Jonathan Brun

Funny Money

A few years ago I came across Modern Monetary Theory (MMT). MMT radically changed my perspective on money and the way society actually works. At its core, MMT states that in a society that has its own currency (USA, Canada,..) a government pays for services not with collected taxes, but rather with newly issued currency. Tax collection is in fact a way to take money out of the system and destroy it, keeping inflation under control and more importantly, directing society in a certain direction. By implementing tax rules and various government incentives, the government can encourage behaviour that would not otherwise occur. Of course there is a constant cat and mouse game between tax payers and the government, but the core concept is that the government does not collect taxes to pay for services, but only to control society.

Another key insight from MMT and related anthropological work on the origins of currency indicate money did not arise from barter. We are often told that money was invented to allow a pig farmer to trade his pigs for horses when the horse salesman wants to buy chickens. The evidence that this barter exchange led to the rise of currency is non existent. Instead, money mostly originated from temples who wanted to account for how much “stuff” there was in society. Leaders of early society then took this and extended it by issuing currency to their soldiers and staff and then demanding citizens pay taxes. This created currency exchange as citizens needed to offer services to the lord’s servants to obtain the currency needed to pay taxes. Through the military force of the leader, a currency was born.

Today, currency is created by central banks under the supervision of governments. The problem of course is that governments are run by humans who have all sorts of messy conflicting interests. Governments are constrained by a myriad of vested interests, elections, international trade, exchange rates and much more. The easy solution is to constantly issue more money than you destroy, therefore increasing the money supply, prop up industries, and cause inflation. Some inflation is a good thing as it forces currency holders to invest to try and obtain a return at or higher than inflation, but too much inflation is quite problematic. Broadly speaking the main problem with increasing the money supply comes when too much of that new money supply accrues to the capital holders in society. That is the current situation.

There is no shortage of books and articles on the growing wealth disparity in society. Much of this is driven by increased money supply. The work by the economist Thomas Picketty clearly outlines the historical trends and he argues that the natural state of society is a three class society. For nearly all of human history and in nearly every society you had three classes: the aristocracy, the church and the peasantry. He traces this traditional class structure into our modern one. AI can explain this better than I can, so just talk to the AI.

If increased money supply was more evenly distributed in society, in the form of a basic income or a capital allocation to all citizens, the negative effects of increasing money supply could likely be limited. However, the current increases in money supply in western society has led to run-away wealth accumulation for those in the right position. This seems to be forming a new class of ultra-wealthy who have so much wealth very few people will ever catch up. In a sense, it is the new aristocratic class.

This excessive capital allows these capital holders to gobble up more assets, raising prices and further exacerbating the problem. You can solve this of course through higher taxes or taxes on capital and by changing the distribution of new money supply. There are also ways to create better outcomes, such as a universal job guarantee and a variety of capital controls. Needless to say, it is complicated.

All that being said, it feels that our current system is not sustainable and eventually something will have to give. What, When, Who is impossible to say. Uber-wealthy hedge fund manager and wanna-be economist Ray Dalio has been harping on this problem for years now and has constantly predicted an imminent collapse – as have others. Who knows?

In sort, we need to find a way to ensure currency is used to foster productive activity that increases overall productivity of society and deliver more services to citizens at a lower cost. This is basically the source of all wealth – do more with less. The tremendous progress that we have made is well analysed in The Origins of Efficiency by Brian Potter, who also has an amazing Substack. Fundamentally, government needs to ensure money is directed towards shared prosperity and not into the pockets of capital holders. Infrastructure, innovation, commercialization and education are basically the bedrocks. Nothing new under the sun, but we need keep those in power on a short lease to avoid a return to an aristocratic society where most people are worse off.