People often ask me what difference Modern Monetary Theory (MMT) would actually make in practice.
The surprising answer is that, in many respects, MMT already describes how the UK monetary system actually works. The government already creates new money when it spends, through the Bank of England. Taxes do not fund spending in the way most politicians and economists claim. Instead, they remove money from circulation and help manage inflation.
So if that's already true, what difference does MMT make?
The answer is that it changes how we think about policy.
Using the current debate over defence spending as an example, I explain why cancelling infrastructure projects to “pay for” defence makes no economic sense. Roads are built by different people with different skills from those who design advanced military equipment. Destroying one part of the economy does not magically create capacity somewhere else.
The real constraint is never money.
It is always people, skills, technology, energy and other real resources.
MMT encourages governments to ask the right question: do we have the resources to do this? If we do, then financing them is not the obstacle politicians pretend it is.
This changes everything from defence to healthcare, housing, climate policy and public investment.
Whether you agree with me or not, this is one of the most important economic debates taking place today.
This is the audio version:
The Debate Ammunition for this video is available here.
This is the transcript:
People sometimes ask me: what does modern monetary theory really have to say when it comes to practical policy? How would we tell the difference?
And I answer in some ways, you wouldn't tell any difference because, in fact, modern monetary theory is already in use in the UK economy. It describes what actually happens in the UK already.
The government does already spend money into existence when it spends. Every single penny of government spending is created by the Bank of England on behalf of the government. And tax does already exist to take money out of circulation in the UK economy, as modern monetary theory describes, and which most economists deny.
But there are big changes you would see, and I want to use a recent political example to explain this.
We've seen the whole of our political establishment go into some form of paranoia about defence spending of late. They believe that the Russians, who are currently bogged down in a field in Ukraine, are deciding that they will be invading Europe soon, even though they cannot make any progress in the war they've currently got underway and are losing, maybe, millions of people on the front there.
But they say, as a consequence, we've got to spend a fortune on new defence spending. And apparently, the £15 billion that Keir Starmer has promised as his swan song isn't enough.
And when he did promise that £15 billion, he said he had to fund it by cancelling road schemes, energy schemes, other types of funding arrangement, and still leave £5 billion unfunded. And people are now attacking him on all fronts for that.
The point is, Keir Starmer showed why he should not ever have been Prime Minister, and if Andy Burnham inherits his views, why he shouldn't be Prime Minister either, because there is no logic in cancelling a road scheme to pay for defence.
The fact is, the people who will work on that road scheme will not be working on defence. They have different skills. The people who dig up roads and lay roads are highly skilled engineers, but they're not defence engineers. Defence engineers are quite different. By and large, they won't be transferring from civil and mechanical engineering, which is what road engineers need, to electrical engineering and aerospace engineering in particular, which is what defence needs. So, we are not going to see a transfer of skills, and the real economy depends upon real skills.
So what Keir Starmer actually said is, I'm going to make a pile of people redundant so I can try to find some new alternative people whom I will pay more. That makes no sense at all. If we've got a pile of aero engineers and electrical engineers and other people who can create the defence systems that we need, put them to work with new money, Keir Starmer. That's what MMT says.
But don't now put those people who were working on roads or transport systems, or whatever that we need, out of work because we still need those people in employment. And if you put them into unemployment, which is what he's suggesting, you will create a burden on society, reduce tax revenues, and create waste.
This is the thinking of the person who believes that money is the most important resource available to government when it isn't. And this is the big change that modern monetary theory enables. MMT actually makes clear, despite its name, that money is not the constraint on activity inside our economy.
Money is just a tool.
Money isn't even really a thing.
It's a process.
It's a record-keeping system.
It's a claim, but it isn't something that is in short supply, and it isn't something that we need to worry about with regard to constraints because, as we know, more of it can be created at any time.
I've made a recent video in which I explained we could double all the money in the economy overnight, but that wouldn't create a single new engineer, a single new missile, a single new soldier, a single new whatever you want.
The fact is that money doesn't do that. And yet we are treating, and Keir Starmer clearly is treating, money as the constraint on defence activity.
If we have people who can do defence activity, we can afford to pay for them. It's as simple and straightforward as that. In fact, we're better off by paying for them because they will now be paid more, and they'll pay more tax, and we'll see a return from the stimulus that they provide through their spending throughout the economy as a whole. That's the economic multiplier effect.
But we don't need to make people who can't become defence engineers, or whatever we might need, redundant to achieve that goal because that just shoots ourselves in the foot. It undermines our defence, in fact, by making us into a weaker economy, and that is illogical.
