Portrait of Pierre Joseph Proudhon, 1865 (Gustave Courbet/Wikimedia The aim of the Proudhonists was to do away with the social evils of capitalism, then becoming increasingly apparent due to its recurrent crises, by changing the relations of distribution and circulation, facilitated by money, without touching the underlying social relations of production, based on commodity production. Here Marx raised what he called the fundamental question: “Can the existing relations of production and the relations of distribution which correspond to them be revolutionized by a change in the instrument of circulation, in the organization of circulation.” And further, “can such a transformation of circulation be undertaken without touching the existing relations of production and the social relations which rest on them?” [Grundrisse, p. 122] The Proudhonist scheme, which was based on the continuation of commodity production, the foundation of the capitalist economy, was a utopia. It was, as Marx characterised it, akin to abolishing the Pope without doing away with the Catholic Church. The Proudhonist theories of the 1850s, which sought to resolve the crises of capitalism through what Marx called the “tricks of circulation,” have been repeated in various forms in the period since. In the midst of the social distress afflicting workers and small farmers in the US during the 1890s—resulting from a severe economic downturn that saw unemployment rise to an estimated 25 percent in 1893—William Jennings Bryan won endorsement as the Democratic Party’s presidential candidate in 1896 by promising to remove the “cross of gold” from mankind. The gold standard, it was held, was the cause of the deflation, and the money system had to be changed by making silver part of its basis, which would promote a return to economic prosperity. The deepening economic crisis of global capitalism following World War I led to the advancement of a number of theories that claimed the crisis could be alleviated through changes in the forms of economic distribution and the monetary system. In the 1920s, C. H. Douglas put forward the theory of social credit. Contrasting the gap between the value of factory output and payments made in the form of wages, salaries and dividends, he proposed the payment of a national dividend to make up for this deficit. Douglas’ social credit theory and its notion of insufficient demand found expression in the views of Keynes, who maintained that the problems of the capitalist economy resulted from insufficient effective demand, a gap that should be closed by government spending. During the 1920s, major currencies were still tied to gold—a situation that came to be viewed by some critics as responsible for the continuation of depressed economic conditions. In 1924, the German economist Georg Friedrich Knapp advanced a new theory of money. He maintained that money did not arise from commodity production and did not have any intrinsic value. It was a token created by governments as means of payment for the tax obligations they imposed. This theory, known as chartalism (derived from the Latin word charta, meaning token), is the basis of MMT. All of these theories, from MMT going back to those of Proudhon, as well as those of Keynes, have a very definite political perspective. Emerging in periods of economic and social crisis, they are grounded on the position that these crises do not arise from the inherent contradictions of capitalism, rooted in commodity production and the transformation of labour power into a commodity and its exploitation, but can be overcome through a change in government policies and the development of a new monetary and credit system. They are aimed at diverting the working class from the task posed to it by these crises—that of overthrowing the capitalist mode of production and undertaking the reconstruction of the economy on socialist foundations. Rather, according to these theorists, the task of the day is to convince the powers that be to abandon their incorrect theories and adopt the solutions they propose, which will provide a basis for capitalist expansion and obviate the necessity for social revolution. This is the essential theme of Kelton’s book and MMT. The Deficit Myt From the outset, Kelton waxes lyrical about the power of MMT, claiming it challenges the status quo with sound economics and “gives us the power to imagine a new politics and a new economics,” enabling us to see that “another kind of world is possible, one in which we can afford to invest in health care, education and resilient infrastructure.” [The Deficit Myth, pp. 12–13] There is no question that such things are materially possible, because of the vast development of the productive forces, created by the labour of billions of workers, which would be utilised to meet human needs in a planned socialist economy. But they are impossible to achieve under capitalism because of the social relations on which it is based—relations that MMT completely ignores, treating the capitalist economy not as a social system, with irreconcilable class divisions, but as a kind of machine. According to Kelton, the social ills created by capitalism are the result not of its objective contradictions, but of incorrect thinking. She maintains that economic policies which prioritize human need and public interest are possible within capitalism, if only “our self-imposed constraints” are abandoned. These constraints, she maintains, derive from the way in which government spending is viewed and equated with household spending. A household has to acquire money to finance its expenditure and must balance its budget. That is, it is a user of money. The government, on the other hand, is the issuer of money and is not subject to such constraints, she argues. A household cannot create dollars