Value Creation in the Context of Demand Determined Output and Employment

This post concerns total value creation (Marx) in a context of demand-determined output and employment (Kalecki, Keynes). A ‘macro rule’ employed by Marx seems central to this connection. Marx held that, in real terms, an hour of average living labor “always yields the same amount of value, independently of any variations in productivity” (Marx, 1990, Capital, Vol. 1, Penguin Edition, p. 137). Value in ‘real’ terms is expressed as an amount of socially necessary labor time, whereas ‘nominal’ value is expressed in terms of a monetary unit of account. If it is true, as Marx maintained, that an hour of average living labor always creates the same real value, then at the aggregate level, total ‘productive’ employment provides a straightforward measure of ‘new value added’.

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Modern Monetary Theory is Relevant to More than Just Capitalism

Viewed from a certain vantage point, Modern Monetary Theory (MMT) is a very general framework that offers insight into how we might go about making genuine social progress. It does not simply facilitate an understanding of capitalism, but points to a way of transcending the present system. It enables insight into the opportunities available to any society that forms for itself a government and operates a monetary economy.

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The Preferred Policy Instruments of Functional Finance

In a recent post, JW Mason draws an insightful comparison:

Conventional policy and functional finance represent two different choices about which instrument to assign to which target. The former says the interest rate instrument should focus on demand and the fiscal-balance instrument should focus on the debt-ratio target, the latter has them the other way around. … In this sense, the functional finance position is less radical than either its supporters or its opponents believe.

Scott Fullwiler has explained (for example, in this five-part series) that functional finance, far from being reckless or radical if assessed on orthodox criteria, turns out to be “ricardian” as that term is employed by the mainstream. So, the leading Modern Monetary Theorists would likely agree that functional finance is not radical in this sense. What is “radical” – for want of a better word – is that functional finance, like much of currently heterodox macroeconomics, turns the current conventional wisdom on its head.

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Competition, for Marx, was Not Neoclassical Perfect Competition

Sometimes the view is expressed that Marx’s theory, while perhaps applying to an earlier, competitive version of capitalism, has little relevance to the era of ‘monopoly capitalism’ in which we supposedly live today. This view seems to result from mistaking ‘competition’ in Marx – and classical political economy, more generally – with neoclassical ‘perfect competition’.

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Investment Creates Saving

In explaining why it is investment that creates saving, and not the other way around, different economists have offered different ways of looking at the matter. Keynes (see previous posts here and here) distinguished planned (ex ante) from actual (ex post) investment and saving to note the way in which planned saving adjusts to planned investment via changes in income. Kalecki (discussed previously here) emphasized the initiating role of decision making. Firms can decide how much to invest, but not how much profit they will make, because profit depends on the spending decisions of others. Post Keynesian analysis of institutions and monetary operations suggests an explanation summed up with characteristic insight and clarity by Warren Mosler in the short video embedded below. The purpose of the present post is just to flesh out the explanation a little and highlight a few of its implications.

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Government Spending Under Alternative Operational Arrangements in a Nutshell

Three previous posts (here, here and here) outlined the operational differences and similar macro effects of some alternative approaches to government spending; namely, bond issuance to the private sector, interest on reserves, and overt monetary financing. Since these posts were quite detailed, it might be worth spelling out the short answer to what is going on in each case. Further details can then be found in the earlier posts.

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‘Overt Monetary Financing’ Poses No Special Inflation Risk

As discussed in the previous post, the net impact on balance sheets of the various approaches to government spending – (A) overt monetary financing, (B) sale of bonds to the private sector and (C) interest on reserves – is the same. There is a direct and immediate increase in net financial assets held by non-government as well as a creation of income. Both effects are equal in size to the amount of government spending. But in the case of method B, these effects are achieved in an inefficient and convoluted way that obscures the origin of government money, which in reality is created through the act of government spending or lending rather than being “borrowed” from the private sector. Even so, in outdated textbooks, the practice of auctioning bonds to the private sector has often been rationalized on the supposed grounds that methods A and C are more expansionary in their demand effects than method B, and so are claimed to carry a greater inflation risk. In truth, there is no difference between the three methods when it comes to the expansionary impact or inflation risk of government spending. There is a different effect on the composition of net financial assets, but no difference in the private sector’s enhanced capacity to spend or the demand effects of the government spending.

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‘Overt Monetary Financing’ in Terms of Simplicity and Transparency

Government spending has two immediate and direct macro effects. It:

  1. adds to the net financial assets held by non-government;
  2. creates income equal to the amount spent.

This is the case whether the central bank is (A) permitted to purchase government bonds directly from the fiscal authority (‘overt monetary financing’) or instead (B) is required to buy them from the private sector (currently the procedure under “normal” circumstances in many countries). It is also true if (C) the government simply spends without issuing bonds and pays its policy rate (which can be zero) on reserve balances.

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