A recent story in The Wall Street Journal discussed the new economic theory on the block known as Modern Monetary Theory (MMT). This is a concept that was developed over time, but its birth as a “theory” came around 1947 in an article written by economist Abba Lerner. It is an extension of an older concept known as Chartalism, which was developed by German economist, Georg Friedrich Knapp, as an argument against the gold standard. Knapp argued that governments could create paper money and recognize it as legal tender, and that money could serve as a means of exchange in the same way as gold.
The MMT goes much further, in suggesting that states can create an unlimited amount of paper money as long as there is enough slack in the economy to keep the growth in currency from being inflationary. Deficits do not matter, and the economy is only constrained by the specter of inflation. The popularity of the theory among political elites is obvious in that it gives them a blank check to spend.
Like most economic theories, MMT does make many good points. There is much merit to the argument that governments cannot effectively control the economy by tinkering with interest rates, so too is the idea that fiscal policy is much more useful than monetary policy at actually guiding growth. However, suggesting that governments have a free lunch and can have the economy follow their bidding simply by printing money is patently absurd.
In fact, MMT is based on the false presumption that money is inherently valuable. This is simply not true, as even commodity-based money, in and of itself has no value at all. Money is effectively no different than a check – you know those old fangled things that we all used to write – acknowledging the payment of a debt. It’s a means of transaction and a representation of value, but not valuable itself.
The first purpose of money is to facilitate exchange. If money did not exist, transactions would have to involve barter. If I want a shirt but I only have a pig to pay for it, the transaction with the tailor becomes difficult. However, if I can represent the value of the pig using a generally accepted token, be it a shell, a gold coin or a Federal Reserve Note, and the tailor can do the same with the shirt, then we only need to trade tokens, not physical commodities.
The second purpose of money is as a representation of value – in effect a unit of measurement much like an inch, a pound or a gallon. Again, it is difficult to store, save, and often times use, physical commodities or the results of physical labor. I can pick hundreds of pecks of apples over the course of a week, but I can’t eat them all or even trade them all for the goods that I need to last the remainder of the year. I can, however, trade them to a fruit wholesaler for a certain measure of money. That money represents my week’s work, and can be easily stored in a mattress, a bank or traded for other goods and services over time.
Unless money has value in and of itself, then the ideas of MMT simply can’t hold water. It is true that the supply of money in an economy can and should grow along with the amount of value created. If it didn’t then there would be downward pressure of prices. On the other hand, if the amount of money in the system grows faster than the value produced, there would be upward pressure on prices. Neither is good, as they would in effect change the measurements represented by money. How could a building be built when the length of a meter changes every day, or milk be bottled when the volume of a gallon goes up and down with the wind. Neither can work, and neither can the economy when money no longer serves as a reliable unit of measurement. Examples abound. Imperial Rome fell in part due to a debasement of its money, so too did Weimar Germany, and more recently Zimbabwe, Argentina and Venezuela. Just by looking at the news we can all see that simply printing Bolivars has not done much to grow the Venezuelan economy, and printing dollars will not create wealth in the United States.
Economic theories can be powerful tools to help guide business, consumers, investors and government. Unfortunately, the public will always be susceptible to the siren song of charlatans selling snake oil, and a free lunch. MMT is nothing more than another Ponzi scheme posing as a solution to today’s woes. Let’s not fall for it.
John Dunham is President of John Dunham & Associates. John Dunham & Associates, based in Brooklyn, has built its reputation as a leader in the field of tax and regulatory economics by producing economic impact studies that are clear, concise, and effective. They can be a great source for any of your stories needing economic analysis.