Most people have probably wondered, at one time or another, why national currencies gain wide acceptance. Why, for instance, do so many Americans choose to hold and transact in dollars rather than some other currency?
A currency-issuing government is not revenue constrained. It is always able to purchase whatever is available for sale in its own currency. This simple reality is partially concealed by a variety of contrived hoops through which modern day governments require themselves to jump. There are at least two different ways in which we can see past the confusion. The easiest way is to stand back and look at the big picture, both from the standpoint of logic and by considering the monetary and fiscal authorities as two parts of the same entity, the consolidated government sector. For the eagle eyed, this approach may appear to overlook potentially consequential details in the way governments actually spend. In practice, the monetary authority plays one set of roles, the fiscal authority plays another, and many governments have introduced various restrictions on the way in which the two can interact. The present post begins with a bird’s eye view of government spending, and then turns to a more detailed consideration of the way in which self-imposed constraints and convoluted operational procedures complicate but do not undermine the sovereignty of a currency-issuing government. The case of the US government is taken throughout as an example, but much of the discussion is also broadly applicable to other currency-issuing governments.
I’ve been pondering whether it is possible to reconcile a number of notions within the same economic story about long-run growth and accumulation:
- An accelerator-type determination of private investment;
- A possible tendency, under laissez-faire capitalism, for profitability to fall as accumulation proceeds;
- Capitalism as prone to financial instability;
- A state able either to attenuate crisis tendencies or, cajoled by democratic pressure from below, push the system beyond capitalism;
- A capitalist state able to “manage”, to a degree, the rate of profit.
It is possibly a tall order. The following is intended as just a rough sketch of what I have in mind. I might go deeper into some aspects of the argument in future posts, as it raises various questions, but think it would be better to catch any glaring faults now before carrying the exercise further.
An effect of being trained in mainstream economics but then encountering alternative approaches is to experience a growing realization — or at least a creeping suspicion — that most of what has been taught is the opposite of the truth. Even when the story told contains some truth, it is likely to have been turned on its head. Thanks to Kalecki and Keynes, for example, it becomes clear that demand (spending) determines supply (income), including in the long run. Spending, in a monetary production economy, must come before production can commence. Thanks to Post Keynesians, it becomes evident that loans create deposits, not the reverse. There could be no deposit prior to the decision to extend the first private or public loan (unless through government spending). Thanks especially to Sraffians, it has been established that profit cannot be a remuneration for (marginal) productive contribution. We can conceptualize profit as unpaid labor (Marx) or due to ownership (Sraffians, Post Keynesians).
Most economies around the world have been in the doldrums since the Global Financial Crisis of 2007/8 and the Great Recession that followed. Unemployment in some European nations has been at levels not seen since the Great Depression. Although the situation is not as dire in all nations, economic activity remains well below potential virtually everywhere. The result is needless human suffering.
In a nutshell, the economy comes down to this: we have available labor time and natural resources with which we can produce some stuff and distribute it. Unemployment now means lost production now that can never be recovered in the future.
I very much enjoyed this talk in Adelaide by Steven Hail (first hour) and Q&A session with Steven and Phil Lawn moderated by Anna Milhaylov (following half hour). The talk was organized by the Mayo Branch of the Australian Greens.
It was suggested in the previous post that the notion of ‘value of the currency’ adopted in Modern Monetary Theory (MMT) seems compatible with Marx’s theoretical framework, provided it is acceptable in that framework to consider a state currency, and not only gold or some other commodity, as “true” money. As was explained in the post, currency value in MMT can be defined as the amount of labor time a worker must perform in order to obtain a unit of the currency. An advantage of this definition, if applied in Marx’s framework, is that it offers an explanation for the value of fiat currency that can be expressed in terms of socially necessary labor time.
In Marx’s theory, formulated in terms of the gold standard of his day, the value of commodity money is taken to be the amount of simple, socially necessary labor time required to produce gold. This treatment of the value of commodity money is consistent with Marx’s treatment of commodity value in general, which always represents amounts of socially necessary labor time. Since the value of the currency under a gold standard depends not only on the labor time required to produce gold but the rate at which gold is exchanged for currency, the question arises as to whether it is gold that is actually “real money” in such a system, or, rather, state currency, issued and exchanged at a fixed rate for gold, that is real money. If it is gold that is real money, Marx’s theory would seem to suggest that there is no value underlying fiat currency, since fiat currency takes zero (or negligible) labor time to produce. If, instead, state currency can be real money in Marx’s framework, then fiat currency can be conceived as having value in much the same way as currency under the gold standard. In either system, the currency is produced with zero (or negligible) labor, but obtaining a unit of the currency requires a definite amount of simple, socially necessary labor time to be performed by the non-government. From the non-government’s perspective, it is as if that amount of labor is required to “produce” a unit of the currency. There is no suggestion, here, that this would necessarily have been Marx’s view, or that there is necessarily strong textual evidence for it. But it is suggested that taking this interpretation enables Marx’s notion of the value of money as an amount of socially necessary labor time to be extended to fiat money.
Private and public exogenous expenditures have different impacts on the sectoral balances. The same rate of growth in income has varying implications for the domestic private sector’s financial balance (saving minus investment or, equivalently, income minus private spending) depending on the composition of the demand driving that growth. An increase in private investment pushes the private sector toward deficit. Even though the investment boosts income, saving will not rise as much as investment because of leakage to taxes and imports. In contrast, government spending adds income and saving for a given level of investment. An implication is that growth driven by private expenditure that occurs without compensating growth in government spending pushes the private sector into deficit except to the extent that net exports counter the effect.