Modern Monetary Theory:
Post-Modernism in Economics
“Knowledge is an integrated totality. To evade one fact is to introduce a contradiction into one’s consciousness, which, if left unchecked, must engender further contradictions, and the ultimate disintegration of one’s cognitive and evaluative mechanism.”
Chris Matthew Sciabarra, Ayn Rand: The Russian Radical, p. 245
In Ciclos Fatais: Socialismo e Direitos Humanos (Deadly Cycles: Socialism and Human Rights), Gianluca Lorenzon uses the Venezuelan case to masterfully explain how any socialist economic system, even if initially moderate, must unavoidably become more authoritarian and violent if it wishes to maintain its policies
Constructivism, in this particular context, is used with F.A. Hayek's definition of it as the association between order and premeditation. To Hayek, the constructivist fallacy consists of assuming that structures that follow a specific order were purposefully built by an individual or a group, ignoring the existence of spontaneous orders.
The Austrian School of Economics traditionally defines money as the medium of exchange universally accepted in a society, and distinguishes three types of money:
i) Commodity money, based on a marketable commodity's value, like silver or gold
ii) Fiduciary money, based on an economic entity's debt, like the Dollar and the Euro
iii) Fiat (or token) money, based solely on the individual's expectations, either because of tradition or the law itself, like Bitcoin, the Chinese Renminbi and, to a lesser extent, also the Dollar and the Euro.
What - or, more specifically, who - defines what those ideal levels are is a matter of controversy, and seldom addressed in depth. The fact that someone or something dictates ideal levels, however, is often taken as a truism.
Milton Friedman, the founder of the Monetarist School of Economics, saw money as essentially a creature of the Market, but advocated for its regulation and control by the State as means to properly maintain its value.
It is important to distingish law from legislation. Law refers to the universally adopted principles in a society that guide social interactions, which give rise to its legal system. Legislation refers to the specific rules that determine how a specific government or legal system work. Law develops spontaneously through the sporadic, independent interactions between individuals - kosmos - with lawmaker being charged with properly identifying it. Legislation, on the other hand, is developed and instituted deliberately by a society's law makers - taxis.
It is noteworthy how a free market for labour is essentially a kosmos, with both employers and employees crafting out their contracts aiming at their own benefits. Throughout the duration of a contract, however, that relationship works as a taxis, with the employer defining the course of action to be taken by the employee.
Trade, in this context, must not be understood as free trade in a Market situation, seeing as the threat of violence was an ubiquitous factor in the negotiations of primitive peoples.
To those interested in understanding the historical and social developments that took place from barter to trade mediated by currency, I make two suggestions. The Origins of Political Order, by Francis Fukuyama, is a systematic analysis of the social development of multiple different societies, with plenty of information on the tribal and pre-tribal period. The Nuer, by E. E. Evans-Pritchard, on the other hand, focuses on a single African tribe, and gives a more detailed and concrete account of how primitive societies organize.
Many other countries, from Switzerland to Ethiopia, adopted essentially free monetary systems at one point or another. Due to the lack of a philosophy that consistently explained and defended such a system, however, they did not last very long.
This quote by C.M. Sciabarra illustrates the nature of any system of ideas that allows the existence of contradictions: inevitably, more contradictions must be accepted if the original contradiction is to be maintained. A practical consequence of this fact is the tendency of any intellectual movement that is somewhat irrational to spawn increasingly irrational versions of its own theory.
In painting, Degas e Monet’s Impressionism and its rejection of realism, despite leading to beautiful art, established a philosophical precedent that made the existence of further irrational movements such as Kandinsky’s Expressionism and Picasso’s Cubism - movements which, in turn, paved the way for completely irrational schools of painting, such as Dadaism and “Conceptual Art”. In politics, the “mixed system” of democratic socialism, essentially an attempt at combining capitalism and socialism, tends to become more authoritarian over time, as that is the only way to keep the system functional despite its ever growing economic deficit. But does this also hold true when it comes to the study of economics?
