[PDF]Neo-chartalist or Marxist Vision of the Modern Money?

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Neo-chartalist or Marxist Vision of the Modern
Money? Critical Comparison


Damian Winczewski


To cite this article: Damian Winczewski (2021) Neo-chartalist or Marxist Vision of the
Modern Money’? Critical Comparison, International Critical Thought, 11:3, 408-426, DOI:
10.1080/21598282.2021.1966641


To link to this article: https://doi.org/10.1080/21598282.2021.1966641








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Neo-chartalist or Marxist Vision of the Modern Money? Critical
Comparison


Damian Winczewski


Faculty of Philosophy and Sociology, University of Maria Curie-Sktodowska, Lublin, Poland


ABSTRACT ARTICLE HISTORY
The set of neo-chartalist views on the functioning of money in the Received 18 August 2020
economic circulation advertised as Modern Monetary Theory is Revised 8 April 2021
becoming increasingly popular on the left. Marxist economists Accepted 7 July 2021
usually dispose of this theory as another incarnation of Keynesian

; KEYWORDS
reformism. However, because of its growing popularity, Neo-chartalist: Modern
confronting this theory with the Marxist theory of money seems Monetary Theory; Marxist
to have considerable political significance. A comparison of the monetary theory; Karl Marx;
two in the descriptive area indicates that there are some dialectics
similarities between the two theories, but they are very general.
On the other hand, my analysis shows that Marxist theory of
money is not only compatible with the assumptions of Modern
Monetary Theory concerning the functioning of modern money,
but also gives a much more complete picture of its significance in
the historically limited specificity of capitalism. Therefore, this
comparison shows that it is worth promoting the Marxist theory
of money as a true, actual theory of modern money, which is in
its essence much more practical than alleged pragmatism of the
Modern Monetary Theory.


Introduction


Modern Monetary Theory (MMT), also referred to as neo-chartalism, is a macro-econ-
omic theory analysing modern economy from the perspective of the functioning of pub-
lic finance in the state that has the monopoly to create independent currency in the fiat
money system, which is not based on tangible commodities such as gold. The theory is
frequently considered to belong to the school of post-Keynesian economics. In the recent
decade, MMT has been gaining increasing popularity and attracting the attention of
representatives of mainstream economics. Simultaneously, the theory has been the target
of sharp criticism from all competitive schools of economics. Even the post-Keynesians
themselves accuse MMT for vulgarizing that heterodox economy accomplishments
(Lavoie 2011; Palley 2013, 2019). Marxists are predominantly highly critical of the clas-
sical chartalism and the post-Keynesian concepts of money, which constitute the basis of
the theses put forward by MMT supporters. Despite of conciliatory statements made by
some representatives of MMT such as Bill Mitchell (2019) and the publications of some
other economists who notice significant concurrences between their theory and Karl


CONTACT Damian Winczewski @) damian.winczewski@gmail.com
© 2021 Chinese Academy of Social Sciences


INTERNATIONAL CRITICAL THOUGHT 409


Marx’s concepts (Niggle 2000; Tcherneva 2006), Marxists remain exceptionally distrust-
ful of MMT and consider it to be one of the vulgar versions of Keynesianism. The existing
Marxist criticism of MMT concentrates chiefly on its normative aspect, i.e., the principles
presented by neo-chartalists concerning an economic policy that allows the state to
achieve full employment in capitalism. According to a recent article by Michael Roberts
(2019), MMT boils down to offering a theory to justify unrestricted government spending
to sustain and/or restore full employment.

Bearing in mind the fact that neo-chartalists, who are constantly gaining popularity,
are a part of a wide opposition to the mainstream neoliberal approach to money,
which makes them also a political problem, it is worth discussing the matter more exten-
sively. Therefore, in my paper I would like to present a criticism of MMT focused on its
descriptive aspects, emphasizing the profound discrepancies between MMT and Marx-
ism, and showing the general vagueness of the alleged common aspects of the two theor-
etical approaches. Leaving aside the broadly analysed neo-chartalists’ theses concerning
the conduct of an economic policy by means of using budget deficit, I intend to compare
the approach of Marxist and neo-chartalist economists to the nature and function of
money. Thus, I would like to demonstrate that the dialectic Marxist theory opposes
the main discussions of neo-chartalists concerning money, defying the classical opposi-
tions between commodity money, credit money, and coupon money as well as ontologi-
cal disputes between various heterodox economists about the role of the state and the
private sector in the control of money supply. This would show that the Marxist vision
of money's nature is more complex than neo-chartalists’ theses. MMT in comparison to
it appears to be a very general theory. I think that considerable cognitive advantages of
Marxism can be presented in this way: the supporters of popular neo-chartalism and
other heterodox concepts might benefit from the reading of Marxist ideas about inter-
connections between money and labour theory of value.


