Modern monetary theory (MMT) is a recent addition to the landscape of macroeconomic perspectives on the relationship between the money supply, price inflation, sovereign debt, and real economic activity. In effect, it advances the simple proposition that the money supply, in fiduciary (non-metallic) monetary systems, is a government construct, emanating from the act of fiscal expenditure. That is to say, government spending summons real economic activity into existence, compensated with money created for the same purpose. This money then largely circulates, summoning still more economic activity into existence until it is withdrawn from circulation, entering into private hoard or returning to the government in the form of taxes or lending. As such, receipts of fiscal revenues or borrowing by the government, generally, appear not as constraints on government spending but as regulatory mechanisms to control the pace of economic activity generated by the circulation of monetary resources - higher taxes and increased government borrowing slow down the pace of private economic activity by withdrawing money from the private sphere.
The ultimate novelty in this approach to the money supply is that it turns the problem of fiscal solvency for states utilizing sovereign currencies on its head. For MMT, it makes no sense to ask whether a government can fiscally afford to spend money on public services without raising taxes or borrowing provided the macroeconomy stands below full employment of production factors (a critical point). Effectively, the production of real goods and services summoned by the government's actions will pay for the creation of new additions to the money supply - the government can print new money to spend it, and, up to a point, it will not have to worry about generating price inflation. The basic point, in this respect, concerns the relationship between the money supply and aggregate constraints on real economic productivity (i.e. the total mass of production factors available and offered, the prevailing levels of production technologies, and the efficiency of distributive mechanisms for produced goods and services). If resources exist to produce new goods and services with an expansion of government spending, and those resources can further be deployed efficiently to produce the streams of new goods and services that would need to be generated to meet induced demand as the recipients of government funds recirculate their incomes, then new government spending will have, at most, a modest inflationary impact on the prices of goods and services.
Having been, to a substantial degree, outside of academic environments where I might have been exposed to MMT earlier, I first started hearing about MMT in relation to the Green New Deal introduced by New York Democratic Representative Alexandria Ocasio-Cortez and Massachusetts Democratic Senator Ed Markey. Ocasio-Cortez has apparently utilized MMT to argue that the federal government can embark on vast levels of new fiscal expenditures, backed by massive expansions of debt, without worrying about induced price inflation ( see Noah Smith, "The Green New Deal would spend the US into oblivion," on Bloomberg Opinion, 8 Feb. 2019, at: https://www.bloomberg.com/opinion/articles/2019-02-08/alexandria-ocasio-cortez-s-green-new-deal-is-unaffordable). My initial reaction was that this entire line of reasoning seemed unavoidably plagued with hogwash. After listening to one of MMT's initial academic/political popularizers, Stephanie Kelton of Stony Brook University, on an economics podcast, explaining MMT in somewhat greater detail (see "What is Modern Monetary Theory? (with Stephanie Kelton)," on Pitchfork Economics with Nick Hanauer, 23 April 2019, at: http://www.pitchforkeconomics.com/episode/what-is-modern-monetary-theory-with-stephanie-kelton/), I realized a few things, however. First, left-leaning partisan players like Ocasio-Cortez are, importantly, overplaying the conclusions of MMT without grasping its larger nuance and missing important conditionalities of the theory, sadly, to the detriment of its larger (rhetorical) appeal. As a result, instead of appreciating the particular ways in which MMT could inform the budgetary process as a consequential counterargument against more Monetarist and otherwise austerity-oriented perspectives, at least on the political left, the theory is encountering vigorous resistance. In this regard, it does need to be emphasized that MMT is not, in itself, a radically transformative new approach to macroeconomic analysis. It is just a slightly novel combination of old Keynesian arguments about the relationship between the money supply and real economic growth to emphasize a few relevant rhetorical insights on the fiscal process. Finally, the question of whether MMT reveals any new truths about macroeconomics ultimately can be answered in revisiting the same themes that have played themselves out in theoretic struggles between old Keynesians, New Keynesians, Post-Keynesians, Monetarists, and New Classicals on the role of monetary expansions in reshaping expectations regarding real economic growth. That is to say, I mean to argue that, on the level of theory, there just isn't anything new in MMT. It isn't making any arguments about human behavior that have not already been made many times over again in the recent or more distant past in economic theory. The newness of MMT resides exclusively in its particular packaging, and the nuance of this packaging can be readily subverted by partisans who attempt to utilize the theory to justify arguments it was never conceived to prove.
The rest of this document attempts to flesh out these general observations regarding MMT. Emphatically, the arguments made by MMT with regard to government spending in relation to the growth of the money supply need to be situated more thoroughly with regard to the nature of money. That is to say, we desperately need to embark on a speculative anthropology of money as a social relationship to ask where the state fits in and, in so doing, query the relationship between market processes (as the raison d'etre of money) and the state. Beyond this, we need to situate MMT more fully in relation to traditional (General Theory) Keynesian, New Keynesian, Post-Keynesian, Monetarist, and New Classical thought essentially as divergent attempts to produce dynamic readings of the Quantity Theory of Money through diverging conceptions of expectations. Finally, I do need to evaluate the rhetorical value of MMT as a contribution to the budgetary debates in the US federal government and elsewhere if only to ask how MMT might be meaningful even if its arguments are granted a requisite degree of nuance and modesty.
A Speculative Anthropology of Money
In its most general sense, money constitutes a medium of social relations. We can configure the roles of money in social relations in two particular senses as passive and active modes of relation. In the former, passive sense, money constitutes a standard for the attribution of prices on particular goods and services or on portfolios of abstract claims to property in goods and services in relation to diverse, finitely divisible quantities of money. In the latter, active sense, money is a medium of exchange and measure of values, representing equivalence between definite masses of goods or services being actively transacted between individual parties to a transaction. These are the two roles on which Marx concentrated his attention in his introduction to the economic concept of exchange value, relative to the utilization of monetary valuations, in volume one of Capital. They are, as such, my logical starting point, but I need to dig deeper, if only because Marx's treatment is incurably tainted with metalism. Fiduciary money can't be reduced to a value under a labor time embodiment theoretic. Even as labor time embodiment theories are more complicated and more social than they appear at first glance, the valuation of fiduciary money is more complicated as it is considered against conventional value theories. The critical point that I need to settle on here regards the quintessential social, consensual attribution of value to money.
I label this section a "speculative" anthropology of money because I know next to nothing about the actual (pre)history of monetary forms beyond recitation of Keynes' brief insights at the beginning of his Treatise on Money about the beginnings of coinage and ancient Chartalism (i.e. the institution of state monies) and Adam Smith's chapter in the first book of the Wealth of Nations on the origins of money. This paucity of knowledge on the history of money matters very little for the larger rhetorical mission on which I have embarked. I can (rationally) speculate to develop rhetorically convincing arguments about the development of monetary economy and, more importantly, its contemporary use. How do we conceive the development of money as a medium of social (market) relationships? What relationship does money have to the state (as sovereign political power) and how does democracy/democratic sovereignty transform this relationship? How does trade between sovereign monetary systems refract the roles of money? All of these questions need to be, at least minimally, addressed here.
The rest of this document attempts to flesh out these general observations regarding MMT. Emphatically, the arguments made by MMT with regard to government spending in relation to the growth of the money supply need to be situated more thoroughly with regard to the nature of money. That is to say, we desperately need to embark on a speculative anthropology of money as a social relationship to ask where the state fits in and, in so doing, query the relationship between market processes (as the raison d'etre of money) and the state. Beyond this, we need to situate MMT more fully in relation to traditional (General Theory) Keynesian, New Keynesian, Post-Keynesian, Monetarist, and New Classical thought essentially as divergent attempts to produce dynamic readings of the Quantity Theory of Money through diverging conceptions of expectations. Finally, I do need to evaluate the rhetorical value of MMT as a contribution to the budgetary debates in the US federal government and elsewhere if only to ask how MMT might be meaningful even if its arguments are granted a requisite degree of nuance and modesty.
