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