Modern Monetary Theory Assumptions


A separate study would be necessary to present in detail all the theses of MMT and the
differences between the concepts of its most important propagators. Therefore, the dis-
cussion will cover only the selected crucial principles of MMT which need to be directly
referred to the aspects of Marxist economics interesting to us. This theory, in the relevant
perspective, is primarily a negation of the dogmas of neoclassical economics on the fol-
lowing levels: (a) the origin of money; (b) the supply of money; (c) the role of budget
deficit, public debt and inflation; and (d) the rules of the functioning of state finances
(Uminski 2014). In classical and neoclassical theories, money has three basic functions:
firstly, it enables transactions; secondly, it is a measure of value; and thirdly, it has a
hoarding function, i.e., it stores a given value in time. The main feature of the (neo)clas-
sical approach to money is the emphasis on its neutral character: according to the repre-
sentatives of this theory, it does not affect other, real economic processes (Bell 2001). The
hoarding function is particularly emphasized: money always stores the value related to
some commodity or bullion. In other words, its value is derived from the purchasing
power of the commodity/bullion on which it is based. For David Ricardo (1817, 238),
for example, money was simply gold or silver, and the same commodity as all others.
This is why the representatives of the classical theory of money are called the proponents


410 (we) D.WINCZEWSKI


of the commodity theory of money or, in the past, “metallists.” Neoclassical economists
and monetarists have very similar beliefs. Milton Friedman (1994, 22), the author of the
theory of monetarism, claimed that every currency should be directly or indirectly related
to the value of a commodity. According to metallists, money historically comes from the
barter economy and, as Carl Menger (2007, 257-262) claimed, it was born spontaneously
and at a grass-roots level in order to facilitate the process of goods exchange. The means
of exchange was another commodity then, which represented a special value for the par-
ticipants of a transaction. In the neoclassical theory, savings play a key role in money
supply. In this sense, banks first accumulate savings and then grant credits and loans
as sources of investments, which is implied by the assumption that the rate of savings
determines the rate of investments. This approach is, of course, linked to the quantity
theory of money adopted by classical economists, which Friedman (2010) reintroduced
into mainstream economics.

The genesis of many of the assumptions of MMT is the long-lasting dispute over the
origin and role of money between the supporters and opponents of the position outlined
above. In the history of the economic thought, it has often been called the dispute
between metallism and chartalism/nominalism (Wray 2015, 162). The German econom-
ist Georg Friedrich Knapp is commonly considered to be the father of chartalism. In his
book published in Germany in 1895 and translated into English in the 1920s, he claimed
that money is not a commodity, but a creature of law invented and introduced into cir-
culation by the state. It did not matter to him whether money existed in the form of gold
or paper, because, as he claimed, it should be treated as a coupon or a token (in Italian:
charta), which, through a social contract, allows people to trade (Knapp 1924, 32). Nowa-
days, neo-chartalists believe that, regardless of having the form of paper, bullion or any
other, money is no different from an electronic account entry. Such an entry is only
worth as much as it is worth at the time of a particular transaction, i.e., its value equals
the goods and services purchased at that time (Mosler 2014, 57). According to chartalists,
it is the state that creates public demand for currency by announcing taxes that must be
paid by citizens in the national currency. They believe that this applies to all monetary
systems. An important factor of these systems is the fiscal freedom of the state: it will
be considerable if the state is a sovereign issuer of its own currency with a floating
exchange rate (unrelated to the rate of another currency, which is crucial for its indepen-
dence), and smaller if the exchange rate is fixed or linked to the gold standard. Nowadays
MMT supporters fully accept these assumptions, treating the transition from the bullion-
based money system to the fiat money system, i.e., money not covered by any commod-
ity, created by central banks ex nihilo, as a confirmation of the above theory.

