This is intended as an introductory post to explain the Keynesian (and Kaleckian) view of causation between desired investment and desired saving in particular, and desired injections and desired leakages in general. Initially, the argument is presented with reference to a simple two-sector income-expenditure model of a pure private economy. The model illustrates the Keynesian view that provided the economy is operating below full employment and there is idle capacity, desired investment generates desired saving via income adjustments rather than being financed by that saving. The second part of the post employs a four-sector model with government and external sectors included to draw out a couple of points emphasized by Modern Monetary Theorists.
A common misconception is that if everybody was prepared to take awful enough jobs, unemployment would be eradicated automatically, at least eventually, irrespective of the government’s fiscal stance. Embedded in this argument is a misconception that unemployment, overall, can be eliminated through lower wages or deteriorating working conditions. In a capitalist monetary economy, this is not true. To think otherwise is to succumb to a fallacy of composition.
Modern Monetary Theorists have employed parables or simple teaching models to illustrate how sovereign currencies work. Usually the parables are used to drive home the most fundamental aspect of state or chartal money; namely, the manner in which a tax obligation underpins demand for the currency. It can be instructive to explore the parables in depth. For example, Bill Mitchell has provided a series of posts (here, here and here) adding layers of meaning to a ‘business card model’ initially due to Warren Mosler in which parents represent government and their kids represent non-government. A similar exploration is presented in Parable of a Monetary Economy. These treatments can get fairly elaborate in terms of the numerical calculations, even though the calculations themselves are elementary. This is fine for reading purposes, but when it comes to explaining the basics to a friend or colleague in a social situation it will sometimes be better to avoid numbers and tell a simple verbal story. For this purpose, another variant of Warren’s parable, which he sometimes uses as an opener in seminar presentations, seems especially suited to the purpose. It is possible to delve into the story as deeply as is likely to be necessary in most informal situations.
Imagine for a moment a society without compulsion. People are working for themselves and each other. They might share, barter or agree to use a private money or monies in exchange. If everybody could somehow agree to share land and other natural resources, respect the wishes of all, contribute voluntarily to the production of infrastructure and provision of social services, agree to the modes of production in which they personally need to engage (whether wage labor, cooperatives or communes) and address all other individual and collective needs on a voluntary basis, there would be no need for government and no need for state money. A role for government arises when members of the community cannot find amicable solutions to all conflicts without some mechanism for orchestrating their collective will. Fiat money is a highly effective tool for this purpose.
It seems the failure of neoclassical macroeconomists to foresee the global financial crisis and the willingness of some of its more extreme members, in the Great Recession that followed, to push for ridiculous remedies such as “contractionary expansionism” have resulted, at least in Australia, in the likely downgrading of numerous journals that cater not to neoclassical economics but to non-neoclassical economics and studies in the history of economic thought (HET). There has been a predictable closing of the ranks. Steve Keen wrote an article on the situation in late September.