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Articles by peterc

Macro Dynamics with a Job Guarantee – Part 1: Overview

13 days ago

The job guarantee as proposed by Modern Monetary Theorists would provide a publicly funded job with defined wage and benefits to anyone who desired one, with public spending on the program varying automatically and countercyclically in response to take-up of positions. In a downturn, workers who lost their jobs would have the option of accepting the job-guarantee offer. As the economy recovered, some workers would receive better offers elsewhere. By design, the job-guarantee provider would not compete on wages in an attempt to retain such workers. Rather, the program would provide a stable wage floor, serving as a nominal price anchor for the economy. Periodically it would be appropriate to revise the program wage, but these wage adjustments would reflect factors such as trend

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Labor Power as the ‘Money Commodity’

July 17, 2019

For Marx and many Marxists, money is based in a commodity; in Modern Monetary Theory (MMT), it is not, being based instead in a social relationship that holds more generally than just to commodity production and exchange. Even so, to the extent that commodity production and exchange are given sway within ‘modern money’ economies, operation of the Marxian ‘law of value’ appears to be compatible with MMT. It is just that, from an MMT perspective, private for-profit market-based activity will be embedded within, and delimited by, a broader social and legal framework that is – or at least can be – decisively shaped by currency-issuing government. Therefore, even though in MMT money is not regarded as a commodity, it seems that a commodity theory of money can be reconciled with MMT provided,

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Labor Complexity in Relation to Aggregate Marxian Value

June 21, 2019

Value, in Marxist theory, is an amount of abstract labor that is measured in hours of simple labor or a monetary equivalent. Marx argued that complex labor is reducible, for the purposes of commodity production and exchange, to amounts of simple labor. Qualitatively, complex and simple labor are the same. Both count as abstract labor, and so create value. But, quantitatively, complex labor creates value at a faster rate than simple labor.

This distinction between simple and complex labor complicates Marxian analysis. It remains open to debate whether the complications extend to the macro level. Marxian macro analysis – especially empirical analysis – would be made considerably easier if the value implications of labor complexity could be treated at the aggregate level in much the same

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Currency Acceptance, Currency Value, and Transcending Capitalism

May 13, 2019

While revisiting earlier discussions on Marx and modern monetary theory (MMT), I came across an interesting comments thread. In it, a commenter raised an argument that seems worth addressing (the full comment can be found here). The commenter writes:
MMT treats money as a public utility, while Marxism treats it as an expression of value. And I think that no matter the engagement between these two schools of thought, one has to choose either one or another. Either money is an abstract public utility (grounded only in people’s accepting it, through the force of taxation or whatever), which can then be used quite unproblematically for public goods within any context whatsoever … or one realises that money is not an abstract public utility, but is concretely rooted in material processes,

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Currency Value in Terms of Socially Necessary Labor

May 5, 2019

An economy’s minimum wage equates a unit of the currency to an amount of labor time. For instance, in marxist terms, a minimum wage of $15/hour sets a dollar equal to 4 minutes of simple labor power. At a macro level, this enables currency value to be defined in terms of simple labor. There are, however, at least two ways in which this connection between currency value and labor could be drawn. One way would be to adopt a labor command theory of currency value. In effect, modern monetary theory (MMT) takes this approach. A second way would be to link the value of the currency to the commodity labor power. Adopting the second approach leads to a definition of currency value that is distinct from the MMT definition but closely (and simply) related to it. So far as policy implications go,

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Banks are Capital Constrained, Not Reserve Constrained

March 3, 2019

Generations of economics students have been misled into believing that banks are reserve constrained. Even today, though most specialist monetary economists would likely cringe at the idea, there are widely used textbooks that teach this mistaken view to a new generation of students. Usually the story is framed in terms of a ‘money multiplier’ model in which an addition of reserves into the monetary system by the central bank will supposedly cause a multiplied increase in bank lending and in doing so expand the ‘money supply’ (in this context meaning currency plus deposits). In reality, banks create deposits (add to the money supply) in the act of lending. If they subsequently find themselves short of reserves, they can obtain them from other banks or, in the event of a system-wide

