Modern Monetary Theory – or why infinite (government) debt can move society forward

The new book by Stephanie Kelton, The Deficit Myth is shaking up the establishment. In the book, the author argues that governments who issue debt in their own currency can create infinite debt under two conditions. First, the debt needs to be put to productive use – add value to the economy and to people’s lives. If we create debt to spend on gigantic statues of our leaders then we are in trouble (for a few reasons). The second condition is that the debt cannot lead to high inflation. If inflation starts to creep up then government needs to pull back on money printing. The actual amount of debt itself does not matter. This idea is not new, but the book does offer a compelling narrative to deploy with policy makers.

A number of years ago I read the magistral essay by the late David Graeber, The long history of Debt , which led to his book, Debt. In his anthropological work Graeber outlines a key difference in our perception of money. Most of us think (and are taught) that money is a medium of exchange and must be linked to some hard value (i.e. Gold). We think that money was invented to allow people to trade. He argues that this is not the case and there is no evidence for it. In fact, money is just debt and credit. Anthropologically money was created by Sumerian temples to count what farmers had produced and what taxes were owed. Money is a ledger of credit and debt.

Kelton builds on this key difference and as the London School of Economics professor outlines in his book review,

“First, the shortcoming. Kelton’s argument is based on modern monetary theory (MMT), which hinges on a critique of the orthodox view of money.  The orthodox view of money asserts that the value of money is based historically on its link to precious metals and especially on its function as a medium of exchange. MMT contends the value of (modern) money derives from its link to credit (and debt) and underscores the important role the state plays regarding the ontology of money. George Knapp (1924) called this ‘the state theory of money’, J.M. Keynes further developed it in The Treatise on Money (1930), and it has been most recently promoted by L. Randall Wray (1998) and Warren Mosler (1993).”

The concept that government debt is not that important and what is important is the productive capacity of society is not new. The Social Credit Theory and the corresponding political movement of the 19th and 20th century argued that money should be printed to compensate for the depreciation of assets on balance sheets and for the difference between return on capital and wages paid for labour. The argument is that the government has a duty to print and distribute money to people to compensate for errors in our accounting system. Basically, capital holders have a number of accounting benefits that non-capital holders do not have. Therefore, government should print money to correct those errors.

Why have we not done this in the past you might ask? I would argue that the main reason we pull back on government spending is three fold.

First, government spending can be poorly managed. It can easily be spent on non-productive things that do not deliver value to people. Like a company that builds products that no one wants, a government that spends money on stupid projects that do not deliver value will lose the favour of the electors people (arms and force can keep the people down for quite a while).

The second element is inflation. Governments that issue too much debt and spend too much can create out of control inflation. The list of countries who have done this is long and often cited as examples of what could happen if we let our politicians spend too much. However, many of these out of control inflationary items were due to factors that were context specific and linked to how the money was spent in the first place.

The third and perhaps most critical element is resistance from capital holders. It is said that human history can be summarized as, “The capitalists (capital holders/rich) want as much labour as they can for as little as they can, the workers want to work for as much money as they can for as little time as possible”. This is the basis of class conflict, which is very real. If the government were to print money and distribute it in the form of a basic income to everyone, the weight of capital would decrease in society and capital holders would lose power and wealth. The overall society will be much happier and healthier and as long as the money is spent of productive things – education, factories, innovation,… – then things should work out in the long term.

When we take a step back and seriously question what money is, we realize that money is a creation by man and does not need to obey any cosmic law. We can and should print money to move society forward. As with any use of our collective power we must doe this wisely and judiciously. However, we must educate and explain to everyone that the only thing holding us back from success is ourselves. If we want to prioritize the health of the elderly or put a person on Mars – we can. If we want to shift all vehicles to electric and all power production to renewable – we can.

As long as we do not break the laws of physics we can do whatever we want. Money is an accounting tool to help us move forward, do not let people tell you it is some immutable force. Money has been co-opted by capital holders and it should be taken back by our democracy.

P.S. In many ways, this is what China has done (but that is for another blog post).

Published on September 23, 2020