MMT and the heresy of the self-financing fascist state

by Jehu

At Nathan Becker’s (twitter: @netbacker) suggestion, I have been reading this piece by Billy Mitchell on modern money theory, Deficit spending 101 – Part 3. If you have any background in the assumptions of mainstream economic theory, you will notice that the piece makes a number of surprising claims:

The idea that a currency-issuing government is financially constrained is a myth. The funds that government spends do not come from anywhere and taxes collected do not go anywhere. Taxes do not finance anything and government spending is independent of borrowing. The government deficit determines the cumulative stock of financial assets in the private sector. Moreover, when government runs a surplus, purchasing power is destroyed forever. Finally, government expenditures do not crowd out private expenditures.

That is a lot of heresy in one short (by Billy Mitchell standards) article. People hearing the MMT argument for the first time must have the same reaction I had the first time I heard Warren Mosler pedro-meyer_06explain it in simple language: “That guy is insane.” Over time, I gradually began to realize what Mosler was saying: modern money (as they call the floating dollar/gold standard) was the practical result of the US withdrawing from Bretton Woods in 1971. When the US went off the gold standard, the fascist state no longer was financially constrained in its spending, i.e., it was no longer constrained by the requirement it exchange its worthless currency for gold. The implications of Moser’s talk was that the fascist state’s capacity to absorb excess surplus value is limited only by the quantity of excess surplus value produced in the entire world market. Previously, a given fascist state could appropriate (i.e., borrow or tax) the surplus value produced by private capitals within their territories (including colonies). Since 1971, however, the United States has been able to do this to the entire planet, because it alone controls the world’s reserve currency.

If you press anyone from the modern money school, they may explain that the aforementioned heresies have only been true in practice since 1971 when the US unilaterally withdrew from the Bretton Woods agreement. In other words, whatever else happened when the US dumped the gold standard, the fascist state in Washington now no longer needs to tax or borrow money to spend. As a result of the 1971 event, the fascist state can simply credit the account of its vendors, pensioners, employees, soldiers, etc. It later withdraws all or part of this additional currency created out of nothing through taxes and borrowing. The fascist state can, thus, create the means of exchange apparently out of nothing simply by purchasing. And it can destroy this newly created means of exchange simply by taxing it out of existence or running a budget surplus.

How did the fascist state acquire this strange power in 1971?

Well, here is the thing: the gold standard collapsed because even before the peg was changed the fascist state operated exactly like MMT says it does now; which is to say, Washington was behaving in a way that was incompatible with the gold standard. Its stock of gold reserves were rapidly being depleted because it was printing dollars to finance its spending. Washington simply spent as it does now and when those newly created dollars made their way back from France, Japan or Germany to the Treasury they had to be redeemed for actual gold. At a certain point, with its reserves dwindling, Washington was no longer willing (or able) to redeem its worthless currency in gold and was forced to unpeg the dollar from gold — i.e., the US suffered a massive currency crisis that is not directly mentioned in the official history of the US economy.

The only difference before and after the US unilaterally withdrew from Bretton Woods is that the way Washington operates is no longer a drain on its gold reserves. In reality, then, the US was forced off the gold standard in 1971. Since then economists have made a virtue out of what was in reality a necessary measure to avoid national bankruptcy and default. If Washington wanted to spend more than it took in to finance wars of aggression in Southeast Asia, it was forced to break with the gold standard. The modern money school, therefore, is correct to argue the state at present has no need for taxes or borrowing, but they are wrong to think this began in 1971. It wasn’t the collapse of Bretton Woods that freed the fascist state from the constraints of its budget; what freed the fascist state from the constraints of its budget was a much earlier event: the Great Depression, which began not in 1971, but 1929.

The power of the state to issue currency without limits begins, as Keynes observed in 1930, the year after the depression broke out, with the tendency inherent in the capitalist mode of production to reduce the need for wage labor faster than it could find new uses for wage labor. It is only after capital could produce more value than it could find profitable investment outlets for reinvestment, that the state was compelled to spend without limits. The way the modern money school presents the issue of deficit spending, you would think the state had been freed of all financial constraints. Mitchell, for instance, explains that fascist state spending “comes from no-where”; i.e., the state is not financially constrained in its spending; neither taxes nor borrowing nor both together imposes limits on the spending of the fascist state. To the contrary, says MMT, after the state has already spent, it can then choose to offset its spending by taxes or borrowing — and this, they tell us, is simply a matter of policy.

