MMT Short & Simple (2) — A Summary

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4. Total Spending Equals Total Income

For the economy as a whole total spending equal total income for a given period of time. What one party buy/spends another sells and thereby receives income.

Spenders and corresponding income earners can be individuals, corporations or macroeconomically constructed entities like these:

• the domestic government sector, which includes federal, state and local governments as well as public sector organizations;

• the domestic private sector, which is made up of private businesses and households; or

• the rest of the world (also called the foreign or external) sector, since foreign individuals, businesses and governments can buy goods and services produced in the domestic economy.

5. Uses of Household Income

Total spending equals total income is a proposition that is true for the economy as a whole but not necessarily for household, corporations or macroeconomically constructed sectors.

A household, for instance, may spend more than it receives in income — by drawing down on savings or by borrowing. Conversely, it may spend less than its income, thus saving some money.

A household will use its income to pay taxes, or to engage either in consumption or in saving:

Some of the income will go to taxes. The amount left over is called ‘disposable income’. 

The household can use its disposable income for consumption or saving. 

Consumption is a form of spending. It involves the purchase of goods and services. 

Saving is defined simply as the act of not consuming. It is that part of disposable income not consumed. 

If the household leaves some of its income in a savings account at a bank, this income is not consumed but saved. 

Or the household might purchase some shares or bonds. Since shares and bonds are not goods or services, buying them does not count as spending, and so does not create income. Rather, holding shares or bonds are different ways of saving. 

Some of the household’s income might be used to pay off debt, such as principal and interest on a home loan. This also counts as saving, because it is income not spent on goods and services. 

So, part of income goes to taxes. Part can be consumed. And the rest will be saved.

6. Stocks and Flows

Flows accumulate over an extended period of time, have temporal extension. Stocks do not, they are snapshots taken at a given point in time. 

A flow is a process that occurs through time. To measure it, we need start and end points. 

Spending and income are key economic flows. We measure them as amounts that occur over a period of time, such as a year. 

Other examples of economic flows include saving and depreciation. Saving, as we saw in the previous post, is the amount of disposable income not consumed. Depreciation is the reduction in value of an asset over time due to wear and tear as the asset is used. For instance, a machine that costs a business $10,000 to purchase might last five years, suggesting depreciation of $2,000 per year. 

A stock is something that is measured at a particular point in time. For example, the number of hats you currently own is a stock. 

A notable economic stock is the amount of wealth currently possessed by the community. Another key stock is the amount of fixed capital equipment that has been accumulated and is currently available for use in production. Still another important stock is the number of people currently in the labor force. 

A fundamental point is that flows add to (or subtract from) stocks. It is said that “flows accumulate into stocks”. 

For example, saving is a flow that adds to the stock of financial wealth.

7. A Fundamental National Accounting Identity

A prominent flow measure for the economy as a whole is Gross Domestic Product (GDP). This is a measure of the total output produced within the domestic economy over a year.

In the National Accounts, total output is evaluated at market prices. Conceptually, it is as if the quantity of each good or service produced is multiplied by its price, with the products then summed to give a figure for total output or ‘nominal GDP’. 

The figure for nominal GDP can be adjusted for changes in the average price level to arrive at a measure of ‘real GDP’. This measure is intended to give us a sense of how the physical output of goods and services compares with other periods. 

Although real GDP is intended to shed light on the level of physical production, clearly it is a monetary measure just like nominal GDP. It is just that real GDP is a monetary measure that has been corrected for price changes. 

The reason real output (or real GDP) is measured in monetary terms is that there is no good way to add up physical quantities of different goods and services to arrive at a single number. For example, imagine an economy that produces just three goods with the following physical output: 

Physical Output = 50 computers + 75 motor vehicles + 40,000 apples 

We cannot add up these quantities to arrive at a single measure of physical output. The goods have different units of measurement. They are incommensurable. 

