A Modern Money Tree? (2022)

Book Review from the May 2022 issue of the Socialist Standard

The New Economics: A Manifesto by Steve Keen (Polity, 2022, 200 pages)

In the last part of the nineteenth century pro-capitalist economists, worried by the use Marx and others had made of the Classical Economist David Ricardo’s labour theory of value, sought to change the whole theoretical basis of economics. They also objected to the Classical Economists’ analysing society as divided into social classes (landlords, capitalists and workers) with conflicting interests.

What they came up with was that it was the utility to consumers that determined the exchange value of goods and services, not labour cost. Consumers were assumed to spend their income in such a way that the ‘marginal utility’ of each different item they bought (i.e ., the added satisfaction they get from one more unit of a good) was equal; the price of goods was the result of consumers all doing this and so would typically decline with every additional unit of consumption as consumers were willing to pay less for it. Similarly, labour and capital were considered as each contributing to production and being rewarded according to their ‘marginal productivity’, the theory being that workers will be hired up to the point when the marginal revenue of production is equal to the wage rate. The reward to capital was profits.

This ‘marginalist revolution’ ushered in Neoclassical Economics and became the dominant view amongst economists and is still taught in schools and universities all over the world. It is against this theory that Steve Keen’s The New Economics: A Manifesto (Polity, 2022, 200 pages), aimed at students about to study economics, is directed. Like all manifestos, it is a call to arms. Keen denounces neoclassical economics as a ‘disease’ and calls for its complete eradication.

Money creationism

But what does he propose to put in its place? As an advocate of so-called Modern Monetary Theory (MMT), his main criticism is aimed at the Neoclassicals’ theory of money and banking. As it happens this is something they inherited from the Classical Economists – that banks are essentially financial intermediaries, borrowing money at one (or no) rate of interest and relending it at a higher rate; that banks do not ‘create’ money but merely redistribute it. Keen defends the contrary view that banks can and do create money.

This is partly a question of semantics about what is meant by ‘creating money’. Even Neoclassical textbooks define bank lending as doing this. So, when a bank makes a loan by definition it ‘creates’ money. The justification for this claim is that when a bank makes a loan it doesn’t hand over the cash but deposits money in the borrower’s account. But this is different from when a customer deposits money in their account, which is a liability of the bank to them (the bank owes it to them). A deposit made by a bank into a borrower’s account is the reverse (the borrower owes it to the bank). It is misleading to treat these two kinds of deposit as the same and to assimilate the second to the first.

Supporters of the view that banks have the power to create new money also point to the fact that a bank doesn’t necessarily have to have the money available at the time it makes a loan. This is true. However, when the borrowers actually spend the money it has to be covered. This may be from inbound income, but if there is a shortfall at the end of a trading day when banks settle up with each other, to cover this the bank has to borrow money on the money market from other banks or from the central bank.

Another confusion arises from the fact that governments, which do have the power to create money, don’t normally do this directly. They do so via the banking system, so creating the illusion that it is the banks rather than the government’s central bank that has created new money or, rather, new money-tokens.

The government money tree

MMT makes an additional claim that distinguishes it from other money-creationists. They are ‘Chartalists’ who hold that money did not evolve spontaneously out of trading but that it has always been the creation of a state. This runs contrary to the Classical view that money originated in commodity exchange when one commodity emerged as the ‘general equivalent’, ie, one that could be exchanged for all other commodities. This was Marx’s view too. Coins are issued by states and are (or were supposed to be) a guarantee of the weight of the money-commodity. Coins are indeed the creation of states but the money-commodity is not. Some coins did weigh the stated amount but others were, or came to be, tokens for this, as are all notes and, even more obviously, electronic money.

MMT argues that, because the state can create money-tokens at will, it does not need to tax or borrow to fund its spending. When it wants to spend it can simply arrange for new money-tokens to be created (or ‘printed’, as it is sometimes anachronistically put) and then spend this; this increases money in the hands of the general public, so stimulating the economy; some of this money can even come back to the state as taxes (if there still are any). Conclusion: the budget doesn’t need to be balanced and can be run at a permanent deficit.

There is nothing ‘modern’ about this theory. People have always wondered why, if something needs to be done, the government doesn’t simply create the money to do it. It is not as simple as that as new money-tokens are not new wealth but additional claims on existing wealth, so that if a government were to do this the result would be inflation causing a rise in all prices; even below the level of the full employment of resources the result, after an initial short-lived stimulation of economic activity, would be stagflation. No wonder some people think that MMT stands for Magic Money Tree.

