The following is part-3 in an open series meant to introduce the basics of modern monetary theory (MMT) and to explore the potential for MMT’s radical model of macroeconomic reality to intersect with revolutionary theory and struggle. In Part-1, the basic principles and monetary mechanics of MMT were presented alongside an irresponsibly brief review of money’s evolution from its prehistoric origins to the ongoing failure of orthodox economics to explain how money functions today. Part 2 looked at how MMT re-writes the rules of public spending and how it could be used by the working classes to build radical organizations and fight the power of capital with a self-managed federal job guarantee. And now Part 3 presses on to new territory where, for the first (and probably last) time, engine mechanics and the state theory of money will become relevant to a discussion of one of history’s most exhilarating topics — taxes. (Please, don’t leave)

Parts One and Part Two, for those who missed them:



Modern Money Systems: Understanding the Monetary Mechanics of Value Introduction to modern monetary theory (MMT); history of value, money, coins; the state theory of money; how modern money - that is, fiat currency issued at a flexible exchange-rate - works; why the debt doesn't matter and why deficit spending is good; how inflation works vs 'devaluation' & debasement...

Marx + MMT: Socialism Through a Self-Managed Federal Job Guarantee (Modern Money Systems, Part 2) Is modern monetary theory (MMT) compatible w/ Marxism? Part 2 of Modern Money Systems looks at how the macroeconomic reality described by MMT fits into the framework of class struggle described by Karl Marx & compares the idea of a worker self-managed federal job guarantee to Marx's 'armies of labor'...

MODERN MONEY SYSTEMS, PART III :

The State Theory of Money, Social Power, & Taxes

In the fogs of economic illiteracy that envelop today’s political debate, there exists the eternal stalemate over how much ought to be taxed from whom to pay for what for whom else under which conditions and why.​ Those preferring a small welfare-state that taxes and spends less stand bitterly opposed to those who prefer a less-small welfare-state taxing and spending more. All of it, of course, is silly and unnecessary because, for sovereign currency-issuers like the United States, taxes do not fund spending and the only real constraint on spending is the availability of idle labor and resources. Public healthcare in the US, for example, is not a financial question of funds but a material question of whether definite amounts of labor and resources are available to build clinics, train doctors, and produce medical supplies.

But if monetarily-sovereign governments like those of Japan, Australia, and the US can fund such ambitious programs as a federal job-guarantee and universal public-healthcare without taxes, the obvious question is — then, why tax at all? Strange as it may seem, it turns out that the value of money depends on taxes….

How Money Gets Its Value & Why Gold Is Just a Yellow Rock

For anyone still using gold doubloons as money, it may seem reasonable to assume that money’s value results from its materials since metals have value apart from any seal of authority. But considering that all major currencies are issued by fiat today, it seems absurd for anyone else to assume so and particularly for the billions who regularly use this money made from nothing valuable and backed by even less. Metallism — the notion that money’s value results from its price as a commodity — simply fails to describe any form of money that has actually existed (including the metal ones). The fetish-worshipers of gold and other metals can cry all they like but the fact is that bits of paper work as well as (and in many ways better than) electrum, silver, and gold ever did.

A Quick Word About Value: Use-Value & Exchange-Value

One way to pose the question of money’s value is to ask why anyone would exchange things of obvious value — food, tools, labor, etc — for zinc wafers or paper with spooky symbols, numbers, and images of dead rich people on them? Money satisfies neither hunger nor thirst nor any other need in itself. In fact, money’s only use seems to be in exchanging it for other things but that just leads back to the question of why it has value at all. To get a clear idea of how exactly fiat money differs from things of easily-recognized value, it helps to know how use- and exchange-values work.

If something satisfies a need or desire (real or imagined) it is a use-value. Most things people make are use-values. A use-value that is produced for exchange becomes reflected as an exchange-value by the market and both values together form a commodity that turns value into price, expressed in amounts of money. As an example, a pair of shoes is a use-value that satisfies a person’s need to protect her feet and also an exchange-value equal to, say, 2 months of Netflix, 24 AA-batteries, 3 packs of cigarettes, etc. In commodity-exchange, one side takes the shoes as use-value and the other as exchange-value — it is impossible to possess both use- and exchange value at the same time (i.e. nobody can eat cake and still have it, too).

What makes fiat so weird is that, while the commodities that people are familiar with exist as both a use- and exchange-value, fiat appears only as an exchange-value. And this is too much like a one-sided coin — it just cannot be.

