Catastrophe: Modern money, the state and labor theory

by Jehu

1. Modern Money Theory, or the state as monetary sovereign

I am reading, “Modern Money Theory 101: A Reply to Critics by Eric Tymoigne and L. Randall Wray”. I like this paper because it is a comprehensive defense of the ideology of the modern money school (MMT). Because it is a comprehensive statement of this school, it is possible to show modern money theory is a theory of fascism on steroids.

teapartyI want to state at the outset that by fascism I do not mean Nazism or any other peculiar manifestation of fascist politics from the 1930s. (Indeed, the ideas associated with modern money theory are popular across the entire spectrum of American politics — from the Tea Party to the progressive Left.) Rather, I will show that MMT expresses a fundamental tendency inherent in the capitalist mode of production toward the displacement of the capitalist class as managers of the production of surplus value by the state.

The basis for my argument on fascism can be found in Frederick Engels’ short primer, “Socialism: Utopian and Scientific” where he states:

“In any case, with trusts or without, the official representative of capitalist society — the state — will ultimately have to undertake the direction of production. This necessity for conversion into State property is felt first in the great institutions for intercourse and communication — the post office, the telegraphs, the railways.

If the crises demonstrate the incapacity of the bourgeoisie for managing any longer modern productive forces, the transformation of the great establishments for production and distribution into joint-stock companies, trusts, and State property, show how unnecessary the bourgeoisie are for that purpose. All the social functions of the capitalist has no further social function than that of pocketing dividends, tearing off coupons, and gambling on the Stock Exchange, where the different capitalists despoil one another of their capital. At first, the capitalistic mode of production forces out the workers. Now, it forces out the capitalists, and reduces them, just as it reduced the workers, to the ranks of the surplus-population, although not immediately into those of the industrial reserve army.”

The modern money school is an ideology that unconsciously expresses a material necessity for the state to undertake the direction of production. It is also a description of the extent to which this is possible insofar as commodity money has already been rendered unnecessary. In third place, it is a description of the absolute independence of the capitalist relations of production from society and from the production of material wealth. Finally, it is the expression of the contradictions of capitalism in its final form: a crisis of the state in which one particular state comes to stand over against the working classes of all countries and must be overthrown by them together.

2. A state without external constraints

In the opening lines of their paper the two writers, Tymoigne and Wray write that one of the main contributions of MMT is to explain why what they call a “monetarily sovereign state” is not subject to hard financial constraints. The argument here is written in such a way that its implications may be missed by most readers and perhaps even reflects a naiveté on the part of the writers.

To understand the significance of this statement, one has to realize the state produces nothing and for the whole of its existence has only lived on the labor of society. The state, therefore, has relied, directly or indirectly, on uncompensated appropriation the product of society’s labor. In the direct form, the state simply appropriates the product of labor as taxation; while, in the indirect form, it carries out this appropriation by means that themselves ultimately rely on taxes to be repaid, e.g., public debt.

The argument Tymoigne and Wray make in their opening line is not simply about balances in a ledger book as the modern money school thinks. It means, in plain English, that the state no longer faces any social constraints at all on the appropriation of the product of social labor. Previously, if the state faced a “financial constraint” on its appropriation, it had recourse to direct physical taking. But something has occurred since 1971 that has not just provided the state with recourse to direct physical taking, but has also placed in its hands, the very means of exchange society uses in its market transactions — the value-form itself, money.

This absolute loss on the part of society appears in MMT as the absolute power of the fascist state against society, an event they designate with the term “the monetarily sovereign government”.

3. The puzzle of the monetarily sovereign state in labor theory

This presents labor theory analysis with a puzzle that goes back to the very opening chapters of Capital: Since the state’s capacity to appropriate the product of labor through taxation is not in any sense based on exchange, it would appear that this power stands outside labor theory analysis. Indeed, Marx and Engels went out of their way in the first chapter to specify that taxes fell outside the analysis of the mode.

“The mediaeval peasant produced quit-rent-corn for his feudal lord and tithe-corn for his parson. But neither the quit-rent-corn nor the tithe-corn became commodities by reason of the fact that they had been produced for others. To become a commodity a product must be transferred to another, whom it will serve as a use value, by means of an exchange.”

Marx and Engels made sure to clarify that state taxes and other forms of state appropriation of the product of labor fell outside analysis of the capitalist mode of production. It would, therefore, appear as if “the monetarily sovereign government” must, by the same token, fall outside of analysis of the mode of production.

I have to show this is not true — it is the development of the mode of production itself that hands the fascist state this absolute power; it is necessary to demonstrate that the “monetarily sovereign government” is itself a symptom of the collapse of capitalism. Objections to the arguments of the MMT school can be seen in this sense as objections to the very idea capitalism is doomed. Thus, to disprove the arguments of the MMT school, it is necessary first to prove MMT is correct.