Recently, Modern Monetary Theory has been gaining visibility in the US at an alarming rate, to the point where elected public representatives such as Bernie Sanders and Alexandria Ocasio-Cortez have begun to use it as a theoretical background for public policy. As we will see, however, there is nothing new about this “modern” theory; it is merely the natural result of the expansive tendency of the contradictions that already exist in orthodox positivist economics.
Developed by authors such as Warren Mosler (1949) and Bill Mitchel (1952), MMT consists of the idea that money is fundamentally a monopoly of the State, and that unemployment is a consequence of restricting the supply of money. The reasoning is quite straight forward: money is essentially a legal document issued by the government that allows one to pay for things, which means the government cannot default; inflation only accelerates if money is printed when the economy is at full employment, which means the government can essentially print money to pay for whatever public benefits it wishes to bestow upon its citizens.To better understand the theory - and its underlying principles - one must understand two very distinct views on the nature of money: chartalism and metallism.
Chartalism vs Metallism
Coined by Georg Friedrich Knapp (1842 - 1926) in his work The State Theory of Money, chartalism is the belief that money is essentially a legal device, created by the attempts of different governments to control their nations’ productive activity. According to Knapp, the value of money does not originate from its value as a commodity, but from its function as a means through which one can pay taxes, which is in turn backed by legislation.
Despite its constructivist views, Knapp’s chartalism - from the Latin charta, or paper - does not fully reject the idea of commodity money, but sees the use of money independently from the State as a late and problematic consequence of economic development. His theory states that the use of money independently from the government is only possible in a society where the State has previously introduced and institutionalized the use of money as a means of exchange, and considers that independent use to be a source of economic crisis.
Despite not being widely accepted and taught in its original form, chartalism has influenced multiple schools of economic thought, from marxism, to keynesianism and mainstream positivist economics. Both Marx and Keynes - and, I wager, your average Economics college professor - see money as a vehicle for public policy, as government can manipulate its value so that “ideal levels” of employment and production can be met. All those authors, however, realize that if the government wants its money to be used by society at large, it needs to maintain the illusion of financial solvency.
In the opposite side of monetary theory, there is metallism. Unlike what its name suggests, metalism is not the belief that money should be made out of some sort of metal, but the idea that money is, essentially, a creature of the market, spontaneously created by the independent actions of multiple individuals. Despite being the “classical view” on money in a way, with its roots dating back to the ideas of Herodotus of Halicarnassus (484 b.c. - 425 b.c.) and Greek thought in general, its modern proponents are essentially economists associated with the Austrian School of Economics and, to a very attenuated degree, Monetarism.
Just as chartalists do not ignore the existence of commodity money independent from the State, metallists do not ignore the existence of fiduciary or fiat currency, but see commodity money as the original - and often, the ideal - form of money. To economists like Carl Menger and Milton Friedman, money originates spontaneously as commodity money, but government action creates multiple distortions in the monetary market, which make up an important field of study.
But which of these views on money is the right one? If by right, we mean which one provides us with the proper tool for prescribing the best course of action, the answer, as I will show throughout the rest of this article, is metallism. If by right, however, we mean which one properly describes and analyzes the nature of monetary systems, the answer is, surprisingly, both. To make sense out of this mess, it helps to familiarize oneself with part of F.A. Hayek’s theory.
F.A. Hayek: Kosmos and Taxis
In Law, Legislation and Liberty, Hayek discusses the concept of order, in general, and goes into depth about the idea of social order. He revisits an old Greek distinction between Kosmos and Taxis. Kosmos denotes the natural and spontaneous type of order that emerges from the independent interaction between multiple entities, and can be found, in a social context, in how both common law and the Market are organized. Production happens in an organized way in a free market, but that organization is not the consequence of a central planner dictating what every producer must do. Common law is also a coherent, organized set of principles, despite being developed over centuries through the actions of multiple judges, in multiple unrelated cases. Taxis, on the other hand, denotes the type of order purposefully constructed by individuals, such as what can be found in military hierarchies and government legislation.
This particular distinction is competently analyzed in depth by Hayek throughout three volumes and, unfortunately, it is impossible to do it justice in a single article. For the purposes of our present analysis, it is enough for the reader to notice how, the more free a society is, the more it is organized mainly as a kosmos. The opposite is also true: the more authoritarian a society is, the more it is organized as a taxis.
