Donald Trump’s war on Iran is proving what really limits governments. He’s running into problems. But he isn’t running out of dollars. What he’s doing is running out of weapons and military capacity. That’s the real lesson from this conflict. And what that does is something quite curious. It confirms exactly what modern monetary theory (MMT) says.
MMT says that money is never the real constraint in an economy. A government which issues its own money can always create more dollars (or pounds). Trump has asked for $65bn from Congress to continue this war. But that does not solve his problems. Money organises resources, but it doesn’t create them.
Money isn’t the limit
The real limits on activity anywhere are people, skills, factories and materials, and Trump’s war is exposing this reality more clearly than just about anything else of late.
Weapons cannot be created by spending alone. Missiles require factories, supply chains and raw materials. Military equipment depends on skilled labour. Production capacity takes time to expand, and no amount of money can remove these constraints.
And this is exactly what MMT always says. You can only spend when there is something to buy. You must stop when there isn’t. If you don’t, you will get inflation.
And this is true of every part of the economy. It’s not just true for this war economy that Donald Trump is trying to manage. It’s also true in the UK. The NHS needs doctors, nurses and equipment. It doesn’t just need budgets. House building needs land, labour and materials. Climate action needs engineers and infrastructure.
Every policy depends upon the availability of real resources. We can always find the money if those resources exist. There’s no point creating the money if they don’t. And that’s the key point.
Asking the wrong question
Conventional economics, and all our journalists, always ask the wrong question: “Where will the money come from to pay for this?” But their first question should be something quite different. It should be: “Do the resources exist for money to buy?” If they do, finance can always be arranged. Those resources can then be put to use. And by putting them to use, we will almost invariably create the value within the economy to recoup their cost. Political choices determine how resources are used. Money should follow the resources.
In that case, what Trump is proving is that war is an exercise in political economy. Governments must decide what resources matter most to them. They must direct production to meet national priorities, and markets alone cannot solve strategic shortages of the sort that this war is exposing.
The wrong priorities
It is power, in this case, government power, that determines economic outcomes. And in fact, what this war has proven is that the US has been wrong to try to outsource warmongering to the private sector, which is what it has done. They’ve tried to run it on a just-in-time supply chain basis, and that, as we now know, does not work. Money is not the issue. Resource management is. The US government has got their priorities wrong, and as a result they can no longer run a war.
The real limits are always physical, and not just when it comes to war. This is true of any activity anywhere, whether in the state or private sector, but we don’t seem to understand that.
We also don’t understand that when we try to buy resources with money that we’ve created for a purpose, but there aren’t resources, we get inflation. Good government then has to manage real capacity and not arbitrary budgets.
Prosperity depends on expanding productive potential, and economics should always begin, whatever the issue, with resources and not money.
Modern Monetary Theory in practice
This truth has been demonstrated during the course of this war. It is ironic that modern monetary theory has been shown to be right by Donald Trump, who would never embrace the ideas of MMT. It has exposed the fact that money is never the problem when it comes to war; real resources are.
Real resources are the foundation of every economy. That’s the central insight of modern monetary theory. That’s the insight that our generals and our politicians should be adopting. That’s the insight that our journalists should be taking from this exercise.
We always need to ask the question: “Are the resources available to do something?” Not, “Is the money available?” Because asking if the money is available is putting the cart before the horse. And as we all know, the horse has to go before the cart. The horse is the real resource that we need, to achieve anything in our society.
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