The Philosophy of Debt

I thought I’d take the time to transcribe some of one of the more interesting podcasts I listened to last year, Tom O’Brien’s interview with Alexander Douglas, the author of The Philosophy of Debt. It covers a lot of things from a perspective you don’t hear anywhere else:


“I suppose I was interested philosophically when I read an article in the Economist…on heterodox economics. And it was talking about how the [2008 financial] crisis had revived heterodox economics to a certain extent. And it mentioned this guy called Warren Mosler. It painted quite a complimentary picture, but left open the possibility that he was just a crank.”

“I was intrigued, so I thought I would check it out. I watched him on FOX News, because…the first thing that came up was a video of him being interviewed on FOX News. And he started off to me sounding like a crank until he said something like, “Well, remember that government bonds are just saving accounts at the Fed.” And that made me jump out of my seat. I had just never thought of it like that. And it was this very simple philosophical point that, even as somebody who likes to think about these things philosophically…it had just never occurred to me to think, ‘Well, what is the difference between a bond issued by the treasury and a savings account which is just the liability of the central bank’…That’s probably when I started thinking about the concepts like debt and what and like what an asset is and what it means to hold an asset…”

“Following on from this point about bonds, I guess the question that I asked myself was, why does that seem plausible, and why does it seem weird at the same time?”


“If you’re educated in the mainstream of economics, or even in a lot of heterodox traditions…a bond is a debt marker. It’s a certificate of a debt from the government to you. It is something completely different from the thing that’s actually owed. It specifies that you’re owed a certain amount of currency, but it isn’t the currency…

We think about debt intuitively…we think of simple cases like I borrow your lawnmower, and there’s no debt marker at all there, but maybe I could write out a debt marker for you. I could say ‘I owe you a lawnmower.’ And it’s very obvious there that there’s one object in the world that I owe you. And then you have this debt marker that is just your claim on that one object. That’s nice and simple.”

“You have to build up a very long way before you get to a government bond…Suppose your lawnmower is destroyed somehow in an accident. You might say, now I owe you *a* lawnmower. But the, what I call using a bit of medieval logic, the suppisitio of the term, …it has now changed. The thing that I owe you used to refer to one particular object; now it is a distributive term. There’s some lawnmower out there that I owe you. It’s got to be one of a class of certain lawnmowers which are equivalent in value or something like that. But that is now looking like a very different sort of relationship…

What if the class of objects you could present to extinguish the liability [included] the debt marker itself? That seems to be what’s happening with the government bond. So a government bond says you have a claim on any risk-free financial asset worth this amount. But of course that bond itself is a risk free financial asset worth that amount. Both are liquid financial assets that serve the same purpose. And that’s when I realized that was Mosler was doing was not just economics, he was making this interesting philosophical intervention.”

Tom O’Brien (TO’B): “That’s quite a tricky concept…a government bond is not a debt, it represents something that’s equivalent to a debt.”

Alexander Douglas (AD): “Well, the weird thing about it is, it’s a debt and also something that extinguishes a debt…In principle, with a fiat currency, the only thing that the state can use to extinguish any of its debts is other liabilities. You can use Bank of England notes to repay the debt that’s supposedly embodied in the government bond. The Bank of England notes are liabilities of the Bank of England, which are in turn backed by government debt, at least nominally. So the government seems to be extinguishing the debt with its own debt. That’s why we have so much trouble making sense out of it.”

“And there are two dimensions to that. One is the financial accounting which you can just learn. The other is how we should morally think about this. The morals of the lawnmower case seem so benignly intelligible by comparison…It’s pretty clear that if I just walk away with the lawnmower and never return it to you, I’m doing something wrong; I’m harming you. But when we get to these cases where the relation between the thing owed and the marker of the debt, and the two agents involved, is just so completely loopy, it’s no longer possible to apply our moral intuitions in a straightforward way.”

TO’B: “The way I personally like to think about the government debt or the government currency…is [that] it’s the same thing…one is like an interest-bearing currency and one is like a bog-standard currency….”