Heterodox economists often challenge the thesis that money was born spontaneously
during a barter exchange and, in their research, they go back to ancient times and the first
state institutions of that era (Semenova 2011; Bransbourg 2011; Graeber 2011). The sup-
porters of chartalism believe that money was created as a result of actions taken by the
state. This position has serious macroeconomic implications. Contemporary followers
of chartalists assume that taxes do not finance state expenditures. On the contrary, it
is the state that imposes taxes to create demand for the currency it creates and uses a
fiscal policy to regulate the behaviour of economic entities (Mosler 2014, 31). In other
words, Margaret Thatcher’s famous bon mot that the government has no money of its
own is reversed here. In a sense, in a country that is a sovereign issuer of its own currency,


INTERNATIONAL CRITICAL THOUGHT & 411


the government “has all the money” and creates a fiscal burden to ensure that the supply
of currency matches the demand for it. Thus, for example, for neo-chartalists, the well-
known problem of the modern-day crisis of the pension system is not reduced to raising
money to pay out pensions. According to them, the state pension or insurance system
cannot go bankrupt because the funds accumulated there are nothing more than an
account entry (Mosler 2014, 73). They believe that instead of financial security, it is
important to ensure an adequate supply of goods and services. Therefore, it can be
said that, although MMT is largely a theory of the functioning of finances, the real
effect of adopting its assumptions is at least a partial shift in the focus of the economic
policy from the financial sector fetishized by neoliberals to the sphere of real work and
production. That is why we can generally agree with David Fields claim that: “Like Marx-
ism, MMT grounds value in the construction and maintenance of a collective material
reality” (Fields 2017).

The acceptance of the above theses about the origin and role of money implies a differ-
ent stance from the neoclassical theory concerning money supply and the functioning of
state finances. According to MMT supporters, the concept of the exogeneity of money
and the possibility of the central bank’s exercising full control over it is highly question-
able. According to Wray (1992), recognizing the strong exogeneity of money would
require ignoring the endogenous variables such as expenditures, interest rate, unemploy-
ment, inflation and the private sector's demand for credit. Realistically speaking, the cen-
tral bank must keep these variables in mind, which rather confirms the assumption about
the endogenous nature of money. Moreover, the representatives of the neo-chartalist the-
ory of money affirm that the creation of money is also the responsibility of commercial
banks or, to be more precise, they claim that money in the economy can be created and
destroyed. With every credit granted, a bank creates a new deposit, which results in the
appearance of a new purchasing power. In other words, the bank does not use the exist-
ing deposits (“does not take away from anyone”) to grant a credit. New deposits create
new assets (receivables due from the borrower to the bank) and liabilities (amount to
be used by the borrower). Similarly, the repayment of a credit destroys money. Similarly,
a purchase/sale of financial instruments representing the public sector (e.g., bonds) by
the central bank constitutes the creation of new money. The above mechanism of creat-
ing and destroying money is confirmed by publications of the Bank of England (McLeay,
Radia, and Ryland 2014). Therefore, the central bank’s possibilities to control the supply
of money are very limited and in fact come down to controlling the interest rate. There-
fore, neo-chartalists think that the state acts in a similar way, recognizing, in accordance
with the concept of functional finances, that the state “destroys” the surplus of money on
the market with taxes. The supporters of MMT are also quite sceptical about the effec-
tiveness of the monetary policy instrument of setting the required reserve ratio. It is
claimed that it is not savings that are responsible for the creation of money, but the neces-
sity of increased expenses. This implies an assumption that the level of reserves kept by
commercial banks in the central bank largely depends on endogenous variables, i.e., on
the current situation on the market, and it is influenced to a lesser extent by top-down
directives of the central bank authorities concerning the level of minimum reserves.
The endogenous nature of money leads also to rejecting the quantity theory of money
and the resulting views on inflation. Neoclassical economists assume that the free market
economy is based on a self-regulating mechanism leading to the maximum use of the


412 e D. WINCZEWSKI


means of production. As a result, the state’s entry into the market game causes inflation-
ary pressure and consequently increases production costs. However, neo-chartalists,
similarly to Keynesians, claim that, in the market economy, the means of production
are not fully utilized, which opens the door to state intervention. According to them,
additional expenditure financed from the budget deficit does not translate in a linear
way into an increase in inflation until the condition of the full utilization of the means
of production is reached. Until then, in the event of excess demand, private companies
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