Zackonomics — how green can you be? (2026)

From the March 2026 issue of the Socialist Standard

In their party political broadcast on 22 January, the Greens’ new eco-populist leader Zack Polanski ran through the various problems people face and pointed out that a lot of the wealth they create ends up in the pockets of the super-rich. But went on: ‘This isn’t just an economic failure. It’s a failure of leadership. The people we elected choose to serve the wealthy. And, yes, that is obscene. Good leaders put people before profit’.

Self-styled good leaders

So what does Polanski, as a ‘good leader’, propose that a Green Party government would do? Its manifesto for the 2024 general election promised ‘the public ownership of public services’ and talked about ‘taxing wealth fairly and borrowing to invest’, in particular ‘a Wealth Tax of 1% annually on assets above £10 million and of 2% on assets above £1bn’. This is the sort of thing the Labour Party used to advocate and will be one reason why the Greens have had some success in winning over people disillusioned with the Labour Party after Starmer (with a little help from Peter Mandelson) axed its leftwing.

In this sense, the Green Party is reviving the illusion that the Labour Party once entertained that capitalism could gradually be changed, through ‘public’ ownership, tax changes and social reforms, into a less unequal society. The only difference is that the Greens think that ‘good leaders’ should put the environment as well as people before profit (and sometimes before people). All the arguments that socialists have made against Labour Party reformism apply equally against the Greens. Capitalism is an economic system driven by firms, whether private or state (or cooperatives), seeking to make a profit and to accumulate this as more capital to be reinvested for more profit. Putting profit-making first is imposed on those making economic decisions, including governments, as an external coercive force that they ignore at their peril.

Polanski and the Greens, if ever they got to form the government and tried to put people before profit, would be ‘bad leaders’ as far as capitalism was concerned. They would put a spanner in the way capitalism works and provoke an economic downturn, forcing them into a U-turn, as has happened many times to Labour and similar governments in other parts of the world — punished for refusing to put profits before people.

What this means is that, contrary to what Polanski claims, a ‘good leader’, for capitalism, is someone who does put profits before people, someone who applies rather than challenges the economic laws of capitalism. Those individuals who workers elect to govern have no alternative. The nature of capitalism, as a profit-making system that can only work for the profit-takers, obliges them to do this on pain of provoking an economic slow-down.

Replacing them with self-styled ‘good leaders’, like he imagines himself to be, won’t change things despite good intentions. They, too, would end up having to serve the wealthy as that’s the only way that the system can work. What is needed is not a change of leaders, but a change of system. But that’s not what the Greens want.

Cranky economics

The Green Party accepts capitalism. It doesn’t challenge the ownership of the means of life by a minority nor that goods and services are produced primarily for sale on a market with a view to profit. At most, it seems to want to go back to an earlier stage of capitalism in which production was in the hands of small and medium-sized enterprises.

To tell the truth, the Green Party is all over the place when it comes to economics which, anyway, is not the primary interest of most of its members. That — and it’s a perfectly legitimate concern — is to protect and save the environment, which they imagine can be done by pursuing policies and passing laws without changing the basics of the present, capitalist economic system.

The Greens’ relative lack of interest in economics has left them open to all sorts of cranky theories. For instance, their manifesto for the 2015 general election declared that ‘the power to create money must be taken out of the hands of private banks’ and that ‘commercial banks should be no more than the custodians of publicly created money in current accounts’. This reflected a resolution on ‘monetary and financial reform’ carried at their 2013 Conference:

‘97% of the money circulating in the economy takes the form of credit that is created electronically by private banks through the accounting processes they follow when they make loans … The 1844 Bank Charter Act will be updated to prohibit banks from creating national currency in the form of electronic credit. To finance their lending, investment or proprietary trading activities, banks will have to borrow or raise the necessary national currency from savers and investors’.

This would considerably limit what banks would be able to lend, even to individuals let alone to business. But loans to profit-seeking firms are essential to the workings of capitalism as it means that capitalist entrepreneurs do not have to have accumulated all their own money before they can start a business. The role of banks is to make available money for investment that would otherwise lie idle or be scattered in small amounts.

