Proceedings of the 54th International Academic Virtual Conference, Prague

MODERN MONEY THEORY, BY DEFINING MONEY AS STATE-ISSUED DEBT INSTRUMENT, FAILED TO PROVIDE SUFFICIENT SPENDING FOR SECURING FULL EMPLOYMENT; BUT SUCCEEDED IN BLURRING OUR UNDERSTANDING OF MONEY

NABA KUMAR ADAK

Abstract:

The purpose of this paper is to explain MMT’s misconception and misrepresentation relating to money’s origin, character and function, and monetary & fiscal policies. The MMT is a conglomeration of different contradictory and already discarded theories put forward by earlier economists like Credit Theory of A. Mitchell Innes, State Theory or Chartalist Theory of money of Georg Friedrich Knapp, combination of Credit Theory and State Theory of money by Geoffrey Ingham (in his article “Money is a Social Relation”), Functional Finance theory of Abba Lerner, Money theory of Keynes, Sectoral Balance Approach of Wynne Godley and so on. The MMT developed another unique theory called Consolidation between the Government and the Central Bank. Though MMT claims that it provides an alternative definition of money, yet, in reality, it does not want to explore what money is and how money had been evolved as a medium of exchange. The MMT argues that in the modern capitalist system, money is nothing but a numeraire or an account of credit (debt) and has no intrinsic value of its own and that money is neither pegged to any commodity nor a medium of exchange. The MMT, then, begins to impose this theory (money is a state-issued debt instrument) on the history of evolution of money. Therefore, their explanation does not reflect how money really evolved or what money really is. Other purpose of this paper is to explain that these concepts and theories of MMT are hypothetical and have no connection with how present economy is functioning. If the suggestion, of MMT for increasing budget-deficit without provisioning how the debt (for financing the deficit) will be redeemed, is followed blindly then the economy as a whole will be led to a catastrophe and collapse. This conceptual/ theoretical paper concludes that the MMT became a hotchpotch combination of impractical fanciful and arbitrarily concocted theories. Therefore, the MMT became the most un-intelligible theory. It is not at all functional. So, this exercise (criticism of MMT) is necessary in order to eliminate the negative impacts of the MMT on the theories and practices of economics at large. Another purpose of this paper is to show that the primary cause of most of the economic anomalies is money’s entrance into the economy from its issuer the central bank as debt. This paper suggests that economists should formulate such a theory that will free money from its debt nature. This paper concludes that the very nature of money’s origin as debt (from the central bank to the economy) is a systemic defect and this defect is primarily responsible for continuous economic downturn and frequent recession. However, the MMT does not try to find how this debt-nature of money can be eliminated. On the contrary, the MMT gives emphasis that money (even commodity money) should be recognized as nothing but a debt-instrument. Therefore, this paper implores that some theory should be constructed so that money can originate as “debt-free”. If money originates free of debt only then sustainable economic growth can be secured.

Keywords: Functional finance, hierarchy of money, Modern Money Theory, credit theory of money, state theory of money, printing money, theory of consolidation between the government and the central bank, full employment, High Powered Money, barter through caste system, sectoral balance approach

DOI: 10.20472/IAC.2020.054.002

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