Free individuals, by definition, are not coerced into behaving in ways dictated by central planner. A society of free individuals, therefore, is shaped essentially by the free and spontaneous interaction between multiple individuals, with the taxis aspect of it being restricted solely to the state and the inner workings of companies, where legal and contractual obligations impose a certain predefined structure. An authoritarian society, on the other hand, is so because there is an authority with the power to establish, in a centralized manner, the way in which individuals should interact and associate with one another.
To bring the abstraction to a more concrete level, a free market of potatoes is made up by multiple producers, transporters, retailers, certifiers and other professionals, all engaging with one another in the way they consider to be the most profitable, subject only to basic legal restrictions - a kosmos. The production of potatoes in a totalitarian regime, on the other hand, is premeditated by a group of central planners, who create directives to be followed by the regime’s servants along the entire chain of production - a taxis.
Historically, money originated as commodity money, possessed collectively by the tribe or band, and was used to trade with other tribes or bands, without any individual rights to property. This mix of kosmos, as there is no monopolistic central authority mediating the interaction between two groups, and taxis, as the social interactions inside the tribe are organized in an authoritarian fashion based on tradition and the will of political leaders, gave birth to a monetary system that partially fits both the chartalist and the metallist monetary model. From this mixed, primitive way of dealing with money, two distinct traditions developed.
The Greek tradition, that was given new life in the Italian Renaissance, the British Enlightenment, and the works of the Founding Fathers, consists in using the most marketable commodity in the economy as a means to stock value independently from any political authority, emancipating the individual from the collective and the State, at least in the realm of economic production. The rest of the world, from continental Europe to the Asian empires, developed the institution of fiat currency, issued by the State and backed by its power, both through establishing legal tender, and through the imputation of value stemming from the ability to use it in order to pay taxes. In the first case, money is an tool for the maintenance of economic freedom, and transmission of information in a kosmos. In the second case, money is a tool for government accountability - a way to attribute “economic power” to different agents, in an attempt to give a taxis the efficiency of a kosmos.
With this distinction in mind, one can see that chartalism and metallism aren’t really distinct views on the nature of money, as both explain two different institutions, and are partially right in their historical analysis. Chartalism and metallism are, essentially, ethical and political views on the organization of society as a whole, and about the role of money in social organization. To clarify the difference, it is worth contrasting the political and monetary systems of a free country with that of a slave country.
American Freedom and Brazilian Slavery
More detail on the Brazilian "gold rush" can be found in Celso Furtado's The Economic Growth of Brazil. Although the author has a very clear marxist and positivist influences, his work still provides a great source of historical information on the economy of colonial Brazil.
In his História da Riqueza do Brasil (The History of Wealth in Brazil), Jorge Caldeira outlines how and why these economic practices originated in the original period of colonization and have held strong up to this day.
Sir Thomas Gresham (1519 - 1579) explained how, when different coexisting currencies have their prices fixed in relation to one another, the least valuable one "pushes out" the more valuable one. The explanation is rather simple: if a law makes an ounce of gold equal in value to 80 ounces of silver in a specific territory, but the international market is willing to pay 90 ounces of silver per ounce of gold, it becomes profitable to export all the gold one has, trade all the silver one acquired abroad for gold in the domestic market, and repeat the process. If, however, the international market is willing to pay 70 ounces of silver per ounce of gold, it becomes profitable to export all the silver one has, trade all the gold acquired abroad for silver in the domestic market, and repeat the process.
This principle is now know as "Gresham's Law"
A young American country much like the US, the monetary history of Brazil is a great exemplar of the human capacity for fraud. The first Portuguese expeditions traded with the multiple indigenous societies in the traditional primitive fashion: barter, with the constant threat of violence from both sides. As the Crown’s hold on the country got stronger, however, with the end of the Iberian Union in the 17th century, Brazil started to use the perverse monetary system of Portugal.
