I have published a second edition of 'Modern monetary theory: an explanation'. That's good going after a day in circulation, but indicates that I listen.
Some typos have been corrected. Some small redraftings based on comments have been made.
As requested, a contents page has been added.
And to satisfy those from the MMT 'community' who say I am not allowed to publish this or call it MMT a note has been added, which says:
Modern monetary theory (hereafter, MMT) is an explanation of the way in which money works in an economy. It also explains the consequent impact that the best use of money, using this understanding, might have on behaviour in that economy.
The core suggestion made by MMT is that a government is constrained by the real productive capacity of its economy and not by the availability of money, which it can always create.
Secondary insights are that money is created by government spending and is destroyed by taxation.
I developed this understanding independently, a fact I first mentioned in a blog post in 2013, which was the sole reference I made to MMT on that site until 2015 when further comment was promoted by an invitation to debate with Bill Mitchell on MMT and People's QE. That was immediately prior to publication of my book, The Joy of Tax, in which ideas that relate to MMT are discussed but the term is never used because I was still pretty unfamiliar with what it had to say.
As I now know, MMT is most identified with the work of Warren Mosler, Bill Mitchell, Randy Wray and, most especially, Stephanie Kelton, whose understanding differs from that of the other three to some degree, in my opinion. They built on the ideas of othes like Abe Lerner, Hyman Minsky and Wynne Godley
What I offer here are my interpretation of what I think to be core MMT understanding. I suspect there is much common ground in that.
There will be much less common ground on my interpretation of what the understanding means and on the supposed (and very largely, in my opinion, unnecessary) theoretical justification for it. So be it: that is what political economy is about.
I hope those who have nitpicked con now comment in the substance of the matter. It is much too important for such issues to get in the way.
The new download is here.
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Noted & thank you.
I’ve kept and original copy. It might be worth some money in a few years 🙂
🙂
“To ratify the value of the currency: this means that by demanding payment of tax in the
currency it has created a government effectively requires that the currency in question be
used for almost all transactions in a jurisdiction……..To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate as a means to control inflation.”
There’s nothing wrong with this per se.
You’re saying that a government uses its power to demand the payment of taxation in its currency of issue. This, as you say, ratifies its value and enables the government to buy something with its created currency. So what does it buy?
The answer has to be primarily labour power which is contained in just about everything from the wages and salaries of its direct workers to the intrinsic labour power contained in the goods and services provided by contractors. It’s the Government’s way of provisioning itself. As you also argue it mustn’t overdo the spending relative to the amount of taxation revenue collected, otherwise the government’s money won’t be worth as much.
In other words it is getting people to work for it who otherwise would be unwilling to do that. So how’s this different from what anyone else in MMT says?
Looking at it from the POV of the workers the government is saying that they need to pay a tax. They don’t have any job to pay the tax so they’ll need to get one to earn the government’s money. Maybe they don’t earn enough to pay any tax but they will still want to work because the government has created something of value to them. They will be moving, as Warren Mosler would put it, from being unemployed to employed.
It is all the same intrinsic argument, but perhaps differently expressed.
In amongst that word salad, which is what you have offered, I think that you are saying that people would not wish to work for the government unless they are paid. I am not sure what do you think is particularly novel about that.
What you do not get close to answering is why there must be tax in the first instance to make those who the government might wish to work for it unemployed before they might accept its offer of employment. It really would be good if you would answer the questions that are posed, not least by Warren Mosler himself. Why aren’t these people simply lured into employment with the government by the offer of a decent pay rate for a decent job of work? Why is it that they must be made unemployed first? And how do they become unemployed by the issue of a demand for tax when there has been no government spending, and therefore no means, according to you, to pay it? I really do wish you would answer the points that I raise.
I also remain completely confused about this government that you think that exists that demandS that a person pay tax without having the means to do so, or the income to support the demand. What is this all about? And please do not refer to huts in your answer.
Finally, suppose a tax was demanded, but there was no government spending, but there was a declaration that there is a legal tender, which is the currency that the government demands that all bank transactions bve recorded in, then what would be the problem in paying tax in that currency without there ever having been any government expenditure in the first instance? Of course, this would not happen, but given that you like playing mind games, please tell me what the answer to my question is.
“Avoiding huts”! 🙂
(see https://en.wikipedia.org/wiki/Hut_tax).
That really is about the empire surely.
