Modern Monetary Theory: Charlatan Economics in Service of Capitalism

M Aseem

Till the economic crises of capitalism were periodic with booms following busts, classical bourgeois political economy explained these as General Gluts created by disequilibrium or imbalance of the markets, which gets rectified on its own through the movement of prices since ‘supply creates its own demand’. Hence any outside (government) intervention in the self-correcting markets was frowned upon.

However, as the crises became endemic and persistent with the growth of monopolies and capitalism became moribund bringing proletarian revolution on the agenda of history, umpteen attempts have been made by the so called ‘left wing’ of the bourgeoisie – the social democrats, democratic socialists, Green Socialists, just ‘the socialists’, the greens and so on – to provide remedies to the economic crises of capitalism, which would seem to ameliorate the woes of the working class within the existing bourgeois democracy, obviating the need for sharpening class struggle and overthrowing capitalist rule to establish a planned socialist society under a working class state.

Various theories have been floated how full employment can be achieved within capitalism through monetary or fiscal interventions by a truly benign government elected democratically in a bourgeois parliamentary democracy. Such theories of resolving capitalist economic crises are fundamentally driven by the ‘underconsumption’ – ‘low purchasing power’ resulting in fall in aggregate demand – explanation of the capitalist economic crises. Therefore, the remedy of increasing expenditure or consumption through state intervention to manage aggregate demand in the economy. As the Great Depression of 1920s and 30s devastated the capitalist economies, the Keynesians were the first off the ground. Keynes himself was a bourgeois economist concerned with preserving capitalism against the socialist challenge; but precisely for that reason he recognized what he considered the fatal flaw of capitalism, that it was afflicted with intolerable levels of unemployment, and advocated State intervention to mitigate it.

Deficit Spending – Keynesianism

Keynesians argued that a market economy suffers recession when the aggregate demand is low, and inflation, when demand is high and these can be mitigated by economic policy responses coordinated between fiscal policy actions of the government and monetary policy actions by the central bank, stabilizing economic output, inflation, and unemployment. Expansionary monetary policy by the central banks can reduce interest rates by increasing money supply which will encourage large consumer sales through debt (houses, automobiles and consumer durables on EMIs) as well as more productive investment by the capitalists as demand picked up and capital became cheaper and thus ‘grow the economy’. Expansionary fiscal policy consists of increasing net public spending by the government through taxing less and spending more on infrastructure raising demand for commodities and in turn, wage labour. The government finances the extra expenditure by borrowing from capital markets issuing government bonds, called deficit spending. This initial government spending, in turn, creates a multiplier effect as the workers and capitalists re-spend their wages and profits.

The Keynesian multiplier as described by Samuelson and other Keynesians gives the impression that making society richer is the easiest thing in the world: the government just needs to increase the total expenditure. However, it is impossible under the classical bourgeois economic theory since the level of expenditure is limited by the economy’s income/output. Hence, they raised objection that such expenditure through fiscal deficit will ‘crowd out’ the private expenditure. However, Keynesians like Joan Robinson and Richard Kahn explained the falsity of these claims by showing that the private capitalists have exactly the same amount of profit saved with them after their own consumption as the multiplier effect raises the incomes (Rs 100 remainder profit with capitalists as the total income rises by Rs 400 with the increased expenditure of Rs 100, and this Rs 100 is held by the same private capitalists as claim on government for bonds). Hence, increased government expenditure is beneficial for private capital and has no ‘crowding out’ effect on it.

‘Tax the Rich’ – Social Democrats

While agreeing with the basic proposition of the Keynesians, Social Democrats oppose financing the increase in expenditure through fiscal deficit, asking to ‘tax the rich’ instead. We quote Prabhat Patnaik, “the Left says, quite rightly, that a fiscal deficit does not lead to any “crowding out” or to any inflation (in an economy with unutilized resources), but on the contrary increases demand and hence output and employment; but the Left
opposes a fiscal deficit because it gratuitously increases capitalists’ wealth for nothing
that they have done. … the government’s spending of Rs.100, while it raises output and employment, increases capitalists’ wealth by Rs.100 which they hold in the form of government bonds, i.e., claims upon the government. If the government did not resort to a fiscal deficit, but instead taxed this additional wealth, which in Keynes’ own words is a “booty” landing in the lap of the capitalists, by imposing a wealth tax of Rs.100, then nothing else will change: the additional output generated by government spending will still be Rs.400; the increase in employment will be exactly the same as before, the increase in the wage-bill will be exactly the same as before; but there will be no extra wealth for the capitalists, no “booty” landing in their lap.” As if the other profits of the capitalists are hard earned and not result of surplus value extracted from the wage workers!

