Monday, January 28, 2019

Michael Roberts — Modern monetary theory – part 1: Chartalism and Marx

Modern monetary theory (MMT) has become flavour of the time among many leftist economic views in recent years. The new left-wing Democrat Alexandria Ocasio-Cortez is apparently a supporter; and a leading MMT exponent recently discussed the theory and its policy implications with UK Labour’s left-wing economics and finance leader, John McDonnell.
MMT has some traction in the left as it appears to offer theoretical support for policies of fiscal spending funded by central bank money and running up 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 post and in other posts to follow, I shall offer my view on the worth of MMT and its policy implications for the labour movement. First, I’ll try and give broad outline to bring out the similarities and difference with Marx’s monetary theory....
Can the Chartalist/Modern Monetary Theory (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 those arguments....
If you are already interested in MMT and Marx, this is obviously a should read. But if you are just getting interested, I can recommend London based Marxist economist Michael Roberts as a good entry point. He works in finance, so "money" is his thing. However, one also needs to be aware that there are different interpretations of what Marx actually said and that no one speaks for Marx. Be aware that Michael Roberts is not an expert in MMT. For an economist that is deeply familiar with both MMT and Marx, and sympathetic to both, see the work of Peter Cooper at If you are seriously interested in MMT and Marx, Peter is the go-to guy in my view.

Michael Roberts Blog
Modern monetary theory – part 1: Chartalism and Marx
Michael Roberts


AXEC / E.K-H said...

Here is the long overdue scientific death certificate for Marx and Marxists
Comment on Michael Roberts on ‘Modern monetary theory ― part 1: Chartalism and Marx’

Michael Roberts evaluates the commonalities and differences of MMT and Marxianism. This is a futile exercise because both approaches are proto-scientific garbage. Let us prove this here for Marxianism. Marxianism is supposed to deliver the scientific foundations for the political doctrine of Marxism.

Michael Roberts summarizes: “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, or socially necessary labour time.”

There are some serious blunders in this account, more specifically, Marx’s theory of value and profit is false.#1, #2, #3 In order to see this, one has to start with the most elementary version of what Keynes called the “monetary theory of production”.

As the analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector which, in turn, consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market clearing X=O and budget balancing C=Yw in each period, the price is given by P=W/R (1). The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. This translates into W/P=R (2), i.e. the real wage is equal to the productivity. Under the initial condition of market clearing X=O the workers get the whole product.

Monetary profit/loss of the business sector is defined as Qm≡C−Yw and monetary saving/dissaving of the household sector is defined as Sm≡Yw−C. It always holds Qm+Sm=0, or Qm=−Sm, in other words, the business sector’s nominal surplus = profit equals the household sector’s nominal deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. Under the initial condition of budget balancing C=Yw, total monetary profit is zero.

What is needed for a start is two things (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii), a legal system which declares the central bank’s deposits as legal tender. This is the analytical interface to Chartalism.

Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Yw. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income.

For the case of a balanced budget C=Yw, the idealized transaction pattern of deposits/overdrafts of the household sector at the central bank over the course of one period is shown on Wikimedia.#4

See part 2

AXEC / E.K-H said...

Part 2

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector.

From this follows the average stock of transaction money as M=kYw, with k determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money.

The transaction equation reads M=kWL (3) in the case of budget balancing and market clearing. If employment L is doubled, the average stock of transaction money M doubles. In a fiat money economy, growth is not hampered by a lack of the transaction medium. If the wage rate W is doubled M doubles. Because of (1) the price P doubles and the real wage (2) remains unchanged. In this case, one gets a strict proportionality of M and P which seems to confirm the Quantity Theory.

In sum, (i) money is NOT a commodity, (ii) there is NO fixed quantity of money, (iii) money is created and destroyed by the transactions between the household and the business sector, (iv) money is endogenous, (v) the value of money is given by W/P=R, i.e. is equal to the productivity, (vi) the creation of fiat money (= a generalized IOU) for the payment of wages is the correct way of bringing money into the economy, (vii) MMT’s deficit-spending is the incorrect way of bringing money into the economy, (viii) there is neither government-spending nor taxation needed to get the elementary production-consumption economy going and growing, (ix) if the rate of change of the wage rate W is equal to the rate of change of productivity R there is neither inflation nor deflation.

The elementary production-consumption economy has the following properties: (i) there is no exploitation, i.e. the workers get the whole product. (ii) there is no profit, (iii) there is no surplus value, i.e. whether the wage rate W is lowered or labor time L is extended does not matter, it always holds W/P=R, i.e. the workers get what they produce.

Where, then, does profit come from? The macroeconomic Profit Law Q=−S tells one that profit comes from dissaving, i.e. comes only into existence if the household sector spends more than its wage income, i.e. if C>Yw. In this case, Marx’s formula for the business sector holds, i.e. money M thrown into the circulation creates more money M’. This extra money, though, does NOT come from exploitation or surplus value but from deficit spending = growth of household sector’s debt. This process is reversed as soon as the household sector starts to redeem the debt. Then profit turns into loss and capitalism breaks down.

The same holds for the deficit-spending of the government sector.#5

This is Michael Roberts characterization of how capitalism works: “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.”

This is pure proto-scientific garbage. From Marx onward to Michael Roberts, Marxians never had any idea of how the monetary economy works. Michael Roberts is so stupid that he does not even realize that MMT is a program for the permanent self-alimentation of the Oligarchy. As an anti-capitalist, you cannot sink deeper.

Egmont Kakarot-Handtke

See Part 3 References

AXEC / E.K-H said...

Part 3

#1 Profit for Marxists

#2 Capitalism, poverty, exploitation, and cross-over exploitation

#3 If we only had classes

#4 Wikimedia, Idealized transaction pattern

#5 Stephanie Kelton on how to become fabulously wealthy

Noah Way said...

Don’t feed the troll.