I have been aware of the existence of Modern Monetary Theory for a while. It’s hard not to, especially now. SARS-COV-2 has convinced central bankers and heads of government to magick into existence trillions of Euros in relief packages almost overnight, with very little hand wringing on public deficits. In a way, we live in a MMT world now.
But I am lazy, and so I waited for the release of a book aimed at the general public as a primer. We now have one: Stephanie Kelton’s The Deficit Myth, released last week straight into the New York Times’s bestsellers list. I have read it. Perhaps some of you have, too – I imagine @kevin_carson and @petussing, for example, to be familiar with MMT at this point. So, we are ready to consider MMT as a potential building block of Sci-Fi Economics.
About Modern Monetary Theory
MMT’s main idea is: currency issuers can never, by definition, run out of the currency they issue, as long as that currency is “full fiat”, not pegged to something else (like gold or another currency). This has profound implications:
- A currency-issuing government does not spend tax revenue. Rather, it spends money into existence and taxes it out of existence.
- A currency-issuing government budget deficit is just a number on a spreadsheet, and has no economic significance.
- If a currency-issuing government issues the currency commonly accepted as payment for international trade, its foreign trade deficit is also just a number that has no economic significance. In today’s world, that would be the USA.
- Fiscal policy, not monetary policy, is the main tool for government intervention in the economy. Used well, it opens up a much broader array of outcomes than we are accustomed to seeing. More on this later.
- Inflation is a potentially serious problem, because a currency-issuing government could in principle stoke up a demand for more resources than are available in the economy, pushing prices up.
- However, inflation control as we do it today is inefficient. Moreover, it is inhumane. In many countries, authorities target a rate of unemployment that they think will not cause inflation (NAIRU). In Kelton’s vivid words, this policy “uses people as human shields against inflation”.
I find MMT compelling. It’s not even a theory, exactly: Kelton calls it a description. It’s based on accounting identities and careful consideration of the concrete legal mechanisms whereby the US Congress authorizes public federal expenditure, and the Federal Reserve issues and buys back securities. These are not theories or opinions, but facts. I cannot find any contestable claims here. So, at least for now, I accept that MMT holds true.
MMT and science fiction economies
Understanding the Public Service Employment program
I propose that some of the science-fictional economies we have been looking at are a good fit for MMT. It seems likely that those worlds are “MMT worlds”. To make this argument I have to go a bit deeper into MMT’s policy prescriptions.
MMT economists are fans of automatic stabilizers. These are components of public expenditure which react to the economic cycle, with no need for decision making. Taxes are an example: if the economy slows down and our income declines, our tax bill also declines, helping us to go through the difficult period.
The main policy prescription of The Deficit Myth is an unusual type of automatic stabilizer: a government job guarantee. The idea is this: the federal government hires anyone who is out of a job. It pays a not-very-attractive salary, but still a decent one, with health care and paid leave. When the economy is bullish, it is easy to find private sector jobs that pay better, so few people would want those government jobs. In a recession, though, many more people would take them rather than be unemployed. The number of people in these federal jobs, so, goes up and down according to the economic cycle, with no decision needed. This means perpetual full employment, which in turn means more buoyant consumption. This would help businesses get through the recession in a less traumatic way. Workers avoid great suffering and productivity decline associated to long-term unemployment.
Ok, but in practice what would these federal workers do? Kelton:
Several MMT economists have recommended that the jobs be oriented around building a care economy. Very generally, that means the federal government would commit to funding jobs that are aimed at caring for our people, our communities, and our planet.
There is a detailed proposal for such a program in the USA (report by Wray et. al.), called Public Service Employment (PSE). Its main policy objective is of course employment itself, but there is a list of additional ones:
- To guarantee a basic human right to a job, as outlined in the UN Declaration of Human Rights and President Franklin D. Roosevelt’s call for an economic bill of rights.
- To implement an employment safety net. […]
- To serve the public purpose. […]
- To be used as a vehicle for addressing other social ills—urban blight, environmental concerns, etc.