To make up for the fall in bank lending that their scheme would bring about, the 2013 resolution proposed that ‘all national currency (both in cash and electronic form) will be created, free of any associated debt, by a National Monetary Authority (NMA) that is accountable to Parliament’ and that ‘any new money created by the NMA will be credited to the account of the Government as additional revenue, to be spent into circulation in the economy in accordance with the budget approved by Parliament’.

Imagining that banks create money out of thin air and wanting to devise a debt-free money is classic currency crankism. Banks don’t create new money when they make a loan; they lend out money that they have (from deposits and loans) or can quickly acquire (from the money market or the Bank of England) and the interest they receive comes from the future profits of loans to business and from the future wages of those to individuals. The 2013 Green Party resolution and 2015 Green Party general election manifesto were proposing an imagined solution to a false problem, a solution which if applied would lead to financial chaos and roaring inflation.

These days the Green Party does not push this policy much. It wasn’t in their 2019 or 2024 general election manifestos. However, it remains part of their official policy and is included in their Policies for a Sustainable Society. Polanski, who knows a thing or two about selling false remedies and so about what sells and what doesn’t, doesn’t mention the banking reform part and talks only about some National Monetary Authority providing the government with whatever money it needs to pay for a Green Deal and social services.

Magic Money Theory

This has led some, such as Jonathan Prynn, business editor of The Standard (formerly Evening Standard), to accuse Polanski of embracing another mistaken monetary theory  — self-styled ‘Modern Monetary Theory’, or MMT (which also, appropriately enough, stands for Magic Money Tree). This teaches that the government doesn’t need to borrow money but can simply create the money it needs and spend it; this will stimulate the economy and the government will eventually recover the money as increased tax receipts.

It is not clear that Polanski has embraced MMT. He may just be using the naive (and therefore good populist) argument that if the resources are there to save the environment or eliminate poverty (as they are) and the government has the power to create as much money as it wants (as it does), why does the government not simply create the money to use the resources? If it did this, it wouldn’t need to worry about borrowing money and so wouldn’t be in thrall to international speculators. Which is essentially what Polanski and the Greens are saying.

The trouble is that this ignores the way the capitalist economic system works. Wealth is produced in the profit-seeking sector of the economy in response to the prospects of making a profit. Governments as such produce no wealth; to get the money to buy what they need to carry out their activities they have to resort either to taxation of the profit-producing sector or borrow from those who have acquired money from that sector. When the government creates money it is not creating any new wealth, only claims on existing wealth. It can create as much of these claims as it likes but, if it creates more than the economy needs for its buying and selling and other monetary transactions, then the result will be a fall in the purchasing power of the claims and so a rise in the general prices level, or inflation.

If a Green government were to simply create and spend the money to protect the environment or to eliminate poverty or to improve living conditions generally, the most likely result is that there would be a one-time spurt in economic activity but in time there would be an inflation which could get of hand. Apologists for capitalism, such as Prynn, happen to be right when they point this out.

The conclusion to be drawn is not to accept that profits have to come before people, but that it is futile, and even counter-productive, to try to prevent this under capitalism. What is needed is to get rid of the profit system altogether and to use resources to simply and directly produce what people need. But this is only possible on the basis of the common ownership of the world’s productive resources. It would then no longer be a question of what should come first — profits or people? — because profits wouldn’t enter into it at all.

Adam Buick

Cooking the Books: An April Fool (2024)

The Cooking the Books column from the May 2024 issue of the Socialist Standard

On the First of April the Guardian seemingly pulled off a good April Fool as many people wouldn’t have recognised it as such. They published an article by a ‘Stuart Kells’ who argued that banks can create money out of thin air and that governments don’t need to tax or borrow money.

‘Stuart Kells’ begins by criticising a scene in the 1946 film It’s a Wonderful Life in which:

‘depositors demand their money from a small town building society. Its manager, George Bailey (in an unforgettable performance by James Stewart), explains that the money is not in the building society’s vault; it has been lent to other people in the town. “The money’s not there,” Bailey pleads. “Your money’s in Joe’s house … and in the Kennedy house, and Mrs Macklin’s house, and a hundred others.”’

The joke consisted in claiming that this explanation of how a bank works is incorrect:

‘Banks don’t lend out money from reserves or deposits or other sources of pre-existing funds. (…) When you borrow money and your bank credits your loan account, the account is created anew, “from thin air” …’

If by this point Guardian readers hadn’t realised that the article was an April Fool, they just needed to consider how a building society operates. If it could create a mortgage out of thin air why would it need to attract depositors? Why do building societies compete with each other by offering savers an attractive rate of interest on their deposits? And why did Northern Rock go bust?

