Short & Simple 10 – Spending Independently of Income

It was mentioned (in part 2) that a currency-issuing government issues its currency in the act of spending. An implication of this is that a currency-issuing government does not need income in order to spend. We have also noted (in parts 5 and 9) that a household or business can spend independently of current income. They can do this either by drawing down past savings or through borrowing.

Continue reading

Share

The Strange Capitalist Embrace of Austerity Viewed in Terms of Marx’s Falling Profit-Rate Law

Marx’s ‘law of the tendential fall in the rate of profit’ holds that there is a tendency, during a phase of capitalist accumulation, for the ‘organic composition of capital’ (constant capital c divided by variable capital v) to rise. Other factors remaining equal, this puts downward pressure on the rate of profit r:

where s is surplus value and s/v is the ‘rate of surplus value’. If the organic composition of capital (c/v) rises, then r will fall unless the rate of surplus value (s/v) is increased sufficiently to offset the effect.

Continue reading

Share

Truth and Lies About Government Deficits

There is a lot of misinformation spread by politicians and much of the media on the topic of fiscal policy, particularly when it comes to the role and impact of government deficits. When the level of economic activity collapsed in the wake of the global financial crisis, government fiscal balances around the world moved toward, or into, deficit. To a degree, in some countries at least, this occurred as a result of appropriate policy responses to the depressed economic environment. To a larger degree, it was due to the automatic effect of declining income on tax revenues through what economists refer to as the automatic stabilizers. These are fortunately in place to cushion households and businesses from the worst effects of a downturn.

Continue reading

Share

Fiscal Policy, Sectoral Balances and Financial Sustainability

Many people, upon hearing “fiscal policy” mentioned in relation to “financial sustainability”, might imagine that it is the government’s financial sustainability that needs to be placed under scrutiny. Given the mass media’s proclivity for pumping out superstition and myth, especially when it comes to macroeconomics, this reaction would be entirely understandable. But, actually, assuming the government is a currency issuer that refrains from borrowing in currencies other than its own, questions of its financial sustainability do not apply. Rather, concerns of financial sustainability properly pertain to the private sector. Whereas a currency-issuing government faces no financial constraint (its only hard constraint is in terms of real resources), the financial reality for private households and firms is completely different. Private debt can very definitely reach financially unsustainable levels. This occurs when growth in income is insufficient to service private debt.

Continue reading

Share

Demand-Led Growth With Cycles – A Simple Model and Illustration

Regular readers may have noticed that I am interested, among other topics, in demand-led growth theories as explanations of capitalist growth performance. In the following discussion, I borrow very liberally from two approaches in this theoretical tradition, without remaining completely true to either of them. One is Kalecki’s approach, especially as outlined in his 1954 work, Theory of Economic Dynamics. Following Kalecki, the current discussion treats the long run simply as a sequence of short runs without any independent existence of its own. Lagged effects of private investment generate cycles. Capitalist growth is considered to be dependent upon ‘external markets’, by which is meant sources of demand that are external to the domestic private sector. Here, for simplicity, government is taken to be the only external source of demand. (For an open economy, exports are another important example of demand that is external to the domestic private sector.)

Continue reading

Share