MMT: historical and logical foundations

by

Robert Cauneau – MMT France

Ivan Invernizzi – MMT France / Rete MMT Italia

August 16, 2019


 

The contribution of the historical dimension to a theory, monetary or otherwise, is undoubtedly not sufficient in itself to demonstrate the correctness of this theory. But it does shed light on the underlying dynamics and the way in which they are articulated. It helps to identify the chains of causality that serve as a basis for the construction of a coherent body of theory, and it helps to eliminate arbitrariness in reasoning. It also helps to falsify certain ideas, such as the idea that bartering preceded the appearance of money, or that the market and real exchange predate money.

The main objective of this article is to show that MMT (Modern Monetary Theory) is based on solid historical facts and on the use of logic. In particular, it explains that coercive power is absolutely necessary for the emergence of monetized societies, and that the market is an epiphenomenon of the State 1 , while unemployment is a social construction of the State, which itself has a monopoly on currency. Finally, he presents the specificity of MMT thinking compared to all other monetary approaches.

1. On the origin of societies2

A good understanding of the potential of MMT can only be obtained if we have a good knowledge of the origin of societies. A return to the past shows us that they never appeared spontaneously, but always under the pressure of an authority exercising a strong coercion. It also shows how the need for money came about.

With rare exceptions, history teaches us that societies can only emerge where there is a political authority, that is, a system in which there is a part of the population that does not work to produce its own food, and which can unilaterally obtain the good produced by other parts of the population in a systematic way. There are no large spontaneous human groups living together, showing systematic interaction, without political authority, without coercion. The great civilizations, in prehistory, long before history, before the invention of writing, which already had formalized and articulated accounting systems, conveyed differently than by verbal language, were always connected with a military and political power of coercion over their population. The constitution of civilizations has always been based on the control by a military force.

It is important to note that when a civilization disappears, the reason is in most cases the fact that it can no longer sustain such coercion, probably because its social organization does not leave sufficient economic resources to sustain military forces. The reasons for the disappearance of the Roman Empire are essentially the fact that, at some point, it became too large to be able to organize systematic coercion. This made it very difficult to maintain control over these troops of barbarian origin, who obeyed their military hierarchy more than that of the Empire. And it is interesting to note that the Middle Ages, which followed, in the western part of the ex-Empire, did not see any monetization with the Roman currency of the west, which had therefore disappeared. This period then saw the emergence of the seigneuries, which allowed the development of an economic system still based on coercion, but without currency. These were closed economies, the only goods exchanged being marginal, absolutely not necessary for the survival of the community. It is interesting to note that in this region, from the sixth century to the beginning of the tenth century, the division of labor led to the disappearance of the currency, which in turn generated an important decrease in cultural, scientific and technical production. This is an interesting example of how the disappearance of political authority and the control of force led to the disappearance of the currency, as well as the market economy.

Related to this, although potentially not necessarily replicable in all situations, for a community to develop beyond small groups, there must be sufficient division and specialization of labor to produce the social and material infrastructure. One cannot build, for example, large water systems, aqueducts, or communication routes, for systematic exchange, to provide the physical capacity to reach other individuals, without having some level of division of labor. Farmers are not engineers. So, in order to have this division of labor, there is a need for the population that produces the primary goods to make them available to those who, while playing an important role in society, do not produce them, such as engineers, people with technical know-how and intellectuals. There is also a need to direct production towards that of maximum calories and to solve storage problems. And this type of evolution is by no means natural. Only the coercive force of military power, which itself conditions the emergence of political power, can allow it. Indeed, coercion is necessarily needed to oblige those who produce primary goods to provide a part of their production to those who do not. There are therefore no social classes a priori3 of the State

It follows that the concept of « social contract » has no historical basis. No State has been built in this way. For most of its history, human beings have lived in groups of more or less twelve people. It is plausible to consider that there is a biological basis in groups of this dimension. In mammals, the natural size is usually a few dozen at most. Beyond that, the groups break up. And only the human being has been able to go beyond. But for the developed mammals closest to us, there are no societies of billions of elements that would have been created spontaneously. If we look at human history, societies are not something natural. They are constructed entities, which require artificial structures in order to be maintained.

2. On the origin and nature of money

The origin of money is closely linked to that of States.

Money predates the market and real exchanges. « It is not a creature of the market. It also appears as a social mechanism of distribution by an authority of power. Money can be said to be a ‘creature of the State’ that has played a key role in the transfer of real resources between parties and in the distribution of economic surplus. »5,

A historical journey through the origins of money indicates that it is first and foremost a social relationship. More precisely, it is a credit-debt relationship of power, in which the indebted party issues a liability that is held by the creditor as an asset. Behind this social relationship lie various social power relations that codify human behavior in the specific historical context and the cultural and religious norms that govern the social procurement process.

