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Articles by peterc

Government Spending Comes First in a Sovereign Currency System

May 31, 2020

Modern Monetary Theory (MMT) makes clear that the spending of a currency-issuing government necessarily precedes tax payments and bond sales to non-government. This has important implications. It means that a currency-issuing government does not – and cannot – require revenue prior to spending. It means that it is government spending that makes possible the payment of taxes and non-government purchase of bonds, not the other way round. And it means that when a government requires itself to match deficits with bond sales to non-government, it does so voluntarily, and on terms that are entirely at its discretion. In short, the constraints on a currency-issuing government are not financial in nature. The constraints on the spending of a currency-issuing government are properly understood

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The Unlimited Financial Capacity of Currency-Issuing Governments

May 6, 2020

Policy responses to the COVID-19 pandemic, much like policy responses to the global financial crisis and Great Recession of a decade ago, carry a couple of clear macroeconomic lessons for anyone who cares to learn them:
1. A currency-issuing government faces no revenue constraint.2. A currency-issuing government dictates the terms on which it issues debt.
It is not only electorates that, understandably, have been slow to appreciate these aspects of reality. Plenty of economists, perhaps with less excuse, also exhibit little understanding. The lessons had better be learned fast, or austerity will be applied once the situation attenuates on the spurious grounds of “paying for” the fiscal deficits of the present period. While fiscal restraint, in some measure, may turn out to be

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State Money and Markets

April 8, 2020

A national government with the authority to tax gets to nominate a money of account along with the ‘money things’ that will be accepted in fulfillment of the tax obligations it imposes. In doing so, the government creates a demand for a particular money – a ‘state money’. This motivates the formation of markets for goods and services whose prices are denominated specifically in the money of account. This is true whether the national government with the authority to tax is a monetary sovereign (a currency issuer) or a monetary non-sovereign (a currency user), though a monetary sovereign will have greater autonomy in shaping the economy according to democratically expressed preferences as well as the werewithal to underwrite the economy.

 Markets in a sovereign currency system
In the

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Introductory Macroeconomics with a Job Guarantee

March 21, 2020

In some earlier posts, a job guarantee is added to an otherwise condensed income-expenditure model. This enables comparisons of steady states under different scenarios akin to the typical exercises conducted in introductory macroeconomics courses. What follows is a summary of the model, bringing together aspects that are dealt with in greater depth – but disparately – elsewhere on the blog, along with brief indications of how the model can be extended to include simple dynamics and short-run price behavior. Links to fuller explanations of various concepts are provided along the way.

 Simplifying assumptions
The model composes the economy into sector b and sector j. Sector j is the job guarantee sector. Its operations are confined to the activity of workers employed in the job guarantee

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Politicians Who Want Us to Live Beyond Our Means

February 13, 2020

Politicians often tell us that we should live within our means. Quite right. Unfortunately, many of them do not appear to understand what this actually entails when it comes to fiscal policy. So far as most economists are concerned, the events of the last decade have thoroughly discredited advocates of austerity. Yet, it remains quite common to hear politicians from across the political spectrum calling for reductions in fiscal deficits or even fiscal surpluses. There appears to be little awareness that, in most countries, a call for a fiscal surplus is, literally, a call for the society to live beyond its means.
A basic accounting identity
Here is a simple accounting relationship. It is an identity, true by definition:
Government Balance + Domestic Private Sector Balance + Foreign

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Three Economic Ideas Threatening to Defenders of the Status Quo

January 31, 2020

Neoclassical economics, which remains the prevailing orthodoxy, emerged in the late nineteenth century in the context of rising working-class opposition to capitalism. The theory’s appeal in certain circles as an apologetic for the status quo probably assisted its rise to prominence, which is not to imply that this was necessarily a motivation of the neoclassical economists themselves. The rise of any theory requires a receptive audience. Classical political economy had not provided defenders of the system with a comparable apologetic. Not only had it informed Marx’s analysis of capitalism but there were socialist movements drawing on interpretations of Ricardo’s labor theory of value. Class was central to the understanding of capitalism in both classical political economy and Marx, and

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Productivity, Labor Complexity, and Wage Determination Procedures

January 24, 2020

This post concerns an implication of Marx’s treatment of productivity and labor complexity for the appropriateness of alternative processes of wage determination. For simplicity, it is assumed that all activity is productive in Marx’s sense (that is, productive of surplus value) and that conditions are competitive in the Marxian (and classical) sense that investment is free to flow in and out of sectors in search of the highest return. Introducing unproductive labor, including a substantial role for public sector and not-for-profit activity, and non-competitive elements would considerably complicate the analysis. The point of the exercise is to consider the incentive effects of alternative wage-determination procedures, from the perspective of Marx’s theory. It is suggested that Marx’s