A Speculative Anthropology of Money
In its most general sense, money constitutes a medium of social relations. We can configure the roles of money in social relations in two particular senses as passive and active modes of relation. In the former, passive sense, money constitutes a standard for the attribution of prices on particular goods and services or on portfolios of abstract claims to property in goods and services in relation to diverse, finitely divisible quantities of money. In the latter, active sense, money is a medium of exchange and measure of values, representing equivalence between definite masses of goods or services being actively transacted between individual parties to a transaction. These are the two roles on which Marx concentrated his attention in his introduction to the economic concept of exchange value, relative to the utilization of monetary valuations, in volume one of Capital. They are, as such, my logical starting point, but I need to dig deeper, if only because Marx's treatment is incurably tainted with metalism. Fiduciary money can't be reduced to a value under a labor time embodiment theoretic. Even as labor time embodiment theories are more complicated and more social than they appear at first glance, the valuation of fiduciary money is more complicated as it is considered against conventional value theories. The critical point that I need to settle on here regards the quintessential social, consensual attribution of value to money.
I label this section a "speculative" anthropology of money because I know next to nothing about the actual (pre)history of monetary forms beyond recitation of Keynes' brief insights at the beginning of his Treatise on Money about the beginnings of coinage and ancient Chartalism (i.e. the institution of state monies) and Adam Smith's chapter in the first book of the Wealth of Nations on the origins of money. This paucity of knowledge on the history of money matters very little for the larger rhetorical mission on which I have embarked. I can (rationally) speculate to develop rhetorically convincing arguments about the development of monetary economy and, more importantly, its contemporary use. How do we conceive the development of money as a medium of social (market) relationships? What relationship does money have to the state (as sovereign political power) and how does democracy/democratic sovereignty transform this relationship? How does trade between sovereign monetary systems refract the roles of money? All of these questions need to be, at least minimally, addressed here.
Monetary economy distinguishes itself principally from economies utilizing pure barter. The creation of a money commodity (or a representative monetary form), characterized (ideally) by temporal durability, spatial portability, finite divisibility, and ready acceptance across real transactions over time and space, constitutes something relatively new in the history of human commerce. It is a critically important transition. The absence of a universal equivalent that can be carried from one transaction to myriad others prevents individuals in possession of a certain portfolio of goods or the capacity to deliver a set of services to render this set of commodities onto others who need them without compromising their own sets of needs that prompted the exchange process. That is to say, a person with a set of shirts looking for a pair of shoes doesn't have to go looking around for someone with a pair of shoes looking for shirts. He can sell the shirts for money and use the money to buy shoes. Moreover, he need not buy the shoes today - he can wait to buy the shoes next week or next month, or he can take the money from the site of his initial transaction to some other place where he can obtain a better price for shoes. The existence of money transforms the conditions under which market transactions happen, eliminating the spatial and temporal limitations of pure barter.
What does it take to get us from a pure barter economy to an economy with a universal equivalent possessing the desirable physical properties we seek in money? The key obviously resides in the property of universal acceptance. You can't walk into a bar, order a beer, and present the bartender with a handful of seashells in payment unless seashells are an accepted universal equivalent in market transactions, however portable, durable, or divisible seashells might be. For that matter, the capacity of a particular good or service to be accepted as a universal equivalent across transactions may transcend the physical characteristics of the money commodity. An economy that accepts live cattle as legal tender to pay debts and obligations may encounter serious limitations on the scale and complexity of its broader organization, but the social determination that live cattle constitute a universal equivalent, standard of price, and measure of value in all other commodities is conclusive. In important ways, the larger organization of a non-barter economy is shaped by its participants' choice of a universal equivalent and the proximity of that choice to ideal conditions (portability, durability, divisibility).
What does it take to get us from a pure barter economy to an economy with a universal equivalent possessing the desirable physical properties we seek in money? The key obviously resides in the property of universal acceptance. You can't walk into a bar, order a beer, and present the bartender with a handful of seashells in payment unless seashells are an accepted universal equivalent in market transactions, however portable, durable, or divisible seashells might be. For that matter, the capacity of a particular good or service to be accepted as a universal equivalent across transactions may transcend the physical characteristics of the money commodity. An economy that accepts live cattle as legal tender to pay debts and obligations may encounter serious limitations on the scale and complexity of its broader organization, but the social determination that live cattle constitute a universal equivalent, standard of price, and measure of value in all other commodities is conclusive. In important ways, the larger organization of a non-barter economy is shaped by its participants' choice of a universal equivalent and the proximity of that choice to ideal conditions (portability, durability, divisibility).
The distinction between commodity money (e.g. metallic specie money) and non-commodity fiat money is, to some degree, a critical issue. In particular, restrictions on the growth of the money supply exhibit greater rigidity in commodity money-based systems, and the function of money as a universal measure of value is relatively more rigorous, at least within certain theoretic approaches (e.g. a Marxian labor time embodied theoretic). For conservative minds who value the stability of market prices above all else, metallic money approaches an ideal that fiat money can never match and that managed, representative money (e.g. paper money backed by a metal with legally sanctioned conversion standards) only imperfectly imitates. The gold standard, as a compromise managed money alternative to metallic commodity money, has, thus, captivated a great many monetary conservatives since its ultimate downfall in the 1970s. The problem is that metallic currencies can be debased, sometimes almost imperceptibly, and managed representative currencies can have their conversion rates readjusted to such a degree that actual conversion into metallic money becomes a fantasy underlying the operation of, for all intents and purposes, a fiduciary fiat money system. If metallic and managed monies reflect a plea for objectivity in the face of the vagaries of international currency exchange, incorporating the effects of both commodity and capital flows, then they are simultaneously a false promise, anchored on the willingness of influential parties to hold currencies at arbitrarily fixed values or arbitrarily constrained relationships to specie. The fundamental virtue of the gold standard exists in its capacity to enshroud the power of financial authorities in the illusory objectivity of the value of a physical commodity. In the end, all currency reflects an implicit universal acceptance of a set of value relationships/relative prices or, more modestly, of a mechanism in which the value contained in separate commodities can be brought to equivalence prior to exchange by means of a universal equivalent, and this acceptance encompasses the use of either commodity money or fiduciary fiat money. It demands that the users of a currency exhibit trust that the issuer will not undertake reckless measures that undermine the capacity of the currency to constitute a measure of value. Hence the fiduciary relationship between the state/central bank and every participant within a monetary zone.
Before leaving the subject of metallic currency, my theoretic background imposes on me an obligation to attempt to resuscitate Marx for his own sentiments about the valuation of money. Marx indisputably connected the labor time embodied in the extraction and refining of metals with the role of metals as a standard of price. That is to say, if it takes x hours of necessary abstract labor time to produce a pound of silver and 10x hours to produce ten pounds, then one pound and ten pound currency notes, backed by silver, hold their value and divisibility across various denominations based on variations of labor time embodied in the actual production of the metal. I harbor misgivings about this view at least as great as those I harbor toward the underlying premises for support of the gold standard. This is a quintessentially Modernist attempt to frame the value of money in objective terms, connected to a broader objective approach to the valuation of commodities. It suffices to say that Marx's views on monetary economy and on value theory, per se, cannot be extracted from the time and the mindset of their originator without simultaneously confronting Marx's epistemological presumptions and challenging them in reference to our own. Reading Marx as a Postmodern Marxist, I simply cannot accept the idea of reading the Marxian labor theory of value as an objective value theory any more than I can accept Marx's metalist reading on the valuation of money as objective. No theory commands objectivity - all theories, however rudimentary and simplistic or intricate and complex, are subjective, heuristic, and rhetorical.