to finance its expenditure, but the government can. This means that the limits to spending that apply to a household do not apply to a sovereign government that issues its own currency. It can always finance its spending by simply printing more money, or simply create it through the press of a computer button at the Federal Reserve which transfers money from the central bank to another bank account. “The distinction between currency users and the currency issuer lies at the heart of MMT,” she writes. [p. 18] MMT does not maintain, however, that there are no limits to such spending, but that they are not determined by financial constraints. They arise only when all the available resources of the real economy are fully utilised and further demands upon them, resulting from government spending, go beyond the economy’s capacity, thereby leading to inflation. But until that time arrives, there are many social, economic and even ecological problems, such as climate change, that can be solved. The first point to note is that this is not just an “America First” agenda, but an “America Only” one. The US Treasury enjoys an apparently unlimited capacity to create more dollars because of the role the dollar enjoys as the world’s global currency. However, Kelton claims that other countries, as issuers of their own currency, including countries such as the UK, Australia and Canada, can do the same thing, and MMT “offers insights” for countries with little or no monetary sovereignty such as Panama, Tunisia, Greece, Venezuela and many more. [p. 19] Even a preliminary examination demonstrates the falsity of this conception. The currencies of other countries do not enjoy the same position as the US dollar. If, for example, the UK or Australia, not to speak of countries such as Argentina or Venezuela, were to simply create unlimited supplies of money and use them to meet social needs, they would very rapidly find that their currency value had collapsed on world markets, giving rise to inflation and undermining their capacity to repay US dollar-denominated debts. But notwithstanding the US dollar’s privileged role, there are also inherent limits to the creation of dollars by the US Fed, which derive from the nature of money itself.
ommodity production, the basis of the capitalist economy, is carried out by private entities, corporations and individuals. But at the same time it is social production. Every society has to resolve the question of how the social labour available to it is allocated, how the labour resources available to it are distributed, in order to continue to function. In a socialist society this task will be undertaken through a conscious plan and democratic organisation. In capitalist society it is undertaken through the market. This involves equating the different kinds of labour necessary for the functioning of society. In a commodity-producing society, where labour is at once social but carried on privately, this allocation is achieved through the value system. The value of each commodity is determined by the amount of socially necessary labour required to produce it. But this value must acquire an independent material form, and that form is money. As Marx put it: “Money is labour time in the form of a general object, or the objectification of general labour time, labour time as a general commodity.” [Grundrisse, p. 168] It is through money that the objective social bond that actually exists between the individual private producers is given expression. Economists, Marx wrote, say that people place confidence in a thing, money, because they do not place faith in each other. “But why do they have faith in the thing. Obviously because that thing is an objectified relation between persons; because it is objectified exchange value and exchange value is nothing more than the relation between people’s productive activities.” [Grundrisse, p. 160] To be continue….Modern Monetary Theory and the crisis of capitalism: Part tw The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton Historically, gold emerged as the money commodity. Over the past century and more, fiat money issued by the state has come to replace gold in the daily functioning of the capitalist economy, and above all its financial and credit system, particularly following the removal of the gold backing from the US dollar in August 1971. Under these conditions, the conception has developed that money is merely a convention and has escaped its material foundation. This is the basis for Modern Monetary Theory (MMT) and the promotion of its illusions that capitalism can somehow be made to function in accordance with the satisfaction of social need. “Free of the constraints that bound us in a gold-standard world,” Kelton writes, “the US now enjoys the flexibility to operate its budget, not like a household, but in the true service of its people.” [The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, p. 37] She insists that we “deserve to know the truth” that a currency issuing government “can afford to buy whatever is for sale in its own unit of account,” and that “Uncle Sam’s pockets are never empty.” [p. 256] Stephanie Kelto She even looks to former Fed Chairman Alan Greenspan for support, citing congressional testimony he gave in 2005 in which he said there was “nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.” [p. 182] It is certainly true that the Fed can issue vast amounts of money without limit. But it cannot create the value that this money supposedly represents. It cannot determine how much of this money needs to be used to buy commodities. Moreover, in issuing paper money, it cannot expand the mass of additional surplus value extracted from the working class in the process of production, which forms the basis and driving force of the capitalist economy. That