I read an article in the Financial Times earlier this week (September 23, 2023) -…
I gave a talk at the Resist Event in Brighton UK last Sunday evening. On the panel was a person who dismissed Modern Monetary Theory (MMT) as irrelevant to the real challenges that arose under Capitalism and he invoked Marx a lot. It was not a very illuminating interchange because not only did he misrepresent what MMT was but, in my view, he also seemed to think that we could extrapolate Marx’s scant ideas of money directly into the situation faced by nations today. Marx considered money to be a commodity (gold) and he did not present any meaningful analysis of the role played by the modern consolidated central bank-treasury function (aka government). Last Sunday’s critic claimed that MMT is wrong to assume that unemployment is a monetary phenomenon (insufficient spending) and that government spending can do anything about it. Apparently, Marx thought that capitalist firms have some unique logic that if they decide not to produce no amount of sales orders will induce them to expand production even if they have massive excess capacity (‘machines lying idle’) and a huge pool of idle labour to draw upon. Marx would never have agreed with that idea. Marx’s writings are not the Bible. They are insights gleaned at specific points in history with specific institutional arrangements, some of which remain relevant today, some which do not. Modern Marxist-oriented scholars are aware of that point. A deterministic application of his thinking is not very likely to yield insights when the context is very different. In this two-part series, I seek to lay out a clear reason why MMT is not a violation of a correctly interpreted Marx.
So the proposition we analyse in this two-part series is whether a modern government that issues a fiat currency can alter production and employment levels through public spending.
Is production in the Capitalist system always or ever variant to fluctuations in aggregate spending?
I was told last Sunday that it was and that MMT was therefore plain wrong in thinking that the government could reduce unemployment by increasing its net spending to fill gaps between income and expenditure left by non-government saving.
The idea that Marx would have agreed with that proposition is preposterous.
Marx on Money
Marx’s writings on money were scant and within the context of a convertible gold standard, where the government would always guarantee any circulating currency (notes and coins) could be converted into gold at some fixed price per ounce.
At the time he was writing, one ounce of gold could exchange for £3 17s. 10 1/2d.
Coins were made from gold and were valued by weight.
In his 1859 book – A Contribution to the Critique of Political Economy – Chapter 2, section C – Coins and Tokens of Value – Marx wrote:
Gold functioning as a medium of circulation assumes a specific shape, it becomes a coin. In order to prevent its circulation from being hampered by technical difficulties, gold is minted according to the standard of the money of account. Coins are pieces of gold whose shape and imprint signify that they contain weights of gold as indicated by the names of the money of account, such as pound sterling, shilling, etc. Both the establishing of the mint-price and the technical work of minting devolve upon the State …
… the only difference between gold in the form of bullion and gold in the form of coin is that between the denomination of the coin and denomination of its metal weight. What appears as a difference of denomination in the latter case, appears as a difference of shape in the former. Gold coins can be thrown into the crucible and thus turned again into gold sans phrase, just as conversely gold bars have only to be sent to the mint to be transformed into coin. The conversion and reconversion of one form into the other appears as a purely technical operation.
An individual state’s currency was not universal and nations (central banks) had to maintain stocks of gold to settle transactions between states. For Marx, gold was a “a universal equivalent form of all the commodities”.
Of course, any semblance of gold convertible currencies disappeared in August 1971, when the Bretton Woods system collapsed.
And if we read Marx carefully, Capital and particularly his unfinished book – Grundrisse – (which English speakers didn’t get to access until 1973 and didn’t that change the cultural studies discipline) – we would not get much guidance about how Marx would think of money in terms of the modern conduct of economic policy.
Marx didn’t really consider that issue because he was interested in understanding a different issue – the internal logic of capitalist production.
And, the institutional units of the State we now analyse in terms of fiscal and monetary policy were quite ill-formed compared to how they operate today.
So referring to small tracts, in say, the – Grundrisse – and, in particular, the Chapter from Notebook I – The Chapter on Money – to make a case against the use of fiscal policy in 2021 is likely to be problematic.
In that Chapter, Marx has been interpreted by some as challenging the idea that using the “printing press” which is “inexhaustible and works like a stroke of magic” can change the production levels or reduce unemployment.
This is the section from my 1973 Pelican edition (the first English translation):
He is criticising the views of – Pierre-Joseph Proudhon – that the growth of banking would expand production and the development of new capitalist firms.
In challenging that notion, Marx asked two questions (p.122):
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? Further question: Can such a transformation of circulation be undertaken without touching the existing relations of production and the social relations which rest on them?
Pedants might interpret the words ‘revolutionized’ or ‘transformation’ to mean cannot be influenced, by what Marx wrote as the “tricks of circulation”, by which he meant that policy injections of currency into an economy or variations in the discount rate offered on private bills by the (central) bank could not alter the fundamental logic and destiny of the system.
If every such transformation of circulation presupposes changes in other conditions of production and social upheavals, there would naturally follow from this the collapse of the doctrine which proposes tricks of circulation as a way of, on the one hand, avoiding the violent character of these social changes, and, on the other, of making these changes appear to be not a presupposition but a gradual result of the transformations in circulation.
