Reclaiming the State argues persuasively against decades of neoliberal dogma about the role of state intervention in the economy, finds Phil Armstrong

This book provides an excellent study of post-war economic history and a perceptive analysis of the options available for the future. Its core thesis is that, contrary to the orthodox neoliberal view, the state is alive and well and retains the power for decisive action. It is not that the state has gone away during the neoliberal period but rather that it has been captured by corporate and financial interests who have co-opted it and persuaded it to act in their interests rather than in those of the general population.

The authors suggest that the left needs to provide a powerful alternative to neoliberalism, based around the state reasserting its supremacy over markets, and using its monopoly power over currency creation to introduce policies that favour the great majority. The insights provided by Modern Monetary Theory (MMT) show how such an alternative strategy is possible for countries with their own sovereign currencies, but is not available for those who have ceded their power to supranational agencies (e.g. Eurozone nations who have relinquished monetary control and placed it in the hands of the ECB).

The authors consider the development of the European project from the early days of the ‘Keynesian consensus’ (when governments were generally committed to full employment) to the neoliberal period, when governments became captured by the ‘efficient markets’ hypothesis, abandoned full employment as an objective, and looked at price stability as the only major macroeconomic policy goal (usually requiring ‘independent’ central banks). The authors show how neoliberalism has developed from the free-market dogma of the monetarist period. They also demonstrate that, ironically, the UK Labour government under Callaghan and the French Socialists under Mitterrand were instrumental in the breakdown of orthodox Keynesianism and the development of ‘market-based’ solutions as the foundations of policy.

Mitchell and Fazi are, however, careful to point out that the idea of a dichotomy between state and market is an illusion; the reality is that the market always requires state intervention to sustain it. The authors draw inspiration from Karl Polanyi’s deeply insightful work The Great Transformation (1944). The authors show how neoliberalism ostensibly rejected the Polanyian thesis that the state is required to support markets. Instead, they reversed the power hierarchy, suggesting that individual states are powerless to resist global corporate and financial interests and the creation of supranational agencies was required. Pan-European institutions like the European Central Bank are an example. If the influence of national democracy is reduced and depoliticized, and unaccountable agencies correspondingly increase in power, it is a price well worth paying, according to the neoliberals.

However, as the authors perceptively highlight, despite the thrust of their public discourse, the advocates of neoliberalism are well aware of the actual power of the state. Thus, the reality of neoliberalism involves a concerted effort to ‘capture’ the state and encourage it to act directly in corporate interests. The de-politicisation process taking place in Europe has provided great impetus to this, reducing democratic influence and instead placing power in the hands of unelected technocrats who, in general, have supported the hegemony of neoliberalism. It is important to recognise that the state had never been independent of the interest of capital, but the neoliberal project certainly represented a reversal of ground gained by the working class.

The Global Financial Crisis (GFC) might be considered as the culmination of the damage that neoliberalism has wreaked on the Western world. The accumulation of private debt, which neoliberalism required for growth, finally became unsustainable and the results were catastrophic. The response to the apparent failure of the neoliberal consensus from the right has been powerful, as exemplified by a resurgence of nationalism, xenophobia and protectionism. 

The authors consider that the response of the left has been weak and indecisive largely because the centre-left had been lured into thinking that the nation state is now powerless in the face of the power of global capital and, certainly in Europe, has (erroneously) come to rely on supranational institutions to provide the impetus for growth and progress. This viewpoint is still articulated in the UK by those who remain deeply attached to the EU and blame Jeremy Corbyn for his apparent ‘lukewarm’ support for the ‘Remain’ campaign.

The UK’s centre-left, in general, still favour a ‘soft Brexit’ and wish to remain in the Single Market. They have swallowed the neoliberal pill. EU membership entailed belonging to a whole range of neoliberal institutions and policies. As the authors stress, it is necessary to recognise the power of the state to improve the living standards of its population as a whole. The Single Market is designed to act in the interests of European capital and should be rejected by the left. Instead the government of the UK, post-Brexit, should target full employment, for example.

