Chartalism and Marxism
Proponents of ‘modern monetary theory’ serve to mislead and divert the labour movement, argues Michael Roberts
Modern monetary theory (MMT) has become flavour of the time among many left economic views in recent years. The new leftwing Democrat, Alexandria Ocasio-Cortez, is apparently a supporter; and a leading MMT exponent recently discussed the theory and its policy implications with Labour’s John McDonnell.1
MMT has some traction on the left, as it appears to offer theoretical support for policies of fiscal spending funded by central bank money and the running up of budget deficits and public debt without fear of crises - and thus backing policies of government spending on infrastructure projects, job creation and industry in direct contrast to neoliberal mainstream policies of austerity and minimal government intervention.
So in this article I shall offer my view on the worth of MMT and its policy implications for the labour movement. First, I will attempt to bring out the similarities and differences with Marx’s monetary theory.
MMT has its base in the ideas of what is called ‘Chartalism’. Georg Friedrich Knapp, a German economist, coined the term in his State theory of money, which was published in German in 1905 and translated into English in 1924. The name derives from the Latin charta, in the sense of a token or ticket. Chartalism argues that money originated with state attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenise debt.
It argues that generalised commodity exchange historically only came into being after the state was able to create the need to use its sovereign currency by imposing taxes on the population. For the Chartalist, the ability of money to act as a unit of account for credit/debt depends fundamentally on trust in the power of the sovereign to impose their will on the population. The use of money as a unit of account for debts/credits predates the emergence of an economy based around the generalised exchange of commodities. So Chartalism argues that money first arose as a unit of account out of debt and not out of exchange. Keynes was very much a fan of Chartalism, but it is clearly opposed to Marx’s view that money is analytically inconceivable without understanding commodity exchange.
Can the Chartalist/ MMT and Marxist theory of money be made compatible or complementary, or is one of them wrong? My short answers would be: (1) money predates capitalism, but not because of the state; (2) yes, the state can create money, but it does not control its price; so confidence in its money can disappear; and (3) a strict Chartalist position is not compatible with Marxist money theory, but MMT has complementary features.
Let me now try to expand on those arguments.
Modern monetary theory and the Marxist theory of money are complementary, in that both are endogenous theories of money. They both reject the quantity theory of money: namely that inflation or deflation is dependent on the decisions of central banks to pump in credit money or not. On the contrary, it is the demand for money that drives the supply: ie, banks make loans and as a result deposits and debt are created to fund the loans, not vice versa. In that sense, both MMT and Marxist theory recognise that money is not a veil over the real economy, but that the modern (capitalist) economy is a monetary one through and through.
Both Marx and the MMT exponents agree that the so-called quantity theory of money - as expounded in the past by Chicago economist Milton Friedman and others, which dominated the policy of governments in the early 1980s - is wrong. Governments and central banks cannot ameliorate the booms and slumps in capitalism by trying to control the money supply. The dismal record of the current quantitative easing (QE) programmes adopted by major central banks to try and boost the economy confirms that. Central bank balance sheets have rocketed since the crisis in 2008, but bank credit growth has not; and neither has real GDP growth.
But the Marxist theory of money makes an important distinction from the MMT. Capitalism is a monetary economy. Capitalists start with money capital to invest in production and commodity capital, which in turn, through the expending of labour-power (and its exploitation), eventually delivers new value that is realised in more money capital. Thus the demand for money capital drives the demand for credit. Banks create money or credit as part of this process of capitalist accumulation, but not as something that makes finance capital separate from capitalist production. MMT/Chartalists argue that the demand for money is driven by the ‘animal spirits’ of individual agents (Keynesian) or by the state needing credit (Chartalist). In contrast, the Marxist theory of money reckons that the demand for money and thus its price is ultimately set by the pace of accumulation of capital and capitalist consumption.