“The question that we need to start with is, what is it that makes something money? Warren [Mosler] says that we should just avoid the term money because it’s so vexed and so complicated.

I find it very interesting that in economics textbooks you’ll sometimes just introduce this concept [of] money which is given these various roles: it’s a medium of exchange, etc. None of them seem necessary or sufficient to define something as money.

Joan Robinson pointed out a long time ago, in a barter society, if someone barters one object for another object which they don’t actually want but they just keep—so I might be a blacksmith; I’ll barter you a hammer to you for some corn. I just hold onto the corn not because I want to eat it, but because I know that somebody else will probably give up something that I do want for it. That shouldn’t be sufficient to make corn into money, because people do that with objects all the time. In a barter society you might be constantly swapping for things you just want to hang onto. So you need something else. And all these other conditions—store of value, etc.—they don’t seem to work either because the same argument can just be applied.”

“So in economics textbooks you’re then given this sort of pyramid. Well, there are these different “money things” which variously approximate to the condition of money. So cash, that’s definitely money. And then you have these different sorts of financial assets-you’ve got corporate paper, and government bonds fit somewhere in there. This strikes me as just a useless way of trying to throw any light on the important issues…Of course what we’re interested in is the sorts of social relations you can create, the sort of relations of power that you can create. Surely that’s got to be the relevant feature of defining something as money.”


TO’B: “That’s a very deep point; that the nature of money is intrinsically tied to the social relations of society…It sounds a bit too Marxist to be in an economics textbook.”

AD: “Well, I guess that’s right. It’s interesting if you look at the history of discussion of money, to most of the medieval tradition, this was just an obvious point. That of course money is a sort of political contract as some level. Because otherwise it’s impossible to see what could distinguish it from mere commodity…it’s…the point that almost anyone will arrive at if they think of money in any degree of philosophical depth rather than just wanting to have something to stick in as the value of a viable in an economic model.”

“The MMT way of thinking about money…is that anyone can create money, the problem is getting it accepted. So [economist Randall Wray’s] point is, I can issue IOU’s, I could issue my own bonds and see if I can get them to circulate; see if I can purchase things by issuing debt certificates, and if people circulate them around, then why aren’t they money? The tricky philosophical point there [is]…is it ‘the thing is money and then you have to get it accepted,’ or does it become money when you have the power to get it accepted? I think that’s the crucial point here…”

“But with government money, with currency, the story is quite simple. You impose a tax liability first, and then you can choose what that tax liability is denominated in, and then people will have to give up things, at least to you, to get the thing that extinguishes that tax liability, otherwise you’ll subject them to punishments. So in that case it’s obvious what makes something money. So if that’s what we mean by money, if we’re taking currency as the paradigm of money, then the only question you have to ask is…‘how much coercive power backs the asset that you’re circulating?‘ The answer to that question will determine how much we should classify that asset as money.”

TO’B: “It seems that power and money and debt seem to be inextricably linked. Would you go so far as to say that power is the root [of money]?”

AD: “I’m not sure there’s a coherent account of what a commodity is either…The idea of a commodity is something that’s desired for…what [Adam] Smith would call its ‘value in use.’ And so the idea of a commodity money is, in addition to the value in use, it has to develop some value in exchange which isn’t just reducible to somebody else’s desire to use it; to just extract utility from it. And I can’t see what that could be except for power. So if I start telling everybody that they have to turn over green flowers to me or I’ll subject them to punishments, well then green flowers will start to circulate and they’ll stop being commodities. The problem with that distinction is that the whole exchange economy is infected with these relations of power. There is no hard line between a voluntary exchange and a coerced exchange, so that’s where the issue becomes tricky. Maybe that’s why Marxists don’t distinguish between commodities and money in the way MMT would.”


“…It all stems from the question of what a currency is. The mainstream view is that currency is just this medium of exchange. It reduces transaction costs and the government supplies the currency, or the central bank supplies the currency just kind of as a public service, and people now have this medium of exchange.”

