MMT: New Theory, Old Illusion (2017)

From the February 2017 issue of the Socialist Standard

We look at the latest economic theory to claim that governments can spend their way to full employment.

In 1971 the last formal link between paper currencies and gold came to an end when the US decided to end the convertibility, for foreign governments, of the dollar into gold at $35 an ounce. Before then the currencies of IMF member countries had been tied indirectly to gold by having a fixed rate of exchange with the dollar. This change meant that governments no longer had to take into account maintaining the dollar rate of exchange when making economic decisions.

The link had only been for the purpose of international trade. Internally, all currencies, including the dollar, had been, since at least the beginning of WW2, what the Americans call ‘fiat’ money, from the Latin for ‘let it be done’. Fiat money is government-created money that cannot be converted on demand into a fixed amount of gold or silver, as was the case in most countries up until WW1. The amount that is issued is a government decision, whether taken by the Treasury or the central bank.

The fact that the amount of money in circulation is at the government’s discretion does not automatically lead to inflation, as a rise in the general price level, i.e. of all prices. What it does mean is that, to avoid this, the government has to estimate the amount of currency that the economy needs to pay for goods and services, settle debts, pay taxes, etc, and issue only the amount required for this. Inflation will only result if the government issues more than this. In practice governments everywhere did this to varying degrees; hence the non-stop rise in the general price level in all countries since 1940.

Who needs deficits?

In the 1990s a new school of monetary economics emerged calling itself “Modern Monetary Theory” (MMT). Its exponents claimed that a fiat money that wasn’t tied to a fixed rate of exchange with another currency gave governments much more potential control over the economy. For them 1971 is year zero as it meant that from then on governments could issue as much money as they wanted and need not be constrained by lack of finance; they could spend as much as they want on whatever they choose by simply creating the fiat money to do it.

As one of them, Dale Pierce, put it:

  ‘The essential insight of Modern Monetary Theory (or “MMT”) is that sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, and cannot be constrained, by purely financial limits because, as issuers of their respective fiat-currencies, they can never “run out of money.”’ (LINK)

They challenged the view that governments can spend only what they raise from taxes or borrow. According to them, governments don’t need to have recourse either to taxation or to borrowing; they can simply create the money to spend; the budget deficit (the difference between what a government raises in taxes and what it spends, which is filled by borrowing) is a non-issue.

They go on to argue that, if a budget deficit exists, this is because a government has deliberately chosen not to use the power that they have to create money; unemployment only exists because a government has decided as a matter of policy not to create the money to put the unemployed to work.

As Pierce put it, MMT means that

  ‘no such sovereign government can be forced to tolerate mass unemployment because of the state of its finances – no matter what that state happens to be … A currency-issuing government can purchase anything that is for sale in its own currency, including the labor of every last unemployed person who is still looking for a job. So, a key policy recommendation of Modern Monetary Theory is the idea of a “Job Guarantee”’.

What matters is 

   ‘whether there are enough real resources available to produce goods and services that are equal in value to the government’s job-guarantee spending. If these resources are available – if they are not already being used to produce something else – then the increased demand that results from the payment of job-guarantee wages will not be inflationary, regardless of what they go to produce.’

After reading this article, Richard Murphy, the tax accountant who has appointed himself an unofficial adviser in economics to Corbyn, exclaimed that it had taken him ‘a little while to realise that I am what is now called a Modern Money Theorist.’ There are members in Momentum, Corbyn’s support group in the Labour Party, promoting MMT.

No wonder. Such a theory is bound to be attractive to those who think that capitalism can be reformed to work to everyone’s benefit. But there’s nothing ‘modern’ about it. It’s an old illusion of those who see unemployed workers and idle resources alongside unmet needs and think that the obvious solution is simply for the government to create and spend more money. Various schools of currency crankism have been proposing this since the first capitalist economic downturn in 1825. To be fair, MMT rejects the view that banks can create money out of nothing; they correctly say that only a government can.

Would it work?

It’s an attractive theory, but is it valid? Would it work as envisaged?

It is true that – in theory – a government doesn’t have to resort either to taxation or to borrowing to finance its activities. It could simply print the money and spend it. This is a practice more associated with countries like Zimbabwe, but it could be done in Britain even if, when first implemented, it would provoke a financial crisis and in all probability an economic downturn too.

The way it is supposed to work is that the government introduces money into the economy through the wages and salaries of its employees, state pensions and other benefits, and what it pays its contractors; these then spend it, stimulating the growth in the rest of the economy, out of which the government eventually recoups most of the money via taxes. This is an odd way of describing how the economy works, putting the cart before the horse (government spending before taxation) and making the tail wag the dog (government spending driving the economy rather than factors within the economy itself).