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Fiscal Policy and the Inflation Constraint

February 27, 2019

Modern monetary theory (MMT) makes clear that, for currency-issuing governments, the macroeconomic constraint on fiscal policy is resource availability, not revenue. This is sometimes summarized as “the constraint on fiscal policy is inflation” in recognition of the link between resource availability and the macro impacts of spending. So long as there are available workers, materials, plant and equipment, it is possible to produce more. Under these circumstances, extra spending on goods and services can initiate or encourage production without necessarily affecting prices. Although this point is elementary, recent public debate suggests that it is not obvious to everyone. Some appear to believe that inflation will result whenever there is: (i) money creation; (ii) spending; or (iii)

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Developments in Value Theory

February 13, 2019

Previously I have discussed how Marx’s well known aggregate equalities have been shown to hold under single-system interpretations of his theory of value. In the July 2018 edition of the Cambridge Journal of Economics, there is a noteworthy paper by Ian Wright that reconciles the classical labor theory of value with Marx’s prices of production within a dual-system framework. As with single-system interpretations, Marx’s equalities also hold under Wright’s approach. However, they do so in a different way. Here, I want to offer some thoughts on the difference.

 Background
The classical labor theory of value in the form developed by Ricardo ran up against the difficulty that, under a capitalist tendency toward equalization of profit rates, prices of production (or what the classical

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MMT and Capitalism from a Marxist Standpoint

February 12, 2019

A perennial question for Marxists is how to overturn capitalism. Will institutional changes that improve the lot of workers but fall short of ending capitalism immediately help or harm this cause? To the extent that social struggle is a learning-by-doing process, it may be that the securing of small gains can whet the appetite for more significant gains and that institutional reforms of a transformational nature can place revolution on a more secure footing if and when it does occur. But there is also the possibility of complacency in which workers come to tolerate capitalism so long as their own situation is not so dire.
The increasing prominence of modern monetary theory (MMT) has once again brought the perennial question to the forefront for some socialists. Is knowledge of MMT going

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MMT is Politically Open and Applicable to Both Capitalism and Socialism

February 9, 2019

Modern Monetary Theory (MMT) offers an understanding of sovereign (and non-sovereign) currencies that is applicable to a wide range of economic systems, including capitalist and socialist ones. Irrespective of the personal political preferences of its proponents, the theoretical framework in itself is neutral on the appropriate balance between public sector and private sector activity, or the relative merits of capitalism and socialism. In contrast to neoclassical theory, which starts from a general presumption in favor of private market-based activity except where the existence of market failure in excess of government failure can be explicitly established, MMT as a theory characterizes the appropriate mix of public and private activity as a social (or political) choice.
It is a social

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One of the Fundamental Differences Between Modern Monetary Theory and New Keynesian Economics

January 15, 2019

With Modern Monetary Theory (MMT) making inroads in the public policy debate, some New Keynesians have transitioned from ignoring or dismissing the approach to engaging with it. This is healthy for both sides. There has been a tendency, though, to make “we’ve known it all along” type statements. A comprehensive response to the “nothing new” claims is provided by Bill Mitchell in a recent three-part series of posts (part 1, part 2 and part 3). My focus here is narrower and concerns a view (for example, expressed in a considered response here) along the lines that MMT has nothing new to say when the economy is at full employment.
Leaving aside that MMT and New Keynesian Economics (NKE) define full employment differently, this claim obscures a fundamental difference between the two

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Fairness and a ‘Job or Income Guarantee’

January 2, 2019

Of the various criticisms leveled at a combined ‘job or income guarantee‘, ones appealing to fairness usually go along the lines that it would be unfair for healthy individuals outside the workforce to receive an income while others are occupied in jobs. In considering this objection, a number of points come to mind:
1. the arbitrariness of exempting the wealthy from any expectation that income of the able-bodied be conditional on labor-force participation;
2. the range of options that would be available to all individuals under some kind of ‘job and/or income guarantee’;
3. the unfairness of work outside the labor force (most notably home parenting and housework) being performed without receipt of income simply because it is not codified within a waged or salaried occupation;
4. the