That James Stewart was correct was confirmed when in 2022 central banks raised the bank rate, as the rate of interest at which they lend money to commercial banks. As a result, the rate at which banks lend to each other via the money market, if at the end of the day the money they have paid out is less than the money that came in, also went up. As banks were paying more to borrow ‘wholesale’ they had to raise the rate of interest which they charged those they lent money to. They were slower to raise the money they paid savers who lent them money ‘retail’ but eventually they had to as borrowing from savers is cheaper than continually borrowing from the money market.

The financial media rediscovered the concept of ‘net interest income’ as the difference between the income from the interest the banks charged borrowers and the amount they had to pay those they borrowed money from. That banks — and, more obviously, building societies — are basically financial intermediaries borrowing money at one rate of interest and re-lending it at a higher rate was evident for anyone to see.

Perhaps the Guardian was relying on this for its readers to realise that they were dealing with an April Fool. In case this was not enough, ‘Stuart Kells’ went on to claim that governments don’t need to impose taxes or borrow money and that they should simply create and spend it. Governments have been known to try this, as in Zimbabwe, but the result has not been quite as intended. And, why do governments borrow money and pay interest for it when they don’t need to?

Maybe it was us who were fooled as it turns out that Stuart Kells is a real person and the author of a book entitled Alice TM: The Biggest Untold Story in the History of Money from which the article was extracted. Knowing how the Guardian allows funny money merchants free range in its columns — in this case, MMT, which stands for Modern Monetary Theory and Magic Money Tree — we should have realised it wasn’t intended as a joke after all.

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

Confusion compounded (2022)

Book Review from the March 2022 issue of the Socialist Standard

The Pound and the Fury. Why Anger and Confusion Reign in an Economy Paralysed by Myth. By Jack Mosse. 168 pages. Manchester University Press, 2021.

To explain why ‘for decades, our economy has failed to work for ordinary citizens’, Mosse had the idea of asking various groups of people what they thought the ‘economy’ was and how they thought it worked. He interviewed people on a nearby estate, people working in asset management, civil service economists, and journalists on a magazine advising small investors. It worked and makes interesting reading. Those in the estate thought that the economy is a conspiracy of the rich and powerful to keep them poor; the asset managers and civil servants saw it as ‘an autonomous natural entity’; the financial journalists came across as simple conmen.

The trouble is that Mosse himself is confused about economics, as revealed by his comments on the answers and in his final chapter on ‘Demythologising the economy’. Early on (p.27) he states his belief that ‘money can be magicked up out of thin air’ by banks. In fact, some of those he interviewed had a more accurate understanding than he does.

He criticises the asset managers and the civil servants for ‘reifying’ the economy ‘as an entity operating according to its own autonomous logic‘ with the result that ’human actors are understood as merely complying with the irresistible base force that drives the economy’ (p. 60-1).

Actually, that is not a bad description of how the capitalist economy does operate. Human actors (capitalists, workers, governments) do have to submit to the logic of the system in the end. The asset managers and civil servants misunderstand the system as an expression of human nature. Mosse calls seeing the economy as an autonomous natural force ‘reifying’. The word Marx used was ‘fetishism’ – humans attributing autonomous power to and being dominated by something that ultimately they create. Humans could cease to be dominated by the outcome of their activity if they changed that activity from producing wealth for sale on a market with a view to profit to producing directly to satisfy people’s needs. This is possible only on the basis of the common ownership and democratic control of productive resources; with this, the ‘economy’ would then cease to operate and humans would be in control of what they produce.

Mosse’s alternative proposal is just to tinker with the banking system while leaving the rest of capitalism unchanged. He attributes to private banks a power which they do not possess. When he says that ‘governments, as well as private banks, create money out of nowhere’, he is only half right. The government, normally via its central bank, can create money, or at least money-tokens, at will (but this will have consequences). Banks cannot. They can only lend what they have themselves borrowed; they don’t create new money, they only redistribute money that already exists. The myth that they can create money out of thin air arises because modern economics has come to define making a bank loan as ‘creating’ money. Banks do make loans of course but not out of thin air.

