Blair Fix

I've always been baffled why 'modern monetary theory' is called a
*theory*. I don't mean this in a disparaging way. As far as theories of
money go, I think modern monetary theory (MMT for short) is the correct
one. But having a correct theory of money is a bit like having a correct
theory of traffic lights.

Traffic lights (like money) are a social convention. We agree that red
means stop and green means go. Why we've chosen these particular colors
is an interesting question, as is why we choose to put traffic lights
where we do. But the fact that red means stop and green means go just
*is*. It's something we've defined to be true. The workings of money are
similar. True, money is more complex than a traffic light --- but only
in application. In conceptual terms, money is equally simple. It's a
social convention that we've defined into existence.

To frame our discussion of money, let's begin with what it *isn't*.
Money isn't a *thing*. True, money can have concrete forms like dollar
bills and metal coins. But it needn't. It can be as abstract as digits
in a bank account, or tallies on a stick. Money is an *idea*. It's an
agreement to tie our social relations to a unit of account. To
understand money creation, we need only look at the principles of
double-entry bookkeeping. Debt goes on one side, credit goes on the
other. The two sides carry opposite signs and so cancel out. This allows
us to create money while simultaneously balancing our accounts.

Here's a simple example. Suppose that a friend does a favor for me. I
want to return the favor, but don't have the time to do so immediately.
So I give my friend a note that says "Blair owes you one favor". This
note is *money*. It is created from nothing using the principles of
bookkeeping. On one side is a *debt*: I owe my friend a favor. On the
other side is a *credit*: my friend is due a favor. And that's all there
is to it. My friend can now exchange my IOU with other people. It
becomes money in circulation.

Understanding this act of money creation is trivial --- much like
understanding the creation of a traffic light. Just like we define the
rules of traffic, we define the rules of double-entry bookkeeping. We
then use these rules to regulate our behavior, creating money as we
please.

What's interesting, though, is that few people misunderstand traffic
lights. We all know that traffic lights can be put anywhere we want
them, and that they're based on an arbitrary social convention. Yet when
it comes to money, the same is not true. Many people fundamentally
misunderstand money. To them, it's not an arbitrary social convention
that can be created/destroyed at will. Instead, they perceive money as a
scarce commodity --- something that, like water in a desert, must be
guarded and conserved.

What we really need, then, is not so much a theory of money, but a
theory of why people *misunderstand* money.

### The quantified obligation

To think about why people misunderstand money, let's keep the definition
of money in our heads. The anthropologist David Graeber defines it best.
Money, he argues, is a *quantified obligation*. The holder of money is
entitled to receive things from other people. (See his book [*Debt: The
First 5000
Years*](https://www.goodreads.com/book/show/6617037-debt){target="_blank"
rel="noopener"} for a detailed exposition.)

We can see from this definition that money is a powerful tool. In fact,
it's a tool for power. If I have a lot of money, I can get other people
to do my bidding. This fact is hardly controversial. We all know the
adage that 'money is power'. But somehow we forget this adage when we
think about money creation. Money is nothing but a quantified
obligation, so in principle anyone can create it. But in practice, few
people have this power. The problem is that for money to circulate,
people must trust that they can use it to receive an obligation. I could
*try* to circulate a note that says 'Blair owes you one hug'. But other
than my wife and daughter, few people want that IOU. So it will never
circulate as money.

In practice, money creation is done almost exclusively by the powerful.
Textbooks on money will use the word 'trust'. They'll say that money can
circulate as long as we *trust* the issuer. This is true, but neglects
the flip side of trust. When you trust someone, you endow them with
*power*. When soldiers trust their commanding officer, they're likely to
obey orders. That gives the commander power. Trust, in many ways, is the
basis of power. You can't have stable power relations without it.

So while I could *try* to create money, few people would be interested.
I lack the trust of the public, which is another way of saying that I
have little power. But if *government* wants to create money, many
people are interested. Many people trust the government, which is why
governments have power.

### Legitimate violence

The sociologist [Max
Weber](https://en.wikipedia.org/wiki/Max_Weber){target="_blank"
rel="noopener"} famously defined the 'state' (i.e. government) as having
a 'monopoly on the legitimate use of violence'. I think we could equally
define the 'state' as having a monopoly on the legitimate creation of
money.[^1^](#fn1){#fnref1 .footnote-ref} There are interesting
parallels, in fact, between violence and money.

Just like anyone can create money, anyone can do violence. You could
walk onto the street right now and shoot someone. But most of us don't.
Why? First, because we think it's wrong. Second, because the state
punishes murderers. In other words, violence in modern societies is
highly regulated. The same is true of money. Technically, anyone can
create money. But few of us do. Your personal IOU will never circulate
widely. And if you try to create state-backed money, the government will
punish you. Like violence, the creation of money is tightly regulated.
To see this fact, we need only look at language. We have a name for
taboo violence (*murder*) and we have a name for taboo money creation
(*counterfeiting*).

Those of us raised in stable societies take for granted both the
regulation of violence and of money. This regulation begins to feel like
a 'natural order'. But if you were raised in a war-torn country, I
suspect you'd feel differently. You'd understand that anyone can do
violence --- with devastating results. And if you lived through a period
of hyper-inflation, you'd probably better understand that anyone can
create money. (People tend to make their own money when government
currency breaks down.)

