We understand that, as a rule, total spending must equal total income (this was explained in part 4 of the series). But this raises a question. Is it spending that determines income or, instead, income that determines spending?
Noticing the month is July brought to mind the Swiss-German band BOY that has a song named after the same month. This seemed as good an excuse as any for a music break.
A prominent flow measure for the economy as a whole is Gross Domestic Product (GDP). This is a measure of the total output produced within the domestic economy over a year.
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.
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. Currency-issuing governments, facing no revenue constraint, always have the capacity to run deficits as required.
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.
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.)
‘Government money’ takes two forms: cash and reserve balances. Cash comprises notes and coins. Reserve balances are required for final settlement of transactions. Government is the sole issuer of both cash and reserve balances.
From a broadly Keynesian viewpoint, output is demand determined. This suggests that fiscal policy, by affecting demand, can affect output and employment. At the same time, however, many Keynesians emphasize fundamental uncertainty. Firms’ output decisions depend upon expectations of future demand, and these expectations must be formulated under conditions of uncertainty. It can be wondered how the efficacy of fiscal policy squares with the presence of uncertainty.