But if we know prices, we can express the output of each good in monetary terms. All output will then be measured in a common monetary unit and can be added together. Suppose the prices are $1,000 for a computer, $10,000 for a car and $1 for an apple. Given these prices, nominal output can be calculated as: 

Nominal Output = $1,000 x 50 + $10,000 x 75 + $1 x 40,000 = $840,000 

This is our measure of nominal GDP. 

Perhaps it is known that prices on average rose by 5 percent over the year. The figure for nominal GDP can then be converted into real GDP by deflating the nominal figure by 5 percent. This is done by dividing the nominal figure by 1+p, where p is the rate of increase in prices over the period. Accordingly: 

Real GDP = $840,000 / (1 + 0.05) = $800,000 

If we denote real output by Q and the average price level by P, then nominal output is PQ. 

There is a very important connection – in fact, an identity – between total output and two other major macroeconomic flows, namely total income and total spending. 

First, total output Q is identically equal to total income Y. The reason for this is that output priced in monetary terms generates income of an equal monetary amount. 

It is easy to see why this must be true in the case of output that is sold. The amount paid for the output goes as income to the sellers. 

The identity is not so obvious in the case of unsold output. It holds because in the National Accounts this unsold output is treated, for accounting purposes, as if it has been purchased by the firms that produced it. This accounting treatment ensures that total output equals total income, even though some output is unsold. 

Second, we know from part 4 that total spending equals total income. Put simply, all spending goes to somebody as income. 

Putting these observations together enables us to arrive at an important accounting identity: 

GDP = Total Output = Total Income = Total Spending 

Since total output Q and total income Y are the same when measured in monetary terms, both are often denoted simply by Y. 

This identity is at the heart of National Accounting. In particular, it informs various methods of measuring GDP.

The Problems of Germany's Energiewende

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Here are two synoptic articles on the problem's of Germany's Energiewende — unfortunately available only in German:

Die Arroganz der Ahnungslosen

Erneuerbar sind nur Illusionen ...

See also

“Heart-Jamming” Wind Turbines …New Medical Research Confirms Infrasound Negatively Impacts Heart Health!

MMT Short & Simple (1) - A Summary

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In this post, I summarise (cherry pick to my best ability) the essence of a series (of 20 posts so far) by The Heteconomist called Short & Simple, in which he tries to introduce MMT.

1. Government as a Means of Cooperation

Human communities are in need of collective action and social rather than private provisions alone. In this context, governments have functions to fulfill, which in a democratic society are based on a public mandate and monitored by the people or their representatives.

2. Establishing a National Currency

(1) Effective contributions by government to the common weal require that adequate resources are diverted to the state's agencies.

(2) Effective social contributions by government imply also that there must be a reasonable balance between resources going to the non-government sector and government. 

By establishing a national currency, the state attains both goals (1) and (2).

ad (1) By requiring people to pay taxes in the national currency determined and issued y the state, the latter is able to effect acceptance of its currency and spend it to attract resources needed to carry out its mandate.

ad (2) by withdrawing purchasing power from the non-government sector via taxation, government is in a position to influence how much of total resources available to a society go to government and how much are left for the non-government sector.

(3) Safeguarding Monetary Institutions and Banking

One way of fulfilling government's mandate is to organise the financial system and create a division of labour between its own functions within that system and those of participants in the non-government sector, like banks.

Government needs to ensure that enough money is available for the smooth running of the economy, part of which task is, of course, preventing banks from becoming dysfunctional.

A crucial feature of the division of labour between government and non-government financial agency is reflected in the distinction between currency (or state or government money) and bank money.

Banks are allowed to create money by extending loans. the corresponding deposits represent national currency and bank money but not currency in the sense of state money.

A commercial bank deposit is not currency. It is a bank’s promise to supply the government’s currency to the deposit holder. Since the government is the sole issuer of currency, banks ultimately depend on government to obtain it. 

Even so, banks do not need to have the currency at the time they make the promise. They just need to know that, as necessary, they will be able to get it. 

The bank promises to provide the currency at par, meaning that each dollar of deposit is completely convertible into a dollar of currency. 

With a current account or checking account, the bank is obliged to supply currency on the spot, whenever the deposit holder requests it. With a term deposit, the bank promises to supply currency at a future date. 