Having two different definitions of money creation only causes confusion of which Mosse is a victim. He needs to explain, if banks can ‘magic money out of thin air’, how come that during the crash of 2008 they had to be bailed out by the government? Why did they not use their supposed ability to create money to bail themselves out?

He gets himself into another contradiction when discussing one of the reforms proposed by Positive Money – ‘to ban private credit creation’ (p. 137). This turns out not to be stopping banks lending altogether (as it ought logically to mean if banks create money whenever they make a loan), but to allow them to re-lend only money deposited with them. This would mean that they would no longer be able to use the money market to borrow money from other banks and financial institutions to re-lend. Mosse concedes that this ‘draconian policy’ would provoke ‘a huge immediate shock effect on all kinds of economic activity, which would dwarf any previous banking crisis’. Yes, it would.

Seeming to realise the impracticality of that particular money reform, he turns to another funny money theory, so-called ‘Modern Monetary Theory’. MMT is based on the fact that governments do have the power to create money-tokens out of nothing. It argues that all a government has to do is to decide what it wants to spend money on and then create the money; governments don’t really need either to tax or to borrow. Given certain unrealistic conditions a government could perhaps do this but the most likely outcome would be Zimbabwe-style roaring inflation.

It is a pity than Mosse has let himself be influenced by monetary reformers and so ends up propagating confused and confusing myths himself. Despite this, the chapters – four-fifths of the book – where he interviews people are worth reading as good reporting.

Adam Buick

Material World: Sri Lanka: capitalism unable to provide economic security (2022)

The Material World column from the March 2022 issue of the Socialist Standard

Across the world, workers are enduring the consequences of capitalism’s inability to deal with its many problems. Sri Lanka, the island state of 21 million people, is one more country to add to the long list where our fellow workers are facing deep insecurity in the coming months.

President Gotabaya Rajapaksa declared Sri Lanka to be in an economic emergency but has done little to ease people’s plight. Workers have to bear the brunt of the economic crisis by themselves due to the lack of effective social protection. It is working people who make the economy. 2020 figures show the garment workers brought in US$5 billion and tea plantation workers US$1.4 billion. Yet, most lead precarious lives forced to shoulder the effects of budget cuts on education, health care and public transport.

Sri Lanka is entering a humanitarian crisis caused in part by the impact of Covid. The World Bank estimates 500,000 people have fallen below the poverty line since the beginning of the pandemic. Within the tourism sector, more than 200,000 people lost their livelihoods. Once bringing US$4 billion to the country, the tourism industry is struggling to stay afloat. By October last year, it brought in just US$82 million. From close to 2 million tourists in 2018, the island nation received just 160,000 in 2021.

High government spending and tax cuts eroding state revenues, vast debt repayments to China and low foreign exchange reserves are also important factors.

The government printing money to help pay off domestic loans and foreign bonds has created overall inflation of 12 percent in December and those escalating prices have left many basic necessities unaffordable. Food prices rose by a record 22.1 percent in December. Supermarkets have for months been rationing milk powder, sugar, lentils and other essentials as banks ran out of US dollars to pay for imports.

A top agricultural official warned of impending famine and requested the government to implement an orderly food rationing scheme to avoid such a scenario. He was fired within hours of making the appeal.

The food crisis was worsened by the government’s April 2021 ban on agrochemical imports with an intention of switching agriculture to being organic. The policy was reversed in November after crop yield falls and protests by farmers.

Sri Lanka has a huge foreign debt burden. It owes China more than $5bn and last year took an additional $1bn loan from Beijing to alleviate its financial crisis, which is being paid in instalments. Struggling to pay back Chinese loans, it has handed over the majority share of the Hambantota port to a Chinese state-owned company on a 99-year lease.

In 2022, it will be required to repay an estimated $7.3bn in domestic and foreign loans. However, as of November, available foreign currency reserves were just $1.6bn.

