This week the GIMMS team welcomes Carlos Garciá Hernández to the MMT Lens blog. Carlos, in this fascinating commentary, shows how Marx is unquestionably relevant to MMT. Beginning with an exploration of Marx from his own world perspective of gold standard economics which formed the basis for his analysis of the capitalist economy in which he lived, Carlos takes a look at Marx’s economic philosophy through an MMT Lens and comes up with his own unique and updated description – fiat socialism. At a time when capitalism has reached a point of crisis where deregulation has given more power to capital, redistributed income away from workers and reduced the political and fiscal capacity of governments to serve public purpose, he brings his own style of fresh thinking to how we can re-define socialism for a post gold standard world through an MMT framework.
A fictional story
August 16th, 1971. The Secretary General had cancelled all his appointments. The day before, the person in charge of economic affairs had sent him an urgent note. It was vital that they meet. Eventually, the economist entered the room.
“I hope it’s important.”
“It is. The money Marx talks about no longer exists.”
The Secretary General went from surprised to impatient. “Would you please explain yourself?”
“Previously bank deposits were backed by gold. One ounce was equivalent to 33 US dollars. The international currency exchange system was based on this equivalence. And even more important than that, the spending capacity of governments was limited to the quantity of gold available. Now it’s not like that anymore. Governments can create and spend without limit in their own currency. Money is not a commodity any longer, it has become an intangible accounting entry. This is called fiat money. This changes everything.”
The face of the Secretary General was very perplexed. He could only ask: “Since when?”
“Since yesterday.”
Inexplicably, this conversation is a fictional story. How can it be that such a historic event, comparable to the acceptance of the Copernican model in physics, was not analyzed by any communist party in the world? This is a mystery for me, but the truth is, that the basis on which Marx builds his whole work, namely gold standard-based money, ceased to exist on August 15th 1971, the day when fiat money was adopted.
Quack remedies
For Marx, money based on the gold standard is a premise. It is the starting point that he uses in order to analyze the capitalist economy in which he lived: “Throughout this work, I assume, for the sake of simplicity, gold as the money-commodity” (Marx 2015). Therefore, gold, by convention, is the commodity that not only has use and exchange values, it also measures the exchange value of the rest of the commodities, which turns gold into money: “The commodity that functions as a measure of value, and […] as the medium of circulation, is money. Gold (or silver) is therefore money.” (Marx 2015)
This means that the accumulation of gold equals saving money, and that the value of the money the state issues varies depending on the quantity of gold it represents. That is how in the end the spending capacity of both the state and the private sector is determined by the amount of money saved, whether as paper money or as gold. If, in this gold standard-based system, private ownership of the means of production is allowed, then the capitalist form of production becomes a method to accumulate money in the hands of one social class (the one that owns the means of production) while the rest of society receives a subsistence wage in exchange for generating goods and services that allow the bourgeoisie to improve its level of savings in a kind of money that bases its value on its scarcity.
This reality, in which money-gold is scarce, leads Marx to the conclusion that only the direct ownership of the means of production can decide the distribution of wealth in the economy. Either private ownership of the means of production is abolished, or the private ownership of the means of production will always tend to accumulate the money in the hands of the bourgeoisie, and to augment misery among the working class. For Marx, whose intellectual references were mainly the works of David Ricardo and Adam Smith (Georg Friedrich Knapp’s Chartalism comes after Marx), there was no other conceivable starting point than the gold standard. He branded the money theories, which were not based on the gold standard, as “quack remedies” (Marx 2015).
Modern Monetary Theory
The analysis of the change from the gold standard to fiat money has recently been made by the Modern Monetary Theory (MMT). Ever since August 15th 1971, states have created money out of thin air by typing on keyboards at the Central Banks. Those keystrokes make the balance of accounts in private banks go up when a person or company receives a payment, and they make those balances go down when a person or company pays taxes to the state. Therefore, the state can’t run out of its own money and the idea of it saving its own currency becomes nonsensical. Companies and families do need to save because they are users, not issuers, of money, but the state doesn’t save in its own currency because it can always issue as much as it wants and it can never run out of it. In this way, money stops being a commodity and becomes a mere accounting entry (Wray 2012). Furthermore, the capacity of the state to spend stops being dependent on the collection of taxes or on the issuing of debt (Mosler 2010). However, taxes keep on being necessary, but not to finance the current spending of the state, but to accomplish a double function: they give value to money and they control aggregate demand (consumption capacity). Through the first function, they assure that state money will be accepted as a payment means (here is a “quack remedy” that Marx overlooked), and through the second, they control inflation.