In fact of course it assumes that the real economy – where wealth and value are actually produced – is already operating, so what the government would be doing is buying some of the goods and services produced there. It also assumes that the government has already been financed from taxation or borrowing.

An economy operating normally generates, when new goods are produced, new spending power as wages and profits roughly in tandem with new market value created (new things worth buying). The whole of one more or less adds up to the whole of the other, like a pair of balanced scales. If the government starts injecting extra spending power in the form of new money into the economy which is over and above the total value, the scales will tip, more money will chase goods of a lesser total value, and inflation will result.

The proponents of MMT deny this and when there are resources that are underused and people who are unemployed. They argue, as Pierce above that, in these circumstances, the extra government-created money would go towards using these unused resources and employing the unemployed to create an equivalent amount of new value. But they are ignoring the reason why these resources and people are unused in the first place, which is that the market does not recognise any profitability in employing them. This is the cruel fate of many workers who have struggled to pay for their own training and skills only to find that the market does not want them, even though their skills would be considered useful by any sane person. Capitalist economics is not interested in what is useful, it only cares what is profitable.

We’ve heard this idea before of course. It’s the classical Keynesian argument, though they envisaged the extra government spending being financed by running a budget deficit and financing it by borrowing rather than by simply printing more money.

When put to the test, in the 1970s when the post-war boom began to peter out, Keynesianism didn’t work. The economy remained stagnant and the result was to add inflation to it, a state of affairs that came to be described as ‘stagflation’. 

A slowdown, a standstill or a downturn in production is not caused by a lack of spending power but by a decline in profitable things for capitalists to spend money on. When this happens, it seems as if there’s not enough spending money, whereas in fact money is being kept in the pockets of the capitalists because they see nothing worth investing in.

The only way out is for profitability to be restored. The government can help this to some extent by cutting taxes on profits but this means that, with less income from taxation, it has to cut rather than increase its spending. Other factors such as the clearance of stocks, bankruptcies, capital depreciation, lowered interest rates, and reduced real wages will be more important. These are what will restore profitability and eventually re-stimulate the economy and move it on to the next-stage of its regular boom/slump cycle.

Keynesianism did not work and there is no reason to suppose that MMT would either. The government pumping more money into the economy would just cause inflation, whatever the stage of the cycle. MMT is in fact in the Keynesian tradition, regarding itself as part of ‘post-Keynesian’ economics and advocating the same policies – counter-cyclical government spending and job creation – , the only difference being in how they think this should be financed.

Capitalism runs on profits

MMT’s fundamental flaw is its assumption that the capitalist economy is geared to meeting paying needs – that, as Warren Mosler, the founder of MMT, has put it, ‘capitalism runs on sales’. Capitalism does of course need sales but profitable ones. It is not simply a system of production for sale, but of production for sale with a view to profit. It runs on profits and is driven by investment for profit, not people’s consumption nor government spending.

This is something governments have to recognise and, on pain of provoking an economic downturn, give priority to profits and conditions for profit-making. It’s why governments have to dance to capitalism’s tune. No government can make capitalism work for the benefit of all. The ending of any link with gold has not given governments any more control over the economy than they had before. Pouring newly-minted money onto one side of the scales is not a magic way to balance the books, no matter what the MMT gurus say, and governments will resort to it at their peril.

Adam Buick

Material World: TCM – Cheaper and Nastier (2017)

The Material World column from the February 2017 issue of the Socialist Standard

Many practitioners of ‘complementary and alternative medicine’ such as homeopathy claim and seek that the state should support those treatments financially. One such unorthodox medical model was in fact sponsored by a government, not due to a proven track record but inspired by political necessity. Mao Zedong explained his support for Traditional Chinese Medicine (TCM) in a 1950 speech:

  ‘Our nation’s health work teams are large. They have to concern themselves with over 500 million people [including the] young, old, and ill. … At present, doctors of Western medicine are few, and thus the broad masses of the people, and in particular the peasants, rely on Chinese medicine to treat illness. Therefore, we must strive for the complete unification of Chinese medicine’ (From Kim Taylor’s Chinese Medicine in Early Communist China, 1945-1963: A Medicine of Revolution).

Of course, this improvised health service was not suffice for the Chinese Communist Party leadership, themselves.

