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A Currency-Issuing Government Must Spend Before Non-Government Can Meet Its Net Financial Liabilities

23 days ago

In reaction to MMT statements that government spending must occur before taxes can be paid, it is sometimes noted that a household could pay taxes by borrowing from a bank that subsequently obtains reserves from the central bank. Whether this is true from inception of a modern money system will depend on the terms set down by the central bank in advancing reserves to banks. But supposing the terms are permissive, would it change anything of macroeconomic significance? Let’s take a brief look.
 Preliminaries
Government money. Payments to government are finally settled only in ‘government money’, meaning reserves or currency, almost always reserves. In a modern money system, the original source of reserves and currency is government.
Bank money. A bank loan to a taxpayer creates a deposit

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Comments on Recent Marxist Claims about MMT and Incidentally Kalecki

27 days ago

This post concerns ten recent Marxist claims about MMT and one about Kalecki (a forerunner, in certain respects, of MMT). Some Marxists claim that:
MMT fixates on the monetary, ignoring the real.
MMT ignores social structure in favor of tweaks of the monetary system.
MMT is incompatible with Marx on money.
MMT falsely claims that fiat money changes the role and nature of money.
MMT ignores the value of money.
MMT-informed policy would destroy the value of money.
MMT-informed policy would be inflationary.
MMT-informed government spending would crowd out private investment.
MMT supports a preservation of capitalism and opposes socialism.
Government spending fails to stimulate private investment and employment.
Kalecki is confused on causation between profits and capitalist investment.

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Marx and MMT – Remarks on Long-Term Policy and Social Implications

October 21, 2021

In recent exchanges on Marx and MMT, one question has concerned the capacity of government spending to encourage private investment and promote employment. Some Marxists appear to regard MMT as incompatible with Marx on this question. My own view is that Marx and MMT are compatible, both in general and on this particular question, and that the contributions of both, when viewed together, hold an important long-term social implication. What follows is a set of remarks outlining my position. Remark 1 is intended to provide context and to identify what I regard as the main social implication following from a joint reading of Marx and MMT. Remark 2 notes the critical significance of Marx’s ‘law’ of the tendential fall in the profit rate when interpreting the long-term implications of MMT

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‘Money’ in Marx and MMT and Social Implications

October 8, 2021

For both Marx and MMTers, money is a social relationship. For Marx, the social relationship is fetishized in a commodity for reasons that stem from the nature of commodity production. Money only becomes necessary, for Marx, when it is impossible for a currency to represent social labor time directly, which is the case under commodity production in which concrete labors are converted into abstract labor (i.e. marxian value) only indirectly through the workings of the ‘law’ of value. For MMTers, money is a social relationship that originates in debt. Debt relations can apply whether labor is directly social or only indirectly social (as in commodity production). Money, in MMT, is therefore a broader notion than in Marx. If Marx and MMTers meant the same thing by the word ‘money’, Marx’s

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Marx, MMT, and a Currency’s Expression of Labor Time

October 5, 2021

For Marx, a currency’s representation of the labor performed in commodity production is indirect, mediated through a ‘money commodity’. The reason for this is that labor performed in commodity production is not directly social but only made so, indirectly, according to the ‘law’ of value under which the concrete properties of diverse labors are abstracted from and the amount of labor socially necessary to produce each commodity is determined. Since the currency, at least from the standpoint of the currency issuer, does not require labor for its production, the currency itself is not a commodity and so does not in itself have (marxian) value. Instead, the currency expresses value indirectly by representing a commodity that does have value – the money commodity – which serves as universal

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MMT and Embedded Marxian Value

September 28, 2021

Bill Mitchell has just posted the first instalment in a two-part series on Marx and MMT. I was unaware of that while preparing the body of this post, but some of what follows bears incidentally on the topic. Bill Mitchell’s series is in response to a Marxist on the panel at one of his presentations who apparently cited Marx’s theory as proof that government, through its spending, is powerless to do anything about employment in a capitalist economy. The phenomenon of some Marxists being more neoclassical than Austrian and others more Austrian than neoclassical is not new, but it is unfortunate from a Marxist perspective. It leads, in practice, to uselessness at best and policy prescriptions that are more right wing than the proposals of the right wing at worst.
A first question that

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Do Sectoral Rates of Surplus Value Tend to Equalize, and Why Ask?