The State Theory of Money

The answer to the riddle, as it turns out, is not so much on either side of any coin but printed right across the front of the fiat. Inscribed on all notes denominated in US dollars are the words “this note is legal tender for all debts, public and private,” along with the authorizing seals of the US Department of the Treasury and US Federal Reserve. This tells us a few things –

That the US government has the sole authority to issue US dollars

That the US government accepts payment in US dollars to settle public debt (taxes, fines, etc)

And that private debts under US jurisdiction are legally settled by payment of US dollars

To take part in the production, distribution, and consumption of goods and services that forms the basis for society, virtually everyone ends up with debts owed to the government as taxes on income, payroll, and property or other fines, customs, and fees. By fiat — meaning in Latin an official decree or literally ‘let it be done’ — the state imposes these debts periodically on adult citizens, a vast majority of whom pay up with a shrug to avoid the eventual imprisonment. And of course, such debt is only payable with… wait for it — US dollars.

Taxes Drive the Currency

Effectively, these tax-debts create a base-level of demand for dollars so long as the US has sovereign power to issue and tax its currency. Taxation (or another form of distributed debt, such as tithe or tribute) is what drives demand for a currency. This is corroborated by the historical record, which consistently shows that various forms of money rise and fall with the state-powers that tax them. In a nutshell, the state theory of money (also known as the chartal theory or chartalism) is that it was never about the gold — money was always a creature of the state. Sure, a Roman denarius is still a use-value to museums and it could even still be melted down to sell at current market-prices of silver 2,000 years later — but as a state, Rome is no longer in a position to insist on anyone making payments in denarii and so no one does.

In the end, the only real way to guarantee that any currency will be widely accepted in exchange is to enforce its acceptance with the organized power of the state.

Thought Experiment: Money & the State

Say someone hands you a note with “1 dollar” written on it. How valuable would this “dollar” be? Then, say that person returns with a baseball-bat demanding either “1 dollar” or your teeth — the dollar became pretty valuable, didn’t it? But more importantly, the dollar became a use-value — and even more importantly, it became the first and only unit of paper fiat-money in a very tiny hypothetical monetary system. Just replace the person and the bat with the state and the severe penalties it imposes for refusing to settle tax-debts, then multiply the whole scenario by 200 million or so, and presto — money.

Money, Among Other Units of Measure

In context, the fact of money’s origin in the state is hardly surprising. Few take any issue with the state’s role in setting most of the other official national standards. Is it not the state that typically decrees whether a nation officially uses Metric or Imperial units of weight and measure? And does the state not also declare whether temperature is recorded using the Fahrenheit or centigrade scales, as well as the calendar system used to date said records? Considering how normal it is for states to set everything from units of measure to national birds, official languages, and the whole kaleidoscope of regulatory standards, it almost seems obvious that states would also set the unit of account, aka money.

The Real Function of Taxes

One of the implications of this state theory is that taxation (in one form or another) is a vital, non-negotiable feature of money systems. To get rid of taxes altogether would also get rid of demand for — and thus, the value of — the currency.​ To be clear, this point — that a state’s ability to impose tax-debts is a core component of money systems — does not mean that a state “should” tax its citizens for moral reasons or because it is fair or just, or even reasonable to do so. It means that failing to enforce payment of tax-debts in a currency will result in evaporation of demand for that particular monetary-instrument and the system will literally be toast.​

Punching holes in the bottom of a boat will cause it to sink despite what anyone may think or feel about it because it is buoyancy that keeps vessels afloat, not feelings or opinions — likewise, the fact that taxes drive currency is just part of the operational reality of running a monetary system. If or when it might be ethical to punch holes in boats is probably a great topic for academic debate but, since this post is about how money works and not how to destroy it and because such a debate is clearly not in the interests of those of us on board, let’s leave it to the philosophers.

All that being said — while tax-collection is necessary to maintain a currency’s value, taxes are never needed to fund spending. ‘Taxpayer dollars’ fund nothing and no one’s hard-earned income is shoveled back into the treasury by the IRS — taxes are deleted. Taxes destroy the money that spending creates from nothing — however, the real economy happens in between.

Micro- & Macro-Economic Perspectives

To understand how a money system works, a macro-economic perspective must be adopted. Just as the mechanics of physical matter are different at very large scales — like that of planets and stars, where motion is determined mainly by gravitational forces — and very small scales — like that of subatomic particles, where nuclear forces dominate — the mechanics that rule economies look different at micro- and macro-economic scales.

Spending & Taxation as Inputs & Outputs

Think of all the circulating currency as a system with an input and output — currency is spent into the system and taxed out by the sovereign issuer. The reality is a slightly more complex (for example, the state can also pull money out with treasury bonds, in a way that is similar to taxes) but the principle is simple — the net-total of currency is increased and decreased by the state alone.

If equal amounts of money are spent and taxed, the net-total currency doesn’t change

If more is spent than taxed, the net-total currency increases

If more is taxed than spent, the net-total currency decrease​s

Now — to get a basic idea of how this circulatory system of inputs and outputs works, it helps to understand its limits. In the simplest terms, the system’s capacity is determined by the amounts of actual labor and resources that are available — or, to put it another way, no amount of money can ever cause a factory to be built if there are no building-materials or workers willing to do so. If the system has reached full-capacity already (if labor and resources are fully-employed), then injecting more cash is not only pointless but may lead to unsustainable levels of demand and rising prices — this is where taxes come in handy as an exhaust for pulling out the excess. On the other side, if capacity is not yet reached, then choking the spending-input is a great way to increase unemployment and throw the system into artificial recession.