Fascist state deficit spending is not an optional policy

However, for all this capacity, the ability of the United States to spend without financial constraints does not flow from the dollar’s position in international trade itself. The US is simply in the enviable position among fascist states to have exclusive ownership of the world’s reserve currency. There is nothing particularly special about the US dollar and its position in economic relations is mostly a matter of historical fortune. What is not a matter of fortune is that some particular currency had to play this role and a fierce competition between national capital went into the determination of which currency it would be; in particular, two world wars that cost more than 100 million lives.

For all of this, the dollar’s position as world reserve currency is not imposed on other nations by force as many believe. The hardest thing to explain is that the dollar’s position as world reserve currency is not just the result of policy decisions made in Washington, but equally arises from the needs of other national capitals as well. Which is to say, keeping the dollar as reserve currency is not actually a policy at all, but is imposed on Washington as well. Other national capitals need the dollar to function as reserve currency as much as Washington enjoys the benefit.

To be clear on the implications of my argument here: running a fiscal deficit is not an optional policy that the United States can choose to do or not to do. So long as other national capitals produce more than they can reinvest, some fascist state must absorb the resultant excess capital, and this state is the owner of the reserve currency. Over the past 35 years, the United States has tried to balance its budget on numerous occasions and each time it has led to economic crashes. In fact the last three world recessions were caused by attempts to reduce the national deficit of the United States.

Folks like the followers of MMT take this to mean Washington should run deficits, but it actually means the reverse: The deficits facilitated the accumulation of excess capital and thus extend the shelf-life of the capitalist mode of production. The only people favored by deficit spending are the wealthy, since US deficits ultimately take the form of apparently risk-less dividend streams on state issued bonds. But no Leftist seems willing to even think about that. They want to explain rising inequality by everything except the stream of interest on the national debt that Washington has paid for the last 35 years. How can you be offended by tax cuts for the rich and not realize the money handed out in tax cuts is later borrowed back by the state? What sort of ideological disconnect from reality does that imply?

But this is exactly the sort of thinking behind the MMT school: If Apple wants to sit on huge hoards of capital it can’t invest, the fascist state must run deficits — Mitchell has labeled this scam the “cumulative stock of financial assets in the private sector” and it is equal to the magnitude of fascist state deficits. What he never mentions, however, is that this ‘cumulative stock of financial assets’ is absolutely worthless as capital and cannot be invested. If it could be invested, it would be at work producing more surplus value and none of it handed over to the fascist state voluntarily.

To put this another way: the accumulation of “financial assets” in the private sector is as much a symptom of a profound crisis — a depression of the Great Depression type — as a large mass of unemployed workers. We should no more want the accumulation of financial assets (i.e., government debt) in the private sector than we want the rising inequality that directly results from the debt service on those fictitious assets.

Why fascist state spending does not crowd out private capital

It is quite true that there is no crowding out from fascist state deficits, but this is because there is no place to profitably invest the excess capital. It is excess, which means it cannot become real capital, it cannot employ labor power for the further production of surplus value. To say that fascist state budget deficits don’t crowd out private investment only confirms that the capital involved is dead and must be lent to the fascist state if it is to produce any return at all. China, for instance, has no possible use for its dollar reserves even if it stockpiled every spare ounce of copper, oil and gold in the entire world market. The day after it did this, the national capital of China would still have produced more new capital than it could profitably reinvest and thus it would still be necessary for the government to purchase fictitious debt instruments from Washington. In this way, China actually finances its own military and diplomatic encirclement by the US despite knowing it is doing so. But it has no choice.

China’s predicament is not unusual in this sense: Every communist knows theoretically she is only enriching her exploiters and impoverishing herself by going to work each morning, but she does so anyway, because she has no choice but to submit to the requirements of the capitalist mode of production. The very same law of value that forces us to submit to capital compels China as well. If China continues to run trade surpluses, it must find new markets for its capital or hand it over to the fascists in Washington, who will employ it against China.

MMT as the theoretical expression of the nonnecessity of labor

The subject matter of MMT, whether its writers know it or not, is the same as Moishe Postone in his book, Time, Labor and Social Domination. In the book, Postone speaks of a process that he labels, “the growing historical nonnecessity of value-constituting labor”. According to Postone, in the Grundrisse and in Capital, Marx develops a third category of labor time — superfluous labor time — that stands in opposition to the more familiar categories of necessary and surplus labor time. As Postone explains it, both necessary labor time and surplus labor time are forms of socially necessary labor time. The first, necessary labor time, more or less accords with the subsistence of the working class; while the second, surplus labor time, more or less accords with the labor time appropriated by the capitalist as profits.