To guarantee that deposit holders can always convert deposits into currency (up to some limit set by government), the central bank acts as lender of last resort.
This means that if a bank is short of currency and cannot obtain it from another bank, it can borrow from the central bank. 

This makes deposits “as good as currency” for most purposes, up to the limit at which deposits are guaranteed by government.

More Italian News on the Faulty Design of the EU

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Writes Paul De Grauwe,

The European Commission can now force countries to increase taxes and reduce expenditures without, however, having to bear the political costs of these decisions. These costs are borne by national governments. This is a model that does not work 

National governments bear the political costs of expenditures and taxes. The risk therefore arises that they will contest the decisions of non-elected officials who do not bear these costs. This has happened a few times in the past. In 2003-04, when their economies were not doing well, the German and French governments collided with the European Commission about their budgets. The European Commission wanted to force these governments to reduce their budget deficits. Both governments refused to do this and the rules were changed ‘à la tête du client’. 

Today the Italian government is doing the same. It is a government that has made a number of election promises and wants to implement them now. That has budgetary implications. The European Commission is now trying to force the Italian government to abandon these election promises without having to bear the political cost of doing so. The new Italian government would pay the political price for shredding its election promises. It will not do so, as the French and German governments did not do in 2003-04. 

The model of top-down budgetary control does not work in Europe. It does not work because the whole process of decisions on taxes and expenditures still exists at the national level. It is also at the national level that the democratic principle of “no taxation without representation” is implemented. The European Commission’s attempts to bring Italy into line today are therefore also attempts to impose exceptions to this democratic principle. It does not work, and fortunately so.

Italian News

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From this readable article:

The Prime Minister Giuseppe Conte was quoted as saying:

The more I study the draft budget, the more I like it.

The fact is that the fiscal plan drawn up by the new government will “fulfill election promises”. That is, the Italian people clearly voted in favour of the policies and the intervention of the European Commission merely highlights the anti-democratic nature of the European Union and its institutions.

[...]

The common currency has only survived because the the ECB has been systematically breaching the Treaty rules, although claiming otherwise, and the Commission has turned a blind eye.

The fact is that the ECB has been funding fiscal deficits since May 2010 and while they can claim they have only been buying trillions of euro of government bonds as a ‘liquidity management’ operation, the truth is obviously otherwise.

Spiegel Online is clearly trying to sheet all the blame home to Italy.

They claim a pending crisis is:

… because a country like Italy doesn’t follow the rules.

They are silent on the on-going current account surpluses that Germany has been running, which have been well in breach of Eurozone rules.

The German external surpluses (three year average) have risen from 6.2 per cent of GDP in 2012 to 8.4 per cent in 2017 where the maximum allowed under the Macroeconomic Imbalance Procedure is 6 per cent of GDP.

Perhaps if Germany spent more domestically, the other Member States would not need to stimulate their own domestic demand quite as much.

It is ridiculous to isolate Italy in this current period and accuse it of undermining the Eurozone.

Last week’s national account data reveals how poorly the overall Eurozone economy is performing. That has nothing much to do with Italy and everything to do with the poorly designed monetary system which requires an austerity bias under its rules in defiance of the responsible use of fiscal policy.

[...]

The impact of the austerity inflicted on Italy over the last many years will resonate for generations to come.

And these are real costs, not the confected ‘debt burden’ that is usually claimed to represent violations of intergenerational equity.

We can expect the unemployment rate to start increasing again as growth has slumped to zero.

MMT's Concept of Unemployment

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Cullen Roche has this criticism of the MMT concept of unemployment:

The MMT argument, in a nutshell, is that the financial system is imposed on us. So, the government establishes property rights and taxes and that forces people to obtain an income denominated in the national currency. If you can’t obtain a job and income then you’re unemployed and the MMT people would say that the government caused this by imposing property rights and taxes on you.