Approaching Marx's ideas in these terms, the basic Marxian labor time embodied theoretic constitutes a (subjective and rhetorical) framework for analyzing the creation of value from the production of commodities, in the same way that marginal utility-based commodity valuations constitute a competing (subjective and rhetorical) analytical approach. Indisputably, on some level, all produced goods and services are products of a labor process, and, accounting for recursive chains of past labor processes culminating in the final preparation of an object of consumption, the quantity of labor time imparted in the production of any good or service must, in some way, on average, be related to its value in market exchange. Conversely, the extension of this framework to money still leaves us with problems if we are to accept the idea that universal acceptance constitutes the fundamental property of money as a universal equivalent in market exchange, even if we are dealing with strict metallic specie. On some level, money has to be different from every other commodity with a value corresponding to labor time embodied, and this difference is most readily apparent with state fiduciary fiat money. Fiat money, in paper or any other form, holds a fictitious value, in the sense that its place as a universal equivalent to commodities in exchange can never correspond to the labor time embodied in the currency. On the other hand, this is a collective fiction, even to the extent that attributions of monetary value are implicitly shaped by prevailing power relations within a social structure (e.g. the capacity of financiers to leverage particular policy regimes in maintaining the value of currency against the interests of borrowers/anti-inflationary bias). In the end, the fictitious character of the value of money is, precisely, the thing that it shares with all other commodities, for whom any theory of value amounts to a fiction, ratified by the (power-inflected) consent of market participants. Whether we utilize a labor embodied theory of value or a marginal utility-based conception in the determination/validation of a commodity's value in exchange, we are telling a subjective, partial, and partisan story about how particular individuals in a particular context of exchange arrived at particular terms of the exchange, and the valuation of money, as the medium of such exchange, constitutes a part of the same story that must, consequently, be integrated into the larger account, however awkwardly. The broader theme, therefore, in our Marxian tale of money and market exchange is consent/consensus on the valuation of money (commodity, fiat, or otherwise) and the valuation of commodities, whether or not the valuation of money formally corresponds to the valuation of all other goods and services and whether or not both processes in the determination of values are inflected by asymmetric power relations across a social structure. In the end, the property of universal acceptance/validation in all market exchange transcends the limitations evident in Marx's prioritization of a labor embodied theory to establish the value of money and its consequent bias toward specie.
Universal acceptance of a monetary issue can either be constructed in a piece-wise manner from the ground up or it can be imposed from above by state fiat, where the state constitutes an indivisible sovereign, capable of dictating social regulations with the full force of its authority, if necessary through threat or practical exercise of coercive violence. These alternatives are not necessarily mutually exclusive. If the state is a democratic sovereign, then there is an implication of universal consent to the will of the majority, at least as an implicit condition of citizenship, even to the extent that such determinations reflect power asymmetries. Piece-wise (networked) sanctification of a universal equivalent may itself operate as an implicit mechanism. If enough participants in a market economy choose to accept a given universal equivalent, then there may be a tipping point at which all other participants are inclined or, minimally, compelled by practicality considerations to accept such an equivalent. Beyond this, determination of the requisite qualities of such an equivalent, including its purity and the relationship of particular, divisible weights of the equivalent to other goods and services in the contexts of transactions, must incorporate universal acceptance among market participants. Certain forms of universal equivalents with really good physical properties, like metals, might make this process easier, if only because they help cement supposed objectivity in the content and quality of the universal equivalent.
The most obvious point of difference that would appear to exist between a monetary system that is strictly piece-wise (networked) and a state fiat system concerns the control of the aggregate money supply within the system. How does the system control the creation, integration, removal, storage, and destruction of units of the money supply, contingent on the reality that regulation of the scale of the money supply in active utilization exerts real effects on the flow of commerce and the structure of prices? In a true piece-wise system, a potential must exist for individual participants to alter the size of the money supply through unregulated activities (e.g. unlimited hoarding, integration of new, individually monopolized reserves). In a piece-wise system constituted with a metallic money, say copper, the owner of a copper mine might possess the capacity to integrate large quantities of new copper money into the economy at will, thus, at least potentially leading to systemic price inflation. Such a capacity explains why Keynes, in the Treatise on Money, makes the observation that "(t)o-day all civilised money is, beyond the possibility of dispute, chartalist," where chartalism is defined as the reduction of all legal money to state regulated money. Effectively, there are no true piece-wise monetary systems in existence or at least worth examining in the world today. In restating this observation, I would also include the possibility of block-chain money (e.g. bitcoin) within the spectrum of chartalist state (fiat) money, by the definition employed by Keynes. The point here is not that block-chain monies do not constitute piece-wise, networked monies but that the structures of these networks are regulated to prevent individual participants from altering monetary conditions without the consent of all network participants. In effect, block-chain systems constitute state fiat money systems, with centrally defined structural parameters, operating outside the Westphalian state system and its component state fiat money systems. Block-chain is (democratic) state money absent a true political state.
Approaching regulation of the money supply from the opposite standpoint, let us say that we have a state monetary system with a very different kind of political state from contemporary constitutional democratic systems. Let us say we have an absolutist monarchical state in which the titular head claims all persons and possessions under the canopy of the heavens as his personal property and in which this head claims the ability to regulate all prices at which market transactions shall be conducted in monetary terms between his subjects. All money is, thus, by definition, chartalist money, and the parameters within which money will be used exist to be regulated at the pleasure of the sovereign. Better yet, let's give this sovereign a definite historical identity. This is Qin Xi, the first emperor of the Chinese Qin dynasty, the first figure to claim the moniker "Son of Heaven," and one of human history's true megalomaniacs. From his capital in Xianyang, Qin hears the constant flow of reports from the borderlands of the raids by the nomadic Hu (barbarian) people against his peasant subjects on the northern frontier with Mongolia, and he decides that it is time to make the Qin empire great again for his beleaguered subjects. He is going to build a wall, a (G)reat wall.
The problem is that his treasury isn't quite large enough to accommodate the expense of constructing a wall over a thousand miles in length, even where some preexisting segments remain from the building projects of local dynasties from the earlier Warring States period. In his silver based monetary system, there aren't enough silver coins or silver bullion in the world of his time to pay for all the things Qin needs to build his wall. Qin has to act decisively, so he decides to do something radical - he debases his currency. Instead of having one hundred percent silver coins, coins will now be composed of twenty-five percent silver content, raising the money supply to four times its initial size. At the same time he mandates that all prices across the empire must remain constant, and, to hammer home the point, he is ready to send his army out to discipline any of his subjects who dare to raise prices against his debased currency. The problem with this solution is that the empire is quite large, stretching from the desolate lands on the borders of Inner Mongolia to the boundaries of present-day Vietnam, and Qin just doesn't have a large enough army to enforce his anti-inflationary edict at all places and at all times.