To all this, we have to add that non-convertibility meant the emergence of floating exchange rates. They prevented private speculation in the international exchange markets from being able to destabilize the exchange rates of the different currencies. Therefore, fiscal measures like the First Lerner’s Law that we are going to review in the next section gained an effectivity that previously used to be counteracted by private speculation on the exchange markets.
This is how the availability of real resources in the economy became the only limitation on the spending capacity of the states. In turn, public deficits generated by that spending were always sustainable, because they were generated in the currency of the state, and contrary to what happened under the gold standard they are not necessarily inflationary, they don’t make interest rates go up and they don’t impose a burden for subsequent generations (Wray 2012).
Public deficits are no more than an accounting entry on the national balance sheet. They only show us the savings in national currency which, through public spending, the government sector allowed the non-government sector (families, companies and external sector) to accumulate, because: balance of the government sector + balance of the private sector + balance of the external sector = 0.
The Lerner point
MMT maintains that there is a particular state in the economy that is defined by Abba Lerner’s first law of functional finance. This law states:
“The first responsibility of the government (since nobody else can undertake the responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. The government can increase total spending by spending more itself or by reducing taxes so that taxpayers have more money left to spend. It can reduce total spending by spending less itself or by raising taxes so that taxpayers have less money left to spend. By these means total spending can be kept at the required level, where it will be enough to buy the goods that can be produced by all who want to work, and yet not enough to bring inflation by demanding (at current prices) more than can be produced […]” (quoted in Mitchell 2015).
This means that a country that issues its own money in a sovereign fashion and collects taxes efficiently can bring its economy to a certain point in which public deficits (or surpluses) are those that make the unemployment rate 0% and keep the level of prices stable. I like to call this economic state ‘the Lerner point’. MMT proposes to reach this point by job guarantees or transitional jobs programs. These programs are based on the principle that everybody who can work and wants to work, but doesn’t find a job in the private sector, will receive a job in the public sector. In this job in the public sector, the worker will receive the minimum wage, which will allow him to live with dignity until he finds a job that offers better conditions in the private sector.
Fiat socialism
‘Fiat socialism’ is my name for an open and prosperous society ruled by the principles of the modern monetary theory and functional finance. A society without unemployment or poverty, in which everybody has a decent job (either in the private sector, or in the public sector) which allows him to fulfil all his basic needs and coordinate his working and private life because of reasonable time schedules. A society in which public services, education and health access are of the highest quality, and in which the level of prices remains stable.
I use the adjective, fiat, in order to emphasize the differences between this kind of socialism and traditional socialism.
The first meaning that the Royal Spanish Academy gives to the term socialism is this:
- m. Social and economic system based on collective or state ownership and administration of the production means and of the distribution means of the goods.
As has already been explained in the second section of this article, such direct ownership of the means of production is an essential condition if we want to control the economy in a collective way inside of the gold standard. This is because in this scenario, allowing the private ownership of the means of production concentrates the spending capacity in the hands of the minority who control the means of production, while the working class can’t hope for a bigger spending capacity beyond the level of subsistence.
What happened when fiat money was introduced? As we have seen, the state that issues its own money is no longer dependent on any kind of restriction in spending its own money. In this scenario, the private sector can only save in the national currency if the state goes into public deficit, in other words, if the state decides to spend more than it collects through taxes. In this scheme, the “[…] collective or state administration of the production means and of the distribution of goods” doesn’t have to imply the direct ownership of the means of production. This could stay in private hands, because the level of accumulation in terms of national currency in hands of the owners of the means of production is determined by the state through its fiscal policy. Therefore, the administration of the means of production and the distribution of the goods is done by the state, but in an indirect way. This means that the owners of the means of production can only appropriate the amount of money that the state allows them through the collection of taxes, and this also means that the state can spend as much as it considers necessary, regardless of the level of money accumulation in the hands of the owners of the means of production (money is no longer a scarce commodity).