I suppose, one should explicate Roche by adding that certain adherents of MMT tend to refer to the hut tax to explain how government — historically, in the case of the hut tax in Africa — and in principle induces people to seek/accept employment to be able to pay government its dues (especially taxes). I guess, the reason Roche mentions property rights is that the hut tax implied loss of the property right to a hut if the tax liability is not settled.

I would argue even more generally, the imposition of tax liabilities on the citizenry is tantamount to charging them a fee to be free, i. e. not to be incarcerated, otherwise punished or restricted in the liberties of ordinary life.

I shall discuss the MMT account of unemployment more fully at the bottom of the post.

Cullen Roche goes on to argue:

There’s a huge problem with this theory – if this is true then you should be able to sue the government and make them give you a permanent income and/or job because they are liable for causing your unemployment. However, you cannot, at present, sue the government and force them to give you a full-time job and income. To date, no one has been able to successfully make this case in court resulting in a permanent full-time job/income as a result of government liability. So the crux of MMT is inconsistent with the actual legal precedent in the USA.

I disagree. First, let us assume that the MMT argument is correct, i. e. government is responsible for unemployment — for your unemployment. I do not see how the economic argument necessarily implies a legal judgement. Some people may conclude from the economic argument that the government is culpable and that, therefore, it is just to legally force it to indemnify the victims of government-induced unemployment. In fact, a lot of people take that attitude, expressing it in a whole range of different forms. Some demand the right to work, others insist that the unemployed must receive social benefits. Also, I am sure there are countless legal battles going on relating to the governments duty to compensate those disadvantage by unemployment — and a number of these grievances will or may be based on the economic argument that government causes unemployment. But once again, I cannot see how MMT commits its adherents to only one interpretation of the economic argument.

Leading proponents of MMT do not seem to recommend individual legal action to remedy the disadvantages of unemployment but propose a Job Guarantee, which I would classify as belonging to the broad category of social insurance — so in this sense it is nothing out of the ordinary in the era of the welfare state, other than being designed to be a more extensive and effective form of social insurance guaranteeing continuous full employment (see below).

To be sure, MMT in tune with longstanding social convention in the era of the welfare state does not recommend individual legal bit collective social action to come to grips with the negative effects of unemployment

Roche then writes:

The problem with the MMT argument is that they ignore the fact that, when you create a monetary system you also have to choose the type of economic system that that monetary system serves. Is it a socialist system? Is it a capitalist system? If one chooses to make a monetary system in a capitalist world then unemployment results.

MMT would disagree, claiming that permanent full employment is within the possibilities of capitalism, as government determines the level of employment in an economy and has always the means to employ and pay the wages of those who do not find employment in the private sector. It is unfortunate that Roche does not even mention this important piece of MMT. You may question the argument but it is pertinent in the present context and should not have been omitted by Roche.

The interesting issue, to me, is whether government does cause unemployment. Roche does not think so, he believes unemployment is a necessary feature of capitalism and hence created by the latter rather than the state. That is an interesting debate.

MMT would argue, I think, that the state can create unemployment in two different ways: 

(1) It can provoke unemployment by demanding taxes in a currency not yet available to the tax debtor. 

(2) It can fail to ensure full employment, even though it is within the means of government to achieve it.

These seem to be two different, though related and not mutually exclusive things.

Ad (1)

Think of the hut tax. The British demanded from the indigenous population of an African region to pay a tax on their huts on penalty of losing the hut. The tax was payable in the currency determined by the British. The Africans did not have that currency. They needed to get hold of it. They had to earn it. Not being in a position to earn income denominated in that currency meant people were unemployed — without work from which only they could uphold their livelihood.

Remember, only the state can issue that currency. If the state does not offer this money to its tax debtors, people are not only unemployed (without work that pays the kind of money needed to honour the tax liabilities that the stationary bandit imposes on the citizenry), they are criminals liable to lose their freedom. Taxes are a price one pays to remain free and unpunished. That is the nakedly coercive side of modern tributes called taxes.