Theory and history
That raises the underlying issue between MMT and Marxism. Marx’s theory of money is specific to capitalism as a mode of production, while MMT and Chartalism is ahistorical. For Marx, under capitalism money is the representation of value and thus of surplus value. In M-C-P-C’-M’, M can exchange with C because M represents C and M’ represents C’. Money could not make exchange possible if exchangeability were not already inherent in commodity production, if it were not a representation of socially necessary abstract labour and thus of value. In that sense, money does not arise in exchange, but instead is the monetary representation of exchange value (MELT), or socially necessary labour time (SNLT).
Marx’s theory analyses the functions of money in a capitalist-commodity economy. It is a historically specific theory, not a general theory of money throughout history, nor a theory of money in pre-capitalist economies. So if it is true that money arose first in history as a unit of account for taxes and debt payments (as the Chartalists and Keynes argue), that would not contradict Marx’s theory of money in capitalism.
Anyway, I have considerable doubts that, historically, state debt was the reason for the appearance of money. David Graeber, the anarchist anthropologist, appears to argue this in his book, 5000 years of debt. But it does not wash well with me. Marx argues that money emerges naturally, as commodity production is generalised. The state merely validates the money form - it does not invent it. Indeed, I think Graeber’s quote from Locke summarises the argument well: “Locke insisted that one can no more make a small piece of silver by relabelling it a ‘shilling’ than one can make a short man taller by declaring there are now 15 inches in a foot” (p340).
In the classic statement of Chartalism, Knapp argued that states have historically nominated the unit of account and, by demanding that taxes be paid in a particular form, ensured that this form would circulate as means of payment. Every taxpayer would have to get their hands on enough of the arbitrarily defined money and so would be embroiled in monetary exchange. Joseph Schumpeter refuted this approach when he said:
Had Knapp merely asserted that the state may declare an object or warrant or token (bearing a sign) to be lawful money and that a proclamation to this effect that a certain pay-token or ticket will be accepted in discharge of taxes must go a long way toward imparting some value to that pay-token or ticket, he would have asserted a truth, but a platitudinous one. Had he asserted that such action of the state will determine the value of that pay-token or ticket, he would have asserted an interesting. but false proposition.2
In other words, Chartalism is either obvious and right or interesting and wrong.
Out of thin air?
Marx argued that money in capitalism has three main functions: as a measure of value, as a means of exchange, and ‘money as money’, which includes debt payments. The function of measure of value follows from Marx’s labour theory of value and this is the main difference with the Chartalists/MMT, who (so far as I can tell) have no theory of value at all and thus no theory of surplus value.
In effect, for MMT exponents, value is ignored for the primacy of money in social and economic relations. Take this explanation by one supporter of MMT of its relation to Marx’s value theory:
Money is not a mere ‘expression’ or ‘representation’ of aggregate private value creation. Instead, MMT supposes that money’s fiscal backbone and macro-economic cascade together actualise a shared material horizon of production and distribution … Like Marxism, MMT grounds value in the construction and maintenance of a collective material reality. It accordingly rejects neoclassical utility theory, which roots value in the play of individual preferences. Only, in contrast to Marxism, MMT argues that the production of value is conditioned by money’s abstract fiscal capacity and the hierarchy of mediation it supports. MMT hardly dismisses the pull of physical gravitation on human reality. Rather, it implicitly deprioritises gravity’s causality in political and economic processes, showing how the ideal conditions the real via money’s distributed pyramidal structure.3
If you can work through this scholastic jargon, I think you can take this to mean that MMT differs from Marx’s theory of money by saying that money is not tied to any law of value that drags it into place like “gravity”, but has the freedom to expand and indeed change value itself. Money is the primary causal force on value, not vice versa!
