Modern Monetary Theory and the Labour Theory of Value

Added: 2026-05-14

[00:00:00]modern monetary theory and the labor theory of value.

[00:00:08]Okay, I'm going to be covering an introduction talk about the quantity theory of money, the labor theory of money, the chartlist or state theory of money and how to synthesize the two and then I'll give a mathematical appendix.

[00:00:23]So why am I doing this? I have had several requests to cover modern modern monetary theory again. There is a previous video called what is money which already gave an introduc intro to this but this talk will be more focused and more historical. I'm going to look at the history of monetary theories starting with Hume then Marx and Ricardo and then the nap or state theory of money and I'll then show how options two and three can be combined into a single theory. So the prevalent theory in economics is the quantity theory of money.

[00:01:15]And this began with the Scottish philosopher Hume who also wrote a fair bit on political economy. And he sets out in a simple form the quantifier theory of money in an essay called on money and in a second one on the the balance of trade.

[00:01:41]And both of these argue that prices are determined by the quantity of money.

[00:01:47]Now later on, Ricardo and Markx both rejected this proportional relation.

[00:01:53]They held that gold's value is intrinsic and derives from labor and that paper money should be limited to the quantity of gold that would circulate in the prevailing level of commodity production at that time in order to maintain par between paper currency and gold.

[00:02:15]So Hume starts off saying, "Money is not properly speaking one the subjects of commerce, but only the instrument which men have agreed upon to facilitate the exchange of one commodity for another.

[00:02:29]It is none of the wheels of trade. It is the oil that renders the motion of the wheels more smooth and easy.

[00:02:38]If we consider any one kingdom by itself, it is evident that the greater or less plenty of money is of no consequence since the prices of commodities are always proportioned to the plenty of money. And the crown in Harry the seventh time served the same purpose as a pound does at present. So here we have him saying that prices are determined by the plenty of money are proportioned to the plenty of money and he gives an example.

[00:03:12]Now was this example he gave true? Was it true that a crown of Harry VI that or we would now call him Henry VIIth um was worth the same as a pound in Hume's day?

[00:03:29]Hume was writing around the 1750s.

[00:03:33]So let's take 1500 as a year that's representative Harry the Harry VI.

[00:03:41]The wheat price at that time was five shillings a quarter.

[00:03:47]Um by Hume's day it was 34 shillings a quarter.

[00:03:54]Now how much is a crown? Well, a crown was actually five shillings.

[00:04:03]A pound is 20 shillings or was 20 shillings. So, Hume was saying there had been an increase in prices of about four times since the time of Henry VIIth. Well, it's not exactly right, at least for corn. It may be true for some other things but it was within an order of magnitude.

[00:04:27]He was giving a round number macroeconomic comparison. So there's a real problem that he's trying to explain and that he knew about why had prices risen so much historically.

[00:04:40]And he was also saying it didn't really matter if all prices rose by the same amount. He goes on to say that the only um people concerned with the amount of money in the country really is the state because the amount of gold or silver in the currency in the country was what they needed to prosecute foreign wars.

[00:05:04]But why had there been this big inflation over the last two and a half centuries at the time he was writing?

[00:05:10]He's trying to answer a real question.

[00:05:13]His answer was that prices are proportional to the plenty of money. He knew that at the time of Henry VIIIth, the coins were purer than in the 18th century. They contain more silver. And he also knew that the mint had been printing far more coins over the 16th and 17th centuries than had been the case up to 1500. And why was that? is because thousands of tons of silver from the new world had since 1500 spread throughout Europe via trade. And it was this increase in the quantity of money that he said explained why the price of grain and other commodities was now much higher than it had been at the time of Henry VIIth.

[00:06:03]Now, Hume as a philosopher is famous for being skeptical about causation and saying that all that empirical science can really do is observe regular correlations and that what we say about cause is really a matter of of observing regular correlations.