Like any good old stationary bandit, the modern state uses its coercive power to extract wealth from its subjects. In order to avoid imprisonment or worse, people must offer the state something it wants. Goods, services, labour used by the state to pursue its purposes. In return, the providers of these inputs receive that very special kind of money issued by the state which is uniquely authorised to redeem the tax debts imposed on the population. Serving the state, they receive state money which they can use to pay for the right to remain free and unpunished.

Ad (2)

I will not elaborate on this point, except to point out that from this perspective too the state is clearly responsible for unemployment.

Why is the thesis — in the form put forward by MMT — that the state creates unemployment a little hard to grasp or liable to leave one with a feel of incongruousness?

As for point (2), the most obvious objection will come from those — like Cullen Roche — who do not believe that government has the ability to ensure full employment at all times. I shall not delve in to that topic here.

As for point (1), in an African community not yet integrated into a modern monetary economy, people will tend to have employment nonetheless in the sense of earning a living, presumably at least physically, and perhaps partly in terms of their traditional money. So, the parallel meanings of one and the same term — unemployment — may have a jarring effect on the reader.

Clearly, MMT reduces the meaning of employment to the ability to earn — by engaging in paid work — the money in which tax debts are to be settled.

One might ask, are there people who can be said to be in employment who are not threatened by the inability to pay taxes? I think, there are such people. Those exempted from taxation, say, because their earnings are too low to be taxable or people subject to other reasons for exemption. Is unemployment always caused by an inability to earn "tax credits" (money that can be handed over to settle tax debts). You may lose your job, yet still have enough money to pay taxes, and if you stay unemployed will not be required to pay taxes.

I suppose, it is this sort of noise in the background (minor exceptions) that makes us feel uncomfortable with the proposition here discussed.

In the main, however, I hold the MMT thesis to be warranted.

The Essence of Freedom

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In this post I revisit findings from my research into the phenomenon of freedom. I am preparing a post on the relationship between money and freedom and hope to find inspiration from my earlier historical and sociological investigations.

Having started from a partisan view of freedom, my research into the phenomenon has gradually steered me into a different position which I have summarised in a paper delivered at the University of Witten/Herdecke. Below find the paper's conclusion:

5.0 Conclusion

Discovery through political competition is not without risks, and it cannot guarantee the absence of severe error, but it is still the best way (1) to incorporate knowledge generated in civil society, (2) to keep politically dominant views exposed to ongoing corroboration and (3) to include the largest possible number of interest groups in the permanent sequel of repeated games that produce effective trust in society, thus bringing about the dynamic equilibrium of dissension and pacification which defines feasible freedom.

5.1 Lessons for Freedom

Classical liberalism tends to misunderstand or ignore the political logic of freedom, owing to a monadic conception of the rights underlying personal freedom. In theory, these rights are absolute, immutable, and monadic, i.e. attached to and owned by the individual in inalienable form. Under feasible freedom, however, people, in exercising their liberty, negotiate and renegotiate these rights, both in politics and in private transactions. Free citizens constantly renegotiate new permutations of feasible freedom, thereby constantly rewriting the social contract.

We detect an unexpected and rather incongruous similarity of deficiency in socialist ambitions for central planning and liberal calls for a depoliticised society. Both desiderata are based on incomprehension of a vital spontaneous order which concerns the economy in the case of socialism and politics and the state in the case of liberalism. Both political camps underrate or misconstrue the need and the logic of the indispensable discovery procedures required for strong economic performance and, respectively, the feasibility of civil society at large.

As there is no single person or group of persons capable of registering all inputs needed to calculate an efficient [allocation of resources], Hayek suggests inclusion of all citizens in a free economy to approximate far better the needed range and quality of information. Analogously, no single person or group of persons is capable of registering the inputs needed to take better political decisions than are available from a regime that guarantees the possibility for all citizens to make their contribution to political decision making. Incongruously, liberalisms akin to Hayek’s insinuate the equivalent of an impersonal central planer by suggesting that observance of certain rules activate automatisms in a free society, notably the market mechanism and the rule of law, that reduce the need of politics to such an extent as to portray freedom as a state of affairs distinguished by the absence of significant levels of politicisation - a visionary predilection that amounts to the disenfranchisement of the public. 