In my view, this is nonsense. It echoes the ideas of French socialist Pierre Proudhon in the 1840s, who argued that what was wrong with capitalism was the monetary system itself, not the exploitation of labour and the capitalist mode of production. Here is what Marx had to say about Proudhon’s view in his chapter on money in the Grundrisse: “... can the existing relations of production and the relations of distribution which correspond to them be revolutionised by a change in the instrument of circulation?” For Marx, “the doctrine that 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 not to be a presupposition, but gradual result of these transformations in circulation” would be a fundamental error and misunderstanding of the reality of capitalism.
In other words, separating money from value and indeed making money the primary force for change in capitalism fails to recognise the reality of social relations under capitalism and production for profit. Without a theory of value, the MMTers enter a fictitious economic world, where the state can issue debt and have it converted into credits on the state account by a central bank at will and with no limit or repercussions in the real world of productive capital.
For Marx, money makes money through the exploitation of labour in the capitalist production process. The new value created is embodied in commodities for sale; the value realised is represented by an amount of money. For Marx money is a commodity like gold or silver, whose value could be exchanged with other commodities. So the price or value of gold anchored the monetary value of all commodities. But, if the value or price of gold changed because of a change in the labour-time for gold production, then so did the value of money, as priced in other commodities. A sharp fall in gold’s production time and thus a fall in its value would lead to a sharp rise in the prices of other commodities (eg, Spain’s gold from Latin America in the 16th century) - and vice versa.
The next stage in the nature of money was the use of paper or fiat currencies fixed to the price of gold, the gold exchange standard and then finally to the stage of fiat currencies or ‘credit money’. But, contrary to the view of MMT or the Chartalists, this does not change the role or nature of money in a capitalist economy. Its value is still tied to the SNLT in capitalist accumulation. In other words, commodity money has/contains value, while non-commodity money represents/reflects value, and because of this both can measure the value of any other commodities and express it in price form.
Modern states are clearly crucial to the reproduction of money and the system in which it circulates. But their power over money is quite limited - and, as Schumpeter said (and Marx would have said), the limits are clearest in determining the value of money. The mint can print any numbers on its bills and coins, but cannot decide what those numbers refer to. That is determined by countless price-setting decisions by mainly private firms, reacting strategically to the structure of costs and demand they face, in competition with other firms.
This makes the value of state-backed money unstable. Actually, this is acknowledged by the Chartalist theory. According to it, the main mechanism by which the state provides value to fiat money is by imposing tax liabilities on its citizenry and proclaiming that it will accept only a certain thing (whatever that may be) as money to settle those tax liabilities. But Randall Wray, one of most active writers in this tradition, admits that, if the tax system breaks down, “the value of money would quickly fall toward zero”.4 Indeed, when the creditworthiness of the state is seriously questioned, the value of national currencies collapses and demand shifts to real commodities, such as gold, as a genuine hoard for storing value. The gold price skyrocketed with the start of the current financial crisis in 2007 and another large-scale rise was propelled in early 2010, when the debt crisis of the southern euro countries aggravated the situation.
I often hear various MMTers saying that “money can be created out of nothing”.5 Bank money does not exist as a result of economic activity, they argue. Instead, bank money creates economic activity. ‘The money for a bank loan does not exist until we, the customers, apply for credit.’6 The short reply to this slogan is: ‘Yes, the state can create money, but it cannot set its price’ - or value. The price of money will eventually be decided by the movement of capital as fixed by socially necessary labour time. If a central bank ‘prints’ money or deposits credits with the state accounts, that gives the state the money it needs to launch programmes for jobs, infrastructure, etc, without taxation or the issuing of bonds. This is the policy conclusion of the MMT. It is the ‘way out’ of the capitalist crisis caused by a slump in private sector production.
