An earlier post discussed some of the dynamics of output and demand implicit in the income-expenditure model. Attention was confined to a simplified economy that was stationary other than when adjusting to one-off exogenous changes in demand. The present post considers a continually growing economy in which autonomous demand changes over time. The discussion is kept simple by treating all demand other than private consumption as exogenous. The model can be extended to include additional endogenous demand components – such as investment or job-guarantee spending – but this is left for another time.
Whenever the topic of economic growth is broached, there is a common and understandable reaction along the lines that growth is ecologically unsustainable or socially harmful. Since one of the preoccupations of this blog is demand-led growth, it is perhaps worth pausing to reflect on the appropriateness of the topic. This can be broken down into two parts. Why consider growth as such? And why emphasize the possibility that growth is demand led?
Theoretical studies of output and growth often focus on the behavior of equilibrium output. The usefulness of this approach depends on there being a tendency for actual output to converge on equilibrium output. With such a tendency present, studying the behavior of equilibrium output will tell us something about the behavior of actual output. It is therefore of interest to spell out the process by which an economy in disequilibrium is thought to tend toward equilibrium.
I have been thinking about a simple depiction of a demand-led economy. Mostly it draws on standard Keynesian macro, Kalecki’s work on cycles and growth, and supermultiplier models developed within the surplus approach. The main focus is on the evolution of a demand-led economy through time. The present post simply sketches the basic framework and provides some context. Perhaps in the future certain aspects can be fleshed out.
A key purpose of demand-led growth theory is to extend the ‘principle of effective demand’ to contexts in which productive capacity is best considered variable rather than fixed. The central idea is that, over any time frame, it is demand that determines output, and demand-led variations in income that adjust planned leakages to planned injections. Once it is acknowledged that capacity is variable, it becomes clear that the adjustment of output to demand, and planned leakages to planned injections, can be achieved not only by utilizing existing capacity more fully, but by expanding capacity through investment.
Modern Monetary Theory (MMT) continues to make inroads into the mainstream discourse with the appearance of an article by Youssef El-Gingihy in The Independent Online. The article features MMT in connection with the new book by Bill Mitchell and Thomas Fazi, Reclaiming the State. At its recent rate of dissemination, MMT may transition from heterodox to mainstream ahead of expectations.
Welcome to the very first (and possibly last) “Don’t Understand, Don’t Even Want To F___ing Understand Modern Money” post, otherwise known as a DUDE WTF UMM… post. This is for those of us who have no desire to consider economics at even an elementary level but who are tired of others exploiting our indifference and blasé attitude for their own dubious ends. Just because we don’t know diddly-squat about economics and are proud of it, this should not disadvantage us in life. What we need are some easy ways to spot when we are being led astray, without too many boring details.
When Marx’s theory of value is interpreted in a simultaneist way, it is relatively easy to calculate the ‘monetary expression of labor time’ (or MELT). This is true, at least, when the MELT is defined as the money value created per raw hour of employment. When it is defined as the money value created per hour of abstract labor, there are additional complications due to labor complexity. In the ensuing discussion, either the MELT can be understood in terms of raw hours of labor (i.e. hours of concrete labor) or all labor can be assumed simple. The MELT can then be calculated as new value added, measured in monetary terms, divided by productive employment. If it were not for the ‘productive’/’unproductive’ distinction, the simultaneist MELT (in terms of concrete labor) could be calculated from the National Accounts as the ratio of Net Domestic Product at current prices to Total Employment. Retaining the productive/unproductive dichotomy complicates matters somewhat, because it is then necessary to exclude unproductive activity from the calculations, but no other hurdles appear to be present.
A monetarily sovereign government is one that issues its own currency and is the currency’s sole issuer. Ideally, it allows the currency’s value to float in relation to other currencies in foreign exchange markets, meaning its currency is not convertible at a fixed rate into either another currency or a commodity (other than possibly the commodity labor-power through the provision of a job guarantee). Although this ideal maximizes policy space, a government that promises convertibility can renege at a later date, and so, strictly speaking, does not relinquish its monetary sovereignty so long as it retains the authority to issue its own currency. A monetarily sovereign government that operates a flexible exchange rate faces no revenue constraint provided it refrains from borrowing in a foreign currency and so avoids exchange-rate risk on its debt.
From inception of a monetary economy with a government-issued currency, it is clear that government spending must come before tax payments or purchases of government debt. The order of requirements is basically: (i) government defines its monetary unit of account; (ii) government imposes taxes and other obligations that can only finally be settled in that currency; (iii) government spends (or lends) its currency into existence; (iv) non-government can now obtain the currency and, among other things, pay its taxes and purchase government debt. It is clear that government spending must logically come before tax payments or purchases of government debt because non-government must be able to get hold of the currency before it can do these things