Civil Society, Economy / Finance

Modern Monetary Theory Could Save System

Jan 7 2021

By Tihomir Domazet*

Fall of the Berlin Wall, the End of the Cold War, the Collapse of communism, all symbols of the victory of Western ideology, led by the United States, were to bring new economic prosperity to the West. But this did not happen: the EU’s share of the world measured by GDP decreased from 1977 to 2019 by 9.8 pp (percent points), and US, Japan 4.2 pp and 4.1 pp, respectively. The West (EU, USA, Japan) lost its economic primacy: in 1977 it accounted for 66.1% of the world, and in 2019 it accounted for 48.0%. If someone were to ignore these huge economic changes, attributing them to globalization, it just confirmed that in the global competition this model has collapsed.

Covid-19 outbreak and health crisis, which soon transformed in an economic, financial and social crisis, brought although  it not caused dramatic events that will irreversibly affect the shaping of the new economic and social system, of which the following stand out in particular:

  • The Covid-19 vaccine is and to be available for all residents of each country free of charge regardless their social, national social or other status. That happened never before.
  • Workers are brought to the global level by Covid-19 (capital was before). Workers are affected by Covid-19 in all economies and they are now the globally factor.
  • Profit will be no longer the only goal due to achieving the social responsibility goals, environmentally and climate change by micro level or enterprises (companies) and public requirement including health care like Covid-19.
  • Performance measurement on macro level should be different, as Covid-19 provided evidence a number of activity sections within non-financial sector couldn’t achieve any GDP without active role of health system.

There were wrong and inappropriate politics in the last decaades hence a number of scientists and great thinkers already alarmed with warnings, as Anne Case and Angus Deaton concluded “American capitalism is not serving most Americans”, due to “two-thirds of the population – are dying younger and struggling physically, economically, and socially” (Deaths of Despair and Future of Capitalism). Paul Krugman recently summarised: „the 2020 was the year Reaganism died”.

These changes could lead to conclusion as the Schumpeter’s self- destruction capitalism, but he exclaimed, “‘inevitably’ creates conditions in which it will not be able to live and which strongly point to socialism as its heir apparent.” In any case it should looking for a new system.

A huge number of thinkers are looking how to save the system – as Keynes did it in 1930s – but that would be same as search together for a new system in order to avoid revolution. The claim to save system, from the West perspective, is based the huge shifts that happened in last decades or so as follows:

Neoliberalism as an ideology and economics theoretically and empirically failed. The very virulence of neoliberal anti-socialism meant that it represented the drive to a complete market-privatization of social life and that is one of the sources of conflict.

  • State was changed – the state too became subject to the financialization policy, shifting its overall role to protecting the value of money. In the crisis labeled Great recession (2008), almost all big banks and corporations were bailed out, but the population was not.
  • Externalities of this capitalism system exceed any future economic benefits. It should emphasize that from the last two decades and further the externalities of this irrational system, such as the costs of war, the depletion of natural resources, the waste of human lives, and the disruption of the planetary environment, now far exceed any future economic benefits that capitalism offers to society as a whole.
  • Economics laws failed: (a) The labour market (labour force) is not working; (b) The market has collapsed; it is time less and less can be talked about the efficiency of market action, which in particular came to the force in the crisis caused by Covid-19; (c) Say’s law doesn’t work; (d) Phillips curve no longer applies; (e) S (national savings) no longer determines I (Investments); (f) Today, fiat money works, and money that has worked for 4,000 years does not exist.

West blamed communism for its failures until about 30 years ago, but now couldn’t do it what opened bad sides of the system, which is also the cause of the current situation.

Great concern about future is recently issued by Roberto Savio from Other News (Italy) in article he explained it: “The Second Cold War is coming”.

Due to the fact that West as greatest economic, military and political power failed, as it is explained, and it could lead to collapse it is necessary to find out how to save the system. This is one of the searching as a part of broadly study search.

There are assessments by great philosophers, economists and other intellectuals who suggested that the main cause of this situation and who threaten to collapse are (i) unsustainable relationship of labor and capital, (ii) others believe that new technology imposes new relationships because previous relationships are outdated, and (iii) others that the cause is a prevailing ideology and worldview.

The changes, which are very boldly called the emergence of a new civilization, are the result of the emergence of a new world, whose main feature is the integration of matter (body), mind (consciousness) and spirit and the integration of physiosphere (matter), biosphere (life) and noosphere (mind). These integrations will lead to a new pattern of thought, culture, behavior of new social relations and institutions. At the same time, human consciousness is expected to be above egocentrism and ethnocentrism, in fact at the level of universal cosmocentrism. It should be added that this process has already begun and is taking place under the same influence of new technologies, such as robotics, artistic intelligence and automation.

 Taking into account that economic system is the very important part of a society here is conclusion and suggestion that the system could be saved by Modern monetary theory implementation.

Modern Monetary Theory (MMT) has been on the table of economic discussion for at last two decades, but it has recently moved to the heart of interest such as of US, EU, UK, Australia and elsewhere.

The shift in interest pre-dates the COVID-19 crisis, but the virus has given MMT a huge boost. Governments around the globe have been quick to dramatically expand their budgets in response to the crisis, with deficits of 10 per cent of GDP becoming routine.

Current economic data and trends raised question whether it led to huge crisis or collapse.

From the economic and financial perspective MMT is a main part of theory in Keynes’s monetary tradition, which includes eminent thinkers worldwide and it describes how “modern” governments and central banks actually work.

In this circumstances MMT argues that economic and financial situation facing any national government with a sovereign currency is entirely different from that faced by a household, a firm, or a government that does not issue a sovereign currency. Therefore, MMT provide assurance that sovereign currency issuer: (a) does not face a “budget constraint”; (b) cannot “run out of money”; (c) can always meet its obligations by paying in its own currency and (d) can set the interest rate on any obligations it issues.

MMT also provide assurance in the world, which is changing in fundamental ways, because and the actions to be taken in the near future will be critical to lay the groundwork for a sustainable, secure, and prosperous future.

MMT is part of post-Keynesian economics aiming full employment. In addition guarantee jobs  is also based on MMT.

MMT is the best way resolving economic and financial issues related to the Covid-19 and environmental and climate changes on global and national levels.

MMT is solid basis, especially if implement globally, for resolve to set aside the hatreds that have undermined global cooperation, and join forces to overcome the inequality, poverty, exclusion, and environmental destruction that threatens the world.

MMT is the best way to build a future based on UN’s peace, human rights, and sustainable development.

More details on MMT characteristics and capabilities including its implementation in EU and in one large EU member like Italy and smaller like Croatia will be explained in one of the next contributions.

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*Tihomir Domazet, Academic Council Member, and Full university professor, University for Peace ECPD established by UN (e-mail: tihomir.domazet@gmail.com) This was one of the topics prepared for the International Conference on 100th anniversary of the Faculty of Economics & Business, University of Zagreb, Croatia

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