MMT’s crisis theory

MMT is not quite that crude and Keen offers a theory of crises based on banks supposedly creating too much money by making too many loans and fuelling speculative bubbles, a purely monetary theory of crises. ‘Banks, debt and money’, he claims, are ‘the main factors that drive economic performance and also cause economic crises’ (p. 56). He quotes (p. 84) fellow-economist Hyman Minsky: ‘The tendency to transform doing well into a speculative investment boom is the basic instability in a capitalist economy.’ There is some truth in this; bank lending does expand in a boom but this is in response to the increased demand for loans from firms wanting to make hay while there is an expanding market, a view banks go along with as they, too, expect more profits to be made of which they will get a share as interest.

Contrary to what MMT teaches, increased bank lending comes from the demand side, not from the banks themselves. Despite Keen’s claim, banks seeking more interest from more lending is not what ‘drives economic performance’; what does is capitalist firms seeking profits. What causes a boom to bust is overproduction, in relation to its market, in some key industry, which means that the anticipated profits cannot be realised because not all that has been produced can be sold. Production is curtailed and this has a knock-on effect on the rest of the economy, including the banking sector.

Keen does not think that capitalism’s unstable path can be entirely eliminated, only that it can be dampened down considerably:

‘While financial instability cannot be wholly eliminated from capitalism…… the most egregious elements of irresponsible bank lending can be addressed by limitations on what banks can be allowed to lend’ (p.70).

What he proposes, to remedy this, is some reform to banking law and regulations that would ‘constrain or eliminate’ banks from ‘lending that finances asset price bubbles’ (plus a few pet reforms of his own which no government is likely to adopt).

This, he suggests, would be enough to allow another ‘Golden Age of Capitalism’, as from 1950 to 1973 when there was near full employment, low interest rates and only minor recessions.

Keen’s class analysis

That is not to say that Keen is presenting himself, as most bank reformers do, as a conservative out to save the capitalist system. He writes that ‘to acknowledge that capitalism is a class system is simply acknowledging a fact’ and that ‘with a class-based analysis, the consequences for different social classes of different economic policies must be confronted.’ (p. 142)

Earlier he had given an example of what he had in mind by class-based analysis when he described how a computer model of the business cycle he had devised worked. His model assumes that normally the share of profits in GDP is 12.9 percent, leaving ’87.1 per cent of GDP to be divided between workers and bankers, and it doesn’t matter to capitalists how that is allocated between them’ (p. 87). So he is positing a three-class system – capitalists, workers and bankers. Here is how his model presents the business cycle starting from the boom stage:

‘… [R]ising wage and interest costs ultimately mean that the profits expected by capitalists when the boom began are not realized. The increased share of output going to workers and bankers leaves less than capitalists had expected as profits. Investment falls, the rate of growth of the economy falters, and the boom gives way to a slump. The slump reverses the dynamic that the boom set in motion, but doesn’t quite reverse the impact of the boom on private debt… The recovery from the crisis thus leaves a residue of unpaid debt. The profit share of output ultimately returns to a level that once again sets off another period of euphoric expectations and high debt-financed investment, but this starts from a higher level of debt relative to GDP than before. With a higher level of debt, the larger share of income leaves a lower share for workers. So the workers pay the price for the higher debt in terms of a lower wages share of GDP…’ ( pp 87-8).

So, the class conflict in his analysis is between workers and bankers. But the loss to workers is built into his model because it assumes a constant share of profits in GDP. Since the bankers’ income (interest) has to come out of profits, the more interest capitalist firms pay on loans the less the capitalists retain as profits. It would perhaps have been more realistic to have assumed a constant share of wages in GDP. That would bring out that what would change throughout the business cycle would be the shares of the capitalists and the bankers, which would be irrelevant to workers as it doesn’t matter to them how that is allocated between them, especially as both interest and profits are just a division of the surplus value produced by the workers.

Keen’s model is a specious attempt to show that workers have an interest in reducing the income of bankers whereas doing that would benefit only the capitalists. He is in effect asking workers to take the side of the capitalists against the bankers. But why should they as both productive capitalists and bankers are just two sections of the same capitalist class?

Adam Buick

Rear View: So far, so good (2019)

The Rear View Column from the September 2019 issue of the Socialist Standard

So far, so good

Faiza Shaheen in an article titled The Rich Are Getting Richer, And It’s Not Just Their Business – It’s All Of Ours (huffingtonpost.co.uk, 6 August) informs us ‘. . . the top 0.1% enjoy pre-tax incomes in excess of £650,000 a year. And guess what? The increasingly rich elite are increasingly turning their back on the rest of us – moving into spatially more concentrated areas in London and the south east.’ She adds, ‘. . . more than three quarters of us are stressed about money. Household debt is at record highs and work simply no longer pays, with 70% of children in poverty living in a household where an adult works . . .’. She also notes that most of their stolen wealth is inherited – ‘. . .the supposedly self-made nouveau riche like Donald Trump got a $400 million leg-up for his businesses’ and the ‘ 7th Duke of Westminster, for example, is worth at least £8 billion, largely because his ancestors acquired loads of valuable land in London’ – and concludes ‘when the economy is only working for a small percentage of the richest and this in turn is concentrating power and influence skewing our media, politics and inevitably negatively shaping how we feel about each other, the 99% must do more than demand a greater share of the pie – we need to change the recipe’.