Both the Keynesians and the Social Democrats claimed credit for the so called “Golden Age of Capitalism” post-World War II. However, as the crisis returned with greater intensity along with the weakening of the working-class movements, bourgeois political economy since 1970s has largely been dominated by the neo-liberal economic thought backed by all powerful finance capital. It is opposed to State intervention to raise employment. It would much rather have the State providing all kinds of incentives to capitalists to induce them to invest or spend more through the state creating and managing demand for monopoly capitalists through orders for building infrastructure, Real Estate construction, much of it unproductive like Central Vista in Delhi or the ghost cities of China, and the biggest of all, increased expenditure on armaments and militarisation.  The State must not take over the capitalists’ role, they think, for then tomorrow the people may ask: if we need to have the State to intervene for increasing employment, then why do we need capitalists at all? Moreover, the higher employment increases bargaining capacity of the workers and creates what the neo-liberals call ‘wage inflation’ and reduces the rate of profit for capitalists. Hence bourgeois economists and media have propagated the theory of balanced budgets through austerity and low corporate taxes as a sacrosanct creed.

This does not mean that neo-liberals are opposed to state intervention in economy. They are against state intervention only if results in any ‘welfare’ for the working class or creates public facilities like education, healthcare, homes, etc for the people. They support state intervention if it helps in raising profits of the capitalists. For the neo-liberals, the interest of the capitalist class is the interest of the whole society as the increased profits of the capitalists will in turn help working class through trickle-down effect. 

However, as the economic crisis in 21^st century became almost unending (‘permanent’) the complete bankruptcy of neoliberal policies of austerity have become apparent to most people. After a decade of crisis and cuts, workers, peasants, youth, etc all are rightly calling into question the neoliberal consensus that has continued to hold court, despite the seemingly never-ending ‘Great Recession’. With economic growth stalling, business investment stagnant, and monetary policy stretched to its extreme limits, even some mainstream capitalist economists  are now challenging the demand for balanced budgets. After all, with austerity failing and interest rates at 0%, what other monetary weapons do governments and central banks have left in their arsenal?

Now entered on the scene ‘left-wing’ leaders like Bernie Sanders and Jeremy Corbyn promising a ‘democratic socialism’ within the bounds of bourgeois democracy, which will have full employment and public housing, education, healthcare, etc. for all, indeed a ‘Green New Deal’ within the capitalist system. Quite naturally, the ‘right wing’ of the bourgeoisie has raised the counter argument of practicality or affordability – from where the resources will be mobilised to meet the humongous expenses to implement these programmes? That’s where comes the Modern Monetary Theory (MMT) with its supporters citing it as an answer to all the questions. It has been advocated by leading lights of the Democratic Party in the USA, such as Alexandria Ocasio-Cortez as an easy rebuttal to critics who ask how these ‘radical’ policies will be paid for since MMT promises a way of funding everything –free healthcare, public education, mass investment in green energy, municipal homes. Simply create more money!

What has helped MMTers to gain some traction and credibility is the fact that ever-deepening crisis has completely discredited the neoliberals and their macroeconomic theories. “MMT is appropriate only in exceptional situations,” claimed John Llewellyn, a former chief economist of the OECD, “where economies are far from full employment, deflationary pressures are in evidence, and interest rates are at the zero bound”. The problem for Llewellyn and his cohort, however, is that these “exceptional” conditions are the ‘new normal’ now, very much like that which the world economy has faced for the past decade or more. Those criticising MMT from the right, therefore, aren’t in a very strong position to do so.

What is MMT?