is, in the separation of money from the value system, MMT simply sets aside the underlying social relations of the capitalist economy. Money can be created in unlimited amounts. But, in the final analysis, whether in the form of gold or paper money, it must function as the material representative of value. Recent events underscore this. The massive expansion of money by the US Fed since the COVID-19 pandemic set off a financial crisis has seen the value of the dollar fall sharply, while the price of gold has hit record highs amid concerns over how long the dollar can continue to function as the world currency. Addressing this issue in a New York Times article at the height of the March crisis, economic historian Adam Tooze noted that while the American economy was weak, the dollar was still the most universally accepted means of payment and a store of value. His argument was essentially circular: the dollar is accepted as a means of payment because it is a store of value and it is a store of value because it is accepted as a means of payment. How long this might continue and whether the present crisis leads immediately to a crisis of confidence in the dollar and all fiat currencies and a turn towards gold is impossible to say. But there are inherent limits to the creation of endless amounts of money and credit.Capitalist production, with the development of the credit system, Marx noted, “constantly strives to overcome this metallic barrier, which is both a material and imaginary barrier to wealth, while time and again breaking its head on it.” Money in the form of precious metal, he insisted, remains the foundation from which the credit system “can never break free.” [Marx, Capital Volume III, p. 708, p. 741]
Keynes may have dismissed gold as a “barbarous relic,” but the central banks continue to hold it. The German Bundesbank, for example, describes gold as a “type of emergency reserve which can also be used in crisis situations when currencies come under pressure,” and the Bank of England describes it as “the ultimate store of value, inflation hedge and medium of exchange.” Kelton maintains that the analysis of MMT is non-partisan and its explanatory power “describes how our monetary system actually works.” This is false because it leaves out the social and class relations on which the capitalist economy is based—the private ownership of the means of production, commodity production for the market, the transformation of labour power into a commodity, and the extraction of surplus value on the basis of these social relations, which is the source of capital accumulation. This separation, which lies at the heart of MMT’s theory of money, becomes even more apparent when Kelton turns to some of the key social and economic malignancies of the present day and the proposals advanced by MMT to resolve them. One of its main policy prescriptions is the provision of jobs by the federal government. This would consist of guaranteed employment for everyone who wanted a job at the payment of $15 per hour. It would operate as a stabiliser of the economy in periods of downturn. When an upswing took place federal job employment would be run down as workers returned to the private sector. Needless to say there is no explanation of why there is unemployment, not to mention the recurring and deepening crises of the capitalist system that produce it. But MMT proposes that crises can at least be ameliorated though work projects financed by the Fed through the press of a computer button to create more money. The MMT analysis is based on the conception that the function of the economy is to meet the needs of society through the production of goods and services, while providing the population, through the wages system, with the resources to purchase them and sustain itself. This is a completely fictionalised account. The driving force of the capitalist economy is not the provision of the means of life. Its basis is the expansion of value through the extraction of additional, or surplus, value from the labour of the working class. The source of this surplus value—the basis, in the final analysis of industrial profit, rent, interest payments and the returns to financial assets—is the difference between the value of the commodity labour power, purchased by capital through the payment of a wage, and the value created by the worker in the course of the working day. Unemployment does not arise from some unfortunate malfunctioning of the economy, but is integral to the process of the accumulation of surplus value. Each section of capital is in a constant struggle to appropriate its share of the total surplus value extracted from the working class by driving down its costs of production. One of the chief ways of doing this is by lowering wages through the creation of what Marx called the “reserve army” of labour—the unemployed. This tendency continually exerts itself, above all in the supposedly best periods of economic expansion. As wages rise under conditions of such expansion, every section of capital is driven by the competitive struggle to introduce new measures to cut the labour force and intensify the exploitation of those who remain in order to increase profits. The interests of the capitalist class as a whole are enforced by the Fed, along with other central banks, which lift interest rates in order to suppress economic output in order to maintain downward pressure on wages. In the early 1980s, the so-called “restructuring” of the American economy was carried out by the Fed under the chairmanship of Paul Volcker, who lifted interest rates to record highs to close whole sections of industry and create mass unemployment. Unemployment is not some unfortunate or accidental feature, but is integral to a socio-economic system based on the commodification of labour