The MMT and Chartalists propose that private-sector investment be replaced or added to by government investment ‘paid for’ by the ‘creation of money out of thin air’. But this money will lose its value if it does not bear any relation to value created by the productive sectors of the capitalist economy, which determine the SNLT and still dominate the economy. Instead, the result will be rising prices and/or falling profitability that will eventually choke off production in the private sector. Unless the MMT proponents are then prepared to move to a Marxist policy conclusion - namely, the appropriation of the finance sector and the ‘commanding heights’ of the productive sector through public ownership and a plan of production, thus curbing or ending the law of value in the economy - the policy of government spending through unlimited money creation will fail. As far as I can tell, MMT exponents studiously avoid and ignore such a policy conclusion - perhaps because like Proudhon they misunderstand the reality of capitalism, preferring ‘tricks of circulation’; or perhaps because they actually oppose the abolition of the capitalist mode of production.
Of course, none of this has been tested in real life, as MMT policy has never been implemented (nor, for that matter, has Marxist policy in a modern economy). So we do not know if inflation would explode from creating money indefinitely to fund investment programmes. MMT people say ‘monetising the deficit’ would be ended, once full employment is reached. But that begs the question of whether the private sector in an economy can be subjected to the fine manipulation of central bank and state policy. History has shown that it is not and there is no way governments can control the capitalist production process and prices of production in such a ‘finely managed’ way.
Even leading MMT man Bill Mitchell is aware of this risk. As he put it in his blog,
Think about an economy that is returning from a recession and growing strongly. Budget deficits could still be expanding in this situation, which would make them obviously pro-cyclical, but we would still conclude the fiscal strategy was sound because the growth in net public spending was driving growth and the economy towards full employment. Even when non-government spending growth is positive, budget deficits are appropriate if they are supporting the move towards full employment. However, once the economy reached full employment, it would be inappropriate for the government to push nominal aggregate demand more by expanding discretionary spending, as it would risk inflation” (my emphasis).7
It seems that MMT eventually just boils down to offering a theory to justify unrestricted government spending to sustain and/or restore full employment. That is its task - no other. This is why it attracts support in the left of the labour movement. But this apparent virtue of MMT hides its much greater vice as an obstacle for real change. MMT says nothing about why there are convulsions in capitalist accumulation, except that the state can reduce or avoid cycles of boom and slump by a judicious use of government spending within a capitalist-dominated accumulation process.8 So it has no policy for radical change in the social structure.
The Marxist explanation is the most comprehensive, as it integrates money and credit into the capitalist mode of production, but also shows that money is not the decisive flaw and that sorting out finance is not enough. Thus it can explain why the Keynesian solutions do not work either to sustain economic prosperity.
Let me refer you to an excellent short account of the history of money by Argentine Marxist economist, Rolando Astarita.9 Astarita has also analysed MMT in several posts on his blog, and I shall draw on some of his arguments. Suffice it to say that to argue that money only arose because the role of the state in pre-capitalist economies is not borne out by the facts.
Nevertheless, MMT starts with the conviction that it is the state (not capitalist commodity relations) that establishes the value of money. Leading MMTer Randall Wray argues the money takes its value not from merchandise, “but rather from the will of the state to accept it for payment”. Chartalist founder Knapp says: “money is a creature of the law”; “The denomination of means of payment according to the new units of value is a free act of the authority of the state”; and “in modern monetary systems the proclamation [by the state] is always supreme”. Thus the modern monetary system “is an administrative phenomenon” and nothing more.
Keynes also backed this Chartalist view. In his Treatise on money, Keynes says: “... the Chartalist or state money was reached when the state assumed the right to declare which account money is to be considered money at a given moment”. So “the money of account, especially that in which debts, prices and general purchasing power are expressed, is the basic concept of the theory of money”. I do not think it is correct to say that MMT bastardises Keynes, however - on the contrary, MMT and Keynes are in agreement that money is a product of state creation, as the state decides the unit of account for all transactions.
But deciding the unit of account (eg, whether dollars or euros) is not the same as deciding its value for transactions: ie, as a measure or store of value. MMT supposedly supports the ‘endogenous’ money approach: namely, that money is created by the decisions of entrepreneurs to invest or households to spend, and from the loans that the banks grant them for that purpose. So banks make loans and so create money (as issued by the state). Money is deposited by the receivers of loans and then they pay taxes back to the state. According to MMT, loans are created by banks and then deposits are destroyed by taxation, in that order. At a simple level, MMT merely describes the way things work with banking and money - and this is what many MMTers argue: ‘All we are doing is saying like it is’.
