The Problem With Modern Monetary Theory

MODERN MONETARY THEORY (MMT) is making waves at the moment among some on the left. Alexandria Ocasio- Cortez in the US is arguing that the theory be adopted and acted upon as part of a green new deal.

MMT is attractive because it gives the lie to the argument that there is no alternative to austerity and cuts. This Tory trope is based on equating our national economy with a household. If you can’t afford them, you just can’t run out and buy the things you want. If the government is spending more than it’s getting in, it will run a deficit and that must be paid off.

MMT theorists argue that a household can’t print the money it needs to spend, but an independent country like Britain can. If there are unused resources out there (and there always are in a capitalist economy) then the government can spend on projects to lap up these unemployed workers and machinery and make us all better off.

We are told MMT would enable a Labour government to give the kind of boost Keynes proposed during the Great Depression to mop up unemployment. The government could just print money to provide the initial stimulus to the economy. Formerly unemployed workers would have more money jingling in their pockets as they get jobs. They will run out and spend it on the extra output, so there need be no inflation. Free lunch all round!

Socialists have argued consistently against the policy of austerity. Even in its own terms it hasn’t worked. The Tory/Lib Dem government aimed to eliminate the government deficit by 2015. It’s still there and is likely to hang on till 2025 at least. In the meantime austerity has imposed massive hardship on working class people.

So why do right wing governments, backed up by orthodox economic theory, always resort to austerity in times of crisis? They don’t do it because it’s the right thing to do for all, because it’s not. The rich have decided that they don’t want to pay for the crisis, so we must. Austerity is the way the ruling class is bound to react. If the government of the day doesn’t like it, then the establishment has ways of bending it to their will.

When Labour Chancellor Denis Healey faced a crisis caused by capital flight in the form of a run on the pound in 1976 he had to go cap in hand to the International Monetary Fund (IMF) to bail the country out. The IMF demanded cuts in social services as the price of their ‘help’.

A flight of capital is not a malfunction of the monetary system. It is a form of class struggle waged by the capitalist class to assert their will and authority. They are opposed to Keynesian policies because they are only interested in profit, not people’s welfare. Profits are the unpaid labour of the working class. When French Socialist President Mitterand tried to reflate the economy on his election in 1981, he was confronted by wave after wave of capital flight and investment strikes. By 1983 he had given up and imposed orthodox economic policies (tournant de la rigeur) on the country.

MMT doesn’t tell us why the system goes into crisis in the first place. Since the theory is the basis for Keynesian policy, any government attempting to implement its precepts is likely to be met with the same sort of opposition as we have seen before. Like Keynes, modern monetary theorists need not be socialists. Since they believe full employment can be achieved under capitalism, why bother to change society?

Contrary to the belief of some, Keynesian policies were not the cause of the great post-war boom (1948-73). President Eisenhower (1953-61) for instance stuck to a severe balanced budget policy. And British governments were concerned above all to pay off the massive national debt they had built up during the war. So they ran big government surpluses, not deficits.

Nor were reflationary policies implemented by governments in the years when they were needed. When the worldwide recession began in 1973, Keynesianism was abandoned both in theory and practice. The neo-liberal doctrines of Milton Friedman were adopted and implemented by Thatcher and Reagan.

MMT raises unrealistic expectations. No monetary theory can possibly immunise radical governments from the pressures imposed upon them by capitalism and offer a way forward. We have to know who our enemy is and be prepared to fight it.