So near yet so far

Faiza Shaheen is a director for Centre for Labour & Social Studies, which has the promising acronym CLASS. She notes that in the UK the 1 percent is concentrated in London and south east. Here, and worldwide, capitalism shows one of its hallmarks, class division. Poverty is found alongside plenty, the well-heeled alongside the homeless. ‘More than 6,000 homes in Kent are empty. Action on Empty Homes has revealed a total of 6,172 residential properties have no one living in them. And yet 4,723 people are either living in temporary accommodation or sleeping rough in the county’ (kentonline.co.uk, 7 August). These empty homes are worth an estimated £1.8bn. And here another hallmark can be seen: production is for profit not need. Houses are built by workers to be sold on the market and those with holes in the pockets need not apply. Shaheen’s recipe for change is nothing new. Indeed, she and Action on Empty Homes are reading the same reformist cookbook. CLASS – a ‘think tank dedicated to championing policy so that the political agenda works for everyday people’ and AEH’s campaigning issues, such as ‘Council Tax can now be doubled on homes left two years empty. We campaigned against discounts for empty homes and support councils implementing new premiums’ – is thoroughly reformist.

Reform or Revolution

Nearly 150 years ago, Engels stated that there is no possibility of a rational approach to housing within capitalism. ‘As long as the capitalist mode of production continues to exist, it is folly to hope for an isolated solution of the housing question or of any other social question affecting the fate of the workers. The solution lies in the abolition of the capitalist mode of production and the appropriation of all the means of life and labour by the working class itself’ (The Housing Question, 1872). ‘A social transformation and a legislative reform do not differ according to their duration but according to their content.’ A revolution is the work of a class which has gained political power in order to transform society to suit its interests; a reform is carried out only within the framework of the social system created by the previous revolution. Hence reforms cannot end capitalism; they can modify it to some extent, but they leave its basis untouched. To establish socialism, a revolution – a complete transformation of private property into social property – is necessary. ‘That is why people who pronounce themselves in favour of the method of legislative reform in place of and in contradistinction to the conquest of political power and social revolution, do not really choose a more tranquil, calmer and slower road to the same goal, but a different goal. Instead of taking a stand for the establishment of a new society they take a stand for surface modifications of the old society.’

Socialism or Barbarism

We have a choice, but, to quote Rosa Luxemburg, ‘without the conscious will and action of the majority of the proletariat, there can be no socialism.’ We need to seize the bakery and create our own recipes for the cookshops of the future socialist world of production for use and allocation according to self-defined need.

Rear View: Nibiru nonsense (2017)

The Rear View Column from the October 2017 issue of the Socialist Standard

Nibiru nonsense

If you are reading this, the world did not end. ‘This year, a Christian conspiracy theorist David Meade has made an alarmingly specific prediction – not only is the world about to end, doomsday is scheduled for September 23… Meade bases his predictions on an assortment of sources including the Book of Revelation and signs allegedly written in the Pyramids. He says, ’It is very strange indeed that both the Great Sign of Revelation 12 and the Great Pyramid of Giza both point us to one precise moment in time’  (yahoo.com, 8 September). Meade will likely join the many fakirs on Wikipedia’s long list of dates, stretching back to 66CE, who predicted apocalyptic events. Capitalism continues: it’s business as usual –war, famine (amidst plenty) and (often curable) pestilence.

Half-baked

Religion was humans’ first attempt at science. We could not explain the forces of nature, the rising and setting of the Sun, phases of the moon, etc., and ascribed them to the supernatural. Viewed through the lens of the materialist conception of history, it can be seen as a necessary adjunct to our development. Yet religion has long served the interests of the minority master class. Just as the fundamental change from Catholicism to Protestantism was essential for the rise of capitalism as an ideology – for example, the Calvinist idea that God shows his favour on Earth by making merchants rich – so atheism is fundamental for the 99 percent and the socialist claim that the world is theirs to run, with neither gods nor masters, as they see fit. The evangelist Jim Bakker – once jailed for fraud, involved in a sex scandal, and leader of PTL (better known as Pass the Loot) Ministry – continues to divert the gullible from their real interests. ‘During a segment in which Bakker was selling $175 buckets of his disaster preparedness food, Tasty Pantry… he revealed that he felt the real issue with the weather and everything else on the earth has to do with sin and wickedness… Bakker added, ’Just remember, God gets the last word. God gets the last word. Be not deceived, God is not mocked ‘(theblaze.com, 7 September).