However, as Marxists we need to make an objective analysis of Modern Monetary Theory which is neither much of a theory nor particularly modern. It’s just Keynesianism in a new bottle. This eclectic theory has almost as many versions as are its followers. These include, amongst others: Stephanie Kelton, a senior ex economic adviser to Bernie Sanders; Bill Mitchell, a vocal MMT advocate  in Britain; and Richard Murphy, a prominent tax campaigner and political economist in the UK.

Most fundamentally, MMT asserts that:

1. A government that issues its own sovereign, ‘independent’ currency can never run out of money, since it can always choose to pay for any debts by creating more money.
2. Inflation will not kick in if such a government spends freely and runs a budget deficit, till there is spare productive capacity in the economy.
3. Taxes do not fund public spending. Governments, therefore, do not need to tax first to spend later. Indeed, the real process at play (we are told) is the opposite – governments spend on goods and services, and then adjust tax rates to manage demand in the economy.

MMT has been latched upon by reformist ‘left-wingers’ for what it essentially means – freedom for the governments from worrying about balancing the books as they can always find the money to foot any bills, supposedly enabling them to ameliorate, if not eliminate, the sufferings of the working class through monetary tools without the necessity to attack the foundations of the capitalist system itself. Indeed, this has been explicitly spelled out by leading MMT proponents. For example, rhetorically asking “Can we afford a Green New Deal?”, Stephanie Kelton replies: “Yes. The federal government can afford to buy whatever is for sale in its own currency.” Richard Murphy, has stated that: “What this [MMT] means is that there is no requirement per se to balance the government’s books. Indeed, it is not just illogical but completely economically perverse to seek to do.”

Is Underconsumption the Real Cause of Capitalist Crises?

Before discussing MMT further, we need to look into the cause of capitalist crises, to see whether MMT or any monetary theory can provide a remedy to these crises. Marx said, “The superficiality of (bourgeois ~ added) Political Economy shows itself in the fact that it looks upon the expansion and contraction of credit, which is a mere symptom of the periodic changes of the industrial cycle, as their cause.” (Capital, Volume 1) It is true that capitalist crises appear as crises of overproduction when markets are glutted with unsold commodities, money supply becomes scarce and credit vanishes, but it is not the real root cause of crises. Stalin said, “The source and cause of economic crises of overproduction lie in the capitalist system itself. The source of crisis lies in the contradiction of the social nature of production and the capitalist nature of ownership of products.” Hence the crises are inevitable in capitalism. How is this basic contradiction manifested in practice?

The purchasing power of workers is not the basic determining factor of market demand since it itself is determined by the capitalist relations of production. Purchasing power of workers is equivalent to the variable capital (wages paid to workers) advanced by the capitalists themselves. This is equal to the value of their labour power, that is, necessary labour time required to produce value equal to the value of minimum commodities required for their own reproduction. Hence, they can never purchase or consume more than the variable capital deployed by the capitalist. The value produced in the labour time surplus to the necessary labour time is appropriated as surplus value by the owners of capital and is the source of all the profit, interest and rent accruing in the hands of the capitalist class.

Therefore, the commodities equivalent to the surplus value can only be consumed by the capitalist class either as personal consumption of basic and luxury commodities or as productive consumption, that is, consumption as constant capital for extended reproduction in the next productive cycle. Of course, the credit is used as steroid to increase the consumption but for the workers it is really the current consumption from future wages minus interest cost of money. Hence, this pumping up is artificial and temporary. However, till this goes on capitalists can keep on using the surplus value for productive consumption and the whole of commodities produced in a cycle can be realised into money capital. This creates a period of temporary boom as more investment in productive capital creates more demand for workers and increases wages. But every capitalist tries to produce the greatest number of products at the least possible cost they keep increasing the organic composition of capital or the ratio of constant capital to that of the variable capital, that is, quantity of labour power employed in the production process. Hence, while the individual capitalist enterprise functions as well organised and minutely planned, social production in capitalism is chaotic and anarchic as every individual capitalist increases production for maximum profit without any coordination between total demand (purchasing power) in society on the one hand and total production on the other hand. This dislocation and anarchy sooner or later inevitably give rise to overproduction. That is why capitalist crises usually occur not when unemployment is high and wages low but its exact opposite.