In the prefecture seats and the local military outposts, the law is respected, but in small country hamlets and in little crossroad market towns people gradually come to understand that there is something different about the money in circulation. As they do, prices start to creep upward outside the seats of monarchical and military power, and, as a consequence, the prefecture seats and the imperial capital begin to experience shortages of basic goods, as peasants try to hold onto more of their produce, demanding a higher price. Predictably, Qin sends out the army into the countryside to discipline his disloyal subjects and seize produce, but, equally predictably, these actions produce localized insurrections and peasant uprisings. Soon Qin is spending most of the time and resources that he wanted to commit to building his wall putting down local rebellions and seizing goods to feed starving townsfolk. In the end, he never lives to see his wall finished, even if he somehow manages not to see his empire completely disintegrate beneath him.
However much this account might possess a grain of historical truth, it no doubt substantially exaggerates the rigor of market forces in third century B.C.E. China and the unified national character of the Qin economy. The moral of this more or less fictional account concerns neither the Confucian dictate that rulers should practice enlightened benevolence and piety toward their subjects nor the Monetarist hypothesis that peasants, when confronted with a manifestly debased currency, will exhibit adaptive expectations. It is simply that no sovereign (or government acting in the interest of a sovereign), no matter how absolutist and totalitarian, can manipulate economic conditions at will without the implicit consent of the economy's participants. Economies, market oriented or otherwise, are always piece-wise assemblages of individual actors, each possessing the capacity to cooperate or dissent from centralized regulations of economic conditions. Even at the heights of totalitarian autocracy in the Stalinist Soviet Union, individuals still had the means to dissent from government efforts to mobilize their labor or appropriate the natural productivity of their land if at the expense of their freedom and/or their lives. All economic processes incorporate networks in which all of the individual pieces must be made to work in order for a given outcome to obtain.
To make the point differently in reference to MMT, no government, acting in the interest of a sovereign, can print new money at will that is not backed by an increase in real economic productivity without expecting price inflation, and increases in real economic productivity will only happen if active economic agents apply their consent to the government's actions by altering the investments of their factors of production in such a way that raises aggregate supply. Again, as argued above, this isn't a criticism of MMT or its defenders within the academic community as much as it is a warning to political figures who are presently bastardizing the theory. The presence of an acute disjuncture between what MMT actually has to say about real economic activity and what the political left wants to extract from MMT becomes most clear in the cited podcast discussion with Stephanie Kelton when she cites testimony by, of all economists, Alan Greenspan before a U.S. House of Representatives Committee on Social Security funding and potential privatization. Emphatically, Kelton uses Greenspan's testimony to make the point that government spending can summon real economic activity in existence if and only if factor resources exist to meet the increase in aggregate demand generated by the government's actions. This is different than arguing that government spending axiomatically generates economic activity.
The observation that governments cannot simply spend economic activity into existence by printing money at will places us squarely in the middle of the larger theoretic debate over monetary economy, real economic activity, and individual expectations. Before laying out the broader terms of this debate, however, certain issues about the nature of money still need to be addressed relative to MMT.
Before leaving the subject of metallic currency, my theoretic background imposes on me an obligation to attempt to resuscitate Marx for his own sentiments about the valuation of money. Marx indisputably connected the labor time embodied in the extraction and refining of metals with the role of metals as a standard of price. That is to say, if it takes x hours of necessary abstract labor time to produce a pound of silver and 10x hours to produce ten pounds, then one pound and ten pound currency notes, backed by silver, hold their value and divisibility across various denominations based on variations of labor time embodied in the actual production of the metal. I harbor misgivings about this view at least as great as those I harbor toward the underlying premises for support of the gold standard. This is a quintessentially Modernist attempt to frame the value of money in objective terms, connected to a broader objective approach to the valuation of commodities. It suffices to say that Marx's views on monetary economy and on value theory, per se, cannot be extracted from the time and the mindset of their originator without simultaneously confronting Marx's epistemological presumptions and challenging them in reference to our own. Reading Marx as a Postmodern Marxist, I simply cannot accept the idea of reading the Marxian labor theory of value as an objective value theory any more than I can accept Marx's metalist reading on the valuation of money as objective. No theory commands objectivity - all theories, however rudimentary and simplistic or intricate and complex, are subjective, heuristic, and rhetorical.
Approaching Marx's ideas in these terms, the basic Marxian labor time embodied theoretic constitutes a (subjective and rhetorical) framework for analyzing the creation of value from the production of commodities, in the same way that marginal utility-based commodity valuations constitute a competing (subjective and rhetorical) analytical approach. Indisputably, on some level, all produced goods and services are products of a labor process, and, accounting for recursive chains of past labor processes culminating in the final preparation of an object of consumption, the quantity of labor time imparted in the production of any good or service must, in some way, on average, be related to its value in market exchange. Conversely, the extension of this framework to money still leaves us with problems if we are to accept the idea that universal acceptance constitutes the fundamental property of money as a universal equivalent in market exchange, even if we are dealing with strict metallic specie. On some level, money has to be different from every other commodity with a value corresponding to labor time embodied, and this difference is most readily apparent with state fiduciary fiat money. Fiat money, in paper or any other form, holds a fictitious value, in the sense that its place as a universal equivalent to commodities in exchange can never correspond to the labor time embodied in the currency. On the other hand, this is a collective fiction, even to the extent that attributions of monetary value are implicitly shaped by prevailing power relations within a social structure (e.g. the capacity of financiers to leverage particular policy regimes in maintaining the value of currency against the interests of borrowers/anti-inflationary bias). In the end, the fictitious character of the value of money is, precisely, the thing that it shares with all other commodities, for whom any theory of value amounts to a fiction, ratified by the (power-inflected) consent of market participants. Whether we utilize a labor embodied theory of value or a marginal utility-based conception in the determination/validation of a commodity's value in exchange, we are telling a subjective, partial, and partisan story about how particular individuals in a particular context of exchange arrived at particular terms of the exchange, and the valuation of money, as the medium of such exchange, constitutes a part of the same story that must, consequently, be integrated into the larger account, however awkwardly. The broader theme, therefore, in our Marxian tale of money and market exchange is consent/consensus on the valuation of money (commodity, fiat, or otherwise) and the valuation of commodities, whether or not the valuation of money formally corresponds to the valuation of all other goods and services and whether or not both processes in the determination of values are inflected by asymmetric power relations across a social structure. In the end, the property of universal acceptance/validation in all market exchange transcends the limitations evident in Marx's prioritization of a labor embodied theory to establish the value of money and its consequent bias toward specie.
Universal acceptance of a monetary issue can either be constructed in a piece-wise manner from the ground up or it can be imposed from above by state fiat, where the state constitutes an indivisible sovereign, capable of dictating social regulations with the full force of its authority, if necessary through threat or practical exercise of coercive violence. These alternatives are not necessarily mutually exclusive. If the state is a democratic sovereign, then there is an implication of universal consent to the will of the majority, at least as an implicit condition of citizenship, even to the extent that such determinations reflect power asymmetries. Piece-wise (networked) sanctification of a universal equivalent may itself operate as an implicit mechanism. If enough participants in a market economy choose to accept a given universal equivalent, then there may be a tipping point at which all other participants are inclined or, minimally, compelled by practicality considerations to accept such an equivalent. Beyond this, determination of the requisite qualities of such an equivalent, including its purity and the relationship of particular, divisible weights of the equivalent to other goods and services in the contexts of transactions, must incorporate universal acceptance among market participants. Certain forms of universal equivalents with really good physical properties, like metals, might make this process easier, if only because they help cement supposed objectivity in the content and quality of the universal equivalent.
