ATTENTIVE readers will have noticed a war has broken out across print and social media, following a column in The National from Gordon MacIntyre-Kemp – founder of the Business for Scotland think tank – in which he attacked so-called Modern Monetary Theory, or MMT. For the uninitiated, MMT is basically the theory that governments which issue their own currency are able to fund any level of spending they desire, without having to worry about associated deficit.

If MMT is kosher then anybody – especially an indy Scotland – can eliminate austerity at the stroke of the finance secretary’s pen. MMT is supported by former US presidential candidate Bernie Sanders and English academic Richard Murphy, author of the Joy of Tax. Indeed, Murphy and MacIntyre-Kemp have gone head-to-head following Gordon’s article in The National.

Why does this debate matter? First, because it gets to the heart of any post-indy economic policy. Secondly, because it puts Andrew Wilson’s Growth Commission report in the firing line. The Growth Commission wants an independent Scotland to keep the pound sterling for an indefinite period.

For MMT believers, this would eliminate the possibility of the Scottish Government being able to fund a deficit sufficient to increase growth. Instead we would be stuck with austerity for a decade or longer.

Let me begin by defending Gordon MacIntyre-Kemp’s right to criticise MMT. But I think he opposes a simplistic, straw man version of MMT that is not actually proposed by Richard Murphy. Nevertheless, Gordon’s intervention has opened an important public debate. As Ben Wray, editor of CommonSpace, commented: “A whole new economics of independence is needed to adequately replace the Growth Commission, and that economics could be genuinely pathbreaking internationally.”

I can’t do justice in a short article to the technical richness of MMT ideas. Take the following precis as a crude introduction. Although it has earlier roots, MMT is an outgrowth of the work of the English heterodox economist, John Maynard Keynes during the 1930s. Conservative

Keynes wanted to save capitalism from collapse or revolution. So he opposed the austerity of his day in favour of the government borrowing and spending to create full employment. After the Second World War, Keynesian ideas became the status quo.

However, orthodox bourgeois economists continued to fret that Keynesian public spending would lead to hyperinflation, which seemed to happen in the 1970s. Enter Thatcher with a mission to banish Keynesianism and run the economy like a she did her household accounts. Public debt was branded as enemy number one. Later New Labour and Tory governments repeated this mantra.

Meanwhile, somebody emerged to provide a theoretical defence for Keynesian public borrowing:

a maverick British economist named Abba Lerner. Lerner’s work became the basis for Modern Monetary Theory. From a working-class, Jewish background, Lerner was ostracised by the British economics establishment. He left for America where he transmuted into a libertarian, free-marketer and buddy of right-wing Republican Barry Goldwater.

Lerner’s “functional finance” theory (the basis of MMT) says that a government’s primary aim is to ensure permanent full employment. It should do this by borrowing and spending to create sufficient demand to keep factories at full capacity – so no recessions and no austerity. But a government must tax away any excess demand over capacity limits, to halt inflation. In this benign scenario, the government does not need to worry about how much it borrows, only that it taxes excess demand.

Here is where Gordon MacIntyre-Kemp gets worried: he doesn’t believe politicians will take away the punch bowl when the economic party is in full swing. MMT supporters such as Richard Murphy say Gordon hasn’t read the small print. They want to create a system that compels politicians to obey the inflation stop light. One way is for an independent central bank to raise interest rates sharply, cutting off the government’s credit line. Indeed, in MMT, the central bank is not responsible for price stability – that’s the job of the government. Instead, monetary authorities set interest rates near zero to facilitate cheap government borrowing until we reach full employment.

Gordon’s objection matters little, provided you design the system properly. A more important question is: can a government max out its credit card to ensure full employment? Won’t it run up huge, unsustainable debts? No, according to Abba Lerner and MMT theorists. The intellectual trick is to grasp that government debt is everyone else’s primary financial asset. In fact, issuing public debt encourages saving and investment in the first place.

Pension and savings funds will always buy government bonds (and earn income on them) because they are the safest thing to invest in. Government bonds are safe precisely because the state has monopoly of tax powers and so can always find the wherewithal to pay its debts. Besides, if the economy is running at full capacity (thanks to MMT) investor confidence will be high, ensuring both a ready market for public debt and private debt.

There’s an even more cool aspect to MMT. This is where Andrew Wilson’s Growth Report gets it exponentially wrong. If a government has a monopoly over issuing its own currency, it can always (in extremis) create funds to buy its own bonds. Witness the Bank of England’s Quantitative Easing (QE) programme which created £375 billion out of thin air to buy public bonds, boost share purchases, and subsidise mortgage lending.

What objections do I have to MMT? They are many, as it happens. True, on a formal basis, MMT does work. If a government takes political control of the credit mechanism it can boost demand, growth and employment without austerity – unless it is beholden to foreign lenders, which would only be the case if indy Scotland used sterling. But there’s nothing really new in MMT. Utopian socialists have been offering it as a panacea since Proudhon, the 19th-century French anarchist. Which begs the obvious question: why isn’t MMT in use everywhere?

First, MMT ignores the all-important fact that in capitalist economies the means of production (factories, technology) are privately owned by a narrow elite, whose only rationale is profit. Competition between these capitalists results in relentless bouts of over-production and economic crisis – witness Apple’s current glut of iPhones. Certainly, governments can try to mop up over-production by borrowing and spending, using MMT. But this is an economic bandage, it does not eliminate the basic instability. We can only do the latter via direct public ownership of the means of production plus central planning. But surely the capitalist class would benefit from MMT-influenced governments maintaining high demand, thus guaranteeing super profits? No: with permanent full employment, workers – who create all the output – feel secure enough to demand higher wages. This happened in the Keynesian 1970s. Result: a profit squeeze and Thatcher.

Ultimately, MMT is politically utopian because it ignores class conflict. When class conflict intensifies, fat cat investment bankers – who rake in interest on government debt – invariably demand austerity policies to protect “their” money from the workers and from whatever left-wing government is in power.

Conclusion: Modern Monetary Theory is a useful tool for an independent Scotland to avoid austerity. But it is only a temporary bridge to public ownership of the banks and means of production. You won’t find that in the Growth Commission.