Therefore, crises of capitalism are not the result of underconsumption of workers owing to their low purchasing power but of the basic contradiction of socialised production versus private appropriation in the capitalist relations of production. Hence, the solution of these crises demands, in addition to the socialisation of production itself, socialisation of the ownership of means of production, i.e., a socialist system of economy based on planning of production for the fulfilment of collective social needs and not for profit of private property owners.

MMT and the Concept of Money

The origins of MMT lie in a theory of money known as ‘chartalism’ by a German economist Georg Friedrich Knapp, who put forward a hypothesis called ‘the state theory of money’. Knapp asserted that the state creates money through its acts or charters – and then creates a demand for the currency by insisting on its use as a ‘means of payment’ of taxes.

However, to understand the concept and function of money we must turn to Marx. In Capital, Marx noted that “the progressive development of a society of commodity-producers stamps one privileged commodity with the character of money. Hence the riddle presented by money is but the riddle presented by commodities”. In other words, to understand the role of money in society, we must first understand its real origins in commodity production and exchange. Marx explained that money’s history is tied to the rise of the commodity: goods and services produced not for individual consumption of the producer, but for exchange. All commodities, therefore, have an exchange value. This is a relationship – a ratio – between commodities, expressing how much of one commodity would (on average) will be exchanged for another.

Marx also explained that the value of a commodity comes from the labour embodied within it. This labour consists both of the ‘dead labour’ contained within the raw materials, tools, etc. required for its production, and the ‘living labour’ added in the production process by the worker. Marx called this total labour the ‘socially necessary labour time’ – the usual time required to produce a given commodity, based on the current level of technology and industry, etc. within a society. Marx explained in Contribution to the Critique of Political Economy how money serves several functions:

1. As measure of value. In money terms, this is represented by prices.
2. As medium of exchange
3. As store of value – allows wealth to be accumulated and preserved over time.
4. As means of payment, allowing debts to be settled and taxes to be paid.

Money, therefore, is representation of exchange value – the ultimate expression of the generalisation of the law of value; the logical conclusion of the development of commodity production and exchange, which requires a universal or standard measure against which the value of all other commodities can be expressed. Money arises historically during the development of commodity production. It began as a ‘money commodity’, such as the precious metals, with a value of its own, but later developed to be a mere symbol of value.

Today, money is predominantly not metal coins, but paper cash and notes or credit and numbers in digital accounts. Therefore, many people tend to miss the real nature of money. But the reality is that even today, in a real crisis of payment, it needs to be settled by a commodity with real value, say the bullion. For example, during the 1991 import payments crisis in India, tonnes of real gold were loaded on aircrafts and shipped to banks in Switzerland to be pledged to get the ‘money’ which could be used as payment for import of goods, and not some money created and printed by Reserve Bank of India without any underlying value. 

Marx also emphasised that money is a social relation. Money itself is not wealth but is a claim to a portion of the total social wealth created in production –by the labour of the working class. But MMT offer no analysis of value, or of commodity production and exchange. As a result, it misses the essence of capitalism, and of money’s role within it.

Can State Create Money?

The MMTers are technically correct to say that the state can create money. But the state cannot guarantee that this money has any value. Without a productive economy behind it, paper or digital money is meaningless as it is only a representation – a token – of value. And real value is created in production of commodities, through expenditure of socially necessary labour time. The money that a state creates, therefore, will only be of any worth in so far as it reflects the value that is in circulation in the economy, in the form of the production and exchange of commodities.

Hence, it is not the state that creates the demand for money, but the needs of capitalist production. The state can of course choose what unit of measurement to use when accounting for the value in its economy, just as Americans choose to measure distances in feet, whilst Europeans choose metres. But this does not alter the objectives distances between objects in the real world. Similarly, a society does not get wealthier by imagining itself to be so, by printing money or otherwise.

Besides, under capitalism, the vast bulk of money in circulation is not created by governments or central banks but by commercial banks, in the form of bank deposits/loans. This money is created in response to demands from consumers and investors, as credit and loans – the process known as money multiplier function of the banks. If this demand dries up, in terms of falling household consumption and/or business investment, so too does the demand for money. The quantum of this demand is determined by the gross value of commodities put in circulation in a production cycle and the velocity of money (number of times piece of money changes hands in a period) in a society – it is directly proportional to the gross value produced and inversely proportional to the velocity of money.