Resource & Labor Flows

Inside the system, circulating currency is moving labor and resources between the different parts of the society, distributing access to the means of producing wealth and to wealth itself. Broadly speaking, resources flow into activity arising from spending and out from taxed activity — this means spending and taxation (aka fiscal policy) function as levers that direct labor- and resource-flows within the system. To shift resources from fossil fuels to renewables, for example, heavy taxes might be levied on oil as new programs are funded to provide living-wages to millions of workers building a new framework for sustainable energy-production.

This can also be used to do awful things, of course — if the goal is to maintain a robust military-industrial complex full of parasitic finance-capitalists, income could be taxed more heavily than capital gains while subsidizing costs for weapons manufacturers. (As in today’s USA). The money system is a tool — it can be used to fix things just as easily as it can be used to beat the daylights out of poor people and sabotage the dawn of a better world.

It all comes down to whom is driving.

Taxation & Questions of Social Power

Accepting that taxes maintain a currency’s value but considering that taxes are never collected to fund spending, the question arises of what and whom to tax and why. From the perspective of a neutral ‘monetary mechanic,’ more than one answer is possible — unlike the matters of function discussed thus far (like that tax-debts create demand for currency, that sovereign currency-issuers cannot go broke, etc), any question of why to tax what or whom is inherently a human question — one that cannot be answered from a neutral point of view.

From the viewpoint of a currency-issuer looking ‘down’ at the macro-economy, taxation appears as an outlet for removing excess money from circulation that (in addition to driving the currency) can also be used to influence the flow of resources and manage inflation. However, from the viewpoints of individual currency-users, a tax appears as a limitation on the individual’s power to access wealth and control resources (aka capital) — or, to put it another way, taxes restrict how much buying-power an person has. And “buying-power” (at least in the context of capitalism) is hardly more than a euphemism for power itself.

So the correct question is: whom or what should have less power? And the answer depends on the perspective and the interests of the one answering.

The Social Approach: Taxing Bads, Not Goods

One approach to the question — and remember, no approach is neutral — is to employ the logic Mr. Spock used in The Wrath of Khan when he concluded that “the needs of the many outweigh the needs of the few.” Applying Spock’s logic to tax policy, the question can be refined to something like — whose (or what) money has the most negative impact on the society overall? This is the reasoning behind so-called “sin taxes,” such as added taxes on cigarettes, that are intended to deter economic activity considered harmful to society.

The same type of reasoning could also justify taxing activity that contributes to pollution (like oil extraction) or wastes resources (such as the production of junk-foods) and even taxes to deter stuff like the construction of buildings that block the view of natural surroundings or spoiling open spaces with advertisements. This approach to tax policy takes the social perspective of the collective and favors the interests of “the many” over and against individual interests. To implement such tax policies, however, the many would first need to gain control of their state….

Social Class & the State: Taxation as Power

The state, strictly speaking, is not the government. Government is an entire constellation of public institutions tasked with the chores of society, from fire departments and schools to waste and recycling, licensing drivers, civil courts, road work, and so on. Government is less of a monolith than a category of activities that organize society. The state is a political entity recognized as the highest authority in a geographic area. Since wielding supreme authority over even a small population is difficult, states invariably try to maintain at least some popular support, along with the capability to use violent force.

In historical-materialist (aka Marxian) schools of thought, the state arises from class-conflict as an institutional structure that formalizes the power of the dominant class to rule society. The state, in other words, is always and everywhere the organization of class-power. And only an organized class — like say, a hypothetical coalition of social activists and labor unions formed by an increasingly militant working-class majority — is capable of influencing the state’s use of power.

The Role of Taxation in Social Revolution

From a social-revolutionary perspective (broadly speaking, any perspective that aims to put the working-class majority in charge of society) the framework of modern monetary theory seems to offer new possibilities for a viable economic strategy to transition from a society ruled by private capital to one where all power rests with the people.​ Unlike the bourgeois neo-classical and New Keynesian economics, the MMT model acknowledges the social creation of money as an abstract form of value that serves as universal medium for circulating the real values that labor creates.

But to realize a truly modern monetary system — one that issues currency democratically by the public authority to benefit society as a whole and that frees people from the brutal austerity and artificial scarcity that the profits of private capital demand — for such a currency to exist, ordinary working people must become at least as well organized as those who presently hold the reigns of the state. And until the toiling classes do, these rich white men are perfectly content to keep using society’s monetary power to spend into their own pockets and tax away any shred of wealth the ones who actually work for a living manage to get because, wherever money grows, there is the chance it might turn into power.

And they can’t have that, now can they?

In solidarity,

John Laurits