A free society, this is the claim of the present paper, is akin to a free economy, in so far as only the mobilisation of dispersed knowledge lodged in decentralised units (citizens and their organisations) can bring about a discovery process capable of sustaining human relations that make freedom feasible.

Liberalism cannot fulfil its role in a free society unless it acknowledges that its leadership in matters of constitutional integrity does not carry over into the area of legitimate political discretion. And liberalism must recognise that within the boundaries of constitutional integrity there is substantial leeway for political discretion by players of quite distinct emphases of vision. Freedom remains an open-ended project.

In order to establish her meaning and detailed shape, liberty depends on a political infrastructure that engages contestants in a competitive discovery process that is likely to result in eclectic policy outcomes deviating from puristic ideological positions. Adaptability is a survival requirement for any agent participating in the political discovery process. Puristic ideologies fail to stay in touch with the diversity of interests and views that push toward concrete policies. Feasible freedom may be conceived of as a dynamic equilibrium balancing dissension and peaceableness. Approximating the balance requires that the competing agents continuously search for new information about the prospects of their agendas, swiftly adjusting the latter to sustain support and the power to exercise influence. Precise and consistent accounts of freedom such as endeavoured by classical liberalism play an important role in clarifying the rules of the discovery game and the inalienable contours of freedom, but they are too abstract and too general to be able to prejudge the differing aims that people ought to be free to pursue within the competitive political framework of an open access society. Ideologies lend impetus to freedom’s sine qua non: discovery by political competition, but they do so fruitfully only when being capable of changing and renewing themselves in response to the findings elicited by the search.

The success of politics under feasible freedom is to be judged by the ability to balance dissension and peaceableness under the auxiliary conditions of high levels of personal autonomy, productivity, and wealth. We may register good performance and even progress along these lines in the very presence of states of affairs that appear insufferable from a classical liberal point of view. But it should not be forgotten that classical liberalism is just a set of hypotheses, some of which are rejected by freedom. Freedom is not identical with liberalism. Freedom is not identical with liberalism‘s account or expectations of her.

The source. 

Steps on the Way to Fiat Money (1) — Goldsmiths, the Early Bankers

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Picture a world in which gold is money. There is no paper money or any other kind of money other than gold. Security is an issue. The state acts as a secure depository of your gold, but one day it confiscates all the gold that you have left with it for safekeeping. You look for alternatives and discover that goldsmiths have adequate means of protecting large stocks of precious metals. You leave your gold with goldsmiths. You are happy with the service and so are increasing numbers of other clients.

Before long, the goldsmiths discover that people find exchanging receipts (documenting their ownership of the deposited gold) more convenient than collecting physical gold from the goldsmith and exchanging it for payment. the receipts serves as money in lieu of gold, being, of course, fully backed by gold which can be retrieved from the vaults of the goldsmiths whenever needed. 

This gives rise to a new business proposition. The goldsmiths start lending out some of the gold of that they supposedly hold in safekeeping for their clients. They charge interest on the gold loan, earning more than from safekeeping fees. They have become bankers, making profits from extending loans. In fact, in good time they will actually offer interest on gold deposits to attract more species to lend it out at a higher rate. Like a modern banker their business model is based on net interest income in excess of other expenses, notably interest paid to (gold) depositors.

If the amount of gold (not lent out and) left in the vault of the goldsmith is not sufficient to give it back to depositors when they demand redemption, the banker-goldsmith goes bankrupt. Prudent goldsmiths keep a reasonable reserve of gold in their vaults, which, of course, limits the expansion of their gold loan business. 

At this stage, the goldsmith does not lend out more gold than the amount of it available from his depositor clients. If the demand for gold (loans) exceeds the deposits held in safekeeping with the goldsmith, the latter must turn down business.

The volume of gold deposited with goldsmiths could only increase if people were saving more of it or if additional gold was flowing in from abroad.

Again, goldsmiths are lending out what they have received from their depositors. They are not yet creating gold (money). They are still intermediaries passing a part of a fixed stock of deposits from savers to debtors.