Demonetisation – No Arbitrary State Control Over Money

The demonetisation of 86% of the currency notes by Narendra Modi government in 2016 is a glaring example of the misconception that the quantum of money in a society can be determined by arbitrary decisions of a government instead of being the outcome of objective conditions of commodity production and circulation. Hence, the sudden flushing out of the most cash from circulation obstructed the whole circuit of production and circulation exacerbating the existing economic crisis and creating huge misery of unemployment in the lives of the people, especially the working class. 

It’s true that technically the state can create money through printing of paper notes or creation of digital entries in the electronic ledgers. But it cannot ensure how this money is used. The vast programmes of Quantitative Easing conducted across the advanced capitalist world since the 2008 crash are a testament to this. Several trillions have been pumped into the economy by central banks over the past decade, and to what effect? Similarly let us take 8-12 trillion rupees on an average of excess liquidity every week in Indian banking system for more than 2 years now. What is the result? Investment and GDP growth remain subdued. Still, the asset prices –of equities, bonds, property, gold, cryptocurrencies, even artworks – have been going up and up. In short, the speculators are having a field day, whilst ordinary people struggle.

In brief, it is not the state that creates the demand for money, but the needs of capitalist production system which is ultimately driven by profit. Capitalists invest, produce, and sell to make a profit. Where the capitalists cannot make a profit, they will not produce. But MMT has nothing to say about profit, the motive force of the capitalist system. As a result, it cannot explain the real dynamics of the economy under capitalism.

No Independence and Sovereignty under Globalised Capitalism

MMTers state that ‘sovereign’ government that runs its own ‘independent’ fiat currency cannot go bankrupt as it can pay any claims on it in its own currency. Yes, it is true that ‘theoretically’ a government such as in the USA, UK or India – where the currency is not pegged to some other currency, and where the central bank can increase the money supply – can always choose to print (or create digitally) money to meet its debt obligations or fund a budget deficit.

But, where in the world is a government and its currency that is truly ‘independent’ and ‘sovereign’? Let us forget the ‘developing’ or ‘emerging’ countries, most of which are burdened heavily in debts to the big imperialist powers. Let us also forget the well-known examples of Argentina, Zimbabwe, Venezuela, Russia after capitalist restoration, East Asian countries, etc, when the currencies of these countries were decimated by the capital markets. Let us also decide to forget Salvador Allende of Chile in 1973, or Patrice Lumumba of Congo, or Thomas Sunkara of Burkina Faso, or many such examples from Africa, Asia and Latin America where ‘independent’ governments were toppled through brutal bloody coups sponsored by imperialists for the very serious and unforgivable crime of pursuing ‘independent’ economic policies benefiting their own people.

Instead, let us take the example of the oldest imperialist country – the UK. There also the monetary independence is illusory. Yes, the Bank of England can set interest rates, print money, and lend to the government in its own currency. But can a radical left-wing government use this power to run large deficits, fuelled by loose monetary policy, and carry out large-scale public programmes? No, this would quickly shake the markets and would lead to an economic catastrophe. The rich would move their money out of the country; the capitalists would carry out a strike of capital; and the government would be forced to hike up interest rates to attract investors. The currency would quickly be deemed worthless, leading to rampant inflation – inflation that would hit workers hardest as real wages became eroded by rising prices. This actually happened in 1976. Labour won the 1974 election on a promise to nationalise the top 25 monopolies, in the midst of a world crisis of capitalism, with the economy in a state of stagflation as a result of decades of failed Keynesian policies. But once in power, Harold Wilson called for cuts, which were rejected by the Labour left. Wilson had to resign. His replacement James Callaghan, worried by a run on the pound, was forced to go cap-in-hand to the IMF for a bailout of $3.9 billion – the largest loan ever requested from the IMF at the time, of course, with strings attached. And so, instead of nationalisation, Labour found itself carrying out neoliberal austerity.

We can also look at the experience of another imperialist country – France where Francois Mitterrand was elected in 1981 on a ‘left-wing’ Keynesian programme, promising nationalisations, a rise in the minimum wage, and a 39-hour week. But after just two years, facing a flight of capital and a fall in the competitiveness of French industry, he was forced to undertake a turn to austerity to fight inflation and regain the confidence of the markets. All of this took place whilst France was supposedly a ‘sovereign’ country.

