So far, in considering a simplified economy with a job guarantee, the focus has been on the demand-determined behavior of output and employment. Prices, in this exercise, have simply been taken as given on the grounds that they are not causally significant in the process. This approach does not require prices to remain constant, although, for given supply conditions, they may well do so over a fairly wide range of output for reasons to be discussed. Nor does it require that prices are necessarily unrelated to output; only that the direction of causation in any aggregate relationship between the two mostly runs from output to prices rather than the other way round. But once attention turns to the issue of price stability, which is of considerable interest to job-guarantee proponents, it becomes relevant to entertain a possible short-run relationship between output and prices. This will provide a basis for identifying potentially price-stabilizing aspects of a job guarantee in the next part of the series.
The model, in its present form, is short run in nature. It concerns an economy for which total employment, within-sector productivity and productive capacity are all taken as given. Variations in total output are achieved by workers transferring between two broad sectors that have differing productivity. In considering this economy, discussion has touched on aspects of a steady state and system behavior outside the steady state. It has been supposed, in the event of exogenous shocks, that the broader economy (sector b) drives the adjustment process through its reactions to excess demand or excess supply, with the job-guarantee program (sector j) absorbing or releasing workers as appropriate to maintain total employment at its given level. A tendency for the economy to move toward the steady state has been illustrated with reference to a Keynesian cross diagram (part 2) and a description of the growth behavior of actual output and demand whenever the system is outside the steady state (part 3). Attention now turns to the conditions under which this tendency to a steady state is operative, or, in other words, to the question of dynamic stability.
The model as outlined so far implies particular dynamics. These dynamics are driven by the quantity response of the broader economy (sector b) to mismatches in supply and demand. With the size of the labor force, level of total employment, within-sector productivity and the economy’s productive capacity all taken as exogenously given, the quantity response of sector b requires a change in the sector’s level of employment. The response of sector b induces an inverse response from the job-guarantee sector (sector j), which adjusts as required to maintain full employment at all times. The resulting variations in the composition of employment between higher-productivity sector b and lower-productivity sector j enable the adjustment of total output to total demand.
As a preliminary exercise, it may be instructive to modify the familiar Keynesian cross diagram to include the effects of a job guarantee within a simple short-run framework. The diagram includes two key schedules. The first is a 45-degree line showing all points for which actual expenditure equals actual income. The second is a line with lesser slope depicting the level of planned expenditure (total demand) at each level of income. Under appropriate conditions, the two schedules intersect at a steady-state level of income.
The job guarantee as proposed by Modern Monetary Theorists would provide a publicly funded job with defined wage and benefits to anyone who desired one, with public spending on the program varying automatically and countercyclically in response to take-up of positions. In a downturn, workers who lost their jobs would have the option of accepting the job-guarantee offer. As the economy recovered, some workers would receive better offers elsewhere. By design, the job-guarantee provider would not compete on wages in an attempt to retain such workers. Rather, the program would provide a stable wage floor, serving as a nominal price anchor for the economy. Periodically it would be appropriate to revise the program wage, but these wage adjustments would reflect factors such as trend improvements in the economy’s average productivity or distributional considerations rather than fluctuations in demand. Earlier posts have considered various macro aspects of a job guarantee using a model developed within the familiar income-expenditure framework. The present post is the first in a six-part series attempting a more systematic – and in some ways simpler – treatment of the topic. Results presented earlier continue to hold, as the basic model remains the same. The model itself is very simple but amenable to extension.
For Marx and many Marxists, money is based in a commodity; in Modern Monetary Theory (MMT), it is not, being based instead in a social relationship that holds more generally than just to commodity production and exchange. Even so, to the extent that commodity production and exchange are given sway within ‘modern money’ economies, operation of the Marxian ‘law of value’ appears to be compatible with MMT. It is just that, from an MMT perspective, private for-profit market-based activity will be embedded within, and delimited by, a broader social and legal framework that is – or at least can be – decisively shaped by currency-issuing government. Therefore, even though in MMT money is not regarded as a commodity, it seems that a commodity theory of money can be reconciled with MMT provided, first of all, that the connection between a money commodity and currency is understood to apply only to the sphere of commodities and, secondly, that it is legitimate to regard labor power as the ‘money commodity’. An earlier post gave some consideration to the social embeddedness of commodity production and exchange. The present focus is on the notion of labor power as money commodity. On this point, MMT can be understood as directly linking currency to labor power, which, in Marx’s theory, is reduced to the status of a commodity when subjected to the laws of commodity production and exchange. This raises the question of whether labor power can serve the role of money commodity in Marx’s theory.
Value, in Marxist theory, is an amount of abstract labor that is measured in hours of simple labor or a monetary equivalent. Marx argued that complex labor is reducible, for the purposes of commodity production and exchange, to amounts of simple labor. Qualitatively, complex and simple labor are the same. Both count as abstract labor, and so create value. But, quantitatively, complex labor creates value at a faster rate than simple labor.
While revisiting old files on Marx and Modern Monetary Theory (MMT), I came across an interesting discussion. In it, somebody raised an argument that seems worth addressing:
MMT treats money as a public utility, while Marxism treats it as an expression of value. And I think that no matter the engagement between these two schools of thought, one has to choose either one or another. Either money is an abstract public utility (grounded only in people’s accepting it, through the force of taxation or whatever), which can then be used quite unproblematically for public goods within any context whatsoever … or one realises that money is not an abstract public utility, but is concretely rooted in material processes, i.e. is a concrete expression of value. In which case the one can’t really treat it unproblematically as a public utility to be used by fiscal policy to achieve any ends under any circumstances.
Disregard the references to policy being viable “within any context whatsoever” and “under any circumstances”. MMT emphasizes that policy is constrained by the availability of real resources, as well as political factors. The focus, instead, can be on the substance of the comment, which concerns what I consider to be an insightful distinction between currency as public utility and currency as expression of value.
An economy’s minimum wage equates a unit of the currency to an amount of labor time. For instance, in Marxist terms, a minimum wage of $15/hour sets a dollar equal to 4 minutes of simple labor power. At a macro level, this enables currency value to be defined in terms of simple labor. There are, however, at least two ways in which this connection between currency value and labor could be drawn. One way would be to adopt a labor command theory of currency value. In effect, Modern Monetary Theory (MMT) takes this approach. A second way would be to link the value of the currency to the commodity labor power. Adopting the second approach leads to a definition of currency value that is distinct from the MMT definition but closely (and simply) related to it. So far as policy implications go, especially in relation to MMT’s proposed job guarantee and prescriptions for price stability, there appear to be no important differences between the two approaches.
Generations of economics students have been misled into believing that banks are reserve constrained. Even today, though most specialist monetary economists would likely cringe at the idea, there are widely used textbooks that teach this mistaken view to a new generation of students. Usually the story is framed in terms of a ‘money multiplier’ model in which an addition of reserves into the monetary system by the central bank will supposedly cause a multiplied increase in bank lending and in doing so expand the ‘money supply’ (in this context meaning currency plus deposits). In reality, banks create deposits (add to the money supply) in the act of lending. If they subsequently find themselves short of reserves, they can obtain them from other banks or, in the event of a system-wide shortage, they can borrow them from the central bank which is committed to acting as lender of last resort, a function that it must perform under present institutional arrangements to ensure smooth functioning of the system. The constraint on bank lending is profitability and bank capital, not reserves.