This changes when goldsmiths no longer offer loans that are backed by the gold deposited with them but  issue notes (really paper money) representing claims on gold exceeding the amount of gold deposited with the issuer.

By issuing this type of paper money, goldsmiths have entered the era of fiat money, creating new money from nothing, and increasing the money supply endogenously (in the absence of new discoveries or influx of gold from abroad).

The invention of fiat money by goldsmiths in the 17th century represents an outstanding advancement for humanity. It marks the financial revolution that preceded and made possible the industrial revolution. For the first time in human history is the process of investing uncoupled from the need to reduce consumption/demand in order to divert savings toward investments. It had become possible to make investments in excess of savings (thereby enhancing savings ultimately). People had found a way to afford investments as if they were richer than they really are, only to become genuinely richer than they used to be prior to injecting fiat money into the economy. 

The Wealth of Capitalism Is a Creation of Government

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In discussing the ideological reasons that compel mainstream economists to posit the neutrality of money, we have shown that the intervention in the economy by entities of collective action (the state, treasury, central bank) is indispensable for the modern Promethean economies that have provided mankind with continual per capital income growth. 

The modern economy is not a spontaneous product of unhampered markets and would collapse if we were to retract the institutional props on which the modern monetary order rests. Notably, it depends on money originated by a monopolistic and sovereign  issuer of the currency. In the absence of this arrangement, it would not be possible to sustain, let alone accelerate, the kind of ongoing economic growth experienced in the West during the past 250 years.

The meaning of progress turns out to consist in overcoming precisely the conditions that are supposed to be in harmony with free market precepts (Gold standard or the denationalisation of money), which are really efforts to repress that part of the growth of the money supply that is crucial for the Promethean upsurge.

Classically liberal proposals are effectively reactionary. Living up to them makes for stagnation or needlessly inhibited growth. 

Creation of money ex nihilo is the prerequisite for investing in perennially innovative, ever more productive solutions that increase the living standard on the basis of self-perpetuating economic growth. 

The vibrant markets of capitalism are a creation of government. They cannot survive without government managing the monetary system. 

No government, no fiat money.

No fiat money, no capitalist expansion.

No capitalist expansion, no modern levels of wealth.

Without a stable mechanism by which to expand the money supply to provide enough credit for investment in excess of savings, it would not be possible to attain the enormous growth rates that have been the hallmark of the capitalist age.

Investments that rely on the given money supply, especially on the given level of savings, lack the prospect of additional demand which is tied up in money lent out (savings) and cannot serve as effective demand for the products to be newly produced. To that purpose, new money, newly created money, fiat money, a viable fiat money system is needed.

The Tax-Monetary Regime of the Modern State — Stationary Bandits and Refined Coercion

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The modern state emerges when roaming bandits turn into sedentary bandits. Instead of looting the sources of their wealth along their itinerary of nomadic robbery, they become territorial discovering a less destructive and more profitable form of exploitation. A refinement of coercion occurs. 

As we shall see further below, the modern monetary state belongs in this tradition of refined coercion. It exerts pressure on the population to exact tribute from it, nowadays predominantly by threats of persecution rather than manifest violence, of which the state, of course, is quite capable as everybody is aware of. 

The modern state has developed the advantages of benign suppression far beyond the attainments of the first stationary bandits, but as we shall see later on, in many ways it remains a robber of the people, an entity that utilises its monopoly of coercion to exploit its subjects. However that exploitation is part of a trade-off widely regarded as reasonable most of the time.

As I have written here in The State - (6) - [Draft]:

§ 29 - From Roaming Bandits to Stationary Bandits - The State's Advantage over Anarchy 

Nothing is worse than anarchy. The state is guaranteed a floor of attraction in that it is capable of saving people from anarchy. In Mancur Olson's theory of the state, anarchy is characterised by a world in which roaming bandits appear more or less regularly to raid and rob productive settlers. Under these conditions, the size and growth of distributable wealth is severely limited. There is little incentive to invest and produce goods, especially of a kind that is easily stolen. In fact, the roaming bandits and their victims are trapped in a sub-optimal equilibrium. Their forays are far less profitable than other forms of confiscating a society's wealth. The relationship between robbers and robbed could be improved to the advantage of both. How? 