The same can also happen in the USA. The dollar’s ability to act as a world currency arises from America’s relatively hegemonic imperialist position. Only for this reason is the dollar deemed ‘as good as gold’ by international investors. If the US’ ‘strong and stable’ economy was to be called into question by the financial markets, the dollar too could quickly fall. Commenting on the calls for higher government spending in 2019 The Economist had remarked, “The dollar’s dominance is not guaranteed to last indefinitely. When the pound sterling lost its pre-eminence in the early 1930s, Britain, with a debt-to-gdp ratio in excess of 150%, faced a currency crisis. And there is no reason why history could not repeat itself regarding US capitalism and the dollar.”

In short, there is no such thing as economic, financial, or monetary ‘independence’ or ‘sovereignty’ for any country, neither domestically nor in international area, within capitalism, which is a truly global system today, based on a thoroughly integrated world market and the domination of the finance capital, major imperialist powers and the multinational monopolies. Each and every government, in each and every country, today must submit to the dictates of the domestic and international financial capital. Only by breaking with this system – through the socialist transformation of society – can any country be truly independent and free to carry out the economic policies that a society needs to fulfil the collective interests of its people.

Capitalism Offers Only Anarchy

Even if we accept MMT’s claim that certain countries are monetarily ‘independent’ and free to print money, does this really mean that there is no financial barrier standing in the way of a ‘left-wing’ government to implement pro-people policies? The MMTers themselves correctly highlight that there is a limit to any government’s ability to create and spend money – a limit beyond which there will be ramifications in the form of inflation. This limit is the productive capacity of the economy – the economic resources available to a country in terms of its industry, infrastructure, education, population, healthcare, and so on. Stephanie Kelton writes that in theory government could afford to give every American a pony, only constraint being whether they could breed enough ponies. The actual dollar amount needed is not an issue. Hence, in their view, inflation is not caused by supply side constraints in the economy.

However, MMTers are now faced with the problem that post-Covid inflation has already exploded to record levels for decade(s) even though there is huge excess unutilised capacity and economy is just beginning to reach pre-covid capacity utilisation levels in most parts of the world. So, Joe Wiesenthal, another of MMT advocates, writing in Bloomberg Markets Newsletter on 22^nd November, questions the very usefulness of Capacity Utilisation as an economic metric!  Whatever contradicts MMT is to be discarded since to explain it will require investigation into the very system of capitalist mode of production which creates such anarchy where on the one hand people have vast unfulfilled needs while on the other productive capacity lies unutilised.

Monetary Expansion and Inflation

If expansion in government spending pushes demand above that which can be supplied, then market forces will push up prices across the board – that is, it will generate inflation. If this point is reached, MMT advocates say, then it is the job of government to stop the economy from ‘overheating’ by reducing demand. This they claim, is the role of taxes – to suck money back out of the economy. But can governments simply create money at will and then tax it to control demand? Value and demand cannot be created out of thin air. Value is created in production. While the state can print money, it cannot print food, medicines, houses, schools, or factories. Of course, if these things are not being produced by the private sector, then the government can provide them directly through the public sector. But the logical conclusion of this is not to create more money, but to take production out of the market by socialising the economy as part of a socialist transformation. Till the economy remains capitalist, any money pumped into the system will go to pay for commodities – food and shelter, etc. – that are produced by the capitalists. In other words, all this money will end up in the hands of profiteers.

The aim of the working class, therefore, should not be to reform and strengthen the capitalist system of commodity and money, but to abolish it. Implementing MMT might end up devaluing a currency, but it will not put an end to the power of money. This can only be done by abolishing the system of commodity production and exchange out of which money has historically arisen. This means attacking the foundation of the capitalist system – private ownership and production for profit. Only by bringing in common ownership over the means of production and implementing a socialist economic plan under a working-class state can we satisfy society’s needs.