“The thing that weird about that is, if we need a media of exchange, why can’t we just create them ourselves? There’s a tension here…which is also what mainstream economists say when they do tell the historical story—that we just sort of developed this medium of exchange. Okay, well then, why do we need the government to come and issue them?”

“The MMT story is, the creation of a state currency doesn’t begin with the printing…and circulating of an asset; it begins with the creation of a liability that wasn’t there before. So what you do is, you just impose this tax liability, and for MMT that’s the source of unemployment.”

“Their model is the hut tax…The idea there is you go from a village that has zero unemployment. Whether or not you want to call it ‘fully employed’…is tricky because you might want to say that unemployment is very specifically not just deprivation. A person who is starving on a desert island, it would be weird to call that person unemployed. Unemployment is a power relation. It’s a situation in which people need to offer their labor in order to acquire a particular sort of asset—in order to acquire currency.

So you go into a village where it’s perfectly self-sufficient. And then you impose a tax liability on all the huts which can only be paid in something that only you have, which is shillings. It goes from zero unemployment to max unemployment overnight. As soon as you’ve done that you’ve created a currency. You don’t even need to print the shillings. You have unemployment there because you have people who are offering their labor because they have no choice [but] to try and earn these shillings to keep themselves out of prison. You already have the currency there. Whether or not you print the shillings just depends on how sadistic you want to be.”

“And so the job guarantee is just a way of saying, ‘since you’ve created all this unemployment, the least you could do is now provide a means of extinguishing it’…people should at least have the chance to earn the shillings that you created the demand for simply by imposing this tax.”

“The difference between full employment as recommended by mainstream economists, and full employment as recommended by MMT, is that mainstream economists tend to think that unemployment is this naturally occurring phenomenon, and the government can try and do something about this naturally occurring phenomenon. Whereas the MMT view is [that] the government created all the unemployment, so the job guarantee is simply reversing the imposition that it’s placed upon society.”

TO’B: “Its a very counterintuitive way of looking at it–that unemployment is created by the government.”

AD: “Yeah it is. There’s a talk that [Warren] Mosler gives where he starts off by saying ‘what’s the purpose of taxation?’ And of course everybody gets is wrong; they think it’s to bring in revenue for government. He deals with that easily, he says, ‘the government is the only issuer of the currency so how could it possibly need revenue paid in that currency?’ And the answer that he ends up with is [that] the purpose of taxation is to create unemployment. That’s the primary purpose; that’s what taxation is for.”


TO’B: “So taxation, in effect, forces people into work that’s deemed meaningful socially…It’s coercive when you think about its root nature.”

AD: “Its fundamentally coercive, yeah. And its not just about coercing labor, its about creating a certain structure of labor…The problem is, you don’t want to compare our society with its coercive apparatus to some idealized version of our society where you just take the coercive apparatus away. That’s where the myth of barter comes from. Just take a society like ours and take the money away. Well then, you’re taking away the entire coercive apparatus of our society. Whether you’re left with anything that would even be logically conceivable shouldn’t be something you can assume.

But imagine some other sort of society where you don’t have money; where you don’t have a state currency like this. People will still work to produce what they need. They’ll still work for each other, maybe, but it won’t all have to be channeled through this single medium.”

“What I mean is, if I’m hungry and I go down to Sainsbury’s, I can only give them money. I can’t give them anything else. I can’t use my labor in any other way to procure what I need from Sainsbury’s. So first of all, I have to find somebody who will exchange my labor for currency. So there’s a whole structuring of labor relations that occurs.”

“People say that currency is a way of overcoming the inconveniences of barter. But in a way you could say it adds all these inconveniences. It might be the case that otherwise I would have been able to go to Sainsbury’s and say, ‘Look, I’ll stack your shelves for an hour, and let me take home a couple of burgers,’ or something. But I can’t do that because…currency’s is in the way.”


“You’re looking directly at the coercive element of unemployment; that unemployment has to be something you impose on a society by coercion. Then you can recognize the thing that Michał Kalecki was trying to talk about in his 1943 article, The Political Aspects of Full Employment. What happens is, you have socialized the power to coerce labor. That’s effectively what you’ve done.”