According to Postone, however, with the development of the productive forces, there appears a new category, superfluous labor time. This labor time is notable for the fact that it is the expenditure of labor beyond the duration that is socially necessary as defined by the subsistence of the social producers and the requirements of material production.

“The difference between the total labor time determined as socially necessary by capital, on the one hand, and the amount of labor that would be necessary, given the development of socially general productive capacities, were material wealth the social form of wealth, on the other, is what Marx calls in the Grundrisse “superfluous” labor time. The category can be understood both quantitatively and qualitatively, as referring both to the duration of labor as well as to the structure of production and the very existence of much labor in capitalist society. As applied to social production in general, it is a new historical category, one generated by the trajectory of capitalist production.”

Up until this point in the development of social production, says Postone, labor existed in its two familiar forms: necessary and surplus, each more or less according with the two classes, i.e., wages and profit. However, at a certain point a new category emerges that is labor time beyond the subsistence of the working class and the material requirements of production. It expresses a potential for a general reduction of hours of labor, but it takes the paradoxical form of ‘overwork’, i.e., a constant extension of hours of labor beyond any possible productive employment of the expended labor — and this, driven not by the needs of the working class or the material requirements of production, but by capital itself.

The historical necessity for a general reduction of social labor makes its first appearance as a population of proletarians who have been rendered completely superfluous to the production of surplus value and can no longer sell their labor power. These proletarians are locked out of all productive employment because, as Keynes put it, “our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.” The need for a general and all-round reduction of hours of labor thus appears initially in the form of what Keynes first referred to in his General Theory as “involuntary unemployment”. From this point forward, the primary imperative of state economic policy is to absorb this mass of superfluous proletarians and excess capital to achieve “full employment”.

“Full employment” and superfluous labor time

The subject matter of MMT is precisely this problem: how to ensure the “full employment” of the surplus population of workers and the excess capital that is now entirely superfluous to the production of surplus value. Now, it is obvious, at least at first glance, that this problem could have been addressed by reducing hours of labor when the Great Depression hit. But this would overlook the essential character of capital: that it is solely concerned with the production of surplus value, no matter “the cost in human beings and capital-values” (Marx). Even if the existing hours of labor were too long to employ a very large mass of workers and capital, the rate of profit could only be raised by working those remaining in productive employment as long as possible. All else held equal, fifty workers, working 10 hours can produce more surplus value than one hundred workers working only 5 hours; in any case, the wages of the fifty would be half that of the hundred, and thus the mass of surplus value would increase.

MMT (and all variants of Keynesianism) is solely concerned with employment of the now superfluous capital and labor power. If the excess capital and labor power is going to be employed by the fascist state, it must be employed despite the fact that no capitalistically productive use is possible, i.e., it cannot be employed for the purpose of producing surplus value, profit. To be clear, the capital and labor power is not superfluous in any real material sense, i.e., both are still capable of producing material wealth; however, they cannot be employed to produce material wealth at a profit — and capital is solely concerned with profit, the production of surplus value, not the production of material wealth as such.

The labor power of the surplus population of workers has no value, neither does the mass of excess capital. We know this because, in the first instance, the labor power cannot be sold and value can only express itself as exchange value. If the labor power cannot be sold, the labor power itself cannot have any value, even if the worker starves because of this. Capital has no concern for human beings at all, and does not grieve the loss; you may get all teary-eyed over the fate of the poor worker, but capital could not give a shit. The only interest capital has in the worker is as a source of surplus value, a “human resource”. If this “human resource” is no longer capable of producing surplus value, it has no interest in it at all.

Since this labor power cannot be employed for production of surplus value, Mitchell is entirely correct to argue the state does not “crowd” out private capitals by employing it for its own purposes. Likewise, the excess capital cannot be employed for production of additional surplus value, so employing it for the state’s own purpose also does not lead to any crowding out. So long as the state does not actually encroach on productively employed capital and labor power, there is no cause for complaint on this score. Moreover, since, by employing the excess capital and labor power, the state does not seek to compete with private capital, (which is to say, it is not employing them for the purpose of producing surplus value) it adds nothing to the mass of excess capital.

So how do full employment policies of the fascist state work?