### Limits to government power

One of the main thrusts of modern monetary theory is to point out that
government spending has no limits. If governments control their own
currency, they can spend as much money as they want by creating money
out of thin air. The interesting question is not whether this is true.
It's *trivially true* --- much like it's trivially true that a green
traffic light means go. Any currency issuer (government or otherwise)
can create as much money as they want. The interesting question is why
governments *don't* spend unlimited amounts of money.

Many economists will trumpet inflation as the boogeyman. Create too much
money, they say, and you'll have hyperinflation. Just look at what
happened in the [Weimar
Republic](https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic){target="_blank"
rel="noopener"}. It's true that money creation can lead to inflation.
But MMT proponents point out that this has an easy solution. Government
can *destroy* money just as easily as it can create it. Government
spending creates money. Government taxation destroys it. Again, this is
trivially true. And yet few (if any) governments accept this truism. In
fact, most governments behave as if money, like water, is a scarce
commodity. Why?

The answer, I believe, has to do with *power*. The creation of money is
inseparable from the accumulation of power. Here's an example. Suppose
that I'm a king who claims the sole authority to create money. And
suppose that everyone in my kingdom accepts this right. I create hordes
of money and use it to buy all the land in my kingdom. I put the landed
aristocracy out of business. And in so doing, I put all the citizens
under my command. Everyone, in effect, becomes a state employee. It's
the totalitarian dream --- an entire society unified under a single
hierarchy.

This tale is, of course, a fantasy. The problem for a real king is that
his subjects probably won't accept his right to create unlimited amounts
of money. There will be pushback, largely from other powerful people.
The landed aristocracy, for instance, won't want to give up their land.
So they'll oppose the king's right to create money (and to tax it out of
existence). History shows that rather than being sovereign money
creators, feudal kings were in perpetual need of finance. This is just
another way of saying that kings were relatively *weak*. They lacked the
power to finance themselves.

What is true for the feudal king is true for modern governments. Like
the king, governments can *in principle* create as much money as they
want. But *in practice* they don't, because there are limits to their
power. When governments create money, they accumulate power, which
implicitly means taking power away from other (powerful) people. The
landed aristocracy didn't want to cede control of their land to the
king. And modern corporations don't want to cede power to the
government. And so these corporations act continuously to oppose
government money creation.

### The arbitrariness of power

I'm hardly the first to connect money creation with power. It's been
done countless times before. And yet many (most?) people still
misunderstand money. Why? A good theory of money should explain this
misunderstanding. Why --- despite it being plainly true --- do we recoil
at the idea that anyone can create money, and as much of it as they
want?

My suspicion is that accepting this fact is difficult because it means
accepting that our existing social order is *arbitrary*. Those who
create money do so not out of any natural right, but because of power
that has been arbitrarily given to them. Nothing makes the human mind
recoil like learning that the things we hold dear --- the patterns and
behaviors that dominate our lives --- are arbitrary.

This points to a deep truth about human behavior. Our social conventions
are, by definition, arbitrary. And yet the existence of these
conventions is predicated on us believing that they are *not* arbitrary.
One of the worst things you can say about a law is that it is
'arbitrary'. Convince enough people of this fact and the law will soon
change. Similarly, one of the worst things you can say about money
creation is that it is 'arbitrary'. Our social order depends on us
forgetting (or refusing to see) this fact. The flip side is that
*changing* the social order means *remembering* this arbitrariness.

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### Notes

::: {.footnotes}
1.  [I can hear your objections. Private banks create money --- so how
    can government have a monopoly on the legitimate creation of money?
    I think of banks as the equivalent of military subcontractors. The
    latter are private-sector institutions that have been given the
    right to do violence. The same is true with banks, only with money.
    Banks are private-sector institutions that have been given the right
    to create money. Just as easily as it was given, government could
    take this right away.[↩](#fnref1){.footnote-back}]{#fn1}
:::

### Further reading

::::::: {#refs .references}
::: {#ref-galbraith_money_1975}
Galbraith, J. (1975). *Money: Whence it came, where it went*. London:
Deutsch.
:::

::: {#ref-graeber_debt:_2010}
Graeber, D. (2010). *Debt: The first 5,000 years*. New York: Melville
House Pub.
:::

::: {#ref-robbins_debt_2016}
Robbins, R. H., & Di Muzio, T. (2016). *Debt as power*. Manchester
University Press.
:::

::: {#ref-rowbotham_grip_1998}
Rowbotham, M. (1998). *The grip of death: A study of modern money, debt
slavery and destructive economics*. Jon Carpenter Publishing.
:::
:::::::


I’ve always been baffled why ‘modern monetary theory’ is called a
<em>
 theory
</em>
. I don’t mean this in a disparaging way. As far as theories of money go, I think modern monetary theory (MMT for short) is the correct one. But having a correct theory of money is a bit like having a correct theory of traffic lights. Traffic lights (like money) are a social convention.

Messaggi di Rogue Scholar

Why Isn’t Modern Monetary Theory Common Knowledge?