A look at Modern Monetary Theory (MMT) from a Marxist perspective.
Costas Lapavitsas is a professor of political economy at the SOAS University of London
Nicolás Águila is an economist affiliated with the Centro Interdisciplinario para el Estudio de Políticas Públicas (CIEPP) in Buenos Aires
Jonas Elvander is a Brussels-based journalist and editor of the Swedish left-wing weekly newspaper Flamman
JE: In parallel to this development Modern Monetary Theory has had a breakthrough in the debate, especially in the Anglo-Saxon world, but also elsewhere. The US Democrats are now openly ignoring worries about the deficit and one of MMT’s main proponents, Stephanie Kelton, is giving advice to Washington insiders. Have the MMTers been proven right by this crisis?
CL: Well, I note that President Biden just announced that he is going to raise taxes on the rich. We will see what that will look like, but certainly that does not look like an MMT thing… One has to be very careful about talk of the “MMT moment”, or the “Minsky moment” ten years ago – which was not actually a Minsky moment. These things enter popular lore without necessarily being right. That is not to deny that some of the things that MMT has been arguing – and Marxism and various other radical economic currents – have been proven valid. It is true that MMT has had enormous popular success as well as in economic debate, and that should be acknowledged. But we have to be careful about what has been proven right. Everybody has long known that the state can create money to finance expenditure, and that can happen without necessarily leading to inflation, depending on many conditions. That is not really a new discovery, it has been known for a very long time. There were mercantilists who argued this more than two centuries ago.
What is really interesting and needs explaining is why has this kind of intervention become actual policy during in the last dozen years. MMT can hardly explain that since it is a theory which is supposed to hold at any time. This does not rally tell us why the central bank has taken an unprecedented position at the centre of economic activity. It has to do with financialized capitalism and its evolution, and you need Marxist analysis to tackle it.
Beyond that, there is the question of whether the state can continue to play this role without also adopting other policies, particularly on tax, which is what MMT claims. There the jury is still out, and the argument is far more complex than MMT allows. First, as I have said, the US government is already raising taxes, they are not financing spending by issuing bonds. Second, and more crucially, the policies adopted have driven interest rates down to zero and there are negative consequences to that, which MMT ignores. But they cannot be ignored – we are living through them! The US stock-market has gone through the roof, there is an explosion of capital flows across the world, and an enormous accumulation of debt. That is a crucial element of what is happening, and MMT has little to say about it. But it will come up in the near future and we will have to deal with it.
NA: Clearly MMT has contributed to a shift in the debate, mainly to shift the worry to inflation and away from deficits. But to what extent the current policies reflect MMT is something highly contested, even by themselves. Regarding the financing, Stephanie Kelton for example recently wrote an op-ed in the New York Times saying that Biden should spend more and faster, by printing money instead of taxing. And some Democrats have said that this level of spending is possible because of the low interest rates that allow for cheap government borrowing. But that is not what MMT says. And on the side of spending the policies are not reflective of MMT either, as there is no discussion of a job guarantee, at least not that I am aware of, or investing in care or investing in a green direction – maybe a little, but not in the manner that MMT proposes. There is also a methodological problem, which Costas pointed to. I do not think a crisis can prove or disprove a theory. Either you have a coherent explanation of things or you do not. If you present a theory that has some inconsistencies – like the neoclassical theory for example, or, as I also think, MMT – then a crisis will not prove you right. Maybe temporarily, but that is not enough.
JE: The two of you have together written one of the most substantial critiques of MMT from a Marxist perspective. What are your main disagreements with MMTers?
CL: I want to begin by saying that we share quite a bit with MMT. We are both critical of mainstream economics, monetary analysis and policy. MMT is basically a modern variant of the radical, anti-quantitative theory of money that has been around for at least two centuries. Marxism also belongs to the same broad tradition. I want to stress that because people often do not realise it. And more broadly, both MMT and Marxism offer a challenge to the aggressive capitalism of the last four decades.
However, there are crucial differences between us, which Nicolás and I brought out in our paper. They also go back a long time. The most fundamental difference has to do with what money is, and that is not a minor issue. People might think it is a bunch of academics disagreeing about ancient history or abstract ideas. Far from it. The bottom line is this: MMT argues, in the line of previous chartalist theories, that money is created outside the market, that it is the creation of the state, of some sort of a social authority. And, therefore, money in in the power of that authority. In contrast, Marxism argues that money is the creation of the market: it is an unplanned and unintended outcome of spontaneous market interactions. Money emerges when commodities interact, whether you like it or not.