As José Julio Senna (1946) shows in his book, Os Parceiros do Rei (The King’s Partners): “...in Portugal, there was no such thing as sharing political, or economic power. Both of them had a single, perfectly identifiable source.”. Despite utilizing gold and silver, the Portuguese Crown institutionalized the habit of “breaking the coin”, i.e. expanding its supply of money by reducing the metallic content of coins while keeping their nominal value. Because of that, the nation was organized in a fiat monetary system, despite the fact that the money was made out of monetary metals.
The role of the first coinage house, established in Salvador in 1694, consisted simply of rebranding metallic coins according to the guidelines issued by the Crown, so as to supply the bigger coastal cities with enough currency to keep commerce with the metropolis flowing. The money was the property of the Crown, had its value defined by the Crown, and was used to trade with the Crown - essentially, an accounting tool for the colony-metropolis relationship.
A notable exception that illustrates the point being made in this article is the region of Minas Gerais. After the discovery and subsequent exploration of gold in the region of Minas, its ample illegal and independent use as money for its value as a commodity, as well as the virtual non-existent of slavery in the region, resulted in a flourishing internal market such as Brazil, a country reliant basically on the African slave trade, had never seen . This surge of freedom, however, was but a brief anomaly in Brazilian history, the political consequences of which amounted to a failed revolution.
After the Portuguese Crown relocated to Rio de Janeiro in 1808, in an attempt to escape the armies of Napoleon Bonaparte, the pre-existing monetary system proved unable to fulfill the monetary demands of the new economy, causing King John VI to resort to buying Spanish money and, later, to found the Brazilian central bank, starting off the country’s tradition of fiat currency with legal tender. The actions of the king perfectly illustrate the essence of Brazilian monetary policy up to this day: to use fraudulent fiduciary currency, backed by public debt, as a tool of economic control by the political elites, while maintaining a reserve of foreign money as a way to retain credibility . While in Brazil, the chartalist model functioned as one of the Crown’s many instruments of social control, the American monetary system started precisely as an means to protect the individual from the arbitrary actions of state and federal governments.
During the American Revolution, the Continental Congress began to print out a paper currency known as the Continental, with the goal of funding the war. Throughout the war, in a moment where social organization was essentially a military taxis, issues with that paper currency already arose, with the British resorting to the massive falsification of the continental as a war strategy. After the end of the war, however, when the USA established itself as a free society - a kosmos - the intense devaluing of the continental, due to the uncontrolled expansion of credit by multiple monetary authorities brought about its collapse. Nowadays, those events are still remembered with the (somewhat) popular expression “not worth a continental”.
After the war, Congress established the Dollar as the nation’s money, aiming to limit government spending, and ensure the individual’s ability to save. Unlike Brazilian money, the goal behind the Dollar was precisely to establish a currency that was not to be controlled by a central authority, which is why the Coinage Act of 1792 established a specific weight in gold for the money, whose value could fluctuate in relation to silver or any other good. The American monetary system was originally so free and metallistic that even foreign money such as the Spanish Peso had legal tender, so long as it had the appropriate metallic content.
With the exception of brief periods of crisis, when the political class attempted, unsuccessfully, to force a specific parity between gold and silver, American money was stable until the beginning of the 20th century. After decades of importing German subjectivist philosophy, however, part of the political and intellectual elites in America realized that metallic money came with an intrinsic and unavoidable “problem”: it made it impossible to implement the social engineering programs that the Progressive movement advocated.
Precisely because of its efficacy as a tool for the maintenance of the individual’s economic freedom, the institution of commodity money began to be destroyed with the banking crisis of 1907. After an irrational expansion of credit by dishonest banks - such as the Knickerbocker Trust Company - resulted in grave financial crisis, the American government chose, not to punish the irresponsible banks with their own bankruptcy, but to punish competent banks with regulation by creating the Federal Reserve System (Fed). The Fed was founded in 1913, as a regulator and a lender of last resort, allowing for a more “flexible” management of banks and the public budget - specifically, the flexibility of spending more than one produces, and redistributing the costs to society at large in a diffuse manner.