But MMT goes further. It argues that the state creates money in order to receive it for the payment of taxes. The state can force taxes out of citizens and can decide the nature of the legal tender that serves for money. So money is a product of the state. Thus MMT has a circuit of money that goes: state money - others (non-state entities) - taxes - state money. The state injects money into the private sector, and that money is then reabsorbed with the collection of taxes. According to MMT, contrary to what most of us simpletons think, issuing money and collecting taxes are not alternatives, but actions that merely occur at different times in the same circuit. So if a government runs a fiscal deficit and spends more than it receives in taxes, the non-state sector has a surplus, which it can use to invest, spend and employ more. The state deficit can thus be financed by creating more money. Taxes are not needed to finance state spending, but to generate demand for money (to pay taxes!).
But the MMT circuit fails to show what happens with the money that capitalists and households have. In MMT, M (in value) can be increased to M’ purely by state diktat. For Marx, M can only be increased to M’ if capitalist production takes place to increase value in commodities that are sold for more money. This stage is ignored by MMT. The MTT circuit starts from the state to the non-state sectors and back to the state. But this is the wrong way round, causally. The capitalist circuit starts with the money capitalist and through accumulation and exploitation of labour back to the money capitalist, who then pays the state in taxes, etc. MMT ignores this. But it shows that money is not exogenous to capitalist economic activity. Its value is not controlled by the state.
MMT creates the illusion that this whole process starts and ends with the government, when it really starts within the capitalist sector, including the banking system. Taxes cannot destroy money, because taxes logically occur after some level of spending on private output occurs. Taxes are incurred when the private sector spends and governments decide to use those taxes to mobilise some resources for the state. Private incomes and spending on resources precede taxes.
Another Chartalist, Pavlina Tcher-neva, writes:
Chartalists argue that, since money is a public monopoly, the government has at its disposal a direct way to determine its value. Remember that for Knapp the payments with currency measure a certain number of units of value. For example, if the state required that in order to obtain a high-powered money unit a person must provide one hour of work, then the money would be worth exactly one hour of work. As a monopoly issuer of the currency, the state can determine what the currency will be worth by establishing the terms in which the high-powered money is obtained.10
Tcherneva’s policy of state ‘exogenous pricing’ is pretty similar to the views of 19th century utopian socialist John Gray, who reckoned that, by issuing bonds that were exogenously priced to represent working time, so economies could deliver growth and full employment11 - a view that Marx criticised.
Where MMT differs from Keynesian-type fiscal deficit spending is that its proponents see government deficits as permanent in order to drive the economy up and achieve full employment of resources. In this way, the state becomes the ‘employer of last resort’. Indeed, the MMT exponents claim that unemployment can indeed be solved within capitalism. So there is no need to change the social formations based on private capital. All that is needed is for politicians and economists to recognise that state spending, ‘financed’ by money creation, can sustain full employment.
MMT proponent Tcherneva writes:
Chartalists propose a policy of full employment, in which the state exogenously establishes an important price for the economy, which in turn serves as an anchor for all other prices …. This proposal is based on the recognition that the state does not face operational financial constraints, that unemployment is a result of restricting the issuance of currency, and that the state can exercise an exogenous pricing.
This policy conclusion is rather ironic. It leads to a view that full employment can be achieved by the “exogenous” issuance of currency at a fixed price. And yet MMT is prominent in its rejection of the monetarist argument that an exogenous increase in the quantity of money will lead to a boost in economic activity. It seems that MMT also has an exogenous theory of money!
