trade is time lost to production. Barter is an impediment to growth.

Eventually, exchange in terms of rice, salt or precious metals (commodity money) supplanted direct exchange. Then came tokens backed by precious metals. Finally, after millennia of trial and error, we arrived at fiat money. MMT rejects this traditional account as ‘ahistorical’.

Building upon the work of early 20th century economist Georg Knapp, and anthropologists such as David Graber, MMT stresses the absence of any firm evidence that a barter economy existed before the advent of money.

The big question is: ‘How are we going to pay for all this?’

However, it’s important to keep in mind that absence of evidence isn’t evidence of absence. Nevertheless, if money didn’t organically emerge from barter, where did it come from? According to MMT, it was a lot more straightforward: the ‘State’ wanted people to do its work and simply invented fiat money as a way of paying them.

But hang on, why would anyone want to work for that?

The answer is ingenious: the State didn’t just issue fiat money; it simultaneously imposed a tax which could only be paid in its fiat currency. People now needed that currency. According to Professor Kelton: ‘It’s not our tax money the government wants, it’s our time…the tax liability creates people looking for work [paid for] in the government’s currency. The government then spends its currency into existence….’

This is identified as the driving force of economic activity; before money … there was no trade.

In the beginning, there was subsistence farming; the State said: let there be money, and there was trade! Is this account plausible? I don’t think so. The notion that ancient peoples invented fiat money to fund ‘State’ activity simply isn’t credible. It’s far more likely they’d go out and take some prisoners from a rival settlement and force them to do the dirty work.

More damagingly, money is literally inconceivable outside a culture of trade. It would not only be undefined, but undefinable.

To claim the invention of money preceded trade is of a similar status to a claim that music was invented in order to provide material to put on records; or, cars were invented to house seatbelts; or, the camera phone was invented in order to drive sales of selfie sticks.

Be all that as it may, which of the postulates of MMT depend upon (or emerge from) the Chartalist account of the origins of money? Bizarrely, none: there is absolutely no logical relationship between it and any of the postulates. What, then, explains MMT’s enthusiasm
for the Chartalist ‘money was invented by the State’ story?

A question to which I shall return.

(Read Part II)

Peter Lawlor is a trustee of the John Hicks Foundation in Oxford, he was the chief economist at the German Stock Exchange, and continues to act as an economics adviser to senior Wall St figures and political leaders.