The former central bank deputy governor W A Wijewardena warned the country was at substantial risk of defaulting on its repayments, which would have catastrophic economic consequences. In one article (tinyurl.com/2dsf9rzv), he attributes a reason for the crisis to the acceptance of the now fashionable but fallacious economic idea called the Modern Monetary Theory (or MMT ) that argues that there was nothing wrong in governments running budget deficits to create employment, output, and prosperity. Assured by the advocates of MMT that this does not affect inflation or exchange rates, the government allowed various measures of the money stock to rise excessively, Wijewadena says:

‘Credit to Government from the Central Bank and commercial banks – a method of inflationary financing – increased by Rs. 3.7 trillion or by 159% during end-2019 to end-November 2021. Correspondingly, money supply increased by Rs. 3 trillion or nearly 39%.’

The outcome of the increase in the money stock was an undue increase in the demand for imports, prompting the government to impose import controls even on raw materials. It affected the production of goods and services. Sri Lankans are now going hungry.

The government hopes to settle their past oil debts with Iran by paying them in tea, sending them $5m worth of tea every month in order to save much-needed currency.

It has introduced temporary measures, such as credit lines to import foods, medicines and fuel from India, as well as currency swaps with India, China and Bangladesh. However, these loans have to be paid back at high-interest rates, and simply add to the debt burden.

Sri Lanka’s history has shown that capitalism has not provided economic security. In response to the high prices and excessive money-printing, workers are going on strike demanding higher wages to compensate for the spiralling inflation, as in the health service whose strike the government has declared illegal (tinyurl.com/55tw2ayh). Several powerful trade unions in the country, from postal workers to railway workers, from teachers to doctors, have started demanding higher pay and are threatening to launch massive strikes unless their grievances are met.

ALJO

Cooking the Books: Who invented money? (2021)

The Cooking the Books column from the May 2021 issue of the Socialist Standard

Whenever goods are systematically exchanged and so become ‘commodities’, one commodity evolves as what Marx called the ‘universal equivalent’ that can be exchanged for any other commodity. So nobody invented money; it came into being spontaneously. At first this money-commodity was gold or silver measured by weight. The next stage in the evolution of money was coinage, where a state stamped an amount of metal to authenticate its weight. In the European tradition this is attributed to King Croesus of Lydia, an area now in western Turkey, in the sixth century BC.

Historical research now suggests that coins may have been invented in China and at a much earlier date, as pointed out by the Mises Institute in an email note of 15 March:

 ‘China was one of the first countries to develop a metallic money that was valued and exchanged by weight. Evidence suggests that this monetary regime originated during the Shang Dynasty (1766–1122 BC) or the Zhou Dynasty (1122–221 BC). China was also one of the first countries to use precious metals as money and may have invented coined money.’

Also:

  ‘While ideas about the development of money were expressed as early as the seventh century BC, the most prevalent view of money’s origin is attributable to a politician of the sixth century BC. Shan Qi (b. 585 BC) contended that money was invented by one of the ancient philosopher-kings to measure the value of goods. However, several Chinese writers later disputed this story and argued that money originated as a market phenomenon. Sima Qian (104~91 BC) [sic: actually 145~86 BC], Luo Mi (1165~1173 AD) and Ye Shi (1150~223 AD)[sic: actually 1223] basically argued that money grew out of the trading of commodities and could not have emerged in the absence of commodity exchange. Money was only later adopted by kings as an aid in ruling their countries’ (bit.ly/3dc24Sm).

This same debate took place in Europe, with some arguing that coins were introduced by states to enable taxes to be paid in that form and others that they evolved out of commodity exchange. The debate is still ongoing with the proponents of so-called ‘Modern Monetary Theory’ and David Graeber in his book Debt arguing for the former, a position known in the literature as ‘Chartalism’. The other view is defended by Marxists and the Austrian school of economics as represented by the Mises Institute – strange bedfellows as Ludwig von Mises was an arch-enemy of socialism as well as of state capitalism (which he tended to confuse with socialism).

The case for the state being the inventor not just of coins but of money as a ‘universal equivalent’ is given some plausibility by the fact that today the currency – money as a means of exchange – is entirely the creation of the state, ‘fiat’ money as it is known. Gold and silver coins have long ceased to be used as a means of exchange; this is now made up of paper notes and metal discs issued by the state and which have no value in themselves. They are just tokens or counters that can be used to buy things.