If the roaming bandits become stationary bandits, if they settle among the victims of their raids they will inevitably develop a certain interest in improving the very conditions of production which is the spring of their wealth. Exploitation becomes more ample for the exploiter and less disadvantageous for the exploited. There is more left for both. As Olson puts it, the bandits develop "an encompassing interest" in the community from which they steal. Actually, the line between pilferage and exchange begins to blur, when the bandits take into consideration and even cater to some of the needs of the community. Being resident owners of a territorially delimited precinct of exploitation, it is in their self-interest to ensure peace and orderly conditions and provide a range of other public goods liable to make the task of ruling more tractable, efficient, and profitable. High levels of exploitation notwithstanding, compared to anarchy, under the regime of stationary bandits life is still better, allowing for greater efficiency, security, productive innovation and progress, however slim and slow. From the Neolithic revolution to the French revolution, the development of our civilisation takes place mostly in the presence of regimes of stationary bandits. 

The powers-that-be have good grounds to care for the common weal, in however limited and imperfect manner, while the governed populace also have reason to welcome a rule that limits the incidence of violence, robbery and utter arbitrariness. The improving qualitative leap from anarchy to stationary banditry is very large — which is the easier forgotten the more normal is becomes to live in a world pacified and rendered orderly by the state. Also, the population will tend to rank certain fundamental conveniences provided by the state, especially peace and security, higher than others that are lacking or being only deficiently provided for. On balance, even a rather imperfect state will enjoy support or acquiescence by the population, especially if there are avenues for gradual improvement and the voicing of grievances.

Power is the means, coercion the effect of that means. 

The modern stationary bandit exerts its (monopoly of) power and coercion by creating a new phenomenon that is generally dreaded, motivating people to escape it if only they can: unemployment. 

What is unemployment? It is the inability to secure the employment that yields income sufficient and acceptable to pay the state the tribute that it imposes on its citizens. 

Nowadays this tribute takes the form of taxes.

By demanding payment of taxes in a kind of money that only the state can issue, the state is capable of putting every citizen into a state of unemployment:

Think of the hut tax. The British demanded from the indigenous population of an African region to pay a tax on their huts on penalty of losing the hut. The tax was payable in the currency determined by the British. The Africans did not have that currency. They needed to get hold of it. They had to earn it. Not being in a position to earn income denominated in that currency meant people were unemployed — without work from which only they could uphold their livelihood.

Remember, only the state can issue that currency. If the state does not offer this money to its tax debtors, people are not only unemployed (without work that pays the kind of money needed to honour the tax liabilities that the stationary bandit imposes on the citizenry), they are criminals liable to lose their freedom. Taxes are a price one pays to remain free and unpunished. That is the nakedly coercive side of modern tributes called taxes.

Like any good old stationary bandit, the modern state uses its coercive power to extract wealth from its subjects. In order to avoid imprisonment or worse, people must offer the state something it wants. Goods, services, labour used by the state to pursue its purposes. In return, the providers of these inputs receive that very special kind of money issued by the state which is uniquely authorised to redeem the tax debts imposed on the population. Serving the state, they receive state money which they can use to pay for the right to remain free and unpunished.

Before the state can collect the tax tribute, it must first issue this very tribute, spend state money to reward those who are willing, or in fact, eager to provide the state with what it needs to function as a state.

The state spends before it can collect taxes. It does not tax in order to be able to spend. 

It creates money to make people depend on it.

It spends money into existence to reward those who provide the state with what it needs to accomplish its mandate.

It takes money from the rewarded and other users of the state's currency (i. e. it taxes them) to limit their claims on the output of the economy. To the extent that purchasing power is reduced through taxation, the part of the economic pie available to non-government agents is reduced, leaving more for the government to shop.

Money and taxes are the way in which the modern state organises exploitation.