[00:06:28]Thus, if there was an observed correlation between the quantity of currency and the price level, we can be satisfied with that. That's enough of an explanation. You don't need to go beyond that.

[00:06:41]Now the labor theory of money comes in a generation or two after Hume and it was held by Ricardo and then by Marx and they held that the exchange ratio between two commodities was determined by the relative amount of labor required to make them.

[00:07:04]Gold's very valuable because a lot of labor is required to produce a kilo of gold compared for example to a kilo of grain or kilo kilo of flour.

[00:07:14]And this means that one kilo of gold will purchase a vast quantity of flour.

[00:07:21]Let's take an example from the the time of when Ricardo was writing.

[00:07:28]uh Napoleon had set a standard for the French currency.

[00:07:34]He said that one Frank was worth 0.290322 g of pure gold and thus a 100 frank coin such as that shown above contained 29 grams or let's round it up and say 30 grams of of gold.

[00:07:56]Now let's take the time that that coin was produced 1850s. This is a a Napoleon III coin, not a Napoleon the first coin. The price of wheat at that time in France was 1.8 Franks per hecto liter.

[00:08:20]they it vary a bit depending on the the exact local market. So uh that coin would have bought 50 to 60 hectare liters of wheat which is about four tons.

[00:08:35]So according to the Marxian and Ricardian theory of value the price of four tons of wheat theory of prices four tons of wheat contained in the 1850s roughly the same amount of labor as the 30 grams of coin.

[00:08:50]the grams of gold in the coin. So the 100 frank gold Napoleon was equal to four tons of wheat.

[00:09:02]Now what's the difference here?

[00:09:08]Markx and Ricardo for that matter are going beyond Hume and giving a causal explanation of the price rises that had occurred in early modernity.

[00:09:23]They're not just taking a empirical correlation. They're saying why it was.

[00:09:30]The reason was that new mines in the Andes yielded silver and gold with much less labor than the old mines of Bohemia on which Europe had previously relied required.

[00:09:45]This reduction in the amount of labor required to produce gold and silver reduced the objective value of gold and silver.

[00:09:55]And this reduction in the amount of labor explained both the historical increase in the supply of money and the fall in the purchasing power of the silver coin. So the the two things that Hume had observed the increase in the the supply of money and the increase in prices are explained as the result of a common cause.

[00:10:27]Now both of Markx and Ricardo essentially are critiquing Hume on the grounds that gold has an intrinsic labor value and prices express ratios of labor content.

[00:10:44]They both think that for paper money on the other hand, if you want to circulate it at par, that is to say, so that a one pound note exchanges for a one pound gold sovereign coin, it must be issued in the same quantity as the amount of gold coin that would otherwise be required to circulate the commodities.

[00:11:09]Why why do they give this uh proviso?

[00:11:13]because they had observed since the time of Hume periods when there was inconvertible paper currencies and when the paper currencies were inconvertible they had seen that the value of the paper money fell.

[00:11:34]Ricardo lived from 18 1772 until 1823.

[00:11:41]And during all his adult intellectual life, the Bank of England was operating under conditions in which the conversion of banknotes to gold was suspended. This was due to the prolonged war between Britain and France and the aftermath of that war.

[00:12:01]They started they suspended convertability in 1797 and it didn't resume again till two years before Ricardo's death. And Ricardo's early monetary writing an essay on the high price of bullion was focused on the inflation that was caused by this. For instance, in 1813, a gold coin was trading, a gold sovereign was trading at 1 six shillings, whereas it should have been£1.

[00:12:33]Uh, in decimal terms, that's 1.3.

[00:12:38]Now, he explained this by the bank having issued more notes than the gold coin, which would otherwise have been used in circulation.

[00:12:48]30% more notes in this case.

[00:12:52]So what he says in his uh principles of political building political economy, gold and silver like all other commodities are valuable only in proportion to the quantity of labor necessary to produce them and bring them to the market.

