Monday, 30 July 2012

How money differs from magic fairy gold

OK so we like money. And we rather understand money. We work at producing stuff and get money in return. We know that is really is as simple as that - the idea of money isn't complicated at all. It is a conduit for turning the added value that our labour or our investment generates into the things we want - houses, cars, food, drink, nice holidays in warmer parts of the Mediterranean, satellite TV and much else besides. It isn't the money we want (unless you're Scrooge McDuck) its the stuff.

But then these people - clever economist types with PhD's and tenured professorships at fine sounding American universities - pop up and tell us that it ain't so. They have discovered a different, previously unknown form of money - let's call it 'fairy gold'. And the people who play with the fairy gold work in banks, in government treasury departments and other grand finance houses.

The first idea behind this fairy gold is simple - the government cannot run out of money so long as it has a central bank and a printing press. Indeed, the government does not need to raise taxes, issue bonds or all the paraphernalia of the news around budget time. All it has to do is run the presses. Those taxes and those bonds are merely useful tools for regulating the economy - stopping inflation running riot, facilitating redistribution and encouraging growth.

The essential premise of this 'modern money theory', this belief in magic fairy gold, is that is accurately describes the system of finance that has existed since the collapse of the Bretton Woods agreements back in the 1970s. Money exists because governments wills it to exist and those governments can will as much (or as little) of the lovely fairy gold into existence as they wish. And - within certain arguments - this is true, the theory does describe the financial system under which we live. Something we should worry about given the complete disaster that it has proven to be over recent years.

However, the second idea behind this 'money as fairy gold' theory is much the more worrying one. Our clever economist types tell us that only governments can create money and that unless they create that money, we cannot capture the value of our labour or investment and buy that good stuff we want. We are but serfs labouring at the (largely metaphorical) coalface depending on the willingness of the government to create money. If that does not happen our labour will be in vain!

Unlike the description of the financial system (and the fact that a government controlling a sovereign currency cannot run out of money) this position is not an accurate description of reality but a deeply disturbing ideological position. It takes as it premise that all the money is the government's and, therefore, that all the value we add by our labour or investment belongs first to that government. Indeed, how much value we add has no bearing on how much fairy gold there is for us to scoop up.

So the government - regardless of value added - can produce as much fairy gold as it wishes and this accumulation can masquerade (indeed has been masquerading) as money. We are afforded the idea that the government, should it wish to build a new railway, increase welfare payments or build a 100ft statue of the central bank governor, has only to magic up enough fairy gold and issue the contract.

The reason why all this is mad, bad and dangerous - however much it may accurately describe the lunatic casino that is our financial system - is that it turns money away from its purpose. Remember back at the start of this piece - how money is a conduit for turning the added value that our labour or our investment generates into the things we want. That is what money is for - by inventing a 'theory' that describes the production of fairy gold, we do not get to an understanding of money. And pretending that you can put the fairy gold production system on steroids so as to solve the problems created by the fairy gold is to destroy entirely the idea of value. Why on earth should anyone work if the government can just summon a bit more fairy gold?

This modern money theory rather reminds me of the labour theory of value and the lump of labour fallacy - superficially appealling, internally consistent but ultimately an ideological fix that places ordinary folk as mere hamsters scampering round the state's wheels and nibbling at the goodies that state allows us to have. If I have learned one thing from 'modern money theory' it is that the system it describes - however accurately - is a kingdom of madness. And the fairy gold turns to fairy dust, useless. Blown away on the wind.



Sean said...

"We work at producing stuff and get money in return"

No sorry I don't agree with that. That falls into the trap you accurately describe in "fairy gold" terms

Money essentially is "Trust" it is much more than a veil over barter, which is why I dont agree with your first quote.

"Trust" is obviously eroded in what you accurately describe as "fairy gold"

Thus "trust" depends on the productive value of the economy, which as it cant produce the wealth needed to pay off unsustainable debts leading to inflation, stagflation and fiscal suppression erodes the trust it needs.

Frances Coppola said...

I really think you should bother to find out what MMT writers actually SAY, rather than parroting what you assume from the little you have heard. You have got it utterly, totally and completely wrong. I don't wholly agree with them - I don't, for example, subscribe to their ideological call for guaranteed jobs - but if I were to criticise the bits I think they have got wrong at least I would bother to do my research first. You should read Bill Mitchell's blogs for the firm underpinning of MMT, and Warren Mosler, of course.