Modern Monetary Theory (MMT) and Real Capital Frameworks both stress the importance of understanding the capacity of the economy to deliver, using real resources.
MMT demonstrates how the economic system works: a government budgets for a year at time, planning its expenditures and expected levels of tax returns. The expenditures are calculated on resources being available to purchase. Real Capital frameworks offer ways to measure production capability and capacity, and the status of the real capital that will be employed through the budget year. This article explores how MMT and real capital align.
This focus of both MMT and real capital on resources and capability is important. One of the central tenets of MMT is that the Government can afford to do anything there are available resources for. In the Real Capital Framework, capital is characterised as something that is used to provide resources without itself being used up. Real Capital (Human, Social, Built and Natural) then, offers a measure of the capability of the capitals to provide these resources. The Framework also measures the status of the Real Capital. The ability to provide resources can change during the budget year, depending on the way the economy treats the Real Capital. For example, railways (built capital) can deliver services one year, but where maintenance is neglected, services (and safety) could be degraded the next year. The use of the air or water bodies natural capital as a recipient for emissions can degrade the capability of the capital to continue to be a recipient.
Combining MMT with Real Capital Frameworks offers a way to model the economy as stocks and flows, where Real Capital is the stock, the outputs from using the capital are flows, and flows into the Capital, for example maintenance or regenerative work, affect the status of the Capital.
The national budget: blind without Real Capital
The table below shows the national budgeting process, which contains the planned expenditure over the coming year, along with the expected revenues coming in. We can already at this stage use the concept of human capital as the individuals who are paying tax directly, and the social capital, which includes organisations with a national tax number, also paying taxes. In practice, the government budget goes to authorities like the social services, which in turn pays out to individuals, therefore the full budget is represented as going to organisations.
One of the big criticisms MMT makes about how the economy is handled is that it is treated as something that should be balanced, i.e there should be neither surplus nor deficit. This focus is far too narrow when we are talking about citizens who need at least the basics of food, water, shelter and inclusion.
Real Capital explained
The Real Capital Framework states that all real capital has
- A defined function or functions
- Necessary inputs so the function can be realised
- A Status which includes capacity
- A maturity level, which is defined as the level needed to fulfill politically agreed levels of functions
The Real Capital Framework, then, conceptualises the functions of the economy in terms of the four capitals
- Human Capital, providing work and the basics of food, shelter, etc.
- Social Capital, supporting organisations to be stable, productive and sustainable.
- Natural Capital, ensuring there is no depletion of resources or degradation of ecosystems.
- Built Capital, ensuring the built structure is capable of fulfilling at least the basic needs of citizens in an environmentally-friendly way.
A national budget with real capital included
These other capital categories are involved in the economy, but do not appear on any national balance sheet. We attempt to remedy this in the table below. Monetary flows are in red and blue, real capital flows in grey.
From this perspective, it follows that the national budget process should include the other capitals to be used in the economy. After all, these produce the activities that generate the income to generate the tax.
The role of money in the economy – to coordinate for the good of all
MMT teaches us to demystify money. As Wray states, money is not a commodity or a store of wealth in itself, but a state-sanctioned IOU—a social relation grounded in law and obligation. The state issues the currency and imposes taxes payable in that currency, creating demand for it. Money, then, is a coordination tool, not a productive input. It facilitates exchange and mobilizes resources, but it is not the resource itself.
This stands in contrast to how “financial capital” is typically understood. In financialized economies, money and debt instruments are treated as forms of wealth—as if owning claims on future income streams is equivalent to owning productive capacity. But this is a dangerous conflation. Money is a claim, not a capability. It may signal potential investment, but until it is converted into real-world goods, labor, or systems, it remains inert.
Some questions to address in the budget process include:
- How much of the capacity of these capitals does the budget envisage will be used? For example, will all the available iron that can be mined be extracted? Or will all the people available to work be employed?
- Is the capability to deliver there? (If not, inflation may arise as too much budgeted money chases scarce resources.)
- Will the year’s activities regenerate or deplete the capitals? If so, what will be the cost of bringing the capital status back?
Although these capitals are by definition used but not used up, they can still be either degenerated through being employed, or regenerated through being maintained, upgraded etc.
For example, for biological capital, like soils, agriculture can degrade them, and forests can be felled, reducing their capacity. For mineral capital, metals can be discarded in a way that makes them difficult to recover and return into the economy.
In terms of human capital, MMT posits full employment as a function of a fully working economic system. Being unemployed could be viewed as a degradation of the capacity to work. Or being out of work is a lack of effectiveness of the system of providing inclusion. Or being overworked and stressed during the year could negatively affect worker capability as well as factors like ageing and education and training. Again this is poor performance.
For each annual budget, then, the government must take into account the Real Capital Status of each of the capitals to assess its capacity to deliver.
In summary
Based on MMT and Randall Wray’s work, the key takeaway is that money is a tool for exchanging value—it represents claims on real resources but is not itself a resource. Real capital, on the other hand, comprises the productive assets and institutional frameworks that constitute the actual economic system. Recognizing this distinction shifts the focus of economic policy from merely managing monetary aggregates or financial instruments to actively building and sustaining the foundational elements that underpin economic well-being.
The Real Capital Framework encourages us to evaluate economic performance and policy success by the robustness and sustainability of real capital, rather than by financial metrics alone. Such a view supports investments in areas like infrastructure, education, and environmental sustainability, which are vital for the long-term productive capacity of society.
Stephen Hinton Consulting 