In the second part of the book, Mitchell and Fazi explain the types of policies that should be followed in order to achieve this aim. First, they outline the core principles of Modern Monetary Theory. MMT rejects the pervasive analogy favoured by neoliberalism; that the government can be treated as a ‘giant household’. This approach suggests that the government needs to acquire funds, by taxation or borrowing, to finance spending and is thus financially constrained in the same way as a private household.

An understanding of MMT allows us to recognize that such a contention is patently false. A government with its own sovereign currency acts as a currency-issuer (not acurrency-user like a household) and therefore, as a matter of logic, it must spend before it can collect. Taxes do not ‘fund’ spending, rather taxes serve two purposes: first they give value to otherwise worthless state debt, and act as a spur to economic activity. The existence of unemployment is clear de facto evidence that net government spending is too small to move the economy to full employment. The solution follows logically; a tax cut or spending increase is required to achieve this aim.

Taxes and government spending also have a second function; they are required to manage aggregate demand. Aggregate demand needs to be sufficient to generate full employment but not so high as to generate inflation from excess spending. Government spending needs to be adjusted so as to satisfy non-government sector tax liability and net saving demands at the full employment level of income; deficit levels (in absolute terms or as percentage of GDP)and debt ratios per se become unimportant in themselves.An understanding of MMT allows a clear distinction to be made between different monetary realities in countries with their own currencies (such as the USA, UK and Japan) and those without (e.g. euro-using nations). It contends that, in the case of the latter nations who effectively must act as currency-users, taxes and bond sales do fund public spending in an operational sense. Such nations thus have much more limited options in terms of economic policy.

From the perspective of MMT, when a country issues its own fiat currency under floating exchange rates a nation faces real not monetary constraints. Its potential ability to improve living standards is limited by real resources such as the quality and quantity of available factors of production. The government should utilise active fiscal policy to pursue full employment and price stability; the real economic outcomes in terms of output, employment and price stability are what really matters.

Mitchell and Fazi then discuss another key aspect of MMT: the advocacy of a Job Guarantee (JG) programme. The policy requires that the state offer a job to any person who is ready, willing and able to accept employment. The introduction of a JG scheme would effectively reduce ‘unemployment’ to zero. There is no element of compulsion involved and the scheme is entirely voluntary. Anyone who is either unwilling or unable to accept a job would not be included as ‘unemployed’ according to the International Labour Organisation (ILO) definition and therefore would not be targeted by the ELR policy.

Its use is entirely consistent with the simultaneous pursuit of both price stability and full employment, and its provision of a price anchor reduces price volatility in the system. The government first announces the wage rate, a basic public-sector wage, or BPSW, it will pay to unemployed workers and offers them a wide-range of possible occupations. The JG wage effectively provides a wage floor and both public-sector non-JG jobs and private-sector employers would have to compete with JG rates of pay. The JG job pool would effectively become an employed labour buffer stock which enlarged in times of recession and reduced in times of boom. In a declining economic climate, private-sector workers would move into the JG job pool and in improving conditions private-sector employers might offer pay rates in excess of the BPSW in order to attract additional workers from the pool.

Mitchell and Fazi also provide a compelling case for the nationalisation of particular sectors of the economy, in particular, banking. Much of the activity associated with the financial sector during the neoliberal period has served the interests of the elites to the detriment of the population as a whole. Banks should therefore be publicly owned and democratically accountable.

I consider this book to be essential reading for several reasons. First, it provides an excellent description of the effects of neoliberalism and a perceptive analysis of how neoliberals have co-opted the state and persuaded it to act for narrow corporate interests. Second the authors highlight the reasons behind the weakness of the centre-left’s response to the GFC vis-à-vis the right and third, they show that an acceptance of MMT is crucial in developing a meaningful and powerful policy strategy to improve the living standards of the population.

MMT is becoming increasingly well-known but much work needs to be done. For interested readers I recommend not only this excellent book but also Bill Mitchell’s perceptive daily blog Billy Blog. In addition, Warren Mosler’s The Seven Deadly Innocent Frauds of Economic Policy provides a superb introduction to MMT. As Keynes famously said,‘the difficulty lies notso much in developing new ideasas in escaping from old ones.’ Neoliberalism must be abandoned altogether, and, in particular, the toxic ‘the government is like a household’ analogy needs to be rejected; the tenets of MMT offer an important alternative.