The most obvious point of difference that would appear to exist between a monetary system that is strictly piece-wise (networked) and a state fiat system concerns the control of the aggregate money supply within the system. How does the system control the creation, integration, removal, storage, and destruction of units of the money supply, contingent on the reality that regulation of the scale of the money supply in active utilization exerts real effects on the flow of commerce and the structure of prices? In a true piece-wise system, a potential must exist for individual participants to alter the size of the money supply through unregulated activities (e.g. unlimited hoarding, integration of new, individually monopolized reserves). In a piece-wise system constituted with a metallic money, say copper, the owner of a copper mine might possess the capacity to integrate large quantities of new copper money into the economy at will, thus, at least potentially leading to systemic price inflation. Such a capacity explains why Keynes, in the Treatise on Money, makes the observation that "(t)o-day all civilised money is, beyond the possibility of dispute, chartalist," where chartalism is defined as the reduction of all legal money to state regulated money. Effectively, there are no true piece-wise monetary systems in existence or at least worth examining in the world today. In restating this observation, I would also include the possibility of block-chain money (e.g. bitcoin) within the spectrum of chartalist state (fiat) money, by the definition employed by Keynes. The point here is not that block-chain monies do not constitute piece-wise, networked monies but that the structures of these networks are regulated to prevent individual participants from altering monetary conditions without the consent of all network participants. In effect, block-chain systems constitute state fiat money systems, with centrally defined structural parameters, operating outside the Westphalian state system and its component state fiat money systems. Block-chain is (democratic) state money absent a true political state.
Approaching regulation of the money supply from the opposite standpoint, let us say that we have a state monetary system with a very different kind of political state from contemporary constitutional democratic systems. Let us say we have an absolutist monarchical state in which the titular head claims all persons and possessions under the canopy of the heavens as his personal property and in which this head claims the ability to regulate all prices at which market transactions shall be conducted in monetary terms between his subjects. All money is, thus, by definition, chartalist money, and the parameters within which money will be used exist to be regulated at the pleasure of the sovereign. Better yet, let's give this sovereign a definite historical identity. This is Qin Xi, the first emperor of the Chinese Qin dynasty, the first figure to claim the moniker "Son of Heaven," and one of human history's true megalomaniacs. From his capital in Xianyang, Qin hears the constant flow of reports from the borderlands of the raids by the nomadic Hu (barbarian) people against his peasant subjects on the northern frontier with Mongolia, and he decides that it is time to make the Qin empire great again for his beleaguered subjects. He is going to build a wall, a (G)reat wall.
The problem is that his treasury isn't quite large enough to accommodate the expense of constructing a wall over a thousand miles in length, even where some preexisting segments remain from the building projects of local dynasties from the earlier Warring States period. In his silver based monetary system, there aren't enough silver coins or silver bullion in the world of his time to pay for all the things Qin needs to build his wall. Qin has to act decisively, so he decides to do something radical - he debases his currency. Instead of having one hundred percent silver coins, coins will now be composed of twenty-five percent silver content, raising the money supply to four times its initial size. At the same time he mandates that all prices across the empire must remain constant, and, to hammer home the point, he is ready to send his army out to discipline any of his subjects who dare to raise prices against his debased currency. The problem with this solution is that the empire is quite large, stretching from the desolate lands on the borders of Inner Mongolia to the boundaries of present-day Vietnam, and Qin just doesn't have a large enough army to enforce his anti-inflationary edict at all places and at all times.
In the prefecture seats and the local military outposts, the law is respected, but in small country hamlets and in little crossroad market towns people gradually come to understand that there is something different about the money in circulation. As they do, prices start to creep upward outside the seats of monarchical and military power, and, as a consequence, the prefecture seats and the imperial capital begin to experience shortages of basic goods, as peasants try to hold onto more of their produce, demanding a higher price. Predictably, Qin sends out the army into the countryside to discipline his disloyal subjects and seize produce, but, equally predictably, these actions produce localized insurrections and peasant uprisings. Soon Qin is spending most of the time and resources that he wanted to commit to building his wall putting down local rebellions and seizing goods to feed starving townsfolk. In the end, he never lives to see his wall finished, even if he somehow manages not to see his empire completely disintegrate beneath him.
However much this account might possess a grain of historical truth, it no doubt substantially exaggerates the rigor of market forces in third century B.C.E. China and the unified national character of the Qin economy. The moral of this more or less fictional account concerns neither the Confucian dictate that rulers should practice enlightened benevolence and piety toward their subjects nor the Monetarist hypothesis that peasants, when confronted with a manifestly debased currency, will exhibit adaptive expectations. It is simply that no sovereign (or government acting in the interest of a sovereign), no matter how absolutist and totalitarian, can manipulate economic conditions at will without the implicit consent of the economy's participants. Economies, market oriented or otherwise, are always piece-wise assemblages of individual actors, each possessing the capacity to cooperate or dissent from centralized regulations of economic conditions. Even at the heights of totalitarian autocracy in the Stalinist Soviet Union, individuals still had the means to dissent from government efforts to mobilize their labor or appropriate the natural productivity of their land if at the expense of their freedom and/or their lives. All economic processes incorporate networks in which all of the individual pieces must be made to work in order for a given outcome to obtain.
To make the point differently in reference to MMT, no government, acting in the interest of a sovereign, can print new money at will that is not backed by an increase in real economic productivity without expecting price inflation, and increases in real economic productivity will only happen if active economic agents apply their consent to the government's actions by altering the investments of their factors of production in such a way that raises aggregate supply. Again, as argued above, this isn't a criticism of MMT or its defenders within the academic community as much as it is a warning to political figures who are presently bastardizing the theory. The presence of an acute disjuncture between what MMT actually has to say about real economic activity and what the political left wants to extract from MMT becomes most clear in the cited podcast discussion with Stephanie Kelton when she cites testimony by, of all economists, Alan Greenspan before a U.S. House of Representatives Committee on Social Security funding and potential privatization. Emphatically, Kelton uses Greenspan's testimony to make the point that government spending can summon real economic activity in existence if and only if factor resources exist to meet the increase in aggregate demand generated by the government's actions. This is different than arguing that government spending axiomatically generates economic activity.
The observation that governments cannot simply spend economic activity into existence by printing money at will places us squarely in the middle of the larger theoretic debate over monetary economy, real economic activity, and individual expectations. Before laying out the broader terms of this debate, however, certain issues about the nature of money still need to be addressed relative to MMT.
Most notably, monetary sovereignty holds an important place in MMT. Monetary sovereignty implies that the state, acting either strictly through its governmental capacity or through the workings of a (nominally) independent central bank, maintains full control over the money supply. Only states that maintain monetary sovereignty can freely exercise an expansionary fiscal policy not otherwise backed by increased taxation for the stated reason that only states with monetary sovereignty can borrow funds in their own currency. This idea needs to be broken down, in part, to emphasize the assumptions underlying the MMT argument. For MMT, all currency is chartalist and, hence, derived from the state and, for fiduciary fiat money, backed exclusively by the trust of the state. This statement glosses over complexities in the definition of the state, per se. In contemporary liberal democracies, the state, as (undivided) sovereign, encompasses the entirety of the citizenry, and the government, as a conceptually separate, constitutionally sanctified and regulated entity, acts in the interests of the state. Beyond this, control over the money supply and over monetary policy, generally, is often exercised by a central bank only tangentially related to the government. It is, therefore, one thing to say that a state maintains monetary sovereignty and something different to say that a government exercises monetary sovereignty.