@NeilW says “In other words it is getting people to work for it who otherwise would be unwilling to do that.”
Domestically, the King’s Wardrobe suppliers received tally sticks https://www.bl.uk/collection-items/tally-sticks for their clothing work from the monarchy – quite voluntarily and even, willingly, as far as I’m aware – and then used it in due course to pay any taxes that were owed.
They thought that that was their bit for their society.
It is their obligation to society rather than a concept of government money.
So surely this was voluntary labour with a realisation that it was exchangeable for tax…
@NeilW “They don’t have any job to pay the tax so they’ll need to get one to earn the government’s money. ”
Again this is the empire.
Historically this might rather be doing regular work repairing bridges – or even repairing potholes!
It is not tax – but it is an obligation to the state of which the ‘workers’ (albeit often obligated in other respects, too) are a part.
Hasn’t Mosler confused empire building with an existing functioning state?
Indeed isn’t this the fundamenental disagreement?
That is certainly one of the differences
I like your argument
@Richard,
The term “Mind games” has a rather negative connotation. “Thought experiments” are a scientifically valid way of exploring an issue. Perhaps the best known example is “Schrodinger’s Cat”. We don’t need to cause any harm to a living cat by doing the experiment for real!
” Why aren’t these people simply lured into employment with the government by the offer of a decent pay rate for a decent job of work?”
They are! If they don’t have a job to begin with and they wish to work to get money they are unemployed. I’m running out of different ways to explain this but the sequence of events is as follows:
1) Government imposes a tax in its currency of issue.
2) We’ve already agreed that this gives the currency a value. This still true even though no tax has been collected and no Govt spending has yet taken place.
3) Govt spends into the economy. Because it has a value it will buy something. The imposition of the tax means that a decent rate of pay is possible. It wouldn’t be possible if the government was only offering worthless scraps of paper or meaningless computer digits.
4) Government starts to collect taxation revenue for reasons I think we both agree on.
That’s all there is to it.
So, as I said, you argue tax comes before spend
Thank you for agreeing
You are wrong, of course
And tax is never used to create unemployment, as you argue
This is just a very silly story, at best, and you make yourself look daft for relating it
Why not just say the government issues money to buy what it needs and then taxes it back? That is what happens. End of story. The ridiculous explanation you and Mosler propose just undermines the MMT narrative – including that spend comes firstly, as you have agreed – as well as destroying the idea that MMT believes in benign government – and for that reason really should be abandoned. That is all I am saying. It is just not needed.
My suggestions really are in the best interests of MMT
@ Richard,
“So, as I said, you argue tax comes before spend”
Would you mind please re-reading what I wrote?
The collection of taxes is the last in the above 4 stage process. Of course once the process has been running for a number of years it becomes less obvious which is the first and which is the last. This leads many to believe that the Govt is collecting taxes to be able to spend the proceeds.
It’s all quite simple.
If you want some more difficult to discuss have a try explaining how Schrodinger’s cat can be simultaneously both alive and dead! 🙂
No, imposing the tax came first in your argument. Payment might come later. But if you know anything about tax, the real world, or accounting, the liability exists when imposed and would have to be recorded then, and payment is a consequent action unrelated to recognising the sum owing. So, your argument is the tax liability comes first, and that is totally contrary to what MMT claims to say.
And absurdly, you shoot yourself in the foot in this way all to make the claim that MMT must create unemployment so that there are resources for it to employ, which is simply not true. All the government has to do is offer to spend at market rate using money it has created and resources will be available to it. Then it can impose a tax, if it wishes.
Your argument is not just absurd, it defeats the key claim of MMT.
Mine reflects what happens and supports the key claim of MMT. It really is that simple.
I have a credible version of MMT on offer. You and Mosler don’t, because you argue tax has to come before spend.
I’d change your narrative if I was you. It might help your credibility.
I love Mr May’s reference to tallies. Desan is excellent on Tallies, and their role as money. Stuck with gold and silver coin as ‘money’, the medieval Excequer had to figure out how to increase the circulation of money (always problematic with scarce commodities), and the problems of cumbersome delays in gathering taxes to raise revenue, in a hurry: “Tallies became a mode of public borrowing, effectively extracting advances of revenue, generally interest-free, from participants. They also functioned as a way to increase the money supply” (Desan, ‘Making Money’; p.171).