As Cullen Roche, an orthodox Keynesian, put it,
MMT tries to reinvent the wheel and argue that it is the government’s fault (and implicitly, the rest of society’s fault) that you can’t find a job … MMT gets the causality backwards here by starting with the state and working out.
Roche goes on:
The proper causality is that private resources necessarily precede taxes. Without a highly productive revenue-generating private sector, there is nothing special about the assets created by a government and it is literally impossible for these assets to remain valuable. We create equity when we produce real goods and services or increase the market value of our assets relative to their liabilities via productive output. It is completely illogical and beyond silly to argue that one can just ‘print’ equity from thin air. Government debt is, logically, a liability of the society that creates it. In the aggregate government debt is a liability that must be financed by the productive output of that society.12
Some deny that MMT exponents reckon that money can be created out of thin air - this is a distortion of MMT, they say. Apparently the real argument of MMT is that government spending can finance itself by raising economic activity and thus more taxes. Well, British tax expert/economist Richard Murphy is definitely a supporter of MMT. He expounded that MMT first says:
... governments can make money out of thin air, at will … MMT then says all government spending is in fact funded by money created in this way, created by central banks on the government’s behalf … MMT logically argues as a consequence that there is no such thing as ‘tax and spend’ when considering the activity of the government in the economy; there can only be ‘spend and tax’.13
Similarly, Stephanie Kelton is currently the most followed MMT economist. She argues that governments can expand spending to whatever level necessary to achieve full use of productive resources in an economy by state money because such spending is ‘self-financing’.
Money only has value if there is value in production to back it. Government spending cannot create that value - indeed some government spending can destroy value (armaments, etc). Productive value is what gives money credibility. A productive private sector generates the domestic product and income that gives government liabilities credibility in the first place. When that credibility is not there, then trust in the state’s currency can disappear fast, as we see in Venezuela or Zimbabwe, and even Turkey right now.
To quote Cullen Roche again:
... productive output must, by necessity, precede taxes. In this sense it is proper to say that productive output drives money. And if productive output collapses then there is no quantity of men with guns that can force people to pay taxes … So the important point here is that a government is indeed constrained in its spending. It is constrained by the quantity and quality of its private sector’s productive output. And the quantity and quality of income that the private sector can create is the amount of income that constrains the government’s ability to spend.14
This is Keynesian terminology: but if we alter the words ‘income’ or ‘output’ to ‘value’, we can get the point in Marxist terms.
Marx’s theory of money concurs with the endogenous approach, in so far that it is the capitalist sector that creates the demand for money; to act as a means of exchange and a store of value. Banks make loans and create deposits, not vice versa. Indeed, Marx’s theory of money is more consistently endogenous than MMT, because it recognises the primacy of the capitalist accumulation process (with banks and markets) in deciding the value of money, not any ‘exogenous’ role of the state. As Astarita puts it,
the fundamental difference between the Marxist approach to money and the Chartalist approach revolves around this single point. In Marx’s conception, money can only be understood as a social relation. In the Chartalist approach, it is an artifice in which essential social determinations are missing ... it ‘sweeps under the carpet’ the centrality of productive work, and the exploitation of work - the true basis on which capitalist society is based.15
The state cannot establish at will the value of the money that is issued for the very simple reason that, in a capitalist economy, it is not dominant and all-powerful. Capitalist companies, banks and institutions rule and they make decisions on the basis of profit and profitability. As a result, they endogenously drive the value of commodities and money. Marx’s law of value says value is anchored around the socially necessary labour-time involved in the overall production of commodities (goods and services): ie, by the average productivity of labour, the technologies and intensity of work. The state cannot overcome or ignore this reality.
Michael Roberts blogs at https://thenextrecession.wordpress.com.
1. See http://bilbo.economicoutlook.net/blog/?p=40562.↩
2. J Schumpeter History of economic analysis London 1954.↩
6. See Ann Pettifor: www.opendemocracy.net/ourkingdom/ann-pettifor/power-to-create-money-out-of-thin-air.↩