In particular, in the United States, maintenance of control over the money supply is principally exercised through the Federal Reserve system, a nominally independent central bank established by the Federal Reserve Act of 1913 and acting in the interest of the state (i.e. the body of US citizens) with a mandate to control price inflation and facilitate economic growth. The federal government of the United States exercises, at best, a peripheral influence on the actions of the Fed through appointment and approval of Federal Reserve governors and of the Federal Reserve Chair. To the extent that the US Congress possesses enumerated authority, under Article I Section 8 of the US Constitution, to coin money and regulate its value, the maintenance of the broader monetary system in the US transcends the limited terms established by the Constitution. The Federal Reserve Act, effectively, established a regulatory structure to control the creation of money by private banks, inclusive of the balances in demand/checking accounts. Here, again, the money supply in the US is indisputably chartalist, but only a miniscule quantity of that supply is actually generated and controlled by the federal government (i.e. coinage). The vast majority of the American money supply is Fed regulated bank money, including both Federal Reserve notes (US dollar paper money) and, under various definitions of the money supply, account balances of diverse legal designations (demand/checking, timed/savings, etc). The American state, as (undivided) sovereign, may be theoretically sovereign over this monetary system, in all of its components, but that sovereignty involves multiple distinct channels of authority with varying levels of public accountability. With this basic institutional structure in mind, it would be a fundamental misnomer to argue, in MMT terms, that the US federal government can just print money into existence in order to enact an expansionary fiscal policy without raising taxes or borrowing - the federal government has no direct control over the number of US dollars in circulation.
In particular, in the United States, maintenance of control over the money supply is principally exercised through the Federal Reserve system, a nominally independent central bank established by the Federal Reserve Act of 1913 and acting in the interest of the state (i.e. the body of US citizens) with a mandate to control price inflation and facilitate economic growth. The federal government of the United States exercises, at best, a peripheral influence on the actions of the Fed through appointment and approval of Federal Reserve governors and of the Federal Reserve Chair. To the extent that the US Congress possesses enumerated authority, under Article I Section 8 of the US Constitution, to coin money and regulate its value, the maintenance of the broader monetary system in the US transcends the limited terms established by the Constitution. The Federal Reserve Act, effectively, established a regulatory structure to control the creation of money by private banks, inclusive of the balances in demand/checking accounts. Here, again, the money supply in the US is indisputably chartalist, but only a miniscule quantity of that supply is actually generated and controlled by the federal government (i.e. coinage). The vast majority of the American money supply is Fed regulated bank money, including both Federal Reserve notes (US dollar paper money) and, under various definitions of the money supply, account balances of diverse legal designations (demand/checking, timed/savings, etc). The American state, as (undivided) sovereign, may be theoretically sovereign over this monetary system, in all of its components, but that sovereignty involves multiple distinct channels of authority with varying levels of public accountability. With this basic institutional structure in mind, it would be a fundamental misnomer to argue, in MMT terms, that the US federal government can just print money into existence in order to enact an expansionary fiscal policy without raising taxes or borrowing - the federal government has no direct control over the number of US dollars in circulation.
Beyond the concerns raised above on the fragmentation of monetary sovereignty on a domestic level, still other qualifications on monetary sovereignty need to be acknowledged relative to the holding of monetary assets outside of the geopolitical boundaries of the state. If the American populace remains theoretically sovereign over the supply of US dollars in circulation, then it further must encounter the obstacle that US dollars hold status as the default reserve currency in the global economy. Foreign governments, central banks, businesses, and individuals maintain holdings of US dollars as a hedge against instability in other financial assets. As such, some portion of the total dollars in circulation remains hoarded by parties outside of the jurisdiction of the American state. To the extent that the American state, acting through the federal government and the Federal Reserve system, can only manage the supply of US dollars through the domestic mechanisms of monetary and fiscal policy, the sovereignty of the American state relative to foreign holdings of US dollars is strictly limited. In the end, complete monetary sovereignty would demand the closure of an economy from all international capital and commodity flows and, hence, from the economic forces necessitating currency exchange and making external monetary hoarding possible.
In some measure, MMT advances from a vision of monetary sovereignty predicated on a unitary state with a closed economy, in which the government is indistinguishable from the sovereign and maintains full control over the creation, use, and destruction of all elements of the money supply. It relies on the idea that the government, acting as sovereign, can always link its fiscal policy to the creation and regulation of the money supply, effectively eliminating any distinction between fiscal and monetary policy and prohibiting the possibility of leakages of the money supply outside the control of the state. Such a situation is inconsistent with contemporary, globally connected market economies and with the existence of nominally independent monetary authorities, separating the formulation and execution of monetary policy from fiscal policy.
If MMT effectively advances from this position on monetary sovereignty, then how useful is MMT in analyzing the connection between fiscal processes and the regulation of the money supply? In particular, we can take MMT theorists at their word that the key issue involves the capacity of governments in states exercising monetary sovereignty to borrow in their own currencies. If we do so, conceding that when the government borrows it is not creating money, then we must simultaneously step back, even minimally, from the MMT conclusion that fiscal spending creates money. It is a small step from the robust MMT argument on fiscal spending to a concession that any deficit spending leads to crowding out. We need to massage the larger point and purpose of the MMT argument on monetary sovereignty out of these specifications if MMT is to retain the most tangential rhetorical value.
The issue for MMT concerns our capacity to interpret fiscal policy as the privileged driver for monetary policy in such a way that autonomous government expenditures induce increases in the money supply by the monetary authority. If we are proceeding from the basic framework of the aggregate supply/aggregate demand analysis, the ISLM model, and consideration of the institutional responsibilities of central banks, then we may be able to specify a mechanism corresponding to this view.
The issue for MMT concerns our capacity to interpret fiscal policy as the privileged driver for monetary policy in such a way that autonomous government expenditures induce increases in the money supply by the monetary authority. If we are proceeding from the basic framework of the aggregate supply/aggregate demand analysis, the ISLM model, and consideration of the institutional responsibilities of central banks, then we may be able to specify a mechanism corresponding to this view.
If the federal government of the US enacts a budget spending $200 billion more than it is due to receive in tax revenues, then it be compelled to make up this difference through borrowing. When it does so, upon the approval of Congress, the US Treasury will issue $200 billion in government securities. The sale of these securities will draw some portion of the global supply of US dollars out of circulation. Such a reduction in circulating dollars will, in some degree, place upward pressure on interest rates and, possibly, exchange rates relative to other currencies. The logic of the ISLM model suggests that this upward pressure on interest rates will result in some level of "crowding out" of private capital investments. Moreover, under roughly Keynesian assumptions concerning aggregate supply and aggregate demand, it should cause some modest increase in the aggregate price level, effectively lowering the real value of money in circulation and placing additional upward pressure on interest rates. In this regard, the Federal Reserve, pursuing its dual mandate to promote economic growth and to control price inflation/ensure price stability, may decide to undertake open market purchases of government securities to counterbalance the contraction in the real value of circulating currency and reduce "crowding out" resulting from the substitution of public for private capital investments.
In effect, the Fed will "print" money in order to hold the real money supply relatively constant, inhibit increases in interest rates, and inhibit destabilizing aggregate price inflation. Further, its actions would have been largely compelled by the fiscal operations of the federal government. Conversely, if the government pursued an austerity driven effort to reduce budget deficits by increasing taxation, lowering quantities of discretionary money income available for both consumption and savings/investment, then, in the absence any expansionary open market initiatives by the Fed, the government's actions would, in effect, purposefully withdraw currency from circulation, slowing aggregate economic activity, by means of fiscal policy. The MMT argument regarding monetary sovereignty and fiscal expenditure/taxation, thus, works if and only if monetary policy actions/inactions faithfully follow a complementary path in relation to any change in fiscal policy. It would be as if the government printed its own money in order to spend it (or actively withdrew money in order to restrain economic activity) even if, in actuality, the government and the monetary authority exist as nominally independent entities.