Richard,
There’s difference between the imposition of a tax and the collection of taxation revenue which you are failing to appreciate. The MMT position is that Govt spending has to come before the collection of revenue but not the imposition of the tax .
I’ve done my best to answer your questions. Maybe you could answer one of mine:
You’ve written:
“….this means that by demanding payment of tax in the
currency it has created a government effectively requires that the currency in question be
used for almost all transactions in a jurisdiction”
This is true. We could add that the extent of the demand also help sets the value of the currency.
So how can a government spend anything prior to this demand being made? It can’t be a currency issuing government until then.
I have addressed this absurd claim in a blog post now
You really do have to make credible claims, including getting the double entry right and to make your claim you are simply ignoring key stages ion the process which makes the claim untenable.
I have offered an actual explanation of what happens that relies on realistic assumptions.
NeilW says – “Looking at it from the POV of the workers the government is saying that they need to pay a tax. They don’t have any job to pay the tax so they’ll need to get one to earn the government’s money.”
Sorry, that’s complete codswallop. Utter nonsense. The government does not levy any tax and then demand payment for it. All taxes in the UK must have a source which is taxable. That’s a basic that anybody who understands taxation gets taught on day 1.
If you have a source if income or gains, it will most likely be taxable under one of the many taxing provisions. If you don’t have a source of income or gains, no tax can be assessed. The tax charge (broadly speaking) is created when the assessment if income and gains for the period is made. This is schoolboy stuff.
If I read this right, the suggestion you’re making is that governments say “You owe me money so you better get out and find some”. Total rubbish. The truth is government says “If you make money you will (most likely) need to pay tax on it. That tax will be due in Sterling. Go and arrange your affairs accordingly”.
See the difference? Hope that helps.
You are right, of course.
Excepting council tax. But then you get benefits. Not good benefits. And the tax should not be charged in that case. But that does not prove the point either.
So the claim, as you note, is straightforwardly absurd.
Thanks Richard.
I’ve never really thought of Council tax as a ‘tax’ per se. It’s more of a charge for local gov services… I view it more akin to the road fund license. Also, it isn’t charged by central government (although central government have a profound input into the level of the council tax charge)… this discussion is about the role of taxation in relation to the government as a currency issuer.
Anyway, I’m not sure how many more angels I can squeeze onto the head of this pin, so I’ll shut up
🙂
In section D: Book balancing, you’ve got this: “Although fiat currencies effectively disappeared throughout the world after the USA
abandoned the gold standard in 1971” Is this what you really mean? Aren’t all currencies fiat since then?
If you download again you will find that has been corrected
Sorry!
Hi Richard,
**for your information: no need to publish**
I have just downloaded the pdf version 2 and it still contains the Section D (page 11) error:
“Although fiat currencies effectively disappeared throughout the world after the USA abandoned the gold standard in 1971…”
I thought you would like to know.
Thank you for all that you do.
How annoying
I thought I had done hat
I will change again…
As a go-to document for many now, I wonder whether the Green New Deal should be mentioned. Like the Job Guarantee, it may not be seen as a core MMT policy, but it is one that is relevant today, and through MMT, “Anything we can actually do, we can afford”? It’s also a goal of many, who may appreciate MMT as a means to and end.
Hmm, for the third edition?
Next week, maybe 🙂
I have to agree that the Mosler claim is specious to the point of being superfluous.
Government spends (or should spend) to meet is obligations and deliver policy. That’s the primary objective. It’s got nothing to do with coercively getting people to pay tax!! Yes – these workers will pay tax – but so does every worker!!
In some cases it has to create a workforce to execute its aims and objectives or enter into contracts with the private sector or – in reality – both. In both cases it is also creating employment for both public and private providers involved. It’s multiplier heaven!!! Unless of course you are anti-state.
Government money – is then taxed as it is spent. I know this because my public sector payslip tells me this every month – as I am paid (a transaction into my bank account that is a government spend) I am also taxed.
The tax comes after the pay on the slip – always – and I am being paid for my labour that month – in arrears – at the end of the month. The Government is giving me money and then taking some of it back in the form of tax – this could be said to be a control on inflation – that is valid to me.
Government has as a deliberate policy in the past at least to attract people into those posts – but not ‘swapping employment for unemployment’ – just to man its services. It used to do that with decent pay and conditions and pensions as part of a social policy to fight poverty, ill health etc., and so as not to add to the problems it set out to fight. Public sector pay and conditions were a benign intervention in job markets – that’s another way of looking at it.