September 22, 2021

It is suggested in an earlier post that the presence of complex labor affects value creation in Marx’s theory, including at the aggregate level. The argument starts from Marx’s distinction between concrete and abstract labor. In making this distinction, Marx explicitly identifies productivity as a property of concrete labor and labor complexity as a property of abstract labor. Variations in productivity, since they relate to concrete labor, directly affect the aggregate production of use-values (‘real’ output) but not the aggregate creation of value (socially necessary labor time or nominal value). In contrast, variations in labor complexity, since they relate to abstract labor (the substance of value for Marx), directly affect the aggregate creation of value rather than the aggregate

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A Currency’s Command over Real Output in a Nutshell

September 17, 2021

In principle, a currency’s command over any category of real input or output can be considered in terms of a suitably defined price index. The present focus is on the aggregate level and, in particular, a currency’s command over real final output. Earlier posts explore the topic in greater depth (links below). This is a crib notes version.
A currency’s command over real final output – loosely, the amount of real stuff a currency unit can purchase – will remain stable so long as the average level of prices remains stable. Partly for this reason, price stability is generally regarded as a desirable property of well-functioning economies.
For a given distribution between wage and profit income, price stability requires nominal wages to rise in line with productivity. This maintains a

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MMT Applies to Both Growth and Degrowth

September 15, 2021

Modern Monetary Theory (MMT) can be applied to growing economies. Equally, as Jason Hickel rightly observes, MMT is also an appropriate macroeconomic framework for proponents of degrowth. The theory makes clear that a currency-issuing government always has the capacity to maintain full employment through implementation of a job guarantee, irrespective of the overall level of aggregate demand or rate of economic growth. As currency issuer, the government faces no financial barrier, nor has any need of profit. Whereas employment in an economy left to the whims of for-profit firms slumps whenever demand slumps – not least because private firms as currency users are financially constrained and subject to the profit criterion – currency-issuing governments have the capacity to maintain full

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A Brief Q&A on Three Aspects of MMT

September 12, 2021

First acquaintance with MMT can bring clarity on key aspects of the monetary system that may previously have seemed unclear, yet likely also calls other questions to mind. For instance, if taxes do not finance a currency issuer, why are they necessary? And if banks create deposits ex nihilo (“out of nothing”), how is it that (other than the central bank) they are financially constrained and subject to risk? Or, considering that issuance of the currency is essentially costless to the issuer, how can the currency nonetheless have value to its users? MMT has clear answers to each of these questions.
Q1. If taxes do not provide the initial finance for the spending of a currency-issuing government, why do we need taxation?
A1. Taxes drive money. The most fundamental reason for taxation is

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Markets are Creatures of Government

September 9, 2021

This is not just a matter of markets requiring a system of enforced property rights, which presupposes government, at least in rudimentary form. In monetary economies, functioning markets also require a viable currency, one that is generally accepted in exchange. Government ensures a currency’s acceptance when it imposes and effectively enforces taxes that are payable only in that particular currency. This is true not only of exogenous taxes but of taxes on consumption, income and wealth so long as these are assessed in the government’s chosen unit of account.
In this sense, it is perhaps ironic that the most ardent supporters of markets tend to be the least enthusiastic about taxes while the least enthusiastic about markets tend to be the most ardent supporters of taxation. The former

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Persistent Demand-Pull Inflation is Unlikely in Demand-Led Economies

