Below we reprint selections from a lively debate on Modern Monetary Theory (MMT) that has been taking place under the auspices of the Workers’ Party of Britain. Those who are interested can access the full debate on the Workers Party website.

MODERN MONETARY THEORY (MMT) FOR WPB

Chris Williamson

No political party in Britain has ever expressly embraced the possibilities provided by the fact that Britain issues its own currency.  Consequently, governments can never run out of money for anything that is available for sale in pound sterling.

This offers the WPGB an enormous opportunity.  We can explain to the public that a good society is possible and that they’ve had the wool pulled over their eyes about the way in which the monetary system in this country actually operates.  Henry Ford acknowledged this nearly a century ago when he said: “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”  Our job in the Workers Party GB is to facilitate that revolution.  Tony Benn used to say that if we can find the money to kill people, we can find the money to help people, and he was right.  But governments of every stripe have always insisted that the funds necessary to deliver a good society are limited and that tough choices have to be made.  However, as Tony Benn pointed out, there is never a problem finding the money for military adventures.

The covid crisis proved that when there is political will, money is no object, even for a Tory government.  Myths about the size of the deficit were thrown out of the window, only to be dusted off when the lockdown was over.  The problem was that much of the government’s spending spree was squandered, and simply lined the pockets of their Tory friends.

But if the Workers Party embraces Modern Monetary Theory, we can use it to explain how we’d fund a good society without falling back on the myth about raising taxes to fund public expenditure.  Such an approach is a trap that is used by the Establishment to ridicule socialist proposals and frighten the electorate.  It also bestows a status on the billionaire class that they don’t deserve.  When the billionaire, Alan Sugar, said he’d leave the country if Jeremy Corbyn was elected as prime minister, my response was to say, “good, I’ll happily drive him to the airport”.  MMT also destroys Thatcher’s enduring maxim that: “The problem with socialism is that you eventually run out of other people’s money.”

I’ve drawn on the work of Richard Murphy, who established the Tax Justice Network, and was advising Jeremy Corbyn in his first leadership bid.  In fact, it was Richard’s economic prospectus that resulted in Jeremy Corbyn’s economic agenda being labelled ‘Corbynomics’, but it was subsequently jettisoned by John McDonnell when he was appointed as the shadow chancellor.

Pound sterling is a fiat currency, which means there is no asset backing (like gold) to the money in circulation.  Our currency obtains its value from the government’s promise to pay. The same is true of every major currency in the world.  They have all been fiat currencies since 1971, when Richard Nixon scrapped what was known as the Bretton Woods Agreement.

It is important to recognise that the government has to spend money into the economy, before it can collect any taxes.  The government creates money every time it spends by instructing the Bank of England to extend it the credit that makes this possible. It isn’t constrained by the availability of taxation funds when doing so and the Bank of England, will always act on instructions from the government, because it’s owned by the government.

Taxation is utilised to prevent this new money creating excess inflation by withdrawing currency from circulation. That is the primary fiscal purpose of taxation, but taxation has other significant, social functions as well.

Politicians and media commentators often talk about government borrowing, but that is a misnomer.  A more appropriate description would be to refer to it as corporate welfare, whereby the government offers corporations and super rich individuals risk free investment opportunities in government bonds.  Pension funds often hold government bonds as part of their overall portfolio, but the truth is government borrowing makes little economic sense.  Furthermore, a government that only borrows (issues bonds) in its own currency cannot ever default on its own debt because it can always issue an instruction to the Bank of England to settle the debt whenever anyone wants to redeem it.  This enables governments, with the political will, to face down the financial markets.

Although the primary purpose of taxation is to control inflation, its social purposes are also essential.  It can be used to create the space for public spending priorities when the economy is at or near full capacity.  Otherwise, inflation would be created because the public and private sectors would be chasing scarce resources.  Taxation can also be used to address income and wealth inequality and incentivise or penalise certain activities like promoting healthy lifestyles by taxing smoking and reducing taxes on low emission vehicles etc.  Tax is a reflection of society’s values and is the primary mechanism that governments have for reinforcing those values.

So, to summarise:

    The government can and does create money.

    Government debt is just a means for saving private wealth.

   Deficits are not a problem, as long as they’re not overheating the economy, but taxation can be used to stop the economy over-heating.

    Governments cannot create money without limit.  The key is ensuring public spending is matched to the availability of real resources in the economy.

Reply by Tim Pendry.

The economic arguments are worth having but there is a political argument to suggest that there should be no hurry to adopt MMT under present conditions. It is an abstract and contested economic theory that will not be easily understood and it challenges the more easily understood and politically motivating labour theory of value. There are also tough prior conditions for the implementation of MMT (something similar applies to Universal Basic Income and similar policies).

The first is the detachment of the national economy from the international capitalist system without destroying an economic system that has developed into a global trading economy over some 500 years – in other words the socialisation of an existing trading economy is prior to any attempts at radical innovation that would cause massive disruption and be certain to fail under democratic conditions. I assume no one is advocating a suspension of democracy.

The second is to understand how inflationary and bureaucratic effects resulting from a ‘closed economy’ approach necessary for an early adoption of MMT would harm working people long before they harmed the middle and upper middle classes let alone billionaires. In the real world, the propertied would have ample warning of the arrival of the WPB as socialist force in society. It is not likely that the WPB would achieve an early majority of legislators but it could develop a significant and growing representation and then be a broker in a coalition before earning the right to run the country.

In that real world, there would be a dangerous gap between actual power and the potential for power. During that period, capital would rapidly scuttle the country to hedge its bets. We all saw how this broke the political spine of the Truss Administration (a Tory!) in a matter of days. What is needed instead is a powerful statement of intent regarding the value of socialism to the voters and a strategy of implementation that takes account of reality. This reality is that the United Kingdom is deeply embedded in a globalised capitalist system that has had at least forty years to get a near-stranglehold over the population. Any attempt to buck that system in one revolutionary act (short of total social breakdown) is doomed to failure because the consequences of doing so would have results that would alienate the very working people whose lives we wish to transform.

Having said that, there are great merits to this debate. There are ideas here that can be used as a ‘gateway’ to a more radical economics when trust has been built in the socialist model which, it would appear, is now only credibly represented by the WPB (a credibility that should not be sacrificed on a theory) given the utter moral decay of the Labour Party. The key idea is to end ‘welfare for corporations’ which could be both popular and an aid to significant levels of redistribution towards social and economic infrastructures that are badly needed in our collapsing country. We can argue more positively for direct state investment on our terms and not on market terms as a re-nationalisation of failing assets and for the ending and reversal of PFI operations that solve short term political problems at the expense of future generations. And, above all, we can argue for investment in housing and other social infrastructures and concentrate on ‘selling’ this through an abandonment not only of welfare for corporations but also support for our military-industrial complex and expensive overseas non-development commitments.

There is an economic debate to be had that includes consideration of new economic thinking but the Corbyn team were not stupid in rejecting MMT for all the basic reasons outlined above – real world financial constraints and real world socio-political resistance. There is really no point in the WPB becoming a representative of relatively fringe economic theory when our target should be the long haul to power by replacing the Labour Party rather than challenging it as not radical enough in one contested area and being consigned to the fringes ourselves. Let the debate continue …