MMT points out that illogicality. It says the real issues that we manage in the economy are not money at all. They are the real resources. That's the difference between MMT, with its focus on an understanding of money, and the economics that is driving the Treasury, driving our politicians, driving our economic commentators. They think money is the constraint. MMT proves it isn't.
MMT liberates us to think about what we can do best with the resources we have available to us: people, skills, energy, the planet. What can we do with those to achieve the outcomes that best meet the needs of society?
This is the difference that MMT makes.
Keir Starmer doesn't get that.
Andy Burnham doesn't get that.
Kemi Badenoch doesn't get that.
Ed Davey doesn't get that.
Nigel Farage certainly doesn't get that, nor does Rupert Lowe, whatever his name might be in Restore UK.
None of those people understands this.
Only a politician who does could make effective decisions. We might have such a person in Zack Polanski. I can only say I can live in hope, but we don't have many others. Maybe we've got them in Wales, Plaid Cymru, now. We don't seem to have in Scotland.
This is a problem. We need to have people who understand that managing the real economy, where real economic activity takes place, is what we need and that money is not the constraint. That's what modern monetary theory teaches us.
Look at the real stuff. Don't worry about the money because the money will follow real activity if we can create socially useful activity with the resources we've got.
That's my key point. You might disagree with it. There's a poll down below. Please let us have your opinions. Please share this video. This is an important issue because it talks about the fact that our economy is not being managed properly by those in charge of it. And if you'd like us to make more videos like this, if you'd like to make us a donation, we'd be very grateful.
Loading ...Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
[…] The video that this Debate Ammunition supports is available here. […]
Thanks to you and your team for drawing attention to clarified realities!
Might it be that we have been, and are, subject to rule by a main stream media and main stream education supported, and so enabled, kakistocracy?
Nicely explained thank you.
One thing MMT says is that tax is, amongst other things, to prevent inflation. However, that seems to me to be somewhat inconsistent with government releasing resources.
Take, for example, defense. The government wants more “defense”. So it creates money to employ defence engineers. But these probably don’t immediately exist. So it pays a bit more, which encourages others, maybe engineers designing mobile phones, to transfer to defense. Then there’s a shortage of mobile phone engineers, so their employers raise wages to ensure they have enough. This ripples through the economy as it adjusts and as people upskill (a good thing). But the result is inevitably some inflation.
The government does the right thing to create money to use resources. But the economy has to adjust and this requires some inflation. As you say, it doesn’t make sense to cancel other investments, e.g. road schemes, to offset this inflation. It’s just a symptom of the economy adjusting. You can’t expect zero inflation in a dynamic economy which is continuously adjusting (the economy is not in equilibrium).
Neoliberals fetishise low inflation, but it’s often just a sign that the economy is adjusting. IMO modern monetary theorists often seem to overemphasise inflation. Perhaps this is to appease the neoliberal view point that inflation is always evil. But, perhaps, the evil of inflation is another neoliberal trope.
Excellent Richard. Succinct.
Dusting off my fabled PhD in the Bleeding Obvious
What are the scenario’s under which we could end up ‘At War’ with Russia?
Clearly if we end up with a shooting war we will need Hospitals so measures to improve and update the NHS Estate & train and recruit sufficient staff so it can run at something like 90% capacity would be an obvious start.
It seems likley that we will not see a ‘shooting’ war but rather one based on sabotage and recruiting criminals in the UK.
Spending money to ensure we have sufficient infrastructure that we can deal with ‘losing’ some of it and tackling offending in its broadest sense- that includes tax enforcement would reduce the number of potential recruits for foreign powers.
A ‘For Example’ might be that The National Grid which had only just started running as a Nationwide as opposed to regional grids allowed electricity supplies in London to be maintained during The Blitz when the Thames side power stations were damaged.
Reducing our dependency on imported energy and food would make the UK more resilient to both ‘natural’ and human caused shocks.
Think of the Battle of the Atlantic and how close the UK came to starvation and running out of oil during the early years of WW2.
A better educated, trained and cared for population would be better able to support and more likley to assist with the Defence of the Country in addition of course to all the other economic and social benefits that would flow from it.
So we could do a lot that would defend the UK, while having significant economic, environmental and social benefits and without spending a single extra penny on ‘Defence’
I think most politicians are starting to understand MMT. However, it doesn’t fit their neoliberal agenda that their party leaders wish to espouse to prevent fundamental change of the status quo. Therefore, it is never mentioned or portrayed. They will refer to the liz truss budget forgetting to mention that it was the way pension funds were structured that caused a large amount of this issue.
How about suing politicians for fraud or scamming when they use the household analogy?