“The easiest way to think about it is to go back to the hut tax. If you go [back] to the hut tax, and every hut has this tax liability, and then I give the shillings to maybe three or four guys—okay, now I’ve outsourced my power to coerce labor. I’ve deputized it. Now these guys get to decide how they want to use all the labor that there is. Whereas if I have a standing offer that anybody who doesn’t like the terms that those three guys offer can come directly to me—now I’m the government in this example—then you’ve got a socialized system of labor. So [the Job Guarantee] is very significant.”


TO’B: “It seems to me that the people in power—say politicians, and probably the central bankers—I think they know all of this stuff personally, because If you go back to something like, say, World War Two and you look at what America or Britain did; they didn’t say, ‘Oh, Germany’s attacking me, we don’t have enough money to build planes,’ or whatever. They just expanded the monetary base up until everybody was employed to defend the nation and create all the tanks and planes and everything that they needed. They didn’t give a damn about the debt.”

AD: “Insiders are cagey about admitting how much they actually do or don’t agree with this understanding of the issue. I’m sure you know there’s a famous interview with [Paul] Samuelson where, what he says about the deficit is, well, it’s just a ‘noble lie,’ basically. That you want to act as if the government overspend[ing] is some sort of borrowing operation, because otherwise it’s completely unconstrained in what it can spend from year to year. Once people realize that issuing bonds is really just the same as issuing currency, the government can just do whatever it likes. And so somehow this false perception serves some important political purpose by reining in the government. But as you say, does it?”

“You’ve given the clear example there. Britain is running a deficit in 1941. Germany’s on the verge of invading. Does Churchill surrender because he can’t afford to pay for the soldiers? This ‘noble lie’ seems to come and go as it pleases the governing authorities to be subject to it. So who is it constraining? It clearly doesn’t seem to be constraining the decision makers, since they can give up on it whenever they like. It only constrains the population. But why do we need to constrain the population? I mean, we already have the legal system and the police to do that.”


TO’B: “So this seems to really tie into a thing of class and power. What are the problems that [Kalecki] envisions with trying to introduce this guarantee of full employment?”

AD: “Kalecki’s idea is that capitalism has evolved into a system where unemployment is a crucial disciplinary measure in the relation between labor and capital. You can sort of speculate on what would happen if that were no longer there the same way you can speculate about what would happen if prison sentences were abolished. We just don’t know. To not be able to implicitly threaten workers at the bottom–the workers who are as really close as you can get to the threat of unemployment– would change the whole nature of the factory. It’s just unclear that it would be able to be run in anything like way it’s currently run. That was his main concern.”

“He said [that] said the reason why fascism had no problem implementing full employment in Germany is because it did just completely change the nature of the power structure of society. It didn’t have to worry about how things would play out now that these power imbalances had been completely reversed because it sought to do that in the first place; that was the point.”

TO’B: “…The Nazis essentially introduced MMT to get them out of the Great Depression. I think it was called Chartalism back in the day. But they used it to guarantee full employment. They brought their unemployment rates down from like thirty percent down to two percent in a matter of 5 or 6 years.”

AD: “Mind you, any nation that goes to war brings its unemployment rate down to basically full employment levels. So yeah, it’s certainly possible.”


“…the full employment policies that were pursued in the Sixties and Seventies were aggregate demand management polices. So you would just pump as much money into the economy as you could, in the hope that at some point the economic opportunity cost of not hiring any available labor would fall so low as to make it irrational for a capitalist not to do that.”

“Kalecki’s point is that, ‘well, that’s assuming that they’re motivated by purely pecuniary concerns.’ But of course what the capitalist realizes is that unemployment is a useful disciplinary possibility. So the capitalist might be willing to pay for it. In other words, it doesn’t matter how low the opportunity costs, no matter how low their opportunity cost goes, there’s just a certain amount that they’re allocating to pay, or to not maximize their profits, in order to maintain that power which might be vital to the function of, at least at that point, industrial capitalism.”