Simple: the fascist state unproductively consumes the excess capital and labor power. The problem of capitalistic overaccumulation is that newly formed offshoots of capital cannot find a place in production. (Marx) With absolute overaccumulation older offshoots of capital must first stand down to make room for new offshoots in productive employment. According to Marx, absolute overproduction requires that some portion of the existing capital must cease operating as capital, must cease producing surplus value:

“The mode of settlement is already indicated in the very emergence of the conflict whose settlement is under discussion. It implies the withdrawal and even the partial destruction of capital amounting to the full value of additional capital ΔC, or at least a part of it. Although, as the description of this conflict shows, the loss is by no means equally distributed among individual capitals, its distribution being rather decided through a competitive struggle in which the loss is distributed in very different proportions and forms, depending on special advantages or previously captured positions, so that one capital is left unused, another is destroyed, and a third suffers but a relative loss, or is just temporarily depreciated, etc.”

To give an example: If $100 of additional newly produced capital is to find its way into production, a capital of equal size must be withdrawn to make room for it in production. Owing to absolute overaccumulation of capital, the fascist state can consume the old mass of capital in order to make room for new offshoots of capital.

And this is what the modern money school proposes: the destruction of excess capital by the state appears on the ledger of national accounts as the “cumulative financial assets” of the private sector. The excess capital is “lent” to the fascist state which immediately consumes it unproductively. A bond for the now destroyed capital is issued by the state, which replaces the lost capital with a fictitious claim on future state revenues. This bond entitles the holder to collect a stream of income from the state and appears as valid as any loan of money capital. What is missing, however, is that the income stream is not serviced by production of any new surplus value. The state does not employ the loaned capital productively and produces no surplus value with it; it simply consumes the capital unproductively. The bond is entirely fictitious; a self-evident fiction that is now required to maintain the system of production for profit.

The fascist state and the Mother of all Ponzi schemes

If the capital is entirely consumed and no new value is produced to service it, from where does the debt service come? Wouldn’t the fascist state need to increase taxes to service its debts? Surprisingly, the answer is no, just as MMT argues. Since, with absolute overaccumulation, the newly produced capital is always in excess of what can be invested in the production of surplus value and since this newly created capital can only find its place in production if an equal mass of capital is withdrawn, the value consumed unproductively by the fascist state is replaced by a new injection of capital that must be consumed unproductively. Once absolute overaccumulation of capital is encountered, a constant stream of excess capital begins to flow into the state coffers even as the state pays out a stream of fictitious debt service.

Moreover, as the productive forces of capital increase in productivity, the stream of excess capital that must be absorbed and consumed by the state increases and thus increases the mass of fictitious debt service. On the one hand, Mitchell is entirely correct that the state suffers no financial constraints on its spending, and this is because an ever increasing mass of excess private capital must be loaned to the state or cease acting as capital altogether. On the other hand, the state has no choice but to absorb and consume a geometrically increasing mass of capital that constantly threatens the entire national capital with a sudden and unexpected devaluation. In reality, it is not true that the state suffers no financial constraints on its spending; rather, the opposite is the case: the real “constraint” on state spending is that state spending must constantly increase. In the past 35 years, “policy makers” have made one attempt after another to limit fascist state spending, but to no avail. The share of state spending as a percentage of GDP has risen and shows no evidence of slowing down. As the chart below shows, eventually, the state must consume not just almost all surplus value, but the entire “economy”:


The argument of the modern money school seems so counterintuitive because it completely inverts reality. In MMT, (as in all of economics) buying and selling of commodities come before the production of the commodities that are bought and sold. This inversion of the actual process, where producing must come before buying or selling, is a perfect expression of state intervention in the economy. The state produces nothing and therefore could not buy if it were required to produce before it bought. At the same time, the commodities to be sold are entirely superfluous to the subsistence of the working class and to the requirements of production as determined by the development of the productive forces. If the commodities were productively consumed, i.e., employed for production of surplus value, this would only add to the already existing overaccumulation of capital and drive down the rate of profit still further.


The limit on production for profit is thus circumscribed by the requirement that consumption of capital must itself be productive of surplus value. The expenditure of labor beyond this point, no matter how necessary it might appear materially to society, produces no value. Since capital is the production of value and surplus value, it halts and must halt at the point where labor ceases to produce value. Beyond this point — beyond the point where the expenditure of wage labor has any productive purpose at all and where only a general reduction of hours of wage labor in society makes economic sense — the advocates of modern money make complete economic sense only for those who want to maintain the existing society.