4. How MMT avoids the implication of the “monetarily sovereign government”

The writers place these objections in five categories: 1. definition of money and currency and their origins; 2. fiscal policy; 3. monetary policy; 4. MMT and less developed countries; and 5. policy prescriptions. They propose to address these objections by employing the tautologies of national accounting; which is to say, they will pragmatically address each concern in turn without offering an overarching theory to explain their results.

The MMT school are not concerned with political-economy here, and do not wish to explain how the state comes to be a “monetarily sovereign government”; they simply take this development as a given.

Here is my problem with this approach: since the writers never investigate how the state becomes a ‘monetarily sovereign government’, they can bypass the implications of this development. All discussion of what it means for society for the state to have no hard financial constraints on its expropriation of the product of social labor is thus avoided. Arguments may persist over whether the state actually enjoys this privilege, but no one actually asks themselves what it means for the state to have it.

5. Buying without selling: MMT’s inversion of the act of exchange

In section 1 of their paper, Tymoigne and Wray, explain why the world of MMT is not the world we encounter in everyday experience. In our every day experience, if we wish to eat we must first sell our labor power or another commodity:

“Households meet [this] requirement by working and earning a monetary wage, companies do it by making a monetary profit”.

In other words for households and businesses the process of exchange begins by selling their commodities and thus acquiring means to buy. For the state, however, it is otherwise: since the state produces nothing it has nothing to sell. Thus while households and businesses begin by selling, for the fascist state the process begins by buying.

According to MMT, by the simple act of making a purchase, the state injects currency into the economy that is the means of exchange households and businesses use to buy goods themselves. On the other hand, households and businesses sell their commodities to the state in order to gain the means necessary for their own buying. In this topsy-turvy, inverted fascist world, therefore, society (the state) must buy before selling and consume before producing. How is it possible to consume before one has produced? Tymoigne and Wray do not bother to explain this to us, since they are solely concerned with reality as it exists, not as it appears in economics textbooks.

In the real world of MMT, before individuals can buy, the state must buy; before society has means to consume, the state must issue those means by consuming. This, the writers tell us, was “Keynes’s point that spending is what makes saving possible”.

To make their case for this weird inversion, the writers assume a simplified model of the economy, “with a federal government that injects currency by spending and imposes a tax that must be paid with this currency.” But they never explain why is it necessary for us to begin with this assumption? Why can we not begin with the assumption that the state can simply seize the product of labor produced by society? In the latter case, the state has no need to issue currency and demand it be repaid in taxes — it simply takes what it wants. This state also has no “self-imposed constraint on its financial operations’, since it simply grabs by fiat whatever it need to fund its operations. This sort of direct expropriation long pre-dated taxation, amirite? Even if we cannot locate the origins of money thru the fog of history, it is likely simple direct taking long arose before money itself.

However, there is a problem with this: no matter how far we go back into history, logic presupposes that before taking could exist, someone had to be producing — otherwise what the fuck was being taken? Thus, no matter how much MMT wants to claim the origins of money are lost to us, there is no way buying could exist before selling; and no way the consumption of the state sector could have arose before the production of society.

So we have a big problem: we have to explain how, despite the fact that in a mode of production founded on exchange selling must come before buying and production before consumption, nevertheless today these orders of operation have been mysteriously reversed.

6. Quoting Keynes out of his context

It is one thing to cite Keynes as an authority when making the MMT case, “that spending is what makes saving possible”; and another thing to explain to the reader of MMT propaganda why, today, this must be true. The appropriation of Keynes’ words out of context to support the MMT argument is nothing more than a deceptive ploy on the part of Tymoigne and Wray to make it appear as if consumption has always preceded production and that buying has always preceded selling.

In fact, this inversion only arose under certain very definite circumstances, the Great Depression, when the economy suffered under the weight of the most extreme overproduction of capital. With massive underutilized capital capacity and a huge surplus population of workers — in those specific circumstance, when huge stockpiles of unsold goods sat everywhere — restarting production for profit required the fascist state to absorb the surplus masses of capital of every description. Thus, although it appears that since the Great Depression buying has to precede selling and consumption has to precede production, this was only because the depression itself produced huge volumes of unsold commodities that had to be bought and consumed by the state.

To put this in terms that can be understood by our green-shaded accountants in the MMT school, who are obsessed with balances on a ledger book, the alleged self-financing of the state presupposes the fascist state’s “financial” activities are already pre-funded by chronic overproduction of capital, which excess capital has to be placed at the disposal of the state on pain of devaluation.

Now that we have cleared up the mystery of how the fascist state can buy without selling and consume without producing, we can proceed.

7. Does MMT self-financing create inflation?

First up is the Charge that ‘financing’ government by counterfeiting currency, as advocated by the modern money school, leads to inflation. To answer this charge the writers assumes the simplest model of this self-financing: the state counterfeits currency to make a purchase and then imposes a tax to recover from circulation the money it has spent into the ‘economy’.

Since the state is the only source of the means of exchange it counterfeits to make purchases, it “has an unlimited ability to provide funds to the other sectors. Thus, insolvency and bankruptcy of this government is not possible. It can always pay.”

