Graham Hubbs and Torrey Byles on ‘Philosophical Explanations of Money’ by John Smithin

On Tuesday November 20, 2020 Professor Graham Hubbs made a very interesting presentation to the Aurora Philosophy Club (APC), on ‘Philosophical Explanations of the Nature of Money’ which attracted a lot of interest and comments.

Torrey Byles, in his comments, focused on the two conceptions, or ontologies, of money outlined by Graham. One of these (following Hayek and von Mises) is called the ‘catallactic’ theory (this is from a Greek root meaning ‘exchange’), and the other is the credit theory of money. The two competing views of money necessarily lead to very different understandings, orthodox and heterodox, of how the economy, and society in general, actually function.
 
The big difference is that the catallactic theory hypothesizes that markets are prior to money, that money was invented simply as a convenient medium of exchange, allowing a more efficient realization of pre-existing markets. The implication of the credit theory of money is just the opposite. Money is a social relation representing debt and credit. It is not a primarily a medium of exchange but a means of payment, specifically a means of payment of debt, which are two very different things. According to Sir John Hicks ‘money is paid for a discharge of debt when that debt [itself] has been expressed in terms of money’. Only once money came into being did this enable the social structure required for the expansion of market behaviour. 

During Graham’s talk there was a long discussion about MMT (modern monetary theory) which is a heterodox approach to money that in recent times has been in the news and widely discussed in the public policy debate in the USA. (Both Hubbs and Byles are US residents, as was a high proportion of Graham’s audience on this particular evening). MMT is basically an up-dated version of the ‘chartalist’ and/or ‘state theory’ of money, and is clearly a prominent contemporary example of a credit theory of money.

Torrey, in his comments, pointed out that  MMT focuses mainly on issues of demand management by the government (which is certainly an important topic), but also argued that there is a whole other set of implications of whatever ontology one chooses, about how this affects our understanding of the supply side of the economy. In this area, what arises is to note the pervasive financialization of the economy, and a shift of economic activities away from real production to various purely financial machinations, and manipulations of financial markets. Torrey mentioned a phrase that I myself coined about 25 years ago, and used in the sub-title of a book, The Revenge of the Rentiers.

Arriving at the correct ontology of money therefore has implications for both demand side and supply side policies. The mistaken view fostered by the catallactic ontology is that the main function of taxation by the government is simply to ‘pay for’ government expenditures. But is this not the only function of taxes, and not the most important one. 

Here are some comments that John Smithin (not a US resident), made on Torrey’s comments on Graham, and sent to both of them:

- Yes, money must come before markets. Money does not emerge from markets.

- Quite agree that one of the most important things about Keynes was the monetary theory of production. Particularly, the role of endogenous money in the generation of entrepreneurial profit (rather than rentier incomes, or capital gains) - although, of course, Keynes himself let this aspect of it slide (unfortunately) after publishing the Treatise on Money.

- Obviously, the main point of taxes is not to finance government expenditure (MMT are quite right about this), and it really is surprising, after all this time, that this needs still to be debated. What I usually say is that taxes are a question of establishing sovereignty rather than an act of appropriation.

- That sovereignty can be deployed in a number of ways, simply establishing the legitimacy of state's money, discouraging anti-social behaviour, encouraging other behaviour, and so on and so forth. Contrary to the popular view, I don't think that taxes are primarily about income distribution, because so many other factors also affect income distribution, spending, interest rates, financial and other regulation, labour and other legislation, trade policy - and so on and so forth.

- There is an issue about MMT's ‘Old Keynesian’ view of taxes as deflationary. Plausibly, under endogenous money an increase in the average tax rate would be inflationary rather than deflationary. The details of MMT’s technical economic modelling are sketchy.

- The point of my ZRPR proposal (a zero real interest rate policy) is to reduce rentier income effectively to zero - in two ways, (a) because of the zero real interest rate itself, (b) by stabilizing real rates at zero to reduce/eliminate financial speculation. But, as the same time this does not expropriate existing financial wealth. In terms of practical political economy, this would be where taxes do finally come in - that is, if the existing financial wealth was felt to be illegitimately gained in some way. Here, though, we get into the weeds of politics. Going forward, with zero real rates, further wealth taxation would not be required.

Note that this is not Marxism. It is more akin to ‘Islamic banking’. There are no rentier incomes, but there are still entrepreneurial profits and wages. But, I have to stress that all of Islamic banking, MMT, Catholic usury laws (and a fortiori contemporary central bankers!) make the error, as I see it, of not distinguishing between real and nominal interest rates.