THE PROBLEM WITH MODERN MONETARY THEORY

Frank Shostak

Mises Institute, Mises Wire, March, 19, 2019, 9 pgs.

Reviewer Comment:

This is a 'libertarian' critique of MMT based mostly on 'Austrian School' economic theory. I agree with the analysis of the falacies of MMT. But in the section in which he describes the origin of 'money', I disagree with his belief in the role of barter exchange.

Introduction

Dr. Shostak briefly describes MMT theory as "money is a thing that the State decides upon." He notes that it is based on the theory promoted by Georg Knapp 'chartalism' - the idea that 'money' is a 'token' - a receipt - and it does not matter what physical object might be used for this purpose. In other words 'money' is whatever the State - that is the ruler - decides it is and it enforces its definition by demanding that this 'token' be used for paying taxes, which then establishes the 'value' of the token. Then the State can establish that 'value' when it exchanges the tokens for goods and services produced by the private sector.

Related: "The Upside-Down World of MMT"
Shostak inserts this link to an excellent analysis of MMT by Robert Murphy,

Dr. Shostak claims something that is unremarked by many commentators - the actual physical result. The ruler is exchanging a 'token' with the private producers and receiving real goods and services. Then the ruler is taking that 'token' back by demanding it as a tax. The result is that the ruler acquired real goods and services for nothing.

He writes: "If one dissects the whole process, one discovers that it is about an exchange of worthless tokens for real goods and services (i.e. nothing for something."

Exactly, and now it is not even a 'token', but a credit in a bank and a credit is a promise to complete that exchange by producing and delivering something of equal or more value that what the ruler received.

Dr. Shostak continues: The MMT theorists claim this 'token' is a 'receipt' which is a claim on 'a portion of the national resources'. They think the receivers of such tokens have a claim they can exercise to receive such resources whenever they want.

But the ruler eliminates part of that claim by canceling with a tax. And simply enters a 'debt' on its ledger to balance the 'credit' remaining. One needs to study the origination of 'taxes' and 'tribute' in ancient societies. Taxes were paid in real goods - mostly grain - produced by workers. Then to achieve more flexibility in the use of the tax receipts they were shifted to these 'tokens'. But the result was the same. The ruler took a significant portion of the production for its own consumption leaving only the remainder for the private sector.

Defining Money

Dr. Shostak zeros in on the reality by defining what 'money' actually is. Unfortunately he repeats the standard myth about 'barter'.
He writes: "To establish the definition of money we have to ascertain how a money-using economy evolved. Money emerged as a result of the fact that barter could not support the market economy.... The distinguishing characteristic of money is its function as a the general medium of exchange." And he cites Dr. von Mises with a lengthy quotation.
Yes 'money' is the general medium of exchange but first of all it is the standard of 'value'. And for these purposes 'money' originated in Mesopotamia as the detailed accounting records of temples and palaces which showed the imput and output of their wharhouses - the exchange of goods and services between the rulers and the producers. Anthropoligists have found no examples of barter exchange within a society.

In this explanation Dr. Shostak has followed a typical misunderstanding by equating 'money' with currency. But taxes were paid for centuries both prior to the origination of currency and after currencies nearly disappered in Europe. And during the Roman Empire as well.

He continues. "In short, money is the thing that all other goods and services are traded for."

Well, not exactly. In addition, money is also the abstract concept in which the 'value' of goods and services are measured and recorded in account books and ledgers.

He correctly writes that: "Contrary to the MMT then the essence of money has nothing to do with tax payments to the govenment." And, "Furthermore money's function is not a means of payment as argued by the MMT but as a general means of exchange."

It is also an accounting standard.

Dr. Shostak hits rightly on a main point without stating it clearly. Money didn't emerge because of the need to pay taxes. "The sovereign does not require issuing some empty tokens in this respect."

He should point out that rulers for many centuries received their taxes in grain or other products, not in tokens. And the entire social exchange market functioned as well without such tokens.

Mises Explains How the Value of Money is Established

Dr. Shostak again relies on von Mises to describe the origin of money and establishment of its exchange 'value'. Unfortunately, von Mises also confuses money with currency. He claims that: 'its exchange value was estblished in barter'.

No it was not. The exchange value of goods and services in the community was established by regulations issued by the rulers in the temples and palaces, measured by weight or volume and represented by a variety of clay tokens. Then the measure of value was defined by a weight of silver equivalent to a volume of barley. Prices for goods and labor services were established and recorded on tablets.

Drs. Shostak and von Mises are correct that "money must emerge as a commodity." But the relative values of goods and services in terms of those commodities were established by the rulers, not by barter.

But he then digresses into a discussion of the relation of paper money to gold in which he is not fully correct

The Role of Central Banks

His discussion of this topic shifts to the tangential issues of paper versus gold and free banking, and government control of the value of money.

The MMT Framework and Wealth Creation Dr. Shostak return to MMT and states the central thesis - that a government which prints it own money can print as much of it as it wants and what its value will be, which also means that the govenment controls the rate of exhange between this money and real goods and services. This eliminates the ability of a 'free market' to establish these rates. This, then, results in 'inefficient' use of resources.