Potholes. The UK faces a wide range of problems, most of which can be resolved through the use of gov’ money. One of the problems is potholes. The way to resolve them is money, people and tarmac. The fact that the gov (both tory and LINO) are incapable of resolving something simple like potholes (& the imbeciles in Deform – likewise) indicates that the political class as a whole are unfit for purpose and have been for going on for 36 years i.e. ever since B.Liar and Broon & their assorted hangers on – I’m looking @ you Burnt-ham – crawled out of the political woodwork. The problem is that Wezzie does not give a stuff for UK serfs, it never has and never will. Pollicy this, policy that, spads, know-nothings etc. Action? Money to take action? Nah.
Footnote: if you have a car and hit a pothole which destroys the tyre be very careful, if you have alloy rims. The rim will need to be looked at carefully because it might have developed a micro-crack which WILL propagate and WILL cause the tyre to deflate. As I discovered. Another “benefit” of the functionally useless govs that UK serfs have voted in for 46 years years.
Agreed
There are a lot of potholes! And there’s a huge backlog of road maintenance! We need money. But do we have enough people and companies to repair the roads? I suspect that we don’t. So we need more training and, perhaps financial support for companies starting up in this line of work.
In terms of who does it i.e. which org, I’d favour local gov direct labour. Going the private route? Bad value for money, poor quality because private-equity rip-off-scum would muscle in. How to do it? Expert system to decide what needs to be done where. Is the hole a single hole – fix it and everything is OK 100mtrs either side? or does it need a new surface? If the latter then tender to private company (which is what happens now). As for training? Get some experienced blokes and then put them with others that can learn on the job.
None of this will happen, LINO imbeciles will try to give the work to PE and a rip-off for over-priced shite will start. I guarantee. LINO = useless.
I mostly agree. Perhaps I biased comment in terms of companies, which was not intended. But, irrespective of who does the work, there have to be people with the skills to do it, and the necessary machines etc. I doubt there are enough of either of these at the moment, given the scale of the backlog. Which, I think, was precisely the point that Richard was making, that the constraints are physical. So, although we do need more money, and something could definitely be done, we can’t simply pay to fix all the potholes and repair our roads. Money and time are required for training and to scale up our physical resources.
We have the pothole scam already. JCB give money to Reform. Reform councils buy the JCB pothole machine, which is expensive to run and nowhere near as good as a dedicated and experienced team of road repairers. Potholes are mended badly, and need further work by specialist teams. Ho hum.
It’s such an obvious point, yet it’s escaping most commentators. You can’t fix defence capacity by sacking road engineers, since money isn’t fungible into skills.
It’s worth pushing that logic further: once you accept the constraint is real resources, not money, the next question is what the state ends up owning once that money’s spent. When the state spends into existence to build a data centre, housing, or grid infrastructure via a private finance vehicle, it pays for the activity but a private balance sheet ends up holding the yielding asset. The money creation works the same whether the state builds and owns the asset or pays someone else to build and lease it back, but only one choice means the yield and tax base keep compounding back to the public purse, rather than becoming a one-off flow that turns into someone else’s rent forever.
PFI is the cleanest illustration. The engineers, concrete, and electricians on a PFI hospital build are the same real resources you’d use under direct public ownership: same constraint, same skills, same capacity. The only difference is who holds the asset and collects the rent for the next 25-30 years. We’ve spent decades proving your “money isn’t the constraint” point by proxy, through PFI’s absurd maintenance costs, while handing the resulting asset to private capital anyway. If money isn’t the constraint, there’s no monetary reason it had to be built that way.
The ownership question is a separate political choice, currently being decided in exactly the wrong direction by default. Canada’s new sovereign fund, Norway’s, France’s push to own its data and compute: we can make wider choices than we have been.
Thanks
There was a report that George Osborne wanted to buy a Christmas tree for the Treasury but had to pay an exorbitant amount for the PFI company to provide it. How ironic!!
Hi Richard,
I’ve just tried to unsubscribe from this article but I’m unable to do so as there are no check boxes on the article to do so. Can you help? I don’t wish to unsubscribe from your website though.
Thanks
Let me be honest, I have no idea how to do that. I apologise, but this is not something I ever need to do. And I have never worked out how to unsubscribe from a particular post. Please accept my apologies.
I think this will help anyone who reads it to grasp that money is not a resource in the economic sense (land, Labour, and capital are economic resources). But the idea of money as a resource is more of a semantic problem, similar to the idea in accounting that credit=a good thing. I’m afraid both will persist long into our future, no matter how much or how well we correct these errors.
No excuse for people who really should know better.