[00:13:08]Whereas in contrast for paper money, it is on this principle that paper money circulates. The whole charge for paper money may be considered as senorage, that's to say revenue to the king.

[00:13:21]Although it has no intrinsic value, yet by limiting its quantity, his value in exchange is as great as an equal denomination of coin or bullion in that coin. So he's saying if the king issues paper money and withdraws from circulation the gold money but only issues the same amount of paper money as the original gold money there'll be no change in prices.

[00:13:53]Now obviously in the modern era convertability has been generally suspended.

[00:14:02]Direct convertability by individuals has been suspended in Britain since the 1930s.

[00:14:11]Indirect convertability persisted in so far as you could convert into dollars which were convertible to to gold between central banks but even that uh was with withdrawn from the early 1970s.

[00:14:30]So modern monetary theory has to deal with the conditions which were still seen as a somewhat exceptional by Ricardo.

[00:14:41]The it's it's either called modern monetary theory or chartism.

[00:14:46]And the key idea is that money is a creature of the state not a commodity.

[00:14:52]The state imposes obligations either taxes, fees, fines, etc. and says you can only pay these in state money.

[00:15:02]That is to say, in Britain, you can only pay your taxes in sterling.

[00:15:10]They will not accept euros.

[00:15:14]Conversely, if you're in the European Union, they will only accept euros for taxes.

[00:15:23]Um and Knap is first person to put this forward in 1905 and he's saying basically what matters it for whether a currency has value is whether it's accepted by the state to meet obligations to the state.

[00:15:48]This was revived by people like Rey in the 1990s and they say taxes drive money. Taxes create the need to obtain state money.

[00:16:00]And this was a very good example of this is given by Forstata where he shows how in the British colonies taxing the colonized people in sterling forced them to sell commodities on the market to obtain sterling.

[00:16:25]And the sterling only had value because the colonized people required it to pay their taxes. And as a result, Sterling displaced the native money systems in Africa.

[00:16:43]So the important point Rey is pmicizing against is that the idea that the state is dependent on the private banks for money. That the he's pmicizing against the idea that the state only obtains its money by taxing people or borrowing from the private financial system. and he says no it is the state that issues the money it only has to tax in order to create value for that money on the other hand there is a popularized account of mon one monetary theory which says that the state doesn't need to bother raising taxes since it can never run out of money and this is a a popular distortion of what MMT actually says.

[00:17:47]The point is state money only circulates because the state imposes tax obligations which you have to settle in sterling in Britain or dollars in America. So it's taxes drive money.

[00:18:01]If the state stops taxing then the compulsory demand for the currency collapses. the currency use loses its social status and the state will lose its ability to command labor through paying using its currency. So if there's no taxes, there's no chartism and the whole modern monetary theory wouldn't be applicable.

[00:18:26]Taxes don't fund state spending in a mechanical accounting sense, but taxes are essential to create demand for currency and to regulate inflation.

[00:18:39]The confusion arises because people collapse accounts one two and conclude that state doesn't need taxes.

[00:18:49]So can you synthesize Ricardo and Marxist's theory with the modern monetary theory? I'm I'm saying yes you can. We gave an account of this in classical econophysics some years ago um and showed that in the context of modern monetary theory, the labor theory of value and um MMT [clears throat] can be combined to give you a coherent theory of how fiat money works.

[00:19:21]We say that the value of money is determined by the labor time that the state appropriates by purchasing labor and commodities from the non-state sector.

[00:19:35]It is the actual appropriation of commantes, the appropriation of civil servants time, the appropriation of soldiers time, the appropriation of goods that the crown purchases, aircraft carriers, etc. The total purchases of the crown divided by the labor the crown command. The total money purchases divided by the labor the command the crown commands. In doing that set the melt the monetary equivalent of labor time in in the terminology of the Marxist economist Foley.

[00:20:18]And this draws on an apherism of Smith that money is In essence, the power to command labor.