‘Even though I believe we should promote Chinese medicine. I personally do not believe in it. I don’t take Chinese medicine.’ Mao is quoted as saying. (In the Private Life of Chairman Mao by Li Zhisui, one of Mao’s personal physicians)

Inconsistent texts and idiosyncratic practices had to be standardised. Textbooks were written that portrayed Chinese medicine as a theoretical and practical whole, and they were taught in newly founded academies of so-called ‘Traditional Chinese Medicine.’ Needless to say, the academies were anything but traditional, striving valiantly to ‘scientify’ the teachings of the accepted ‘wisdom’ that often contradicted one another and themselves. The belief running through all aspects of TCM is the notion of qi, an energy life-force that flows through everything. Science-based medicine does not recognise qi energy because there is no convincing empirical evidence that such a thing exists. Nor is there any evidence for the alleged meridians or channels in the body where qi flows that can become blocked and which can be unblocked through acupuncture to allow qi to flow freely and restore health.

TCM advocates point to the thousands of herbs and plants used in treatments and it has never been disputed that a great number of these do have health benefits. However what is surprising from those proponents of TCM in the West is the silence about the use of animal parts. Throughout Asia, thousands of bears are kept in tiny cages their entire lives so that their gall bladders can be tapped for bile. Bear bile has always been a popular ingredient in TCM and is used for many ailments from haemorrhoids to hepatitis. Because only small amounts of bile are used in TCM, there is now a surplus of bear bile so bear farmers have also begun producing shampoo, wine, tea, and throat lozenges containing bile.

Extraction of a bear’s bile is done in a process called ‘milking,’ which is performed twice daily. A catheter is surgically implanted into the bear’s abdomen. Veterinarians rarely perform this surgery, which results in roughly half of the bears dying from infections or other complications. Bile is then drained from the catheter and collected by the farmer. Milking begins at age three, and continues for a minimum of five to ten years. Some bears who have been rescued were found in cages producing bile for twenty years or more. The Chinese government banned the use of the catheter method of bile collection in favour of the ‘free drip’ method which involves surgery to create an open hole in the bear’s abdomen through which bile freely drips out. This was touted as more humane, yet is as inhumane for bile often leaks into the bear’s abdomen, which increases rates of infection and mortality. Farmers have trouble keeping the hole open. This results in more painful surgery, and often the implantation of a small catheter to keep the hole permanently open. The filthy conditions on most farms lead the bears to suffer from further infections, worms, and other parasites. The bears’ muscles atrophy from confinement in such small cages for the duration of their lives. They are also extremely malnourished from a diet of grain mash or porridge, and their teeth and claws are often removed to prevent injuries to the farmers.

Overall, the worldwide trade in bear parts, including bile, is estimated to be a $2 billion industry. Research from 2007 shows its profitability: while the wholesale price of bile powder is around US$410 per kg in China, the retail price increases exponentially to 25 to 50 fold in South Korea, and to 80 fold in Japan. The demand for animal products continues to grow as the worldwide interest in ‘alternative’ medicine grows. The impact of TCM goes well beyond bears and as we know affects tigers and rhinos, amongst many other animal species.

Alan Johnstone

Letters: His Excellency (2017)

Letters to the Editors from the February 2017 issue of the Socialist Standard

His Excellency

Dear Comrades

I was shocked a few weeks ago when I read the utterances by a Mr. Steve Franke (said to work for a global group) in a local daily. He attributes President Mugabe’s socio-economic catastrophe to his Marxism. I wonder if anyone on Earth could be farther from Marxism than Mr. Mugabe: Mr. Trump is much better because he acquired his wealth outside of government office. Our own Mr. Excellency abused Marxism (equality/fairness) to win public support.

If you have access to the likes of Mr. Franke kindly put the following questions: Did not Marx say (if socialism is implemented) the state will wither away? While 99 percent of us (Zimbabweans) are literally starving is not His Excellency building a too large army and police force? Marxism? Add state-of-the-art military academies (and we are not under threat from anyone), new parliament, new capital city etc.

While we starve Mr. Mugabe was among the poor before going into public office, but his cabinet are Christian, did not Marx criticize religion? In fact, what I can say is that Marx overrated influential people’s morals and compassion. And while Christ and other religionists were dreamers, mysticists (selfish and arrogant) Marx was the best in terms of ethics, they (gullibly) believe they will join their god in the (imaginary) paradise. Although they now disown each other, law, politics, religion originate together, in a bid to make order to society; tragically the cunning and powerful abused power selfishly. Hence proponents of just, fair and ethical ideals like Marx were condemned while proponents of bigotry/dictatorship like Christ (read, e.g. Matthew 10:34-42 and Luke 9:59-60) are eulogised. An Almighty Dad (if he has the power; love and mercy he is said to have) would never subjected his son to barbaric torture.

