To the extent that “Modern Monetary Theory” (MMT) has been taught in schools to date, it has long been understood by its more common name: Inflation. As with most “progressive” schools of thought emerging from the left side of the political spectrum, MMT is both regressive and no more modern than a horse-drawn carriage. Even the application of the term “theory” to the name itself, coined by one of its pioneers, William Mitchell, falsely suggests a higher intellectual rigor and factual substantiation applied to MMT by its creators, than the idealist guesswork that it proves to be.
Before breaking down its specific claims, it is important to obtain a basic understanding of what MMT argues. In short, it claims “countries that issue their own currencies can never ‘run out of money’ the way people or businesses can” (Vox), i.e. a government can continuously print enough of its own currency to pay the balance of any debts it incurs. While this concept may appear to be of little consequence to the average American, it is anything but. Rather, the full implementation of MMT would predictably lead to the breakdown of the United States economy a la Venezuela (circa 2016), the Weimar Republic, and/or a full communist government.
As is the case with most economic systems proposed, a complete understanding of MMT requires fundamental knowledge of both basic economics as well as several rather obscure and technical concepts such as, in this case, endogenous money theory. Without this knowledge, the implications of the claims MMT makes cannot be fully understood. This article addresses the MMT's most basic overlooked concept: the role of money in society as an instrument of value.
MMT is based on the fundamental premise that a country such as the United States can never go bankrupt because it can print itself out of debt. This ignores the role of money in society and why it functions the way it does. If people are unwilling to accept money in exchange for goods and services, then it has very little, if any value—think about attempting to pay for a new car with bags of sand.
Before the existence of today’s money in its primary form of paper and coins, individuals engaged in barter economies which were smaller, simpler, and less efficient than today’s global economy. Consider the following scenario:
A beet farmer arrives at the town market looking to trade beets for an ox to plow his fields. It is highly unlikely the farmer will be able to trade a beet for an ox or that an ox trader would desire such a quantity of beets as would be able to match the value of an ox. In this scenario, it is highly unlikely any trade between the two parties will occur.
Money solves this issue as it allows the farmer and ox trader to exchange it as an intermediary form of value. As Thomas Sowell points out in his book Basic Economics, “all that people have to do is to agree on what will be used as an intermediary means of exchange and that means of exchange becomes money”. This statement has multiple implications:
Money in and of itself has no value. It only gains value to the extent an individual can trade it for the goods and services desired. Therefore, money acts as an instrument of value, transferring wealth between individuals equal to the value of the goods and services exchanged for it.
Anything can be used as money so long as it is an agreed upon method of exchange; people must accept said money as an exchange in value for the goods or services produced.
Note: The Romans used common table salt as currency; the word “salary” even owes its roots to “salarium”, the Latin word for salt.
Money allows for a more robust economy, and society by extension, since it enables exchange of goods and services between individuals who would otherwise be inhibited as in the example above.
From this, it is clear that arbitrarily printed money is not imbued with any inherent value. It is made out of thin air—actually a cotton/linen blend—without any exchange of value to warrant its existence. Thought of another way, the creation of value from nothing is an impossibility outlined by the first law of thermodynamics in which energy, or in this case value, cannot be created or destroyed; it can only change form or be transferred. Furthermore, a citizen attempting to print and use money would rightly be arrested for counterfeiting and face either misdemeanor or felony charges.
It is this principle that underlies the reason why the dollar is devalued when money is arbitrarily added to its available supply. It means more money attempting to purchase the same amount of goods which raises consumer demand at existing prices; without government intervention, increased demand raises prices (look at the 2021 housing market), subsequently reduces purchasing power, and invariably results in inflation.
MMT overlooks this concept when claiming a government can print its way out of debt; this is true only if the value of that money remains constant. Unfortunately, economic reality refutes MMT's premise. Consequently, the more a particular currency such as the dollar depreciates via inflation, the less likely it is to be accepted as a form of value in exchange for goods and services. In practice, individuals correct correct for the devalued money by seeking more money in exchange for the same goods or services produced (rise in prices). Under MMT, the government, a large player in the United States economy, would print the additional money needed to meet the higher prices, which devalues the dollar, which raises prices, which results in more printing, which devalues the dollar, &c.
Famous examples of other countries falling into this trap include, but are not limited to, Germany's Weimar Republic, Hungary post WWII, and modern-day Venezuela. The danger of this cycle is that it will endlessly repeat until such a point as the dollar becomes completely worthless and unacceptable as payment from the United States government to its foreign creditors. At such time as foreign governments or businesses decide they will no longer accept the highly depreciated US dollar, possibly in favor of the Chinese Yuan, the United States will default on its loans and become de facto bankrupt. For this reason, MMT's primary claim is false.
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