The neoliberal approach to economic growth of the past forty years has been to drive down real wages, deregulate the financial sector, privatize various government functions, cut social expenditures and reduce taxes on large corporations and the wealthy. The period has been characterized by sluggish growth and widening inequalities. In contrast, the markedly higher rates of growth achieved from the end of the Second World War until the early 1970s were sustained in a regime of steadily rising real wages, which were consciously linked through policy or collective bargaining to improvements in productivity. This approach to industrial relations was played out within a context of substantial direct public-sector involvement in the economy, tight financial regulation, high and steeply progressive taxation and a more equal distribution of income and wealth.
The economist Michal Kalecki once joked that economics is the science of confusing stocks and flows. These two concepts are important, but easy to mix up.
The rule that total spending equals total income is very important, but only true for the economy as a whole. It is not true for individual households, businesses or sectors of the economy. Here, we consider a household.
Macroeconomic controversies usually center on causation. Two questions of significance for policymaking concern output and growth:
- Is output demand or supply determined?
- Is economic growth demand or supply led?
If demand is the driver of output and growth, there will be considerable scope for government spending to influence the economy’s trajectory. If, instead, supply-side factors are determining, fiscal policy will be impotent other than possibly temporarily. Recent history suggests – much like the earlier history of the Great Depression and Second World War – that fiscal policy is important to the performance of the economy, and that demand matters. In my view, the causal significance of demand follows quite strikingly from Modern Monetary Theory’s institutional analysis of sovereign currencies together with the fully compatible Post Keynesian analysis of banking and endogenous money. Before getting into that, a brief summary of opposing positions on output and growth determination is perhaps warranted.
An issue that troubles me in relating Marx to Modern Monetary Theory (MMT) is whether to apply the ‘productive/unproductive labor’ distinction to production that is monetized in a state money. Although I am not especially enamored of the distinction in general, it is particularly its application to public-sector activity in a state money system that strikes me as problematic. I ask the reader to countenance two propositions:
Proposition 1. All public-sector labor in a state money system is productive.
Proposition 2. Proposition 1, if true, would alter none of Marx’s central theoretical conclusions.
If the following argument is mistaken, maybe someone can set me straight, and it will then be clearer how to proceed in future.