The difference is paramount. MMT tells you that money is fundamental to human existence, it puts money at the heart of our interactions with nature. It says that as human beings, we solve our economic problems by creating money. Money is an integral part of our relation to nature, the way in which we deal with uncertainty and interact with other human beings. For Marxism that is not the case. Money is a necessary thing, but it is also secondary. It is an outcome of commodity transactions, and if these become less important in society so would money. The difference is of great importance. It guides how one approaches social change, the role of money, society, and the relation of humanity to nature. For us money is a product of markets, and if markets are reduced in importance, so would money. A socialist society would not deal with its problems through money. It would contain some variant of a means of exchange and a unit of account, but these would not be money in the way that we use it to confront our organizational and economic problems.
NA: That is the most important aspect of it. It shows the different understanding of capitalism that we have. For MMT money is a unit of account that is imposed by a central authority and has existed for 4 000 years. We Marxists acknowledge that there was a unit of account in precapitalist societies. But we hold that proper money only emerges with capitalism, because money is the way that our society has to link together different products of work. In earlier societies that need was nonexistent because there was a central planner that assigned work and provided the use values that you needed to reproduce yourself. In our society that is not the case. No one is telling anyone what to produce, how much, and so on, so you need to go to the market. And that requires a way for the value of commodities to find an expression, and that is money, the universal equivalent. So for us, the most important dimension of money is that of being the universal equivalent. The unit of account is just one of its functions. Because of this it emerges without the need of the state or any other authority. The state certainly plays a role; it can determine what the unit of account should be, the issuing of credit money, or symbols of value in Marxist terms, but it does not play a role in the existence of money or in any of its functions. This is important: for us money is something specific to capitalism, while for MMT it is not.
CL: That is exactly right, and I can add two more points. The first is that, if you approach money in the Marxist way rather than the MMT way, you will have something to say about money at the global level. For Marxist theory the form of money and the way money works differ between the domestic and the world market, precisely because of how money emerges and what it does. The domestic market is not at all the same entity as the world market. Money interacts with commodities and accumulation very differently in the former compared to latter.
World money is a global reserve currency that is also used to make payments among states. Historically it was gold, it then became different forms of national money, such as the pound sterling, and now it is primarily the dollar. That form of money operates beyond national states, it has its own logic, and no-one knows that better than developing countries. Because once you get into this terrain you realize that there is a hierarchy of money – not all money is the same, the dollar is one thing and the Indian rupee another. Developing countries know very well what it means not to have dollars. They understand that the dollar is a lever of imperial power. For this reason, they appreciate that MMT prescriptions are not applicable in developing countries because of their subordinate position in the global system. For Marxists this is obvious and fits with our theory, but for MMT it enormously difficult. This is not an accident and goes back to our difference on the ontology of money. I want to stress that, because people often think of the ontological issue as an ancient and irrelevant debate. It is anything but.
The second point is that for us as Marxists, command over money is a very important aspect of what the state can do – it does not invent money, but it can command its flows through fiat money. This gives to the state enormous power, particularly when it controls public credit. However, the power of the state is not unlimited and other policies are irrelevant. Taxation is very important because it is how real resources are obtained. Unlike what the MMT believes, tax is not simply a way of making money circulate, but crucial to obtaining resources for public expenditure and for redistribution of income and wealth. Radical progressive policy includes tax reform and taxing the rich.
NA: I want to add a point regarding world money and its corollary for monetary sovereignty. For MMT monetary sovereignty is a choice. States choose to impose certain constraints on themselves which is why they are not sovereign. But if you think that capitalism is a global phenomenon, it is clear that monetary sovereignty is not at all an option but a structural constraint. You need to get world money to buy things that you need in the world market. And you cannot print money to buy that. You need to get dollars. That is a constraint, and it is very clear in the development literature that this is the biggest problem for developing countries. Because it also pushes the structure of a country’s internal production toward export and makes it vulnerable to flows of international capital.