Capitalism, Class and MMT

MMTers, however, avoid this key question of economic ownership. In fact, they avoid the question of capitalist production and the economic laws that govern this altogether. After all, by their own admission, it is not so much an analysis of the capitalist system, but a description of the relationship between government spending, taxes, and the money supply. The basic assumption here is that parliamentary form of government is not a part of the class state of the bourgeoisie but a representative of the ‘people’ and resolving all the above problems is not a question of overthrowing capitalism but of the will and determination of a benign government. Hence, working class should become class conscious and organised but only to elect such a ‘democratic socialist’ government which will implement policies like MMT. MMT’s economic analysis is completely devoid of the issue of class and the fact that we live in a class society, composed of antagonist economic interests – of the exploiters, and of the exploited.

For example, what kind of state do MMTers refer to? Marx said in the Communist Manifesto, that under capitalism, “the executive of the modern state is nothing but a committee for managing the common affairs of the whole bourgeoisie”. Lenin once remarked that capitalism, far from being a democracy, is the ‘dictatorship of the banks’. Instead of overthrowing this dictatorship, MMTers suggest replacing it with another – the dictatorship of the central bank. But who would control this omnipotent central bank – the working class or the capitalists? A national bank, helping to direct society’s resources around the economy, would certainly be a vital element of a socialist plan of production. But in such setup, this bank would have to be under the control of the working class. Is this what MMTers envision?

MMTers state that their theory “gives us the power to imagine truly transformational politics”. But they do not propose fundamentally challenging the power of the capitalist class, nor altering the current economic relations. Private property, for them, remains inviolable and sacrosanct. The anarchy of the market is untouched. Rather than “the working classes seizing the means of production,” prominent MMT theorist Bill Mitchell asserts, “it’s the working classes seizing the means of production of money” (his emphasis). Richard Murphy goes further, reassuring right-wing critics of MMT that its supporters have “no plans to sweep the private sector aside”.

Like their Keynesian predecessors, then, MMTers’ strategy is one that saves, patches up and irons the rough creases of the capitalist system by diverting and misleading the working class from fulfilling their historical task of overthrowing it.

The Green New Deal

To avoid questioning the capitalist production relations for the capitalist crises, what MMTers propose is nothing but the old Keynesian economics of demand-side management which has been tried before and was in vogue across the advanced capitalist countries throughout the 1960s and 1970s, up until the point where its inflationary policies led to a global capitalist crisis of overproduction, stagflation, and the collapse of the Bretton Woods system that had underpinned the post-war boom.

Today, the call for a Green New Deal (GND) has become popular on the social democratic left. A key element of the GND is the idea of a ‘jobs guarantee’ – the provision of a minimum-wage, public sector job to all those who are unemployed. In this way, MMTers argue, governments can maintain an ‘appropriate’ level of demand in the economy. Maintaining full employment through public works on infrastructure and other schemes, for example, National Rural Employment Guarantee Scheme (NREGS) in India, becomes the primary target. As capitalism’s ‘reserve army of labour’ expands and contracts, so too does the government’s own army of labour in reverse to compensate it.

This of course emulates the original New Deal – programme of public works that were intended to stimulate US economic growth during the 1930s Great Depression. The ideas of Keynes were clearly influential in shaping the New Deal. In his General Theory, he even suggested that the government could boost demand by burying money in the ground and getting workers to dig it back up. “There need be no more unemployment. It would, indeed, be more sensible to build houses and the like, but if there are political and practical difficulties in the way of this, the above would be better than nothing.” However, the New Deal did not work. The slump continued long after its implementation and unemployment went up. Only with the onset of the Second World War and the mopping up of workers into the army and the armaments sector did unemployment fall. Keynes was forced to admit defeat. In an article on War Finance for New Republic, he wrote:

“It is, it seems, politically impossible for a capitalistic democracy to organise expenditure on the scale necessary to make the grand experiments which would prove my case — except in war conditions…. War preparations, so far from requiring a sacrifice, will be a stimulus, which neither victory nor defeat of New Deal could give you, to a greater individual consumption and a higher standard of life.”

Yes, even Keynes was forced to the conclusion that only vast devastation of war can provide a way out, though temporary, of a capitalist economic crisis. That is why all capitalist economies are becoming highly militarised as the crisis intensifies. Thus, it is capitalism which has become the biggest enemy of humanity itself. But MMTers dare not question capitalism.