It was not a coincidence that the USA controversially joined the first world war 4 years after the creation of the Fed. It is rather easy to imagine how, if presented with the real cost of the war through taxation, the people would be much more reluctant in joining a war overseas. Thanks to the Fed, however, the real costs of the war could be hidden until 1929, when public debt resulted in what the biggest financial catastrophe in history thus far. Blaming capitalism and the lack of “flexibility” brought about by the gold standard, much like a suicidal individual blaming the ground for his death after jumping from a 12 story building, the link between the value of the Dollar and its metallic content suffered constant attack, before being destroyed altogether in the 30s with Roosevelt’s New Deal. Since then, the USA has adopted a fiduciary and fiat monetary system, which has resulted in cycles of recurring economic crisis ever since.
From Positivism to Post-Modernism
It might seem strange to the reader to see a moral quality, such as honesty, being used to refer to an inanimate object. If one uses "honesty" in the objectivist sense, however, as the quality of someone who refuses to falsify reality, the term can be applied to money that can not be falsified.
Money does not choose, and therefore is cannot be "honest" in the human sense of the world, but some forms of money allow for reality to be faked through the issuing of fake credit, while some - honest money - do not.
If such a large repository of historical information regarding the practical effects of adopting the chartalist view of money is available to us, why on Earth is this way of thinking becoming popular again? The answer to this question is relatively simple: because of the expansive nature of contradictions in a theoretical system.
From Léon Walras to Paul Krugman, going through David Ricardo, John M. Keynes, Paul Samuelson, Robert Lucas and Milton Friedman, all the authors on whose works most Economic courses around the globe are based upon share the same fundamental belief: it is the duty of the State to maintain the ideal levels of production and employment, by engaging in the proper fiscal and monetary policies. Despite their different opinions on what such policies are, every author whose ideas make up the mainstream economic orthodoxy adopt collectivism as an ethical and methodological premise, accepting the idea that an individual’s property can, and must, be violated for the sake of the common good.
Although in an implicit manner, the nomenclature used by mainstream positivistic economics makes its underlying philosophical roots quite clear. Individuals who refuse to invest in fraudulent government-issued bonds are “hoarding” their wealth, and contributing to a state of “liquidity trap”. Inflation is defined, not as a fraudulent expansion of credit by the government, but as the natural reaction of economic agents of increasing their prices, now measured in a currency that has lost some of its value. The gold standard is considered problematic precisely because it prevents the government from overspending, thus preventing it from implementing the “public policies necessary for economic development”. There is no overstressing this: the chartalist economic orthodoxy considers honest money to be a problem precisely because it is honest.
The fundamental contradiction that enables the growth of Modern Monetary Theory has to do with the government’s need for financial solvency. If money is to be backed by public debt, allowing the State to stave off its bankruptcy indefinitely, and if the artificial injection of money in the economy contributes to employment and production, why impose a limit to the amount of money that can be created? The positivist answer is “because after a certain threshold, society will no longer respond to monetary stimuli” - what that answer really means is “because for people to keep investing in a fraudulent market, government would need to become increasingly authoritarian”.
Positivism is a collectivist, relativist, altruist and authoritarian philosophy. It retains, however, a degree of Aristotelian influence which imposes a certain degree of respect for logic, human life, and objective reality on its advocates - modern Kantian philosophy, however, has no regard for any of those things. If questioned about the concrete crisis to which their actions might lead, a typical positivist answer would be something vague along the lines of “society will bear the costs it must, reorganize, and alter its monetary system so as to accommodate the new circumstances”. The Kantian answer is “there will be no crisis, because there is no reality”. By completely rejecting objective reality, the method of logic, and the value of human life, at the philosophical foundations of its methodology, Modern Monetary Theory shields itself against the inherent contradictions of positivistic economics, much like a murderer shields himself against the remorse of a mere theft.
It is paramount for you, the reader, to comprehend the philosophical principles behind positivist, modern, or any other economic theory so that you can fully understand, and protect yourself from the effects of applying those principles to practice. After all, if the freedom and property of the individual are not relevant to economic analysis, there is no surer way to increase employment the the Russian and Chinese models of enslaving their own people - and that is exactly the direction which the economic regime advocated by positivist economics, and its increasingly irrational evolutions, are steering us into.