However, the commodity-exchange origin of money is still there. Commodity production and exchange is basic to capitalism and the ratios in which they exchange for each other are still related to their labour content. The state issuing more money tokens than needed to carry out these exchanges does not increase the amount of values in existence or to be exchanged. What it changes is the unit in which the price of goods is expressed, reducing it and so raising the number of them to express prices, i.e., increasing prices all round. Which is why the ‘chartalists’ of MMT would come unstuck if ever their policy was to be implemented.

Muddled Money Theory (2021)

Book Review from the March 2021 issue of the Socialist Standard

The deficit myth: modern monetary theory and how to build a better economy. Stephanie Kelton, John Murray Publishers, 2020

You may have read or heard about Modern Monetary Theory (MMT), which has become popular in some left-wing circles as a means for justifying government spending programmes. In essence, it affirms that any state that can issue its own inconvertible (fiat) currency, cannot go bankrupt (so long as it only borrows in its own currency).

This leads to a model of the state in which it is not reliant on taxation nor borrowing to spend. Taxes, for MMT, are merely a means for driving demand for the state-issued currency, and any money paid in tax is effectively destroyed. All state spending is simply the issuing of newly created money. The national debt is simply a different form of money that attracts interest in the normal money the state issues. The national debt, in this model, is merely a means to regulate interest rates.

The only limit to state spending, for MMT, is the availability of resources in the real economy. These limits only become evident through the appearance of inflation: prices would begin to rise as demand from government spending outstripped supply. The method that Kelton promotes to regulate this spending is a government jobs guarantee scheme, so that full employment is maintained at all times. If private sector employment drops, the government jobs scheme kicks in to offer employment, at a minimum rate. As the economy recovers, people leave the job scheme, attracted by private sector wages.

This is, then, unlike the Keynsian prescription, in that MMT encourages government spending at any stage of the business cycle, rather than cutting spending during the upswing and borrowing during the recession.

The core premise of MMT is banally true: the state can always issue more money in its own currency. There is a question of just how much scope there is for increasing state spending before inflation kicks in, and Kelton certainly seems to write a lot of cheques against that spending capacity: healthcare, university education, pensions, etc.

She seems to imply that the current models, wherein the state is assumed to be funded through taxation and borrowing, are simply an error, rather than representing the ideological form of the interests of the owners of money and capital.

Before 1971 other currencies had a fixed rate of exchange with the dollar and the dollar was convertible into gold at the fixed rate of $35 an ounce. This provided an indirect link between a currency and gold. The currencies themselves, however, were not convertible into gold and states could issue as much as they wanted. To the extent that they over-issued them this led to inflation and in the end to a formal devaluation of their exchange rate with the dollar.

When this ‘gold exchange standard’ was abandoned by the US in 1971 the commodity origin of currencies was completely disguised, giving rise to the illusion on which MMT is based that money is entirely a creation of a state. Since then currencies have floated up and down against each other in accordance with the demand for them, for instance to pay for imports. An increase in their supply was still liable, if excessive, to cause inflation. The result wasn’t a formal devaluation, simply a downwards float vis-à-vis other currencies.

To an extent, the commodity origin is still relevant because the state monopoly of fiat currency is not absolute. People can abandon pounds or dollars by buying foreign currencies or value-bearing commodities (in a crisis, the price of gold shoots up, as people buy gold to try and protect the value of their assets). Contrary to Kelton’s assertion, the banks do not have to buy the national debt, they have other options, but it has to remain attractive, and the currency has to retain confidence.

Further, her dismissal of ‘crowding out’ theory only goes so far. The usual idea of crowding out is that government borrowing attracts investable capital and pushes up interest rates, making it harder for private sector businesses to find investment and thus damping down overall economic growth. Kelton argues that the state can effectively set its own interest rates for borrowing, and can thus borrow and hold down interest rates at the same time.

To an extent that is true, but only within broad limits governed by general confidence in the security of the government debt. With international money markets, setting the interest rate too low or too high would make the currency a target for speculation, as people would move their assets into or out of the country. Further, leaving interest rates to one side, as the state can only consume resources (as a state) all the resources employed by the state cannot be employed by private capital to produce profits. Whether this transfer really comes from borrowing, taxation or from creating money is moot, the fact remains that from a capitalist’s perspective, state spending is a threat to their profitability. This means less wealth overall is created for the state to commandeer.