At the same time, MMT shows us that when implementing full employment policies by the state we only have to worry about inflation. Therefore, the level of government spending must bring the economy to its Lerner point, but this point should not be overstepped.
If we introduced fiat socialism along these lines, we could make the following experiment: only one person could know what the level of public deficit in the economy is. The rest, including government officials, wouldn’t know what that level is, we would only care about strengthening public services and controlling inflation. After some years have passed, the person who kept track of the public deficit would reveal us his records. Then we would see that sometimes (almost always) the public sector went into deficits, especially at the beginning when there still was unemployment in society, and other times it went into surpluses, especially when we approached the Lerner Point, but either way we would see that those levels didn’t mean any problem in achieving the introduction of fiat socialism.
As a consequence, a key premise for introducing fiat socialism would be the immediate exit from the Eurozone and the recovery of monetary sovereignty (Medina Miltimore 2016) in order to introduce the job guarantee programs that Izquierda Unida proposed before its agreement with Podemos. The Euro is a currency that Spain uses, but doesn’t issue in a sovereign fashion, because Spain is subjected to the Growth and Stability Pact, and according to this pact the countries of the EU cannot go into a public deficit beyond the 3% of their GDP. This level of deficit is incompatible with full employment and welfare policies in Spain.
Carlos García Hernández
Member of Izquierda Unida – Berlín
Editor
Mårslet (Denmark), Christmas 2016
References
Original text in Spanish: http://www.mundoobrero.es/pl.php?id=6640
Marx, Karl (2015) Capital: A Critique of Political Economy, Volume I Book One: The Process of Production of Capital – online version
Medina Miltimore, Stuart (2016) El leviatán desencadenado, Berlin, Lola Books.
Mitchell, William (2015) Eurozone Dystopia: Groupthink and Denial on a Grand Scale, Cheltenham, Edward Elgar Publishing Limited.
Mosler, Warren (2010) The Seven Deadly Innocent Frauds of Economic Policy, USA, Valance Co., Inc., online version: http://moslereconomics.com/wpcontent/powerpoints/7DIF.pdf
Wray, L. Randall (2012) Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, Houndmills, Palgrave Macmillan.
Excellent article, Carlos….and enjoyable to read.
Great to meet you at the conference in Berlin.
A excellent article. The Fiat Socialism Carlos García Hernández describe could become a reality, it need not be just a desirable goal or utopia. Unfortunately, it is impossible to implement under the current rules of the UE, which limits fiscal deficits to no more than 3% of GDP. This leads to the obvious conclusion, suggested by Carlos, that countries like Greece, Italy or Spain would be far better off outside EU!
Yes, a competent discussion on modern macroeconomics. For me I would emphasize the role of debt which seems overlooked here. Take the definition that central banks “create deposits”. It is inadequate. Central banks create by buying debts. [no debts = no money creation] Also the practical limit to money creation is the quantity of resources available for sale in the currency of the nation.
I like the term fiat socialism. It acts as a break from using socialism as a dirty word[often in the USA]. I like also small S socialism and capital S socialism. All our nations are small s socialism, few are capital S socialism. Small s socialism covers what the government provides free to the citizenry; Police, defence, roads and similar infrastructure, K-12 education, healthcare etc. Big S socialism covers governments owning the means of production, the former Communist nations. If we can make the distinction more recognisable we see a little less obstructionism in comments coming from the USA, which is really handicapping progress over there.
I think what you are saying about money creation is not quite correct, John.
The Fed puts new sovereign money – net financial assets – into the economy only when it buys gold, foreign currencies or goods and services for itself. When the Fed buys Treasury bonds it merely provides money that already existed in the economy when the original bonds purchase was made. This creates no new money and simply amounts to a swap of financial assets!
Oh mate What would I tell? Really… really liked the articleThank you so much!