In Egypt, as in Mesopotamia, money arose as a unit of account out of the need for the ruling class to keep accounts of agricultural harvests and accumulated surpluses, but it also served to account for the payment of taxes, foreign tribes, and tribal obligations to kings and priests. According to Henry (2004), money was of no use to them before societies could produce a surplus. Indeed, a substantial transformation of social relations from an egalitarian tribal society to a stratified and hierarchical society was necessary before money emerged. Once agricultural developments generated economic surpluses, taxation was used by the authorities as a method of transferring some of these surpluses (real resources) from the population to the palaces. The central authority (the king) levied taxes on the population and determined how to settle them by establishing the unit of account used to designate all debts to the State (Henry 2004). Henry (2004: 90) adds that money cannot exist without power and authority. Human populations organized around hospitality and exchange simply did not need it5, whereas in a stratified society, the ruling class is obliged to devise standard units of account that measure not only the economic surplus collected in the form of taxes, but also the royal gifts and religious duties that were imposed on the population concerned.

In ancient Greece, as in ancient Egypt, the emergence of money was closely linked to the need for religious authorities to control the flow of surplus. In other words, money becomes a public mechanism for the distribution of economic surplus and justice.

3. The market is an epiphenomenon of the State

History shows us that there has never been a generalized system of exchange without money. Contrary to what most economists think, exchange is not in the DNA of human beings. In fact, it appeared 200,000 years ago, while the market has only existed for a few thousand years. Thus, in pre-Columbian societies, which certainly succeeded in developing both in terms of culture and urban planning of cities, based on a real social stratification and specialization of work, there was no currency. This was invented in the Afro-EuroAsian zone, but the American continent did not then have this type of mechanism for distributing economic surplus.

The generalized system of exchange of goods and services develops thanks to two elements, private property and the division of labor, which serve as the basis for political authority. This system generates the need for currency, in order for the political power to try to obtain a part of the production of the economic system emanating from its territory.

Thus, if we base ourselves on logical reasoning, we realize that there can be no market without a currency, that there is no currency without a State, and therefore that the market is an epiphenomenon of the State. This process is based on the taxation by the State of agents who are thus obliged to demand this currency, by all possible means, and thus to offer goods and services in exchange for currency, in order to pay the taxes.

The supply of goods and services in currency is created by the imposition of taxes. For example, when the British arrived to colonize Ghana, there was no currency in that country. In order to put the population to work in the coffee fields, they decided to tax their houses, with the threat of burning them down if they did not pay. The Ghanaians were thus obliged to provide themselves with the currency of the English, and thus to offer their work in this sense. This is a system created by force, the logic of which is unilateral supply by the political authority.

4. Unemployment is a social construction of the State

Unemployment is the fact that people who offer work in order to obtain currency cannot find anyone to pay them in that currency. Therefore, there can be no unemployment without currency.

It is also important to note that there can be no supply of labor before the State has created the currency. In nature, there is no labor supply. In tribal societies, there is no unemployment, because there is no supply of labor. The word work does not exist there. In fact, work is not separate from the rest of human activity. It is the currency that makes this demarcation6 . Everyone is busy. Men must spend their days performing the tasks essential to their survival, except in special cases, even before they have money.

Unemployment can indeed exist only in monetized economies. It is not an a priori phenomenon of the State. It is in fact a phenomenon that requires both the State and the currency as preconditions. Unemployment is the fact that the State creates a demand for currency, with taxation, and then a situation in which all the demand for currency is not satisfied. Unemployment is therefore a monetary phenomenon.

Approaches other than MMT tend to interpret unemployment as an endogenous phenomenon, which is the consequence of domestic dynamics only initially within the private sector, which has nothing to do with the State. For them, the State intervenes a posteriori.

On the other hand, for MMT, if there is a market, if there is a labor market, if there is property, it is because there is the State. The results of the markets are a responsibility of the State because it is the State that imposes the rules at the base, that defines the conditions of the game of monetized economies, including capitalism. If the State does not satisfy the net demand for currency savings, either by not spending enough for the given level of taxes, or by not lowering taxes enough, there will be unemployment. And this changes the balance of power in private society. The same is true for the definition of the limits of the market. For example, the end of child labor was imposed by the State. It is not the result of the goodness of mankind. So unemployment is exogenous, which does not mean that there are not private dynamics, that policies should not be in response to the private sector. The same are within a framework that the State has put in place. They are always completely compensable by the State itself.

But there are no autonomous private dynamics. In itself, the monetary structure is the starting point and the condition for the realization of the labor market and all its variables. Unemployment is a supply of labor, and therefore a demand for currency, that is not satisfied. It can only be satisfied by lowering taxes or increasing public spending.

It should be pointed out that the main reason for the current impossibility of full employment is the consequence of the fact that unemployment creates exploitability, among workers, and thus creates power relations within the private sector7 that would not exist with full employment. This benefits one part of society, and not the other.