June 27, 2021

Capitalist economies are demand led in the sense that both output and growth tend to reflect the behavior of autonomous demand, especially in the long run. Prices, in contrast, tend to be supply determined, reflecting cost. Supply shocks can temporarily dominate demand effects on output (for instance, as the result of war, a pandemic, or an oil shock), just as variations in demand, especially if supply is constricted, can temporarily dominate cost effects on prices. But the normal situation for a capitalist economy is demand-determined output and supply-determined prices.
There are two main factors that make persistent or long-lasting demand-pull inflation unlikely in demand-led economies. The first is that firms have reason to adapt productive capacity (including planned margins of

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Currency Value, Productivity, and a Currency’s Command over Use-Values

April 11, 2021

In general terms, Modern Monetary Theory (MMT) defines the value of the currency as “what must be done to obtain it”. As MMT authors have noted, this general definition can be interpreted in terms of labor time. A Marxist interpretation, consistent with MMT’s general definition, is to define currency value in terms of socially necessary labor time. Two interpretations seem particularly suitable. A first approach is to define currency value as the reciprocal of the average money wage. This measure indicates the amount of labor-power that must be supplied in exchange for a unit of the currency and, on average, the amount of socially necessary labor that is performed in exchange for the currency unit. A second approach is to define currency value as the reciprocal of the monetary

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MARX & MMT – Currency Value and its Relationship to Price Stability

March 25, 2021

The marxian labor-time values of individual commodities fall as productivity improves. This means that if a currency unit is to command a stable quantity of use-values (i.e. physical goods and services) over time, the value of the currency must likewise fall as productivity improves. For a given distribution between wage and profit income, and a given share of value added in total value, a currency unit’s command over use-values will remain stable when money wages rise in line with average productivity. This also promotes price stability.

To be clear, for given employment, rising productivity always means that all the currency in existence can purchase more use-values than before. But a single unit of the currency will command more or less use-values according to whether the value of

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Cost-Push Inflation

March 10, 2021

Inflationary pressures can originate from the demand side or the supply side of the economy. Demand-side inflation, known as demand-pull inflation, becomes increasingly likely as the economy nears full capacity. Inflation driven from the supply side, referred to as cost-push inflation, is possible in the absence of any excess demand for goods and services.

A supply shock can cause one-off price hikes, independently of demand conditions, but for the one-off effect to act as a catalyst for cost-push inflation there needs to be a socioeconomic process capable of reinforcing the initial effect and a pliant institutional setting. The most likely candidate is ongoing conflict over the distribution of income, expressed through workers’ wage demands and/or firms’ price-making behavior, with

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Currency Value Interpreted as the Reciprocal of the MELT

February 23, 2021

In an earlier post it is suggested that when value is conceived as socially necessary labor time, it makes sense to define currency value in one of two ways, either as the reciprocal of the average money wage paid for an hour of simple labor or, alternatively, as the reciprocal of the ‘monetary expression of labor time’ (MELT). Under the first definition, currency value is the amount of simple labor-power commanded by a unit of the currency and, on average, the amount of simple labor that will be performed in exchange for a unit of the currency when advanced as wages. Under the second definition, currency value is the amount of simple labor represented in a unit of the currency; that is, the labor-time equivalent of a currency unit.

 Currency value in terms of socially necessary

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The Core Significance of Taxation and Currency Sovereignty in a Nutshell

January 19, 2021

A government with the authority to tax can ensure acceptance of a particular currency. By nominating a currency in which income and wealth are to be assessed, and imposing taxes that can only be paid in the nominated currency, the government establishes a demand for the currency.
This is true whether the government issues its own currency or instead adopts a currency issued by some other entity.
But a government that adopts somebody else’s currency is reduced to the status of mere currency user and, as a consequence, faces financial constraints similar to those that bind private households and firms.

In times of economic crisis, a currency-using government is dependent for assistance on the currency issuer and so subjects itself to whatever terms and conditions the currency issuer

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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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