Only the federal government, as the currency issuer, can fund the PSE. But both Kelton and Wray insist that it should be up to the states and communities to decide what constitutes “public service” for them.
PSE is the cornerstone of MMT’s policy: if past experiences are anything to go by, it could employ between 5 and 25% of the labor force at any given time. That is a lot of people, and what they do matters. If we could really deploy this much workforce towards nonmarket objectives, there would be a lot we, as a society, could do.
Mariana Mazzucato rightly claims that innovation has not only a rate, but also a direction. MMT is compatible with expanding that statement: the whole economy has a direction, not just innovation. Given monetary sovereignty, policy makers can and should target objectives, or “missions” as Mazzucato prefers to say, that are not economic per se: go to the Moon, eliminate child poverty, beautify cities, reclaim ecosystems, abate aggressively CO2 emissions etc. This is what makes MMT so useful for sci-fi authors, and so attractive to me.
Provisioning, not paying
Kelton insists that, when it comes to public spending, “How will you pay for it?” is a meaningless question. Since currency-issuing governments create their own currency, by definition they pay for everything in the same way: they credit the Treasury account in the Central Bank. Treasury then goes on to use that account’s balance for paying salaries and bills. But there is a similar, meaningful question: “how will you provision it?” Which means: never mind financial resources, do the real resources actually exist to do what we want to do? Do we have enough skilled people, tons of steel, gigawatts of energy etc. to achieve our objectives? Are these resources lying fallow, or will we be competing for them with the private sector?
Kelton quotes excerpts from the speech president Kennedy addressed to Congress to ask it to approve the Apollo program. Kennedy used it to reassure representatives that America could put a manned flight on the Moon’s surface: the skills were there, the manufacturing capacity was there. He never mentioned money – he knew money not to be an issue.
A more passing reference is made at the WW2 wartime effort, the only time when America really achieved full employment. Again, what mattered to the strategists was provisioning the military: how many tanks can we make in a months? But wait, to bring them to Europe we will need extra ships – how many can we make of those? That depends on how many people we can hire in the shipyards and the steel mills providing them, which in turn depends on how much food housing we can produce for the extra workers in those areas, and so on.
This is how the better thought-through science fiction economies work. Take Kim Stanley Robinson’s Mars Trilogy: in the first book, a hundred people and a lot of heavy industrial equipment land on Mars. Since on Mars there is nothing to buy, what they can do is limited by their resources.
In order to do anything (say, raising the athmospheric pressure as a first step towards terraforming) they need a habitable environment that protects them from cosmic radiation (or they will all soon develop cancer, and dead people do not terraform). But to build a habitable environment they first need to drill tunnels in the regolith, make enough air to pressurize them, and produce oxygen to make it breathable. This requires energy and plants. Fortunately, they brought nukes and a space greenhouse from Earth, but they need to manage them carefully across other possible (and competing) uses… you get the idea. Most of the Martian economy and society we see in the second and third book (except for people, since at some point Mars has strong immigration) are an outgrowth of the materiel and personnel landed in that one ship.
In economic terms, the Martian colonists are working with something similar to a Leontief matrix. So are the walkaways in Cory Doctorow’s *Walkaway". The latter have access to scavenging the default economy for unwanted resources, but at the end of the day they have to produce their own food, energy, vehicles, communication networks, with these things being both products and production inputs to other goods and services. Having transitioned to a moneyless economy, they face constraints in terms of real resources.
Other fictional worlds in sci-fi work have less of an explicit emphasis on Leontief-like input-output planning techniques. Still, they set themselves civilizational goals, and then shape their economies so that those goals can be attained. For example, the Acquis in Bruce Sterling’s The Caryatids is basically a gigantic operation to reclaim ecosystems lost to climate change and other man-made disasters. Earth superpowers in Paul McAuley’s Quiet War books and the Utopian Hive in Ada Palmer’s Terra Ignota have a similar attitude. All these are much more compatible with MMT than with standard issue neoclassical economics.