On the other hand, if the monetary authority displays a sufficient degree of independence in responding to large changes in fiscal policy, allowing interest rates to rise and fall at will with sizable increases and decreases in government expenditures or taxation, then we would ultimately have to discount the MMT proposition on the relevance of monetary sovereignty. In the above example of US government spending, if the Fed did not adjust its open market operations to increase supplies of circulating US dollars, then, at least in theory, we would have to expect some level of crowding out. Fewer dollars would be available for autonomous private sector capital investments and any available dollars would be more expensive to obtain. In the end, we are still left with an autonomous increase in aggregate demand that is not balanced by a change in the money supply, resulting potentially in an inflationary destabilization of prices.
The critical problem arising here involves a divergence between fiscal and monetary policy regimes where the government is leading with expenditure and taxation initiatives. This situation implies that our imagery of the state as the unitary sovereign becomes, to some degree, schizophrenic in its exercise of monetary sovereignty. With one hand, the state, through the government, is undertaking expansionary fiscal policy while, with the other, the state, through the monetary authority, is allowing the expansionary fiscal policy to destabilize prices and interest rates in a way that is apt to compromise the policy's effectiveness.
There is neither a necessary reason why fiscal and monetary policy, advanced by divergent components of the state, should follow a complementary path nor is there any reason why the government should lead a complementary macroeconomic policy regime with expenditure and tax initiatives rather than following in the wake monetary policy initiatives by a central bank. Fiscal and monetary policy initiatives may follow from divergent sets of motivations. Government policymakers, informed by divergent short and long term electoral and/or bureaucratic interests, may, for example, come into office promising a laundry list of spending initiatives to diverse partisan constituencies. At the same time, central bank policymakers, informed by diverse and contradictory theoretic perspectives on macroeconomic policy management and by close connections to financial sector actors (e.g. large banks, bondholders, fund managers), may seek to pursue a rigorous tight money policy to control price inflation and maintain a conservative macroeconomic growth trajectory. The collision of these different sets of motivations, manifest as an incompatible set of monetary and fiscal policy regimes, thus, results in rising interest rates and crowding out of private economic activity.
On the other hand, if the monetary authority displays a sufficient degree of independence in responding to large changes in fiscal policy, allowing interest rates to rise and fall at will with sizable increases and decreases in government expenditures or taxation, then we would ultimately have to discount the MMT proposition on the relevance of monetary sovereignty. In the above example of US government spending, if the Fed did not adjust its open market operations to increase supplies of circulating US dollars, then, at least in theory, we would have to expect some level of crowding out. Fewer dollars would be available for autonomous private sector capital investments and any available dollars would be more expensive to obtain. In the end, we are still left with an autonomous increase in aggregate demand that is not balanced by a change in the money supply, resulting potentially in an inflationary destabilization of prices.
The critical problem arising here involves a divergence between fiscal and monetary policy regimes where the government is leading with expenditure and taxation initiatives. This situation implies that our imagery of the state as the unitary sovereign becomes, to some degree, schizophrenic in its exercise of monetary sovereignty. With one hand, the state, through the government, is undertaking expansionary fiscal policy while, with the other, the state, through the monetary authority, is allowing the expansionary fiscal policy to destabilize prices and interest rates in a way that is apt to compromise the policy's effectiveness.
There is neither a necessary reason why fiscal and monetary policy, advanced by divergent components of the state, should follow a complementary path nor is there any reason why the government should lead a complementary macroeconomic policy regime with expenditure and tax initiatives rather than following in the wake monetary policy initiatives by a central bank. Fiscal and monetary policy initiatives may follow from divergent sets of motivations. Government policymakers, informed by divergent short and long term electoral and/or bureaucratic interests, may, for example, come into office promising a laundry list of spending initiatives to diverse partisan constituencies. At the same time, central bank policymakers, informed by diverse and contradictory theoretic perspectives on macroeconomic policy management and by close connections to financial sector actors (e.g. large banks, bondholders, fund managers), may seek to pursue a rigorous tight money policy to control price inflation and maintain a conservative macroeconomic growth trajectory. The collision of these different sets of motivations, manifest as an incompatible set of monetary and fiscal policy regimes, thus, results in rising interest rates and crowding out of private economic activity.
These reflections aren't intended to cast blame on any of the components of the state. All social agents, collective or individual, develop their own unique forms of knowledge and their own unique constellations of self interested relationships. Moreover, it would be disingenuous to argue that any particular set of macroeconomic conditions should objectively convey itself to a particular set of monetary and fiscal policy regimes. That is to say, it makes sense that each set of policymakers would pursue a set of policies corresponding to their immediate and/or longer term interests, those of their most closely associated stakeholders, and their own conceptions of what must constitute responsible policy management in relation to their legal/constitutional mandates, even if such an approach prevents coherence relative to other policymakers. Central bankers must continuously ask how their management of the money supply and interest rates corresponds to their legal mandates, and politicians and government bureaucrats must continuously ask how their management of taxation and spending serves the public interest for which they were elected and/or appointed to maintain. In this sense, MMT's imagery of a unitary state is simply lacking in recognition of competing interests across multiple distinct institutional environments, shaping and determining what might be contradictory monetary and fiscal policy regimes.
In further criticism of the MMT approach to monetary sovereignty, European Central Bank (ECB) figures have, similarly, stressed the problematic nature of monetary policy being led by fiscal policy. The extent of this problem should be highly evident for the ECB and the Euro-zone national economies. Governments in Euro-zone national economies can never lead with fiscal policy, if, for no other reason, then because the unified international nature of the ECB, as monetary authority, implies that coordination of fiscal and monetary policies would be virtually impossible without a single, overarching fiscal authority, directing a unified fiscal policy over all the Euro-zone economies. Fiscal policy by Euro-zone governments, thus, limits itself to conciliation with the lead role of ECB monetary policy. On the other hand, as most defenders of MMT have argued, the MMT conception of monetary sovereignty doesn't apply to Euro-zone national governments who cannot borrow in their own sovereign currencies.
In concluding on the issue of monetary sovereignty and fiscal policy leadership, it is worth briefly asking what is at stake in conferring on government a lead role in macroeconomic policy management, one that would force the monetary authority to resign its independent station and conciliate money supply and interest rate management as if the government directly controlled these variables through fiscal policy. Furthermore, assuming that MMT is on to something in stressing the finer points of its arguments on monetary sovereignty in relation to the capacity of the government to borrow in its own currency, it might be worth taking the argument in an entirely different direction from that embodied in the ideal of large monetary unions. That is to say, if instead of pushing the argument in favor of a correspondence between fiscal and monetary institutions in such unions as the Euro-zone (i.e. a single overarching fiscal authority in Europe to match the single overarching monetary authority), wouldn't it make more sense to simply break up monetary zones into a multiplicity of independent monetary areas, each with fiscal and monetary authorities of corresponding scale. In this respect, I do not even have the image of the pre-Euro national currency zones in mind, but, perhaps, something in even finer geographic detail.
The first part of this larger conjecture gets, I believe, to one of the larger motivations of MMT and, certainly, to those of its progressive partisan backers. Emphatically, if the government can effectively be brought into a superior station in the development of macroeconomic policy relative to central bankers, then the health of a national macroeconomy will become a preeminent subject of democratic deliberation rather than one of esoteric theoretic discourse and/or the maueverings of financial sector actors. That is to say, MMT's backers, especially, seem to be attempting to place elected officials back in the driver's seat in managing the macroeconomy and compelling central bankers to assume a purely reflexive role. Such a situation deserves some consideration and criticism, and I plan to do so subsequently.
