Modern Monetary Theory's promise — Dirk Ehnts

If the model of the market-compliant democracy has outlived its usefulness, it is time to look for an alternative political vision. It must convince people that politicians can solve the problems of the 21st century. This kind of alternative blueprint for society needs a theoretical basis. Modern Monetary Theory (MMT) can make an important contribution. Understanding MMT enables us to envisage progressive politics without getting tangled up in misguided debates about whether we can ‘afford’ things or not: a new political realism. The first major thing to note here is that ‘modern money’ is always government money. The state is the originator of currency as it puts money into circulation through its spending. If we have to pay our taxes in euros, the state has to spend a sufficient amount beforehand. That is the only chance we have of getting the right amount of money.

It is also crucial to understand here that modern money can be regarded as tax credit. Specifically, this means our money – the euro – is purely and simply a promise by the state to accept it in future for payments to the state. As taxes account for most of these payments, modern money can essentially be described as tax credit. Money is therefore a creature of law as the state defines the currency in which it accepts payments via its monetary system. In return, we accept the money because we need it for tax payments. Or because we know other people who need it for tax payments and would hand over goods and services or assets such as property or shares to us in exchange. So modern money is not a scarce resource. Under the gold standard, things were rather different. The fact that many of our economic-policy assumptions are still based on this old model of the gold standard is a self-imposed restriction that keeps us as a society from using all the economic-policy options at our disposal.

This means that the state, as the creator of money, puts the money into circulation in its own currency first in the form of tax credits before we use it to pay our taxes later. Although this understanding is fundamental, it supersedes the widespread view that tax payments fund state spending. In a modern monetary system, taxes are not needed to fund state spending. The state first spends money that it practically forces acceptance of through taxes. State spending is not technically limited here. In other words, the state can print as much money as it deems sensible. As it creates the money, it doesn’t rely on an income before it spends anything....

International Politics and Society
Modern Monetary Theory's promise

Dirk Ehnts | Lecturer at Bard College Berlin, research assistant at the Technical University of Chemnitz, and spokesperson of the board of Pufendorf-Gesellschaft eV in Berlin