On the second point, if you could print money to buy real resources that would improve the situation for people without substantially changing the structure of production. You would basically keep it as it is and improve the distribution a bit. But from a Marxist perspective that cannot be done. It is not that production is one thing and distribution another. The two are organically interlinked. So in order to change these things you need more radical change than just buying output from some to give to others. You need to fundamentally change the structure of production and distribution in society, and that is what we argue.
JE: I am not sure MMTers who work on developing countries see monetary sovereignty as only a choice. But in concrete terms, what are the biggest obstacles for developing countries to use MMT?
CL: MMT has become aware of the difficulty of extending the theoretical analysis to developing countries only recently. Historically it has been focused on the USA. Being aware of the problem does not mean that you can solve it. When they get deeper into it they will realize there are major problems in saying that public expenditure can be supported by creating domestic money in developing countries. One way out is to advocate a flexible exchange rate, as is well known in macroeconomic theory. Yeah, well, try doing that as practical macroeconomic policy in a developing and see what happens. There would be a foreign exchange crisis with major negative implications for domestic activity and employment. This is the meaning of currency hierarchy and of the need to hold dollars. The risk would be enormous.
Karl Marx said a long time ago that the capitalist class constantly faces the problem of balancing the domestic needs of circulation with the international needs of circulation, and the latter always win at the expense of the domestic economy. The capitalist class always wants to protect its global position. This also holds today. For a developing country to maintain its position in the global system, it must meet the dictates of the dollar and adapt its monetary policy accordingly. That is what it means to be the finance minister in a developing country today in practice.
Or let me put it this way: if the US is monetarily sovereign and the dollar is the dominant form of world money, then that is the reason why, say, Tanzania is not monetarily sovereign. Sovereignty is not something that spreads homogeneously across the world. If you have a hierarchy, the top makes the bottom less sovereign. That used to be called imperialism. The capitalist world is structured and hierarchical and that is also reflected in money. It is another way in which social class and power appear in monetary affairs, and MMT would do well to acknowledge it.
NA: There are articles by Randall Wray, Pavlina Tcherneva and Eric Tymoigne that deal with monetary sovereignty, and they basically define it as five criteria (the state choosing a unit of account, imposing obligations in it, issuing currency in it, issuing debt denominated in it, a flexible exchange rate) which are all policy choices in their own view. So yes, monetary sovereignty is a policy decision in their framework. Now if new works are saying otherwise that is great, and the fact that they are dealing seriously with developing countries is just a benefit to us all.
Another point: so MMT says that the limit is real resources, right? The main problem in developing countries is that they need to increase real resources. The question is how to increase real resources, and that requires you to import and increase the availability of foreign currency. If you do not have a theory of how to increase real resources, but merely to redistribute the few existing ones that developing countries have, that is not enough.
JE: Judging by the rather heated debates between Marxists and MMTers one easily gets the impression that two perspectives are wholly incompatible. Is there no scope at all to combine, say, a chartalist conception of money with a Marxist theory of value and exploitation?
CL: Chartalism is incompatible with Marxism for the ontological reasons that we have already discussed. That is fundamental. Having said this, however, Marxism and MMT can be on the same side when it comes to opposing mainstream theory or policies, or on issues affecting the livelihood of working people and others. You do not have to agree on everything as long as you know what you disagree on. We did not write as enemies of MMT, but to clarify what we believe is fundamentally different about Marxist monetary theory. We are not waging a war against MMT economists, and we acknowledge their contribution, especially their challenge to the orthodoxy and the way that they have managed put radical ideas on the table. That is a great achievement and we acknowledge it, although our fundamental positions are theoretically incompatible.
NA: I am actually not so sure there has been much debate. Exchanging insults on twitter is not really a debate. I think a serious engagement between the two traditions is largely missing and we have tried to contribute to that. But I think there is still a lot of ground to cover, and it would be great if we could stop being childish and start discussing honestly.
I too believe that the theories are incompatible, and in fact I think it would be a step backwards for either tradition to fall into an eclectic position that is inconsistent. We have to acknowledge their critique of us, and they might want to acknowledge our critique of them, and we should deal with the criticisms seriously within our respective frameworks. That would lead to more coherent answers than just saying: “I am theoretically a Marxist but politically and MMTer”. That is not consistent. It is better to stand by your theory.