In totalitarian States (Nazi for example or the Stalinist Soviet Union) there is no unemployment, because it is not needed to create exploitability. Other means are available to create it. Similarly, during wars, there is always full employment, including for women. The problem of the ruling class is then to win the war. The class relation becomes secondary.

5. For MMT, the currency is a public monopoly

We can thus see that MMT analyzes the currency as a public monopoly. The State is the precondition of the currency. But it can also be said that it is the precondition of capitalism, which is, in fact, only a particular case of monetized society. Capitalism can thus be considered as an epiphenomenon of the State.

Thus, contrary to many other heterodox approaches, which consider that money can be explained on the basis of the market or of capitalism8 , and therefore that it represents something completely different under other political regimes, MMT considers that money has common bases shared by all categories of monetized societies. For it, the State intervenes a priori, and not a posteriori, to stabilize the situation, to fix the problems of a supposedly spontaneous market.

This is the most fundamental point of MMT, which is different from the starting point of other monetary approaches, which do not recognize the currency as a monopoly, i.e., the State is the only one that can create net financial assets9 in its currency. This is the most important demarcation between MMT and other schools of economic thought that analyze unemployment as an endogenous phenomenon, i.e., one that emerges from dynamics internal to the private sector and that is therefore a priori of the State.

MMT is therefore different from other approaches, both orthodox and heterodox, whether they are Marxist or post-Keynesian, including circuitists. Concerning precisely Marxism, which has the great merit of being not only an economic approach, but a holistic approach to society as a whole, it presents a serious limitation, insofar as it interprets the evolution of society as guided by a tension of social evolution, of social contradiction leading to the emergence of different forms of economic system. Here, the State is a product of society, not the essential element for understanding the economic dimension. So, for Marxists, social classes exist a priori of the State, which itself is in fact a superstructure with respect to the economic structure. And social classes are defined as population groups distinguished by the type of relationship they have with the means of production.

On the other hand, if we look at the State through the prism of MMT, there can be no social classes a priori of the State in the sense expressed by the Marxists. For MMT, private property does not exist a priori of the State. Also, there are no capitalist social classes without the currency, because, to achieve a labor market, it is necessary to have the currency. So there is no proletarian class without currency. It is interesting to note that we find in Adam Smith this basic idea that social classes and economic structure are something a priori. Marx and Smith are in fact classical economists. They therefore have a lot in common. For them, capitalism is in a way a possibility that exists in the DNA of human beings.

6. Conclusion

It is clear that MMT is not a simple contribution, not only to economic thought, but also to the whole of the social sciences. It is a profound questioning of it, in the sense that it lays down bases common to all social classes, and therefore contains a theoretical value that goes far beyond the economic dimension. Indeed, by providing an explanation of the foundations of society, it presents itself as a possible starting point for understanding the macro level of the social sciences as a whole. It thus suggests the possibility of a transdisciplinarity allowing to lay the foundations of an integral social science, not only to realize bridges between the conclusions of the social sciences, but rather to lead to an organization of the knowledge concerning them. And this possibility, which has not yet been fully expressed, suggests how potentially very influential MMT is.


Notes

1 By « State » we mean a structure broader than that of the modern State, which could include the American State, or Switzerland, but also the Mongol empire, the Roman empire, and the Greek city-state.

2 By « society » we mean a socio-economic system of a certain size, much larger than in the tribal system, in which there is division and thus specialization of labor, thus in which not all the population is assigned to the primary sector, with a systematic development of agriculture that becomes a fundamental system, and thus, as a result, a social stratification that makes the emergence of cities possible. What is called society here could be called civilization elsewhere. The « tribal society of hunting, gathering and agriculture » does not enter into the definition used here as a society. It is what, in history, is called civilization, as a social structure, with these functions and roles that are distributed, and a whole that is different from the sum of its parts. So we see here the emergence of properties inherent in complexity.

3 The expression « a priori » is used in the article to express a logical, but not temporal, causal relationship.

4 Tcherneva, P.R. « Money, Power and Political Regimes », http://www.levyinstitute.org/pubs/wp_861.pdf

5 Tcherneva, P.R. ibid

6 Breve storia del lavoro / Melvin Kranzberg e Joseph Gies ; traduzione e cura di Giuliano Canavese e Umberto Livini. – Milano: A. Mondadori, 1976.

7 Kalecki M., « Political Aspects of Full Employment », 1946, https://pluto.mscc.huji.ac.il/~mshalev/ppe/Kalecki_FullEmployment.pdf

8 Society in which there is ownership of the means of production and a labor market.

9 MMT prefers to focus on net financial assets in the national currency of issue rather than on « money » because this orientation allows us to understand the intrinsic nature of the monetary monopoly.


Bibliographie


Illustration : wikipedia.org


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