The same can be said for a jobs guarantee. It is useful for Kelton to tell us that the US Federal Reserve sees it as part of its role to deliberately sustain a certain level of unemployment in order to control inflation. While she sees this as the result of mistaken theory, we would see it as part of the essential features of capitalism. Capitalism relies on the lash of the threat of poverty and unemployment in order to sustain its profitability for the capitalists, as well as having a buffer of laid-off workers in reserve for the next boom.

A job guarantee scheme would see wages pushed up to the point where they cut into the profits the capitalists make (and this would happen without causing inflation, since the demand would simply be transferring effective demand from one pocket to another). This would likely result in a capital strike occasioning a form of economic crisis. Just as likely, the state might be called in, as it was under the Keynesian nostrums, to regulate wages and use its job guarantee to control wage levels.

To the extent that Kelton talks about looking past money to think about real economic resources and how they can be commanded for the interests of the whole community, she is on the right path. The lever of state-issued money is insufficient. The distortion of money markets would get in the way of that. Likewise, simply seeing the problem as a misunderstanding of theory, rather than actual contesting class interests, is a greater barrier than any theory of how the state is financed.

Pik Smeet

Cooking the Books: Fantasy politics (and economics) (2019)

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

You can tell it’s election time. The parties are making all sorts of extravagant promises. The Tories are promising to spend an extra £20 billion a year on hospitals, schools and other infrastructure. Labour is promising an extra £55 billion. The Greens are promising £100 billion but, as they have no prospect of being put in a position to honour this, they can promise what they like.

It is not that the physical resources don’t exist to improve hospitals, schools, transport or to do what is needed to combat climate change. They do but, under capitalism, mobilising them has to be paid for, so it’s legitimate to ask where the money will come from.

The Tories say it’s going to come from the government borrowing it. Labour and the Greens say it will come from borrowing and also from increasing direct taxes on the profits of businesses. Neither of these two is suggesting conjuring the money out of thin air – which they might have done given that Richard Murphy, once one of Corbyn’s economic advisers, adheres to so-called ‘modern money theory’ which, in his words, ‘says governments can make money out of thin air’. And the Green Party is on record as wanting the power to create money out of thin air (that they believe the banks possess) to be transferred to a public body that will issue ‘debt-free’ money. The government could, as these theories in effect advocate, simply print the promised amounts of money but, as most people know this would cause roaring inflation, the leaders of these two parties don’t see this as a vote-catcher.

The Tories know well that capitalism runs on profits and that anything that impedes this risks provoking an economic downturn. While Labour and the Greens are saying that most of the extra money will come from borrowing, the Tories say that all of it will.

When a government borrows – and given the amounts involved here, it will have to be from capitalists – the interest payable has to come from taxes. This is not a problem as long as the economy is expanding; if this is the case even an increase in the interest rate won’t cause a problem as the increased revenue from taxes will be enough to cover this without requiring a reduction in other government spending. If, on the other hand, the economy is not expanding, as regularly happens from time to time, interest payments will eat into other spending.

The Tory and Labour spending promises both assume a continuously expanding economy; Labour’s is even supposed to bring this about. When, as proposed, a government spends money on infrastructure there will be some initial economic expansion through construction firms and other contractors having money to extend their business and take on workers. However, there is no guarantee that this will be sustained as the capitalist economy is not driven by government or consumer spending, but by capitalist investment in profitable productive activity. This is not something governments can control as, among many others, the last Labour government discovered.

Because the economy happened to be expanding, Gordon Brown assumed that this would continue indefinitely. He even proclaimed the end of the boom/slump cycle. He was wrong and, when the boom inevitably ended, his and subsequent governments found themselves in financial difficulty and, to protect profits, had to cut back their spending.

Aware of how capitalism works and of past experience of how it has worked, we can confidently predict that neither the Tories nor Labour will be able to honour their election promises. Eventually, for reasons beyond their control, the capitalist economy will stall and they will be forced to renege on them. History will repeat itself.

Labour’s plans for capitalism (2019)

Video Review from the July 2019 issue of the Socialist Standard

For the 2019 local elections, the Labour Party released a video claiming ‘It’s just common sense.’ The video was entitled ‘Five people verses a billionaire’ (see: LINK.). Shares on social media proclaimed the video to be a better education in economics than most university classes.

