One suggestion in the comments to the ongoing “short & simple” series is to cover the balance of payments. This will be covered at some point in the introductory series, but I am still considering how best to present it in brief, simple form. With that in mind, it seemed worth attempting a regular post on the topic. The post is still intended to be elementary in nature, but is perhaps at about the introductory university level. The post is also too long to qualify as “short”, even allowing for the fact that some recent parts of the series have already stretched the definition of “short” beyond what I would have preferred.
The video below is of a three-part presentation by Bill Mitchell, L. Randall Wray and Martin Watts concerning their forthcoming MMT textbook. Throughout the presentation and in the Q&A session that follows there are interesting observations on the current state of university economics and prospects for MMT and the economics discipline in general. The presentation was given at the First International Conference on Modern Monetary Theory held from September 21-24, 2017 at the University of Missouri-Kansas City (UMKC).
Under a job guarantee, there would be a standing job offer at a living wage for anyone who wanted such a position. Anyone without employment in the broader economy, or unhappy with their present employment, could opt for a position in the job-guarantee program. Similarly, individuals with less hours of employment than desired could top up their hours by working part-time in the job-guarantee program. In principle, the program might be locally or centrally administered. But, irrespective of administrative details, it will be assumed that a currency-issuing government funds the program.
What is the most appropriate entry point to the study of a monetary economy in which government is currency issuer? Is it “the market”? Is it the definition: total spending equals total income? Is it real exchange? Real production? Is it total output? Total employment? Total value? Distribution of income? The origin of profit? Price formation? Competition?
Although religious cults are the subject of many glowing news stories, what seems to get missed is that they can sometimes also have a darker side. The effects on those involved are not always as positive as current affairs journalists would have us believe. The following recounting of an untrue story offers an example of this.
Some days, when things seem quiet on the economic front, and even occasionally when they don’t, minds can wander to less weighty matters and become momentarily lost in daydreams of yesteryear; a heady retreat, for instance, back to high school math class one barmy afternoon, sunshine streaming through the windows facing on to Main Quad, with the keener students engrossed in an exploration of the wonders of polynomials; back to a delirious springtime trance interrupted, rudely, by one of the less enthralled students, who wondered aloud, “Yeah, but what good are they in the real world?”
A monetarily sovereign government is one that issues its own currency and is the currency’s sole issuer. Ideally, it allows the currency’s value to float in relation to other currencies in foreign exchange markets, meaning its currency is not convertible at a fixed rate into either another currency or a commodity (other than possibly the commodity labor-power through the provision of a job guarantee). Although this ideal maximizes policy space, a government that promises convertibility can renege at a later date, and so, strictly speaking, does not relinquish its monetary sovereignty so long as it retains the authority to issue its own currency. A monetarily sovereign government that operates a flexible exchange rate faces no revenue constraint provided it refrains from borrowing in a foreign currency and so avoids exchange-rate risk on its debt.
It is easy to represent the ‘income-expenditure model’ in a graph. Some people find this helpful as a visual aid to understanding; others, not so much. For those who find graphs confusing, this post can safely be ignored. In terms of economic meaning, it does not add much to what has already been explained. But for those who are comfortable with graphs, they can be a handy tool for illustrating or thinking through the logic of a model.
We have seen that the ‘income-expenditure model’ combines key macro identities (introduced in parts 7 and 15) with particular behavioral assumptions to provide a theory of income determination (considered in parts 16 and 18). The behavioral assumptions relate to causation. The causation envisaged in the income-expenditure model has implications for the sectoral balances, some of which are the focus of the present post.
In any society, of whatever configuration, production at a given point in time is limited by certain ‘real’ (meaning non-monetary) factors. Notably, a society’s productive activity will always be limited by access to natural resources, the current state of its technology, and the skill, strength, size and imagination of its people. These and similar factors determine the absolute productive potential of a society. At a given point in time, these factors would apply even if, hypothetically, a society happened to be organized in a completely different way to its current form of existence.