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Holiday Time 2018

December 24, 2018

Things have been pretty quiet around here this year. The temptation to embed music videos or insert other snippets of creativity has been resisted because, well, heteconomist has not really paid its way with the requisite quota of economics posts that would ostensibly justify it. Increasingly economics seems to be not only a lost cause but rather beside the point. In any case, with remarkable self-discipline any straying off topic has been put on hold until the Christmas/New Year period, which has now arrived. Hopefully all are well and enjoying a nice break.
—–
Casting a wary eye outside the window, it’s a dire environmental and geopolitical predicament that we have brought upon ourselves. Having waited our whole lives to grow old, it now seems many of us never will. At least there’s

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Productive and Unproductive Labor in a Macro Context

December 9, 2018

As is well known, Marx and the classical political economists before him made a distinction between productive and unproductive labor. Marx’s distinction somewhat differed from Smith’s. For Marx, labor is productive when it is: (i) directly productive of surplus value; and (ii) exchanged directly against capital. I remain unsure how applicable the distinction is to a state money system. Some of my misgivings are explained in an earlier post. The uncertainty has held back an attempt to explore connections between Marx and Modern Monetary Theory (MMT). To get around this, here I proceed on an as if basis by assuming for the sake of argument that the distinction is meaningful.

Consider a simplified economy with a productive sector (sector p) and an unproductive sector (sector u). It can

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China and the Notion of State Capitalism

December 4, 2018

There is sometimes an inclination in the west to depict China or the former Soviet Union as state capitalist rather than socialist or communist. At a time when China is going from strength to strength on certain macroeconomic criteria, some may wish to deny that this could have been achieved through socialism or communism and so instead claim China to be capitalist. At the same time, some may wish to distance notions of socialism or communism from what is perceived to be going on in China or what is perceived to have occurred in the former Soviet Union.

It is conceivable that the questions “Is China capitalist?” and “Is China socialist?” could both be answered in the negative for the simple reason that not being capitalist does not automatically make a society socialist. Or, depending

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Illustration of Dynamic Adjustment with a Job Guarantee

November 22, 2018

In some recent posts, a job guarantee has been considered within the income-expenditure framework. One post in particular suggested a possible conceptualization of the dynamics of the model. It was shown that these dynamics are consistent with the model’s steady state requirements. Demonstrating this took a fair bit of algebra, which may have obscured for some readers the simplicity of the actual model. Much of the algebra was only needed for the specific purpose of verifying that the suggested dynamics are valid. At least for the version of the model presently under consideration, this task has now been accomplished. It is justifiable just to focus on the basic model which is really quite simple while still allowing for somewhat complicated behavior. Below, an example of this behavior

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Some Aspects of a Steady State with a Job Guarantee

November 21, 2018

The first section of the previous post outlined basic steady state relationships in a simplified economy with a job guarantee. There are various ways of expressing the same relationships that shed light on what is going on in the model. Here, a few ways of thinking about the levels of total income and job guarantee spending are noted.

 Two Reference Points
The presentation in the previous post was guided by a desire to have all key expressions share the same denominator. The common denominator was α + q, where α is the marginal propensity to leak to taxes, saving and imports and q is the ratio of job guarantee spending to the income gap.
In thinking about an economy with a job guarantee, there are a couple of obvious reference points. One is the maximum possible level of income given

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Quantity Dynamics with a Job Guarantee

November 16, 2018

A job guarantee would be a standing offer of a publicly funded job. Spending on the program would adjust automatically and countercyclically in response to take-up of positions. The likely feedback between spending on the program and activity in general is interesting and can be considered within the income-expenditure framework. In what follows, the standard model is modified to find the steady state levels and compositions of income and employment and other key variables. Attention then turns to how the system might behave outside a steady state. A way of conceptualizing the dynamics of the system is suggested and formulas developed to describe that behavior. The suggested dynamics are shown to be consistent with steady state requirements.