The video depicts the difference between ‘giving’ money to ordinary people, via a pay-rise, a pension, disability benefits or a small business loan with giving the equivalent amount to a billionaire in the form of a tax cut.

The video then depicts all the five people spending their extra money, generating more business, economic growth and higher tax returns in their area: essentially, making the argument for a multiplier effect, whereby increasing consumer resources generates more wealth than would be spent in pay pensions and benefits.

The video asks the billionaire what they did with their money, and tellingly, he airily declares he forgot about it, but will probably send it to the Cayman Islands with the rest.

There are many problems with this short video. Firstly, the idea that economic growth is driven simply by having more commodity exchanges on the market. Circulating the wealth faster and faster does not create new wealth. Stimulating ‘demand’ by making more money available only generates growth if more wealth is produced to increase supply. Capitalist firms could just raise prices to capture more of this new demand, rather than increase production.

It neglects that the money to pay pay-rises, pensions and benefits has to come from somewhere. Of course, many Corbynistas argue for Modern Monetary Theory (MMT) which says that money can just be created out of thin air (much like the old social credit fantasists of the 1930s). Money not backed by real wealth, though, is just tokens. Government must lay a claim to a share of the wealth that has already been produced in order to have tax money to spend.

A government can theoretically tax any existing wealth: all it needs to do is identify the source of wealth and apply force to claim control of it. The only limit to expropriation is the need for political support to be maintained for the government and the operational efficiency of the laws and bureaucracy of the nation.

Expropriation of wealth and monetising it can increase the value realised in an economy, in the form of windfall profits. A modern government could raid hidden pots of wealth, but this would take money out of the capital cycle which would disrupt the economy, and, at the least, be unpopular (if not actively counter-productive). Governments in a capitalist economy can only tax new wealth, to take a share of the profits generated, if they want to be sustainable. That is, they can only tax within the limits of profitability.

If the tax rates are too high, then investors will be deterred from turning their wealth into capital, and an economic crisis would ensue. The threat of a capital strike is an effective tool for the masters in the class war, and one that is largely hidden as a ‘natural’ fact, rather than a social act of self-interest. Labour’s video fails to expose this, instead simply conveying that billionaires naturally hoard wealth, rather than dutifully spending it.

Any spending done with tax will return less in new profits than the sum extracted from profits through taxation (because any of that spending will have to give a share to wages or paying for capital invested already in goods and services).

The government could instead borrow money from the wealthy, this, however, acts in much the same way as taxation, directing wealth away from the capital investment cycle, and reducing the production of new output. It further adds to the capitalists’ control over the economy, since the state is now committed to paying them back, and it can only carry out policies that will securely honour its debts.

In the specific instance of where the capitalist (the billionaire) would prefer to export their wealth rather than spend it in the country, taking this money and spending it would increase the sum of domestic demand. However, the reason the billionaire would be declining to invest and instead export their wealth is because there isn’t enough profit in the market to induce them to invest in new production. Taxing the profits of the billionaire reduces rather than increases their incentive to invest.

This is just a return to the Keynesian fantasy that the economy can be ‘pump-primed’ by taking idle wealth that is uninvested, and turning it into consumer demand. Even worse, it is the mirror image of the Tory line that a ‘well-managed economy is vital to the delivery of public services’ (i.e. that stringent government restraint to allow firms to grow leads to tax revenue and money to spend on services).

In both cases, human need is subsumed to the need to successfully exchange commodities in a market place. They both rely on a systemic logic that puts the owners of commodities in first place within the economy, and makes everyone else dependent upon fulfilling their interests. Put another way, for all the radicals proclaiming Labour finally coming out in favour of the ‘multiplier effect’, this video radically disarms the electorate, and the working class.

The knowledge that wealth is produced by our labour, and the interests of the property owners hinder it being put to the service of our needs leads to a very different set of conclusions: that we need to take ownership of the productive wealth for ourselves, and bypass the market entirely.

The propaganda of the Labour Party under Corbyn is as much a barrier to spreading the message needed for working class self-emancipation as it ever was under Blair. The Labour Party, far from progressing the interests of the working class, is about trying to use state power to make the market work in favour of people, and that is like trying to put a mad bear to work in a shop. 

Pik Smeet

It's just common sense. pic.twitter.com/ULko6MjPXW

— The Labour Party (@UKLabour) April 29, 2019

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