What is Modern Monetary Theory (MMT) and why should anyone care? In the past few weeks discussion of this obscure economic school has gone viral, from the New York Times to Jacobin magazine.
The interest was sparked off by Alexandra Ocasio?Cortez, the left wing Democrat who last year won a House of Representatives seat in New York away from the party’s conservative establishment.
Soon after arriving in Washington Ocasio-Cortez helped unveil a “Green New Deal”, a massive programme of reforms and public works to combat climate change. Of course, mainstream politicians have asked where the money—on one estimate £5 trillion a year—would come from.
Ocasio-Cortez’s advisers responded by invoking MMT. This is a theory that ultimately derives from the ideas of John Maynard Keynes. He challenged the free-market orthodoxy that still dominates economics today and in particular the assumption that a market economy, if left alone, will achieve full employment.
Keynes insisted that intervention by the state was necessary to ensure full employment. MMT supporters take this a bit further.
They argue that money is created by the state, in particular to provide its subjects with a means of paying taxes. This means that the state can finance its activities, not simply by taxing or borrowing, but by printing new money. So the US state could pay for the Green New Deal this way.
But economists of almost every persuasion object that if too much money is pumped into the economy the result will be an increase in inflation. Despite a certain amount of double-talk, MMT supporters accept this, but argue that higher inflation can be avoided if the extra spending stimulates sufficient increased production.
There are two problems with MMT. The first is that it shares with mainstream neoliberal economics the idea that the state creates money. For neoliberalism too much money creation threatens inflation. For MMT, sufficient money creation can achieve full employment.
But the underlying idea is false. Karl Marx understood that in modern capitalism money is increasingly created through the credit system.
Capitalist economies are defined by the conflict of the production process and ultimately by the class struggle between bosses and workers
These days this means banks create money when they issue loans and allow overdrafts. As Keynes knew what matters is not so much the supply as the demand for money.
In other words, workers and capitalists borrow to finance, respectively, consumption and investment. The state underwrites this process of money creation but doesn’t control it. Margaret Thatcher’s government in the 1980s completely failed in its efforts to control the money supply.
But equally creating money won’t necessarily produce economic growth. If firms don’t want to invest, creating new money won’t make them change their minds.
This brings us to the second problem with MMT.
As the Marxist blogger Michael Roberts points out, it ignores how value is created by workers in the process of production. Capitalists appropriate some of this value in the form of profits. If these profits aren’t high enough, they won’t invest, however much new money is created.
We’ve had a practical proof of this in the past few years with the policy of quantitative easing (QE) pursued by the major central banks since the crash.
This has involved putting new money into the banks. This stabilised the financial system, but it hasn’t kick-started a new phase of economic growth. It also hasn’t, contrary to some neoliberal predictions, caused inflation to take off.
So sluggish are the US and European economies that the central banks have retreated from their plans to phase out QE. This reflects the fact that, as Roberts and his collaborators demonstrate in a new book, World in Crisis, profitability remains low.
What MMT ignores, like the Keynesian thought from which it derives, is that capitalist economies are defined by the conflict of the production process and ultimately by the class struggle between bosses and workers.
It is this that determines the rate of profit that regulates the system. If profitability is too low, no monetary tricks can overcome this.