In further criticism of the MMT approach to monetary sovereignty, European Central Bank (ECB) figures have, similarly, stressed the problematic nature of monetary policy being led by fiscal policy. The extent of this problem should be highly evident for the ECB and the Euro-zone national economies. Governments in Euro-zone national economies can never lead with fiscal policy, if, for no other reason, then because the unified international nature of the ECB, as monetary authority, implies that coordination of fiscal and monetary policies would be virtually impossible without a single, overarching fiscal authority, directing a unified fiscal policy over all the Euro-zone economies. Fiscal policy by Euro-zone governments, thus, limits itself to conciliation with the lead role of ECB monetary policy. On the other hand, as most defenders of MMT have argued, the MMT conception of monetary sovereignty doesn't apply to Euro-zone national governments who cannot borrow in their own sovereign currencies.
In concluding on the issue of monetary sovereignty and fiscal policy leadership, it is worth briefly asking what is at stake in conferring on government a lead role in macroeconomic policy management, one that would force the monetary authority to resign its independent station and conciliate money supply and interest rate management as if the government directly controlled these variables through fiscal policy. Furthermore, assuming that MMT is on to something in stressing the finer points of its arguments on monetary sovereignty in relation to the capacity of the government to borrow in its own currency, it might be worth taking the argument in an entirely different direction from that embodied in the ideal of large monetary unions. That is to say, if instead of pushing the argument in favor of a correspondence between fiscal and monetary institutions in such unions as the Euro-zone (i.e. a single overarching fiscal authority in Europe to match the single overarching monetary authority), wouldn't it make more sense to simply break up monetary zones into a multiplicity of independent monetary areas, each with fiscal and monetary authorities of corresponding scale. In this respect, I do not even have the image of the pre-Euro national currency zones in mind, but, perhaps, something in even finer geographic detail.
The first part of this larger conjecture gets, I believe, to one of the larger motivations of MMT and, certainly, to those of its progressive partisan backers. Emphatically, if the government can effectively be brought into a superior station in the development of macroeconomic policy relative to central bankers, then the health of a national macroeconomy will become a preeminent subject of democratic deliberation rather than one of esoteric theoretic discourse and/or the maueverings of financial sector actors. That is to say, MMT's backers, especially, seem to be attempting to place elected officials back in the driver's seat in managing the macroeconomy and compelling central bankers to assume a purely reflexive role. Such a situation deserves some consideration and criticism, and I plan to do so subsequently.
The second part of my conjecture, however, really gets to the heart of what I find potentially relevant about MMT and, in particular, the MMT argument on monetary sovereignty. Among it's many functions to a market economy, money operates as suture, tying together disparate components of a market system to define its larger contours. Going back to the initial comments in this section, money ties an economy together in ways that a pure barter system simply can't. It enables participants in a market system to defy time and space in the accumulation and utilization of wealth. In these terms, money defines the geo-spatial boundaries of an economy, national, transnational, or otherwise. It establishes a currency zone as a particular and distinct entity, different from the political/legal/constitutional conception of the nation--state, a point well established with the experiment of the Euro. The point that I want to make is that this non-correspondence between the nation--state and the currency zone could operate in multiple directions.
The principle motivation of the Euro was to reduce transaction costs and other sources of friction between the European national economies, expanding the volume of trade between these economies. There are myriad ways to achieve these ends without eliminating national currencies, especially at a time where real time information transmissions can express changes in exchange rates with ready precision. More importantly, finite variation in currency valuations resulting from continuous fluctuations in commodity and capital flows between individual currency zones promote important feedback functions for individual regional economies.
Intense international and/or interregional increases in demand for the goods and services generated by a particular regional economy manifest themselves in an increase in demand for the currency utilized by the exporting economy, lifting its exchange rates relative to other currencies. This raises the price for the exporting economy's goods and services while simultaneously allowing the economy to afford an increase in imports, a counterbalancing dynamic that simultaneously provides direct feedback on the health of individual regional economies to the extent that the currency zone is sufficiently small to ensure proportionality in the conveyance of the feedback. That is to say, if the currency zone incorporates too many distinct and substantially different regional economies, each displaying varying degrees of health in interregional trade, then there may be incongruities in the way feedback from exchange rate fluctuations are received - increases in exchange rates can stifle the efforts of struggling regional economies to generate viable export growth. On a larger level, this lesson can precisely be extracted from the effects of European monetary integration on the weaker Southern European economies (e.g. Greece, Portugal, Italy).
If the operation of these exchange rate dynamics is manifest in the workings of commodity and capital markets between multiple national economies, then it would be true for multiple currency zones within a single national economy, each representing one or more regional economies. In my opinion, it is worth asking, with the various pronouncements of MMT in mind, how larger national economies might benefit from the establishment of multiple currency zones, effectively disaggregating individual regional economies and subjecting them to more rigorous and direct monetary feedbacks.
Intense international and/or interregional increases in demand for the goods and services generated by a particular regional economy manifest themselves in an increase in demand for the currency utilized by the exporting economy, lifting its exchange rates relative to other currencies. This raises the price for the exporting economy's goods and services while simultaneously allowing the economy to afford an increase in imports, a counterbalancing dynamic that simultaneously provides direct feedback on the health of individual regional economies to the extent that the currency zone is sufficiently small to ensure proportionality in the conveyance of the feedback. That is to say, if the currency zone incorporates too many distinct and substantially different regional economies, each displaying varying degrees of health in interregional trade, then there may be incongruities in the way feedback from exchange rate fluctuations are received - increases in exchange rates can stifle the efforts of struggling regional economies to generate viable export growth. On a larger level, this lesson can precisely be extracted from the effects of European monetary integration on the weaker Southern European economies (e.g. Greece, Portugal, Italy).
If the operation of these exchange rate dynamics is manifest in the workings of commodity and capital markets between multiple national economies, then it would be true for multiple currency zones within a single national economy, each representing one or more regional economies. In my opinion, it is worth asking, with the various pronouncements of MMT in mind, how larger national economies might benefit from the establishment of multiple currency zones, effectively disaggregating individual regional economies and subjecting them to more rigorous and direct monetary feedbacks.
My argument here largely reiterates that of American urban/urban-economic thinker Jane Jacobs, who quite explicitly questioned the logic of a correspondence between the nation--state and (regional) macroeconomic systems. This scepticism extended to the foundations of monetary economy. Jacobs' criticism of monetary economics focused centrally on the determination of exchange rates, relative to the trading relations of individual urban regional economies, but MMT's theorization of the relationship between fiscal and monetary policy appeals to arguments also offered by Jacobs, mutually reinforcing the case for smaller monetary zones. In particular, in the context of a critique of early Québécois sovereigntist proposals in the 1970s, Jacobs offers that plans for Québec to retain the Canadian dollar as its currency in the event of a formal political break between Québec and Canada would present Québec with self-defeating constraints on its capacity to undertake an independent fiscal policy (see Jane Jacobs, The Question of Separatism, 1980.). In these terms, it is immediately evident that Jacobs grasped the theoretic underpinnings of MMT even if the approach had never been formally packaged in its current form. In so many words, the Jacobsean argument is that complementary regimes of fiscal and monetary policy are more readily exercised in smaller monetary zones, and such zones will also maximize positive feedbacks from exchange rate fluctuations by minimizing incongruities between individual regional economies contained within the monetary zone.
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