The material is a little on the technical

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Condensed Income-Expenditure Model

November 9, 2018

The following is mostly intended as background for a possible post (or posts) on quantity effects of a job guarantee in which the standard income-expenditure model is taken as a base. It is desirable to work from as simple a starting point as possible as the exercise can complicate pretty quickly. To minimize unnecessary complications, the base model will be presented in highly abbreviated form. This will not cause anything important to be lost because it is always possible to switch back to the more detailed version of the model when desired. The abbreviation has already appeared here and there in earlier posts, but to avert possible confusion it seems advisable to spell out exactly how it corresponds to the more familiar version of the model.

The standard model can be summarized in

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Job Guarantee as Nominal Price Anchor

October 28, 2018

I’ve been thinking about the job guarantee as it is envisaged by proponents of Modern Monetary Theory (MMT). My focus has been on various quantity effects of the policy that can be considered using the standard income-expenditure model as a base (for preliminary posts along these lines, see here and here.) Since the income-expenditure model takes the general price level as given, it does not directly shed light on the aspects of a job guarantee that would pertain to price stability. To provide some context for a possible future discussion of quantity effects, it is perhaps worth summarizing how the job guarantee would moderate price pressures. Clear statements of the MMT position on the topic can be found in a billy blog post (here) and closely related academic articles by Bill Mitchell

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A Simple Modern Money Tale – Buckwell Island Establishes a Currency

July 24, 2018

At one time or another many of us have probably pondered questions such as: Where does a national currency come from? How does a currency system basically work? Why might people agree to accept a national currency in the first place? How can we be confident that a national currency won’t collapse and that people will continue to accept it in economic transactions? Can a government ever go broke and leave citizens footing the bill? Can financial affordability even be an issue for government?

The answers to these questions depend, above all, on whether the government in question is a currency issuer or a mere currency user. The simple tale traced below illustrates some basic aspects of a society in which government issues its own currency. It is important to understand that the

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A Currency-Issuing Government Spends on its Own Terms

May 14, 2018

An alternative title to this post could have been, ‘The Interest Rate on Public Debt is a Policy Variable’. This remains true even though, in the neoliberal era, governments usually require themselves to follow various unnecessary rules on how their spending is to be conducted. These rules typically serve no public purpose but may have the effect of misleading the public into believing that somehow a currency issuer can run out of the currency that it alone is empowered to create.

Consider a currency-issuing government that requires itself either to collect taxes or to issue debt to non-government before it spends. This is quite typical of governments today. At first glance, these requirements may seem problematic. From inception, it would clearly be impossible for a currency issuer to

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Dynamics of Output and Demand in a Growing Economy

March 17, 2018

An earlier post discussed some of the dynamics of output and demand implicit in the income-expenditure model. Attention was confined to a simplified economy that was stationary other than when adjusting to one-off exogenous changes in demand. The present post considers a continually growing economy in which autonomous demand changes over time. The discussion is kept simple by treating all demand other than private consumption as exogenous. The model can be extended to include additional endogenous demand components – such as investment or job-guarantee spending – but this is left for another time.

 Behavioral Assumption
As was emphasized in the earlier post, a key behavioral assumption of the income-expenditure model is that, in setting production levels, firms attempt to eliminate

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Growth is Good?

February 2, 2018

Whenever the topic of economic growth is broached, there is a common and understandable reaction along the lines that growth is ecologically unsustainable or socially harmful. Since one of the preoccupations of this blog is demand-led growth, it is perhaps worth pausing to reflect on the appropriateness of the topic. This can be broken down into two parts. Why consider growth as such? And why emphasize the possibility that growth is demand led?

 Growth as Such
Economic growth entails an ongoing expansion of output. Output, when defined in terms of National Accounting conventions, is a monetary measure. This is true whether the figure for Gross Domestic Product (or related measures) is reported in nominal terms (at market prices) or in so-called ‘real’ (meaning constant-price) terms.

