Classical and modern monetary economics: a creative tension?

David Faber

We live in an era of neoclassical neo-liberal thinking. Old time moralistic economic notions of austerity threaten the very livelihoods and standard of living of the people. Economic ideas have never been more important. In this context modern monetary theory represents a breath of sweet reason, of critical fresh air.

But should we just jettison the older economic tradition of the labour theory of value, with its relation to money as it was over the greater part of human history, before the fiat and electronic money of today?

Or should some synthesis be adventured between the two perspectives? This note, by a humble labour historian interested in the history of economic ideas rather than an economist, seeks to tease out some of the historical and intellectual issues involved.

It is with some trepidation that I come to summarise my understanding of modern monetary theory. Firstly let me direct readers to form their own opinion based on such sources as the writings of Steven Hail, Philip Lawn and John Hermann amongst others as published from time to time in this Review. That said, let me adventure a precis and pose some conundrums.

Modern monetary theorists seem to me to be asserting that money has evolved quite away from its millennial historical roots as a commodity of exchange over the last two centuries, particularly in more recent times. This proposition would seem to be historically, scientifically and intuitively true. But a note of caution is perhaps indicated on the historical score. Does modern money retain no trace of its historical antecedents? Modern monetary theory seems to imply that modern money is pure fiat money. Theoretically this may be so, but what about historically?

Nothing historical is ever pure. Take the case of the non-inflationary issue of fiat money in a monetary economy short of full employment. Doesn’t this imply that there is some relation under certain conditions between fiat issue and the spheres of production and exchange, from which modern monetary theory seems to consider that modern money has cut its moorings? If not, why not, and if so, how so?

And does modern monetary theory presuppose that the concept of value, central to classical theories of economics and money – which links these spheres – is transcended, and some- thing of an historical antique? These musings may embody a misunderstanding of modern monetary theory, in which case I would crave enlightenment by exponents of the theory, especially as they may incorporate the perplexities of others who experience a little reluctance to fully endorse a theory so agreeable in its social democratic economic implications, so important in these dark days of the old time economic dogma of austerity. But again, modern monetary theory is just that, a monetary theory, offering insight into the monetary market place of our monetary economy. Nevertheless one feels impelled to ask if it is fully consistent with what we think we know of the economics of production and exchange.

It may be handy to explore here classical notions of value, trade, production, commerce and money. One of the virtues of classical economics, with its core concept of the labour theory of value, (the notion that labour is the ultimate source of all value which is not ultimately derived from the productive potential of the environment), is that it embraced all these economic spheres together.

It is a mistake to identify the theory exclusively with the work of Karl Marx. Marx ‘only’ refined the concepts of value and ‘surplus value’ (the unearned product accruing to capital once it has payed labour a social subsistence of reproduction) based on thorough study of their employment by such classical predecessors as Adam Smith and David Ricardo. Marx ‘only’ drew out their socialist implications. This is why Marx is referred to as ‘the last of the classical economists’ being ‘the last’ because of subsequent reactive developments.

According to my old lecturer and tutor Bruce McFarlane, once of the University of Adelaide and later of the University of Cambridge, it was this challenge to capitalism which precipitated the moral and intellectual panic of denial of the labour theory of value by middle class neo-classical marginalist economists lead by W. Stanley Jevons in his Theory of Political Economy.

Jevons tightened up economics considerably, intellectually and mathematically, but the apologetic political drift of his economics is undeniable. Another economist who wrestled with the limitations of Jevons’ free market equilibrium model was John Maynard Keynes, who was perhaps the brightest man of his society and generation. Keynes appreciated that capitalist economies were periodically liable to stagnate, and feared for the social consensus under- pinning capitalism accordingly.

Keynes thought hard about how capitalism might be saved from itself and rescued from economic depression and political collapse. Like Jevons, Keynes rejected the labour theory of value, preferring the economics of Malthus to that of Smith and Riccardo because he thought it gave a sound psychological basis to economics. Marx despised Malthus as a plagiarist and a puritan, and Keynes claimed, not altogether convincingly, to never have bothered to read Marx. But I repeat, in the history of economics, Marx aside, the labour theory of value bulked large, especially well into the nineteenth century, and still has its proponents (and of course critics) today.

Of course if the whole notion of value is jettisoned, so is the labour theory there- of. Are we ready to entirely overthrow a great tradition of looking upon labour (and the environment) as the prime forces of production, generating a fulcrum (value or worth) around which supply and demand determine monetary prices?

Here endeth the musings of a social democrat much influenced by both the labour theory of value and the appeal

of modern monetary theory. Is there a productive tension between them in the ongoing scientific and historical task of evolving an economics to meet the challenges of the present and the future?

Dr David Faber is a labour historian and Visiting Research Fellow, School of Economics in the University of Adelaide.