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Politically Motivated Attempts to Own or Disown China as “Capitalist”

January 17, 2020

There are often attempts in the west to depict China as capitalist rather than socialist. After decades of China going from strength to strength on macroeconomic criteria – and in view of its undeniable achievement in reducing poverty at a rate unmatched in recorded human history – some on the right wish to deny that this could have been accomplished through socialism and so instead claim China to be capitalist. At the same time, there are those on the left who wish to distance notions of socialism from China’s economic system and especially its record on human rights.

I view the question in terms of Marx’s ‘law of value’. If the law of value were universally applied to an economy, production would only occur when expected to be profitable for private owners of the means of production.

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Macro Dynamics with a Job Guarantee – Part 6: Price Stabilization

December 17, 2019

The previous part of the series introduced a short-run relationship between prices and output, P(Y), that is in keeping with a Kaleckian or Keynesian understanding of demand-led economies. According to this view, within the economy’s capacity limits, output reflects demand while prices reflect cost. So long as supply conditions remain unaltered, variations in demand are met with variations in production at stable prices. But when spending goes beyond the economy’s current capacity to respond in quantity terms, price pressures emerge from the demand side.

These considerations suggest a shape for P(Y) that is approximately horizontal over a ‘normal’ range of output centered on Yn but that is sharply increasing for output close to the maximum possible, Ymax. A policy implication is that

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Macro Dynamics with a Job Guarantee – Part 5: Price Level

November 22, 2019

So far, in considering a simplified economy with a job guarantee, the focus has been on the demand-determined behavior of output and employment. Prices, in this exercise, have simply been taken as given on the grounds that they are not causally significant in the process. This approach does not require prices to remain constant, though, for given supply conditions, they may well do so over a fairly wide range of output for reasons to be discussed. Nor does it require that prices are necessarily unrelated to output; only that the direction of causation in any aggregate relationship between the two mostly runs from output to prices rather than the other way round. But once attention turns to the issue of price stability, which is of considerable interest to job-guarantee proponents, it

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Macro Dynamics with a Job Guarantee – Part 4: Dynamic Stability

October 13, 2019

The model, in its present form, is short run in nature. It concerns an economy for which total employment, within-sector productivity and productive capacity are all taken as given. Variations in total output are achieved by workers transferring between two broad sectors that have differing productivity. In considering this economy, discussion has touched on aspects of a steady state and system behavior outside the steady state. It has been supposed, in the event of exogenous shocks, that the broader economy (sector b) drives the adjustment process through its reactions to excess demand or excess supply, with the job-guarantee program (sector j) absorbing or releasing workers as appropriate to maintain total employment at its given level. A tendency for the economy to move toward the

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Macro Dynamics with a Job Guarantee – Part 3: Adjustment Process

October 2, 2019

The model as outlined so far implies particular dynamics. These dynamics are driven by the quantity response of the broader economy (sector b) to mismatches in supply and demand. With the size of the labor force, level of total employment, within-sector productivity and the economy’s productive capacity all taken as exogenously given, the quantity response of sector b requires a change in the sector’s level of employment. The response of sector b induces an inverse response from the job-guarantee sector (sector j), which adjusts as required to maintain full employment at all times. The resulting variations in the composition of employment between higher-productivity sector b and lower-productivity sector j enable the adjustment of total output to total demand.

 Preliminaries
Levels and

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Macro Dynamics with a Job Guarantee – Part 2: Keynesian Cross Diagram

August 29, 2019

As a preliminary exercise, it may be instructive to modify the familiar Keynesian cross diagram to include the effects of a job guarantee within a simple short-run framework. The diagram includes two key schedules. The first is a 45-degree line showing all points for which actual expenditure equals actual income. The second is a line with lesser slope depicting the level of planned expenditure (total demand) at each level of income. Under appropriate conditions, the two schedules intersect at a steady-state level of income.
 Simplifying assumptions
Some assumptions are made for simplicity. In particular, the following variables and parameters are taken as exogenously given:
The size of the labor force.
The total level of employment.
Within-sector productivity.
Total productive

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Macro Dynamics with a Job Guarantee – Part 1: Overview

August 11, 2019

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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