We all have strength enough to endure the misfortunes of others.

I've been interested in economics for some time. I heard about Modern Monetary Theory (MMT) recently. Much as I challenge numerous elements of "mainstream" economics, Modern Monetary Theory that just didn't ring true. As I looked into it further, I found that Modern Monetary Theory had less and less validity, and a lot of the historical claims about money didn't make sense either.

But, first, let's take a look at history going back a long way. There's the claim by MMT advocates that historically it was taxation that gave money "legitimacy". But what I can see from history really doesn't mesh with the claims. There are also claims that the first use of writing were to track transactions. In fact this was true for one civilisation, but it wasn't the only way writing developed.Earliest Egyptian writing was around labels for jars and descriptions of the efforts towards monuments - not transactions or money as far as I can tell. There doesn't seem to be any mention of transactions in reviews of early Egypt, currency was a much later development.

Early civilizations had several problems - describing religious worship, marking temples, doing administration, keeping track of what in what jar and where it came from, and keeping track of transactions - it was coincidence that Mesopotamia started out with transactions, it did not have to be that, as it was in Egypt. That occurrence in Mesopotamia was a roll of the dice, not some sort of obligatory outcome.

Ancient Egypt had a developed civilisation with state rule and control of the economy. Grain was created by the farmers, and taxed based on how much the Nile flooded. Given how this was at the root of the economy, it made sense to transact based on this grain. Commodity money co-existed with the state. Also, as an adjunct, oil was used as commodity money. In fact, a lot of historical references to money were based around grain - whatever tokens existed were "linked" to an amount of grain. Another important linkage with money was around weight - the "shekel" was originally a unit of weight, and when it was linked to money, it was to a weight of some precious metal.

Michael Mann, writing in "The Sources of Social Power" says the early Mesopotamians had transactions, but they were in terms of precious metals - a commodity currency, not coinage or "money". So, we had different ways of performing transactions - by the exchange of quantities of grain, oil or precious metal. Coinage was, however, a practical innovation rather than something where its legitimacy resulted from taxation, as MMT advocates would suggest. Precious metals were used, but had the problem of needing to weigh it in order to transact it. If you made the metal into a coin of a fixed weight, you could just count the coins without needing to weigh the metal. Coinage was - at least at first - something that was valuable only because of the value of the metal out of which the coin was made, and the stamping with the image of the emperor or leader meant you could be confident that it really did weigh what was claimed. The emperor may have held the grain stocks and run the stamping machine, but the coinage did not gain legitimacy because of taxation, but rather because of convenience and the king or emperor would be the most powerful person who actually controlled the grain silo and could afford to maintain a coin stamper. Coinage "inherited" the value of the underlying metal, with the identification of a given mass being the thing that made it worthwhile. It was not a function of taxation. The Government may have provided credibility, in that you could believe there was a given amount of metal, but tax had little to do with it.

Roman coinage was different, because the value of the coin separated from the value of the underlying metal. The value was transitioning to "fiat" currency, but it had its origin in coinage being the "mere identification of a given mass of valuable metal". Roman coinage was also linked to taxation, yes. But that was a new development, not anything that was necessarily linked in history.

The next issue is around what goes on in the economy. On the one hand, as some MMT advocates would claim, yes the constraints on the economy are around the available resources and the available possibilities, not so much financial as such. We can make a mistake of looking to the money when the possibilities it represents are the important thing. Nevertheless, this mapping does help us allocate those possibilities. Money may not be ethical or perfect, but it does sorta do this job, IMO. There may be some ethical commentaries to make, but that's separate to the nature of money itself.At any given time, though, the economy can only do so much. This can be adjusted, re-allocated and even grown gradually. While money is a claim to those possibilities, that does not stop those possibilities from being the limiting factor. 

Now, we can imagine situations where there are things the economy could be doing that it is not doing, and we have depression or financial stagnation. Where there is spare capacity, we could re-allocate activity and get more happening, working within the constraints of the whole economy I have mentioned. Yes. However, the point is that printing money will not in and of itself mean the economy can do more. That's where MMT advocates have it wrong. To a first approximation, I embrace Friedman monetarism - if you print money at about the same rate at which the economy is growing, you won't have inflation. Having said that, my understanding is that it has been practically very difficult to actually know what's going on in order to know how much money to print. So, it is less useful as a prescription for what to do, but it does properly identify an underlying relationship.

Now, MMT advocates talk about hyper-inflation, and how the risk is way overstated, that by itself money printing does not get you into hyper-inflation. And you know what, I agree with them. Yes, that only happens in exotic conditions. I agree with that element of the MMT story. However, the point is that money-printing in a "regular" context does not have the threat of hyper-inflation. It has the threat of "rather too high inflation" along with "stagflation" and "wage-price spirals" around "inflationary expectations". Having said this, I believe these concerns are not constraints on reasonable wage increases, which I'll get to later. But, they do represent concerns about the sort of money printing MMT proponents advocate for.

Historically, stagflation was said to have two causes. A first was too much money printing. A second was a feedback loop involving inflationary expectations. For sure, inflation has multiple origins. However, inflationary expectations - people's state of mind - is important. There was the so-called Volcker disinflation which was an economic intervention that "cured" inflation. There seems to be a reasonably straightforward mainstream explanation on why it worked. It seems to me too much of a coincidence that the Volcker disinflation did what it said it would do.

Now, I'll take a bit of a look at labour and other issues. There are certainly some problems which need to be engaged with, but they don't mean the MMT approach is valid. There's the so-called non accelerating inflation unemployment rate ( NAIRU ). In other words, we need to keep people unemployed in order to keep inflation under control. You could label this as pandering to asset owners / the ruling class, but there is a link to worker conditions - if we don't keep inflation under control, you'll eventually have a lot more unemployment. That's possible, though yes, managing the social condition is also a worthy goal. 

But, in any case, our current situation is different to the one where wage increased caused a wage price spiral and locked in stagflation. First, we have the situation where productivity has increased, but business owners have absorbed this as increased profits rather increasing wages. We could increase wages by reducing the rate of profit without causing inflation. And, by some arguments, this would be good for the economy as it would grow it, with more money being in the hands of workers. But, the second factor is that unions do not have the clout they had decades ago. They'll press for wage increases, sure but they won't be as able to get them as they have in the past. A deeper issue, as I see it, is that wages are to some degree allocated based on power differentials rather than what can be "afforded" in any meaningful sense. And the power balance between employers and employees has swung significantly in employer's favor over the last few decades as the result of ongoing Government policy. 

However, that's a few steps removed from the MMT debate. In fact, given some of the labour shortages in elements of the economy, increasing wages - particularly in those sectors where there are labour shortages - would means a better functioning economy with fewer supply chain issues. In fact, I understand there are employers who would like to offer higher wages, but are being held back. We don't even need to force employers to increase wages - in a lot of cases, we just give them the freedom to follow market incentives. So, yes the economy is an issue, and we do need to be worried about social welfare along with wages and inflation. But, that doesn't mean that the MMT prescription is valid.