power. Writing against the Proudhonists and their “tricks of circulation,” Marx noted: “One form of wage labour may correct the abuses of another, but no form of wage labour can correct the abuse of wage labour itself.” [Grundrisse, p.123] The same issue—the passing over by MMT of the social relations of the capitalist economy—arises when Kelton considers the provision of health care and other vital social services and facilities Countering the continued assertions that Medicare is unsustainable, she writes: “All of these arguments are misguided because they are all grounded in the deficit myth. As long as we have health providers and facilities to meet demand, Medicare will be sustainable in the only terms that matter—our nation’s real productive resources.” [p. 173] It is perfectly true that all the resources exist not only to sustain Medicare, but to expand it, along with many other social services. But their evisceration is not a product of the misguided forms of thinking of policy makers or myths to which they adhere. It arises from the very structure of the capitalist economy, based on the accumulation of surplus value. Social services provided by the state do not produce surplus value. Rather, they are a deduction from the total mass of surplus value available for appropriation by capital. This is why every economic crisis that threatens profit accumulation is accompanied by the drive to cut social services. According to Kelton, however, these attacks are not rooted in objective social and economic relations, but arise from outmoded forms of thinking, namely, that the government must balance its budget.In the manner of a religious preacher, MMT proclaims: “I am the wisdom and the light. Abandon your old ways of thinking and society can advance if not to heaven then at least to a better place.” Kelton sets out examples of what she calls the “deficit myth,” some of them derived from her participation in the economics team advising Senator Berne Sanders in 2015. But if, as she maintains, MMT is an explanation of how the monetary system really works, then what is the reason for the persistence of mythology in the face of the insight MMT provides? If a myth persists, then it must have objective social roots. It must serve definite class forces. It cannot be put down to ignorance any more than the persistence of religion can be so explained. This issue can be probed and the reason for the attacks on health and other services revealed by considering the situation that would prevail if the policy makers provided an objective explanation for their measures. What would take place if they told Congress that the reason social services spending must be cut and there is “no money” to fund it is because such spending is a deduction from the surplus value extracted from the working population needed to maintain and increase the profits of Wall Street? If such a scientific explanation, derived from the actual workings of the capitalist economy, were put forward under conditions of rising class tensions, it would fuel a political crisis leading to the growth of anti-capitalist and socialist sentiment. We are by no means suggesting that congressional representatives are aware of the real workings of the capitalist economy any more than is Kelton. But their invocation of the necessity of the government to cut spending in order to balance its budget, like a household, plays a definite political role rooted in the class structure of capitalism. It is the ideological cover for the services they render to Wall Street. MMT plays its part in this system of obfuscation by diverting attention from the underlying objective processes at work, and focusing on the conceptions of politicians and policy makers. It advances the perspective that the capitalist economic and political order, which enables the vast accumulation of wealth in the hands of a financial oligarchy at the expense of society, can be miraculously transformed to benefit the people if only policy makers can be made to see the light it supposedly provides. In Kelton’s presentation, MMT can not only obliterate the class conflicts and contradictions within the US, it is able to transform American imperialism from a predatory power, increasingly turning to military means to maintain its global dominance and threatening to spark another world war, into a benefactor of the world’s people. It is necessary to recognise, she writes, “that the US government can supply all the dollars our domestic private sector needs to reach full employment, and it can supply all the dollars the rest of the world needs to build up their reserves and protect their trade flows. Instead of using its currency hegemon status to mobilise gold reserves for its own narrow interests, the US could lead the effort to mobilize resources for a global Green New Deal, keeping interest rates low and stable to promoting global economic tranquillity.” [p. 151 It is said there is really nothing new under the sun, and MMT, as advanced by Kelton, is very much old wine in new bottles. It is the modern-day version of theories that have been advanced in previous periods of capitalist crisis to divert working people from the real tasks at hand. Not surprisingly, it has been seized on by sections of the pseudo-left such as Democratic Socialists of America member and congressional representative Alexandra Ocasio-Cortez, who maintains that MMT must be “a large part of the conversation.” The way forward is not the false perspective of some reform of the capitalist system via the “tricks of circulation,” but its overthrow by the working class to establish a workers’ government in order to open the way for the establishment of a democratically controlled and organised socialist economy in which the vast productive forces are used to meet human need.