“So in the U.K. there are bad associations with full employment policy because many people—to some extent rightly—blame it for all the industrial conflict that emerged after that period. You basically had this attempt to subvert an existing power balance that didn’t quite work out. You end up with these pitched battles between representatives of different industrial interests.”

“The job guarantee idea is, well, okay fine, so don’t work within the market. You just circumvent the market entirely. Instead of trying to incentivize capitalists to hire all the available labor, we the government would…just hire them ourselves. Of course that’s even more radical.”

“There are two possibilities One way is to kind of smuggle it in as not that great a departure from the current way of operating, which is how a lot of MMT activists are presenting it: ‘Look this is just the logical extension of Keynesian demand management.’ The other is to show it for what it really is, in which case it takes on a pretty revolutionary character, I think.”

“As a person who only has your labor power to offer, you’re a mendicant, and who are you a mendicant to? The job guarantee just means you no longer possibly can be a mendicant to private interests, because if you don’t like the terms any of them offer you, you can always get these guaranteed fixed terms – a fixed living wage by working for the state. I mean, this is a philosophical question. Its not obvious that that’s better. There’s all the debates about state socialism that need to be had to promote the policy in that way, which is why people are trying to say, ‘look, it really just more expansionary sort of fiscal policy; it’s really just a way of extending things we already have’…but I think it’s not, it inevitably has to be more radical.”


“So you have to go back to the point that the state sets the price of its currency. It sets the price of its currency by determining how much of the currency you need which ultimately comes down to the tax liabilities, and what you have to do to get the currency. During the Seventies, arguably, you had labor governments who were willing to accommodate the increasing wage bargains of unionized labor. So in that sense they were just looking after their interests.”

“And the idea is that in the 1980s you had this move toward ‘free markets.’ But in what sense? I mean, a bank is just a deputized issuer of state currency. And when the Bank of England places certain loans to buy certain sorts of assets on it eligible collateral list, it’s guaranteeing the prices of those assets. And so it does that with housing. And so you get this increase in house prices which is completely state engineered in no less a sense than the increase in wages of unionized labor was state engineered. You just have a different government looking after the interests of a different class, but the technique is exactly the same.”

TO’B: “This idea of the ‘free market’ is very far from what people think. People think that a rise in house prices is just some strange occurrence, but it’s a planned class relation, they re trying to redistribute a certain percentage of the social production to certain classes.”

AD: “Yeah. And it goes directly through the financial system which is a public institution. It might not look that way but it is. Because the Sterling framework is a government instituted framework. ‘Unelected central bankers,’ but it’s still a state institution. And the Sterling framework just determines which assets are going to move where. It puts some on its collateral list and it doesn’t put others on. There are very few people in the UK who are thinking of politics like that. Anybody’s starting assumption is that, of course the 80s were the ‘free market’ years, and before that was the ‘state socialist’ years. To get any traction on this debate you have to first disabuse people of that.”


“It depends on how we’re measuring profit. If you take a Neoclassical view–forget about money, I mean, money if anything is a useful numéraire, but that’s not what we’re reckoning any of our quantities in terms of. Then you might be able to argue that there’s an inevitable tendency for the rate of profit to fall if the government pursues at least a consistent policy. But if you’re doing something like [Andrew] Kliman does, and you’re actually measuring the rate of profit in terms of currency, well he himself says that, look, the rate of profit–the decline can be obscured by financial leverage–buying companies [and] gett[ing] these temporary record profits based on valuations based on loans which are never going to be paid off, impossible loans. Of course the government can just make this impossible loan to itself indefinitely. It can roll over forever. So you can’t say that there’s some tendency of the rate of profit measured in money terms to fall when you’ve got a state that has complete control over its fiscal policy.”

One thought on “The Philosophy of Debt

  1. Debt as a power relation… excellent explanation. Money makes the world go round indeed! Interest (= usury) is then the thumbscrews. If everyone owes more than they were lent, where is the excess supposed to come from? Eventually someone has to pay the debt in kind. It the debt’s big enough, that could be an entire country.

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