Since 1979, that pay and those conditions have been eroded. Since 2010, it has been the worst it has ever been in my living memory under the false flag that good pubic sector pay was making it hard for the private sector to recruit, or that the public sector was producing too much of the country’s GDP and also austerity!! All sorts of bollocks was created to justify austerity – even the need to compete with markets abroad.
As for a ‘workers POV’ – I’ve had both private and public sector jobs and I was required to pay taxes on my income in both cases. I did not get a job however just to pay tax.
I got a job to LIVE – OK? I wasn’t thinking about ‘pure economics’ when I went job hunting.
Throughout my private sector careers in catering and retailing I had a great time and learnt a lot but looking back I also saw my pay dropping every time there was a market crash of some sort. So I went back to Uni and ended up in the public sector where my pay was never ever going to make me wealthy but it was steady and reliable enough for me to get mortgage.
Is that still the case? I doubt it. In fact no. My union accepted the ‘bung’ and below inflation pay rise with some back pay at the end of last year and already with inflation, council tax increases etc., my pay is still not making me comfortable – there will be no holiday away this year for us – not even in the UK. I have one child at Uni and we are paying accommodation for her – another goes hopefully in September. But back in 2003/2005 when we decided to have kids, things were VERY different then. I’ve lost count of how many of my colleagues have decanted into the private sector where pay is higher but still below inflation.
What makes me laugh though about public sector pay squeezes is that the Government gets less tax back when it believes that taxes pay for everything, but it’s happy to put up VAT? Explain that? Or rather don’t because it’s bloody obvious what they are doing.
I mention this stuff because Mosler’s idea seems to be a completely irrelevant at the moment. It’s the sort of stuff academics or theoreticians (bless them) do on a Friday afternoon when all their marking is up to date and they have a bit spare time on their hands whilst they are looking out of windows.
But what’s worse is that it negates the facts above about where the real crisis of the moment is, and thus could just add confusion about MMT at a point when we need clarity.
Which is that we tell people that it pays to be in work – except now, it does not – and that the markets that we were told are so efficient have failed at least in this country if not elsewhere to price their goods and services appropriately. MMT could provide relief to these issues right now.
That’s the crisis at the moment – not some new, frankly weird way of looking at the effects of government expenditure on work from an avowedly Neo-liberal ‘rational man’ perspective that errs on the side of suggesting a ‘coercive state’.
I can tell you that the only people who see any benefit in this are those tossers like those calling for crypto-currencies – they’ll love shite like this – money that they can own, free of state control, taxless but no doubt at a rate of interest of course. Yeah – right.
Sorry for the rant.
Rant welcome
Thank you Richard for your document. It will help hugely to inform debates. As an advocate for UBI, I came across this article: https://vocal.media/theSwamp/why-we-need-modern-monetary-theory-mmt-and-why-it-needs-universal-basic-income-ubi.
One challenge not mentioned here is those of us in euro-land. The likelihood of getting buy-in from all euro countries and the ECB makes your task in UK seem almost manageable!
Look forward to seeing how this develops. Thanks again Richard.
I do not think MMT and UBI are incomaptible
They aren’t
That was the third time I have read this and it is definitely the most accessible version, especially with the first part (describing how MMT explains how money works) and the second part (describing what may or may not result from this) being clearly delineated.
I especially liked the paragraph ‘… payment of tax destroys the money that was created to pay for government spending, but does not fund it.’ I’m finally grasping the (indirect?) relationship between tax and government spending.
I can’t help but wonder what the bankers understand about ‘national debt’ and QE and the relationship between commercial banks and central bank. Wilfull ignorance perhaps
Great work – I’m a bit in awe of your energy and committment.
Thank you
Appreciated
This one took some effort, and still is
I welcome this document as helpful in understanding the origins, purpose and operations of money, especially on the tax side.
I have personally found it useful tracking money’s origins from the archeological record, which suggests to me that money is a highly sophisticated and flexible form of corvee labour. YMMV …
But the world does move on
Hi Richard, this is great, very readable and totally shareable and a very good summary of some of the theory and practical implications of an understanding of MMT. Much of it is totally nickable! It is far from complete and is only a basic summary of the pile of great work on MMT that I’ve been exposed to over the last six months. I wish the content i have to cover during my full time 2 years masters could be condensed into 18 pages. Catch up soon.
Thanks
Appreciated