Monetary policy is ultimately based on a theory of money: A Marxist critique of MMT

By Costas Lapavitsas and Nicolás Aguila

During the last two decades, Modern Monetary Theory (henceforth MMT) has won wide academic recognition and public influence. Its most prominent achievements include shifting the public debate on the conduct of economic policy and reviving interest in the theory of money. The former tends to attract most of the attention of both advocates and critics of MMT, but this is unjustified. MMT policy conclusions result from its underlying understanding of money, as some of the more illuminating MMT thinkers make abundantly clear (Bell, 2001; Tcherneva, 2006; Wray, 2010, 2014). A far richer assessment of MMT economic policy proposals would result by first considering the foundations of its theory of money, that is, neo-Chartalism.

In a recent article, we contrasted MMT with the Marxist theory of money. We showed that there were four important points of disagreement between these two schools of thought, namely on: (i) the ontology of money, (ii) the state and money, (iii) state economic policy, and (iv) world money and monetary sovereignty. We supported our argument with historical examples that we omit here for reasons of space.

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Economic Sovereignty for Developing Countries: What Role for Modern Money Theory?

With modern money theory (MMT) receiving impressive attention, the implications this theory has for developing countries have also been discussed more intensely. Emphasizing both its strengths and gaps provides a great chance to further develop macroeconomic strategies for poverty reduction and environmental sustainability.

In brief, the theory starts from the statement that money is issued by the government and brought into circulation via its expenditures. The government does not rely on taxes to fund expenditures when it is itself the source of money. Therefore, money can be created upon demand, is not limited, and can be used by the government to finance all expenditures it considers necessary to achieve policy goals such as full employment or a Green New Deal. The reason why agents in the economy accepts this money only consisting of numbers without any intrinsic value is the obligation to pay taxes. Since the state has the power to impose taxes, individuals need to get hold of money as this is the only way to meet their obligations; this is how the currency is accepted as a means of payments. The government thus has the power to run unlimited deficits because the fact that money is needed to pay taxes guarantees its acceptance even if those taxes do not cover expenditures. In fact, the government should run deficits because it creates the demand required for full employment while a balanced budget constrains it. The government cannot go bankrupt because there is no lack of currency it issues itself. The conditions identified by MMT for the system to work are the following: 1) the country must be sovereign of its own currency and 2) inflation needs to be kept under control. Once the latter starts accelerating due to increased nominal demand stemming from government expenditures, taxes can be increased in order to withdraw money from circulation. However, as long as full employment is not achieved, prices are argued to remain stable.

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Addressing the Pandemic in the Philippines Necessitates a New Economic Paradigm

Rodrigo_Duterte_delivers_his_message_to_the_Filipino_community_in_Vietnam_during_a_meeting_on_September_28In his late-night Talk to the Nation on COVID-19 on 6 April, Rodrigo Duterte, the populist President of the Philippines, echoed the affirmation of leaders from rich countries in North America, Europe, and Asia: to do “whatever it takes” for the economy to survive the pandemic. The problem, however, is that, on his own admission, Duterte is incompetent in economics. His stubbornly militaristic mindset and police-centric approach to governance is even more problematic when dealing with complex developmental causes and impacts of the coronavirus outbreak.

Yet the Philippine state’s inadequate institutional capacity to respond to the epidemic goes deeper. Given the national economy’s position in the hierarchical global economic system, its structural weaknesses impacts on how effective the government’s response can be. The current mainstream approaches to resolve the pandemic and the multiple crises of capitalism would fail to address the convoluted historical process of maldevelopment of the Philippines. Thus, a radical political strategy with a new economic paradigm for post-pandemic reconstruction is needed.    Read More »