The term “pay” is being employed in a rather perverse sense: the state has, in fact, paid nothing. What the state has done is counterfeit the means of exchange and used this counterfeit to appropriate the product of social labor.

The action is not unprecedented: states have long counterfeited their currency and employed it to appropriate the product of labor. For instance, during the American Civil War, both belligerents counterfeited their respective currencies and used this counterfeit to finance their military campaigns. Counterfeiting the currency to finance the war had exactly the impact on the purchasing power of the currency that the opponents of MMT expected.

According to Wikipedia, which keeps track of such trivia, the Confederate states found their currency rapidly depreciating in purchasing power over the course of the war. While both belligerents had the unlimited capacity to counterfeit the currency, and while both never faced bankruptcy in their respective currencies, they did nevertheless see their currencies lose purchasing power against gold and silver. During the Civil War, state fiat currency was not the only means of exchange available to society and its members quickly began discounting the worthless paper against hard cash. The results were rather telling: on the Confederate side, the purchasing power of a paper dollar fell to just six cents against a commodity dollar within three years — by the end of the war a bar of soap sold for 50 confederate dollars.

If you think this cannot happen today, because paper dollars are no longer redeemable for gold, you should know that $20.67 could buy you an ounce of gold in 1933, but nowadays that same ounce will run you almost $1300. While you can no longer walk into your local bank branch and redeem your paper dollars for gold as was common in the 1860s, state counterfeiting has proven as effective today as it was in the 1860s for destroying the purchasing power of state issued dollars.

The comparison of dollars to gold is valid because, no matter what the changes have taken place in the development of the productive forces over the period from 1860 to 2014, the physical characteristics of an ounce of gold as a use value have not changed. It is not as though someone can claim that an ounce of gold delivers more utility today than it did in 1860. The useful characteristics of an ounce of gold has not changed; what has changed beyond all controversy is the purchasing power of state issued currency.

8. The catastrophic origins of the monetarily sovereign government

One of the most interesting defects in the MMT argument is their explanation for how the state becomes a monetary sovereign. Clearly the state can only become monetarily sovereign if it does not have to pay its debts in a form of money it cannot counterfeit. As the writers of this paper admit, logic requires the state has exclusive control over what serves as means of exchange.

“Any issuer can provide a potentially unlimited quantity of her own IOUs, and can agree to accept them back in payment. The trick, as Hyman Minsky said, is to get those IOUs accepted.”

So, how do the writers account for the fact that the currency of the fascist state is accepted as means of exchange?

The fascist state can do this, they argue, by imposing taxes on its citizens and only accepting payment in the form of its currency. If a state promise to pay its debt in a commodity money or the currency of another state, it risks default on its obligations.

I am not sure how this argument has remained unchallenged by the opponents of MMT this long. Clearly, China and Japan are under no obligation to pay US taxes, yet they have accumulated huge masses of US debt. While taxes might play a role in what figures as means of exchange in an particular country, it in no explains why the currency is accumulated as reserves beyond the territory controlled by the state. Moreover, state issued currency as the exclusive means of exchange within the world market only dates from 1971 and, in most advanced countries, only since the Great Depression

MMT must explain why suddenly and without warning all industrial nations moved to state issued currency as their exclusive means of exchange at once. Was this just a coincidence? Or was it motivated by a material changed in the mode of production itself? Even the briefest examination of the record from the period of the Great Depression must lead any objective person to conclude states did not adopt their currencies as exclusive means of exchange voluntarily. The decision was imposed on every state by the crisis and by members of society removing gold completely from circulation. What is today describe as states’ emancipating society from the ‘barbaric relic’ was forced on all states because of the catastrophic effects the Great Depression had on the supply of gold in circulation.

The Chicago Fed, for instance, described the situation this way in 1931:

“IN 1931, as in the preceding year, the Seventh district shared in the world-wide decline in industrial and business activity. The downward movement of prices for agricultural products and the unusual number of bank suspensions gave added severity to depressed conditions in the district. These bank suspensions, a great majority of which were non-member state institutions, in most cases followed upon heavy and persistent withdrawals of funds by depositors. Similar demands upon many other banks impaired their ability to respond to normal demands for credit. A large part of the currency paid out in this district in the course .of the year found its way into private hoards.”

Gold wasn’t replaced by state issued fiat, it was removed from circulation by the members of society, who chose to hoard it in light of depressed economic conditions. The industrial states were compelled as a result of this hoarding to step in and supply their currency to prevent the complete collapse of production. For four years, as economic conditions declined, Washington tried to avoid ending the gold standard, but was finally forced to accept it.

The writers want to ignore this very real history because it contradicts their own prejudices toward fascist state domination of society. In fact no one — not even the capitalists — wanted a “monetarily sovereign government” that had to spend money into existence, “before taxes and other obligations can be paid.” What appears in the MMT narrative as a perfectly logical “framework that is useful for analyzing how modern government works”, was, for society at the time of the Great Depression, a complete and utter catastrophe. Moreover, it was a predictable catastrophe and one that marked an advance in the mode of production itself.