Instead of facing reality (like Marx), mysticists waste time and resources wrestling an imaginary monster. Thus the very real monsters abusing power (the bully bigots exploiting and torturing 99 percent of the population) are ignored. Really, some churches are very well organised, help their members in need but, pathetically, if you are going in the wrong direction, you will never get to your destination, however graceful your pace may be.

Bigots wishfully think they can lock reality out of the front door. I am one of the many made destitute when our cruel and selfish leaders forfeited our savings (now I am unemployable due to age). Ironically, His Excellency wants to work beyond 2020, even if he is 25 years older than me, old enough to be my father. But ever since robbing us in 2008/9 they are bombarding us with propaganda ‘Empowerment! Zim asset’ instead of doing some good to us. They defrauded/robbed in 2008/9, once more they are squandering millions of US dollars telling us how good His Excellency is and how much good is in store for us come 2018.

A week ago: people were tortured and chased by armed police from demonstrating against the bond notes, but the Herald newspaper came out with ‘people ignore the planned demo…’ Yes, locking reality out of the front door, but they forget we live in the situation, although we have no access to the internet and we cannot afford phones, which can access Facebook, Google etc. Yes, religious propagandists are safer with their acumen to articulate and encourage the suspension of logic, hallucinate and infatuate congregants.

Godwin Hatitye

Harare, Zimbabwe

Gig economy

Dear Editors

I read the article ‘Gigs and Umbrellas’ in the December Socialist Standard. It was a very good article and made some excellent points about changing workplace conditions for us working folks, but it left out one relevant point that shouldn’t be missed.

The last 15 years of my own career as an RN was spent as an independent practitioner for a nursing agency. In this situation, I met only my client(s), not my fellow-independent practitioners working for the same agency. Although independent practitioners generally get less pay and are taxed at a higher rate than other workers, there is little opportunity for them to share complaints about the work, the pay, the treatment received from management, etc.

In addition to all the problems cited by in the article, think of the effect this has on potential union activity: there is neither incentive nor opportunity for independent practitioners to form a union. Each one is an isolated individual. ‘Solidarity forever’ is becoming passé in this new world order.

Karla Rab, 

WSP(US)

Reply: 

Actually there have been attempts in Britain to organise workers who are the ‘self-employed’ such as motorbike couriers and Uber drivers. See: https://iwgb.org.uk/

Which way for British capitalism? (2019)

From the February 2019 issue of the Socialist Standard

Interviewed on BBC Radio 4 on 17 January Tony Blair explained the dilemma the UK capitalist class face. He pointed out that for the past 40 or so years their governments (even under Thatcher) had pursued the policy of becoming part of a Europe-wide single market (i.e. a market with common regulations and standards and not just a tariff-free trading area) and that they were now completely integrated into it in terms of export markets and supply chains. They could withdraw but this would cause disruption and would be giving up a secure market they already had. A referendum had voted in favour of withdrawal but this could be interpreted in various ways, including just withdrawing from the EU’s political institutions. He said that this (now called Norway Plus) would avoid the economic damage but would leave the UK in the position of a rule-taker, as the extreme Brexiteers pointed out, as it would have no say in drawing up the single market’s regulations. In that case it would be better for the UK capitalist class if the UK stayed in the EU.

This is politically impossible, at least not without another referendum. But if the UK gives up its frictionless access to the single market this would have to be the first time in the history of capitalism that a capitalist state has voluntarily opted for less favourable access to a market it already has. In proposing this, even via a no-deal, the extreme Brexiteers are in effect arguing that two birds in the bush are worth more than one bird in the hand.

If there is no second referendum and no-deal is ruled out, the only deal that would probably make sense from the point of view of the majority of the UK capitalist class would be Norway Plus, as that would at least ensure the status quo of frictionless exports and imports and would avoid having to turn the clock back by unravelling the single market integration that has happened so far. The trouble is that this is likely to split their main party, the Tories, as the Tories like to remind themselves happened to them in the mid-1840s when Sir Robert Peel embraced Free Trade and repealed the Corn Laws.

From the point of view of pure democratic theory, there is nothing wrong with holding a second referendum. One referendum result can be overturned by another referendum. In this particular case — which is about the trading arrangements of the UK capitalist class — the issue is not one that concerns those who want socialism. It would be an even greater festival of xenophobia than the first. And those favouring it might not get the result they expect, which is why the UK capitalist class might settle for Norway Plus as less risky politically. But they don’t act directly. They leave that to their political representatives, the MPs, who have their own agendas like keeping or obtaining office or being re-elected at the next election or keeping their party together and who might screw things up.