Where is the violence?
MMT could be an important piece of the completely different economic system so many of us are longing for. This is why we need to make sure we fully understand the conditions for it to work. Which brings me to the violence.
Vinay Gupta (@hexayurt) taught me to look for the violence implicit in societal and economic arrangements. This is important for those of us lucky enough to enjoy relative safety, stability and comfort, because it is tempting to assume that everyone is OK when we are. “The war has started – Vinay would say – and you did not notice because your side is winning.” So, where is the violence in an MMT world?
Why money is useful
According to MMT, a currency-issue government can never run out of the currency it itself issues. Moreover, that government is sure that everybody will always want more of that currency. Why? Because it demands people pay taxes to it, and those taxes must be paid in the government’s own currency. Why does this make the currency attractive? Because the government has the power, and the will, to harm those that refuse to pay taxes. According to MMT, taxes are not where government gets its money, because governments issue their own currency. They are there to make sure people accept that currency as payment. Without threat of violence, there is no currency in the MMT sense.
This view is fully consistent with historical evidence on how cash money was invented and adopted. I learnt it from David Graeber’s fantastic Debt. The First 5,000 Years. Here’s how it works: Athenian army engages in imperialistic expansion wars in the Aegean Sea. The problem is provisioning the army during the invasion, with the home agricultural land too far away. The solution is this: army attacks rival city, pillages its gold from temples, divides it up in small lumps, gives it to the soldiers. At the same time it announces that it is going to extract a tribute, in gold, from the occupied city. Athenian soldiers then walk up to farmers and exchange their gold against food. Farmers collect the gold and give it back to the Athenian occupation administration, which uses it to pay its goons and start the cycle all over again. Voilà: the occupied are now provisioning the occupants. Without violence, there is no cash.
The continuum of monetary sovereignty
The Deficit Myth repeats several times that MMT only applies to governments with “monetary sovereignty”. It then goes on to repeat that monetary sovereignty “is best thought of as a continuum”. A government has it if:
- It issues its own fiat, floating currency. This excludes local and city governments; states that use the currency of other states (like Costa Rica); states whose currency is pegged to the currency of other states (like Argentina before the corralito crisis); and the Eurozone countries, since the ECB, not they, is the issuer of the Euro.
- It does not carry heavy debt denominated in currencies other than its own. This excludes many middle- and low-income countries, like Mexico, Brazil and Indonesia.
- And then there is full monetary sovereignty. This term describes the USA’s unique position as the issuer of the currency used in international payments. They can ignore not only their internal budget deficit, but also their foreign trade deficit. In fact, the issuer of the global currency must have a trade deficit, otherwise there won’t be enough of that currency to carry out international trade. This is called the Triffin paradox.
It is easy to see that monetary sovereignty is highly correlated with sovereignty tout court. The stronger your economy, diplomacy and military, the more complete your monetary sovereignty. And the USA has by far the strongest military in the world. A good reason to accept the US dollar is that, if push comes to shove, the US might make you. A country could refuse to accept dollars as a payment, but it would probably suffer some diplomatic pressure, at least. It has even been claimed that the American invasion of Iraq was motivated by that country’s announcement, in 2000, that its oil exports were henceforth to be paid in Euro. Without a big military, there is no global currency.
To summarize…
MMT is an elegant, robust, pragmatic body of work in economics. It is heterodox, but solid and difficult to refute. It enables much more directionality in how we run our economies, and it allows a for a broader array of outcomes, including full employment. Its attention to real (rather than monetary) resources makes it a good candidate for running a sci-fi economy, especially in planet colonization scenarios.
At the same time, the acceptance of currency in MMT is predicated on the threat of violence. This is not to say that competing approaches (say, money supply theory) are any less violent. Nevertheless, when incorporating it in the systems we imagine in the Sci-Fi Economics Lab, we need to pay attention to this violence, and make sure it is exercised with appropriate restraint, if at all.