These banking ‘tricks’ would thus just be inflationary (“devalue its own paper”).
Modern Marxists jump on this discussion and conclude that MMT is wrong to assume that fiscal policy can alter the inherent dynamics of capital accumulation built on class struggle.
This is generalised to mean that:
1. Unemployment is an inherent feature of the conflictual relations in capitalism and is at the discretion of the owners of the means of production.
2. Governments cannot alter production levels (and hence employment levels) by increased its own spending when non-government spending falls and private saving increases. The likely result of these ‘tricks of circulation’ are alleged to be inflation.
Those who make these arguments sometimes cite Duncan Foley’s introduction to Suzanne De Brunhoff’s 1967 book – La Monnaie chez Marx – which was later published in English (1976) to give authority to their argument (the link is to the English version).
I dug my copy out this morning and I note I purchased it in 1978. It is a bit yellowed but well-read.
Duncan Foley opened his preface with this:
The first thing a student of money notices is that in a monetary economy the movements of money and commodities are intertwined. At the level of the individual transaction some means of payment moves in one direction and some commodity moves in the opposite direction. The theoretical question then arises as to which is the determining factor. Does the movement of money determine the movement of commodities or the movement of commodities determine the movement of money?
He asserts that for Marx, “the movement of commodities is largely determined outside the monetary sphere, and that movements of money in most cases are determined by those commodity movements.”
People interpret this to mean that the causality flows from dynamics determined by the exigencies of capital accumulation etc, which then require ‘money’ as a “medium through which commodity exchange takes place”.
But the ‘money’ cannot create “impulses of spending that originate outside itself”.
Accordingly, ‘money’ is only a transmitter and cannot be “an active disturbing element in the economy”.
In that vein, according to this view, the tack taken by Keynes, for example, is wrong.
… the question of the degree to which the monetary policy of the state can create or moderate crises in the accumulation of capital. Keynes’ analysis of this question, which concludes that within broad limits monetary policy can alter the rate of investment and determine aggregate demand, is at sharp variance with the presumption we arrive at on the basis of Marx’s discussion, which limits the effects of monetary policy to the sphere of money and credit …
Which then leads to the agnostic nature of Marx to what we would understand to be modern fiscal and monetary policy.
Most modern monetary theory has been undertaken with the explicit aim of improving state monetary policies in modern capitalism. This study of Marx’s monetary theory shows how little Marx was motivated in this direction. In monetary theory, as in most of his analytical work on capitalism, Marx seeks first of all to discover the objective determinants of social phenomena, the laws of motion of the system … Marx’s approach does not necessarily lead directly to results that will help monetary policy-makers in their problems.
Note: his reference to “modern monetary theory” was not to MMT. This was written in 1967.
In closing his preface to the book, Foley sort of renegs and notes that “the monetary mechanism is closely bound up with the State” and that policy choices by government have direct influence on inflation and unemployment, the “major issues over which class struggle is fought out”.
I will deal with this important point in Part 2 because it is what the whole debate turns on in my view.
The point is that the scant tracts in Marx on these issues were written at a very different time when central banking had not really evolved beyond private banks having some sort of charter to discount private bills and the concept of fiscal policy was primitive to say the least.
Most importantly it was at a time where currency was really just a different form of gold.
But this does stop the critics of MMT from appealing to C19th Marx.
The critic on the panel last Sunday had previously devised a cross plot in a blog post that he claimed proves that higher government spending is associated with higher unemployment (for example, HERE).
His graph is a cross-plot drawn from OECD data showing the government spending to GDP ratio on the horizontal axis plotted against unemployment on the vertical axis.
A simple regression is upward sloping.
Whoopee, those MMTers are wrong.
In Statistics 101 or Econometrics 101, one of the first things students learn is to be careful in attributing causality. Correlation is not causality.
Why might a two-variable cross plot yield an upward sloping trend line in cross-sectional data across nations between these variables?
The first thing I would want to do was to de-trend the government spending data to ensure I was decomposing the endogenous components (driven by the state of the cycle) and the discretionary components.
That is so basic.
We would expect government spending to be higher in nations that had higher unemployment because of increases in welfare outlays and other non-discretionary responses to declining non-government spending (that was driving up unemployment).
Further, there are lags in time series and a contemporaneous cross plot cannot detect those dynamics.
It is highly likely that government spending increases, lag rises in unemployment that have arisen because of a decline in non-government spending. So you get the positive correlation that such a graph might produce but no causation.
It also matters at what stage of the economic cycle one draws this cross-plot for the results will be very different (for reasons explained) if we take the section during a deep recession or at some point when activity is close to its peak.
In other words, the cross-plot cannot prove anything.
In Part 2, I will show why a reasonable interpretation of Marx is broadly supportive of the substantive knowledge presented by MMT in relation to crises, the class struggle over income distribution and the way government policy can attenuate or reinforce these conflictual dynamics.
We will see how nonsensical it is to claim that capitalist firms will not expand production if they have idle capacity and can increase profits by responding to increased sales orders.
We will also note that the government sector is not bound by the so-called dynamics of private capital accumulation and under certain conditions can typically command productive resources from the non-government sector through increased spending without introducing inflationary pressures.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.