[00:20:28]When the state issues money to purchase a ship or the state issues money to employ civil servants, it is commanding labor directly or indirectly.

[00:20:44]And this power of command is an ancient power.

[00:20:52]Before capitalist relations existed, the state had the power to directly command the labor of its subjects. And in times of war, that still exists. The state will use conscription.

[00:21:10]Foley's monetary equivalent of labor time formalizes the power that Smith is talking about as a ratio between money flows and labor flows.

[00:21:25]And what we do is give a specific institutional setting to those flows. It is the state's fiscal operations. And this is exactly what modern monetary theory adds to marxian theory in the context of fiat money.

[00:21:43]It rescues labor value from the commant money framework which was true in the 19th century but is no longer true. But it doesn't abandon the quantitative core of the labor theory of value. Ex. It explains fiat value in terms of labor time and it unifies Markx Ricardo and modern monetary theory under a single principle that money value reflects the labor time society via the state mobilizes for public purposes.

[00:22:25]Okay, I'll give a quick run through of how you can formalize this mathematically.

[00:22:32]We have a set of variables.

[00:22:35]I'll put the slides up. I don't expect people to be able to follow the maths immediately. Here we have G, which is total state money spending on goods and services.

[00:22:48]Um, LG is the total number of labor hours appropriated by the state directly.

[00:23:00]Mu is a is the monetary equipment of labor time.

[00:23:05]W is the average money wage per hour paid by the state to its employees.

[00:23:14]L subs are the number of hours of labor performed by state employees.

[00:23:24]P is P subi is the price of the ice commant purchased by the state. Q submi is the quantity of the commantee purchased by the state.

[00:23:37]LI is the total labor time embodied in one unit of I including both direct and indirect labor. the labor value.

[00:23:53]Now, so we have equations for the monetary equivalent of labor time which is here.

[00:24:00]The melt is equal to mu is equal to government expenditure over government appropriation of labor.

[00:24:08]And government expenditure is the wages of government um servants plus the sum of all quantities purchased by the government times the their prices.

[00:24:23]The labor employed by the government is the direct labor performed by state employees or the labor coefficients of um sorry the sum of the quantities of the commodities purchased by the government multiplied by their labor contents.

[00:24:48]Mu is the ratio of of G upon L and the price level is given of price of the E commodity is given by the monetary equivalent of labor times the labor value of that commodant.

[00:25:09]So let's run through an example uh problem that you can solve with this.

[00:25:15]What happens if there's a change in the wages paid to state employees?

[00:25:21]We'll look at a concrete example. The state commands living labor by purchasing labor power for a wage.

[00:25:30]Therefore, the wage paid to state employees has a crucial effect on the value of money.

[00:25:37]The the melt is given by G over LG.

[00:25:42]That's a government money expenditure over total labor appropriated by the government and state spending is in part determined by the wage whereas a total labor commanded is independent of the wage. So the lab total labor commanded here doesn't have any multiplier there.

[00:26:08]Now if we keep other things constant um this is what I was saying government expenditure varies with the wage whereas the government labor appropriation doesn't vary with the wage that's what I said earlier so if we differentiate the melt with respect to that we get it's the rate of change of the melt with respect to The to the wage is given by the share of total labor appropriated by the state. That is direct labor. LS is civil servants labor over LG is a total labor appropriated [clears throat] by the state. Now since these are both greater than zero it implies that the melt the coefficient or the derivative of the melt with respect to wages of public employees is positive.

[00:27:16]So what does this say? It says that an increase in the state wage raises nominal state spending without changing the quantity of labor commanded by the state.

[00:27:31]Consequently, the monetary expression of labor time mu increases. Each hour of labor now corresponds to a larger number of pounds because this is the original exchange of labor against money, the direct employment by the state.

[00:27:54]This is the fiat money analog of the Ricardian result that a fall in the value of the money commodant raises the general price level.