Marxism vs MMT/Keynesianism

MMTers, however, are not deterred by the historical failings of similar economic strategies. MMT advocate Richard Murphy points out in the Financial Times, why should we worry about pushing the economy beyond its productive limits, when “no economy has operated ‘normally’ for more than a decade”. Indeed, even in times of ‘boom’, the global economy operates far below its productive capacity, only able to limp along thanks to ultra-loose monetary policy and a glut of cheap credit. ‘Excess capacity’ has become a hallmark of a capitalist system that has long outlived its usefulness. Even at its height, capitalism can only successfully utilise about 80-90% of is productive capacity. This falls to 70% or less in times of slump. In some past recessions, the figure fell to as low as 40-50%. Just now, for example, even while loudly claiming ‘impressive recovery’ post Covid Wave 2, State Bank of India management said in its analyst call post Q2 2021 results that capacity utilisation in the Indian economy remains at 60%! So, why aren’t capitalists investing? Why isn’t full productive capacity in the economy being utilised? Why do we see a permanent ‘reserve army of labour’? Why must the government step in to ‘stimulate demand’? Why, in short, is the world economy in a ‘permanent slump’?

The MMTers and Keynesians have no answer except merely stating that ‘excess capacity’ is the result of a lack of effective demand. Capitalists are not investing due to lack of adequate demand. But why? How has the economy become stuck in this downward spiral of low investment, unemployment, and stagnant demand? And why is this cycle of boom-and-bust (these days, mainly bust) such a never-ending feature of capitalism? Keynes himself could only invoke capitalism’s ‘animal spirits’. The capitalists, he suggested, were simply driven by ‘business confidence’. But this explanation is nothing more than the charlatanism of babas like Sri Sri and Sadguru. Fact is that confidence under capitalism has a material basis – the profitability. If there are profits to be made, then the capitalists brim with confidence, their ‘animal spirits’ wake up and they will invest. If not, then pessimism – and slump – sets in.

Marxism, on the contrary, provides a scientific analysis of the capitalist mode of production, its production relations and laws governing its dynamics, and why these inevitably lead to crises. These, in the final analysis, are crises of overproduction created by its basic ‘contradiction of the social nature of production and the capitalist nature of ownership of products.’ The economy collapses not simply because of a fall in demand (or confidence), but because the productive forces come into conflict with the nature of ownership and expropriation.

Capitalism is the Real Problem

Production under capitalism is for profit. To realise profit, the capitalists must sell the commodities they produce. Profit, however, is appropriated by the capitalists from the unpaid labour of the working class. Workers produce more value than they receive back in the form of wages. The difference is surplus value, which the capitalist class divides amongst itself in the form of profits, rents, and interest. Hence under capitalism, there is an inherent overproduction in the system. It is not simply a ‘lack of demand’. Workers can never afford to buy back all the commodities that capitalism produces. The ability to produce outstrips the ability of the market to absorb, that is, the productive forces have developed to a level where the existing relations of production have become the hindrance in their actual utilisation.

Of course, the system can overcome these constraints for some time through reinvestment of the surplus into new means of production, or through credit to artificially expand the market. But these are only temporary measures, “paving the way,” in the words of Marx, “for more extensive and more destructive crises” in the future. The 2008 crash marked the culmination of such a process – a climax that was delayed for decades by Keynesian policies and a boom in credit. But ultimately the crisis struck, and neither the Keynesians, the MMTers, nor anyone else other than the Marxists can explain why and how to resolve these crises – by overthrowing capitalism and establishing a working-class state to build a socialist society by abolishing private property and organising production under common ownership with a plan to fulfil the collective needs of the society.

Throughout the history of capitalism’s recurrent crises, various theories have been put forward by “left” theorists of various hues who maintain that these crises and the social ills they generate can be ameliorated, if not eliminated, by monetary or fiscal changes without touching the foundations of capitalist production itself. While they present themselves as “leftist”, “socialist” and “progressive,” advocating reform of the capitalist system, history shows that in periods of great crisis they seek to divert the working class from the programme of socialist revolution while at the same time providing the ideological foundations for political forces that advance a counterrevolutionary solution to the crisis. Modern Monetary Theory (MMT) is one of the latest expressions of this phenomenon.