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From the Fiction Files – “Easy Money Anytime”

January 31, 2018

I gazed out the eighth-story window of a humble – bashful, even – apartment at crowds of pedestrians on the street below, feeling drawn to those crowds, blissfully lost in their collective thoughts, basking in a sense of universal oneness and kindness toward everyone and everything. I held a specially designated Study Mug to my chest, nestled just so, withholding for a time the pleasure of that first sip. At last I relented, and gave in to sweet temptation, raising the Mug to my lips.

Ugh … I lurched toward the window. Not good.
I glared down at the crowd.
Leaning out the window it was all I could do not to spit the ghastly brew all over their unsuspecting heads.
Damn and blast you all to hell, I thought.
I pulled sharply away from the window, slamming it shut with the anguish of a

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Easy Money Anytime

January 31, 2018

I gazed out the eighth-story window of a humble – bashful, even – apartment at crowds of pedestrians on the street below, feeling drawn to those crowds, blissfully lost in their collective thoughts, basking in a sense of universal oneness and kindness toward everyone and everything. I held a specially designated Study Mug to my chest, nestled just so, withholding for a time the pleasure of that first sip. At last I relented, and gave in to sweet temptation, raising the Mug to my lips.

Ugh … I lurched toward the window. Not good.
I glared down at the crowd.
Leaning out the window it was all I could do not to spit the ghastly brew all over their unsuspecting heads.
Damn and blast you all to hell, I thought.
I pulled sharply away from the window, slamming it shut with the anguish of a

Read More »

Disequilibrium Dynamics of Output and Demand

January 29, 2018

Theoretical studies of output and growth often focus on the behavior of equilibrium output. The usefulness of this approach depends on there being a tendency for actual output to converge on equilibrium output. With such a tendency present, studying the behavior of equilibrium output will tell us something about the behavior of actual output. It is therefore of interest to spell out the process by which an economy in disequilibrium is thought to tend toward equilibrium.

A first step is to consider the disequilibrium behavior of an economy that, for simplicity, is taken to be stationary (non-growing) when in equilibrium. This approach is adopted in the present post. The exercise is really preparation for considering a continually growing economy – a task that is left for a possible

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A Simple Framework for Analyzing a Demand-Led Economy

January 15, 2018

I have been thinking about a simple depiction of a demand-led economy. Mostly it draws on standard Keynesian macro, Kalecki’s work on cycles and growth, and supermultiplier models developed within the surplus approach. The main focus is on the evolution of a demand-led economy through time. The present post simply sketches the basic framework and provides some context. Perhaps in the future certain aspects can be fleshed out.

 The Basic Framework
The level of ‘real’ economic activity – as measured in the National Accounts as Gross Domestic Product at constant prices – will be considered demand determined along the lines of Keynes and Kalecki. It is assumed that normally there are reserves of labor-power and other resources as well as spare productive capacity in the form of

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A Notion of Demand-Led Growth

December 16, 2017

A key purpose of demand-led growth theory is to extend the ‘principle of effective demand’ to contexts in which productive capacity is best considered variable rather than fixed. The central idea is that, over any time frame, it is demand that determines output, and demand-led variations in income that adjust planned leakages to planned injections. Once it is acknowledged that capacity is variable, it becomes clear that the adjustment of output to demand, and planned leakages to planned injections, can be achieved not only by utilizing existing capacity more fully, but by expanding capacity through investment.

For the principle of effective demand to make sense, it is necessary: (i) that the economy is operating within the limits of its productive capacity (defined by the plant and

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If the Robots Outdo Us

November 13, 2017

A while back on Facebook, or maybe it was twitter, someone asked what would be left for our own lives if artificial intelligence ever came to exceed our own.
Or similarly it could be asked, if the robots ever became better than us at everything, what would be the point of life?
I don’t know the limits of artificial intelligence, but one answer to these questions is that we would be freer to focus on learning, exploration, self and group development, social interaction and play. If these robots ever became so amazing that they could compose better music than us, create more captivating movies, engineer sturdier bridges, devise smarter phones, play a more riveting style of football and produce superior widgets of all kinds in next to no time, then by learning from the robots, their

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