The Labour Party leaders want a general election. This makes sense from their point of view since, if they don’t get one now, they won’t get another chance until 2022. Some Labour supporters imagine that this is the most important issue today as a Labour government will end austerity and usher in a period of prosperity for the many whether the UK is in the EU or not. But they are as deluded as those workers who believe the toffs who tell them that Brexit will bring them sunny uplands and a golden future. Neither will for the simple reason that capitalism does not work, and cannot be made to work, in the interests of the majority. It is a system driven by profit-making that can only work in the interest of the profit-takers.

Cooking the Books: Literal Communism (2019)

The Cooking the Books column from the February 2019 issue of the Socialist Standard

In December History Workshop published an article ‘“Communism”: An Intellectual Genealogy’ by Seamus Flaherty, arising out of an exchange earlier in the year on Good Morning Britain in which an invitee had said she was ‘literally a communist’ by which she meant she stood for common ownership.

Flaherty explained the origins of the words ‘communism’ and ‘socialism’ and their use by Marx and Engels:

  ‘The word “communism” was born in 1840. It was coined by leaders of the secret societies which grew up in Paris under the July Monarchy of Louis Philippe (1830-1848). It was preceded by the word “socialism” – first used in an Owenite periodical in 1827 (…). Because of its militant, revolutionary connotations, the word was adopted by Karl Marx and Friedrich Engels, who set out their own communist programme in their manifesto of 1848. By the 1880s however, Engels had ceased to use the term, opting instead for “socialism” in describing the new model of society he envisioned.’

He went on:

  ‘The revolutionary meaning belonging to the word in the middle decades of the nineteenth century applied only in Continental Europe. In Britain and America self-described communists were peaceful and often religious, preoccupied with the formation of intentional communities, rather than the conquest of state power. In fact, between 1880 and 1918, the word communism was almost entirely expunged of its revolutionary content, meaning simply a community of property.’

This is not entirely true. In 1894 the Marxist William Morris wrote one article entitled ‘How I became a Socialist’ and another ‘Why I am a Communist’, neatly illustrating that for him as for Marx and Engels the two words were just alternative ways of describing future post-capitalist society.

The opening paragraph of the second does, however, bear out Flaherty’s contention to some extent (note Morris’s criticism of setting up ‘intentional communities’):

  ‘Objection has been made to the use of the word “Communism” to express fully-developed Socialism, on the ground that it has been used for the Community-Building, which played so great a part in some of the phases of Utopian Socialism, and is still heard of from time to time nowadays. Of Communism in this sense I am not writing now; it may merely be said in passing that such experiments are of their nature non-progressive; at their best they are but another form of the Mediæval monastery, withdrawals from the Society of the day, really implying hopelessness of a general change …’ (LINK)

The real confusion started in 1917 when Lenin introduced a hitherto unknown distinction in Marxism between ‘socialism’ and ‘communism’, the former with its retention of the state and the wages system being what up till then Marxists had identified as ‘state capitalism’ while the latter corresponded to what had been meant by ‘socialism’, i.e., a classless, stateless, moneyless, wageless society. The following year Lenin’s section of the Russian Social Democratic Party changed its name to Communist Party, a name adopted by parties elsewhere that supported the Bolshevik regime.

The Russian rulers never actually called their regime ‘communism’. Even Stalin claimed only to have established ‘socialism’ (state capitalism). But this did not prevent the supporters of capitalism pointing to Russia as an example of communism in order to discredit the idea of socialism/communism as a better society than capitalism. The good news is that this doesn’t seem to be working that well any longer with people on TV breakfast shows saying that they are communist and not meaning that they want to go back to the USSR.

The Reward of Invention. (1933)

From the February 1933 issue of the Socialist Standard

One of the advantages claimed for capitalism is that it acts as an incentive to inventors. This claim disregards the fact that generally inventors are too poor to patent their inventions, or to purchase the plant and machinery necessary for their manufacture. An example of the inventor’s reward is the case of Jean Leroy, who is credited with having invented the film projector which made possible the motion picture industry. Failure to patent his invention 38 years ago lost him untold wealth, and during his latter years he made his living out of a small camera repair shop within a stone’s throw of Broadway’s immense picture palaces, where millions have been made from his invention. He has now died in poor circumstances at the age of 78. Leroy said, “I did not patent my invention because I did not realise what I had, and was ignorant of the patent laws. Like the average inventor, I centred my interest on the solution of the problem I had in mind.” (News-Chronicle, 11/8/32.) Leroy’s reply provides a complete answer to those who think that inventors are spurred on by hope of material gain.