No nonsense Nun

Remarkably, the contents of a ‘coded letter written by a 17th Century nun while she was possessed by the Devil [has been] finally translated using decryption software discovered on the dark web’ (dailymail.co.uk, 8 September) and are –  no crystal ball in sight – likely to be of interest to socialists. According to modern scientists, Sister Maria suffered from schizophrenia or bipolar disorder yet she described God and Jesus as dead weights (predating Marx’s ‘the tradition of all past generations weighs like an incubus upon the brain of the living’ by over 200 years) adding that the former was invented by Man. Maria may well have agreed with Marx when he stated that ‘The abolition of religion as the illusory happiness of the people is the demand for their real happiness. The demand to give up the illusions about their condition is a demand to give up a condition that requires illusion. The criticism of religion is therefore the germ of the criticism of the valley of tears whose halo is religion’ (Introduction to A Contribution to the Critique of Hegel’s Philosophy of Right, 1844). Given the very real threat capitalism represents to our survival – you do not need to be a socialist to recognize the ever-present danger of nuclear Armageddon, for example – reject the pie in the sky when you die of religion and instead worry, agitate now, be happy later.

Capitalist conflict

What are we to make of the ongoing war between the Arakan Rohingya Salvation Army and the state of Myanmar? Mainstream media in the West present it in religious terms: the persecution of Muslims by Buddhists. Religion is often used to justify conflict as well as to obscure the real interests involved. ‘China’s concerns over Rakhine State are related to interests in its One Belt One Road Initiative (OBOR), said political and ethnic affairs analyst U Maung Maung Soe. Rakhine plays an important part in OBOR, as it is an exit to the Indian Ocean and the location of a planned billion-dollar Chinese project – a planned economic zone on Ramree Island, and the Kyaukphyu deep-sea port, which has oil and natural gas pipelines linked with Yunnan Province’s Kunming. “Therefore, the stability of Rakhine State is important for this project. The meeting shows China’s concerns over its One Belt One Road Initiative,” said U Maung Maung Soe’ (irrawaddy.com, 4 September).

Cooking the Books: The Magic Money Tree (2017)

The Cooking the Books column from the July 2017 issue of the Socialist Standard

In the leaders' debate on BBC1 on 31 May, the Tory substitute, Amber Rudd, kept on accusing the Labour Party of relying on a 'Magic Money Tree' to conjure up the money to finance their election promises. She was repeating a Tory mantra designed to get people to believe that Labour's attractive reforms were impossible as there was no money there to pay for them.

In fact, there is plenty of money there, in the form of accumulated profits which, in theory, a government could tax or borrow. It's just that the Tories are against this as they want to protect profits (or want to spend it on vital things for capitalism like weapons of war). But, more importantly, to overdo this would disrupt the workings of the capitalist economic system.

Capitalism is a system of production for sale on a market with a view to profit. Profits are what makes it go round as an economic system. It is driven by investment for profit. If the prospects for this are good, then there's expansion and a boom. If they are not, then there's an economic downturn; which happens quite normally from time to time as part of the way capitalism works, when a boom leads to overproduction in a key industry whose fall in investment then has a knock-on effect on other sectors.

This can also happen through government intervention. If the policy a government pursues threatens profits or makes conditions for profit-making worse, this will have an economic effect – investment and so production and employment will stall. Capital will go on strike.

Left-wing governments that have set out to increase popular consumption have experienced this many times and have attributed it to a 'bankers' ramp', a 'wall of money', or 'gnomes of Zurich'. But there is nothing they were able to do about it and in the end they had to capitulate to the economic forces of capitalism and give priority to profits and profit-making. Two examples within living memory would be the Wilson government of 1964 and Mitterrand in France in 1981. Both demonstrated the limits of reformism.

A Corbyn government would have come up against these forces too and failed, not because the money wouldn't have been there, but because it can't be used to improve people's life at the expense of profitable investment. Profits are the forbidden fruit on the Money Tree – one reason why it makes more sense to end the whole capitalist system rather than try to make it work in a way it just cannot.

In one sense it's capitalism that is a Magic Money Tree – for the capitalists. They invest money in production – buy premises, machinery, materials, hire workers – and sell what it produces, and end up with more money than they started with. Magic. But, like all magic, it's an illusion. What happens away from appearances is that the workers they employ produce goods of a greater value than what they are paid as wages. It is this surplus value that is the source of profits and, further down the line, of the interest of bankers, the ground rents of landlords, and what governments spend. To stop this workers need to take an axe to the root rather than merely trying to get back some of the fruit.