Currency Value is Not Formed “at the Margin”

I have been reading some of the academic literature on the relative merits of a Basic Income Guarantee (BIG) and Job Guarantee (JG). In the academic literature, a BIG – for example, as proposed by Van Parijs – refers to a policy in which every citizen receives a basic income irrespective of labor force participation or employment status. A JG, as readers here will realize, refers to a guaranteed job at minimum wage for anyone who wants one. In opposition to the BIG, one argument advanced by Modern Monetary Theorists (e.g., here) concerns the value of the currency, which they define as the amount of labor time required to obtain it. In making their argument, however, they reason “at the margin”. I think this is incorrect for a reason I will discuss.

In terms of policy, my own preference, as I have discussed in recent posts, is for a Job or Income Guarantee (JIG). In relation to the academic debate, I should clarify one point. In my view, the key distinction between a JIG and the current system is that there would be no conditions attached to the receipt of the basic income in the event that an individual opted out of the JG program. Whether the basic income was paid to all citizens (as proposed by Van Parijs and other academics) or only to those who opted out of the labor force would not be of enormous concern to me. In either case, everybody of working age would be guaranteed at least a basic income and there would be no compulsion to participate in the labor force. Those are the most critical points, in my opinion.

I also want to mention that I am not claiming any kind of originality in suggesting a JIG. The Modern Monetary Theorists have made clear that the JG could be implemented alongside other social or welfare policies. My focus has been on exploring the benefits of a JIG, not staking a claim to the idea, since I am simply drawing on all the serious work that has been carried out by the academics.

Modern Monetary Theorists have directed numerous criticisms against a BIG in isolation. Three of their main arguments are:

1. A JG would provide the most effective nominal price anchor.

2. A JG would provide the best demand stabilization.

3. A BIG would be inflationary – perhaps hyperinflationary – because of its effect on the value of the currency.

Arguments 1 and 2 are partly what inform my preference for a JIG rather than a BIG. They are not the main reasons for my preference. I think the benefits in terms of freedom from wage labor if desired and guaranteed employment if desired are much more important. Nevertheless, I accept that there may be some truth to arguments 1 and 2. In fact, I have suggested that, on the Modern Monetary Theorists’ own logic, the JG when part of a JIG might even be a superior nominal price anchor because employers would know participants in the JG really wanted to be involved in it and were serious about obtaining jobs in the broader economy.

However, argument 3 could be said to apply to a JIG, not just a BIG, so I wanted to address that point.

In the paper linked to above, the authors write:

As we explained in the subsection on price stability, the value of the dollar is determined on the margin by what must be done to obtain it. If money ‘grew on trees,’ its value would be determined by the amount of labor required to harvest money from trees. In an ELR program, the value of the dollar is determined on the margin by the number of minutes required to earn a dollar working in the ELR job—six minutes in our example above. Assuming that BIG provides an equivalent payment of $20,000 per year to all citizens ($10 per hour for a normal 2000 hour working year), the value of the dollar on the margin would be the amount of labor involved in retrieving and opening the envelope containing the annual check from the treasury, divided by 20,000. Obviously, the purchasing power of the dollar in terms of labor units would be infinitesimally small under a universal BIG scheme. Again, as we said above, this is the logical conclusion of the inflationary process that would be set-off by implementation of such a BIG program—it might not happen overnight.

In other words, it is argued that the (domestic) value of the currency is determined “at the margin” by the amount of labor time required to obtain a unit of currency. So in an economy with a JG, the value of the currency is determined by the amount of JG labor time it takes to obtain a unit of the currency. Under a BIG, the amount of labor time required “at the margin” to obtain a unit of the currency is zero, which supposedly drives the value of the currency to an infinitesimally small value.

I have the highest respect for the leading Modern Monetary Theorists, including of course the authors of this paper, but the argument in the above quoted passage does not strike me as convincing. Already, in the current system, it is the case that some people – the recipients of welfare, rentiers, etc. – obtain currency without performing any labor time to obtain it. So it is already the case that, if defined “at the margin”, the value of the currency would be infinitesimally small.

But I don’t consider this to be the correct way to conceive of the value of the currency. Rather, what matters is the average labor time required to obtain a unit of the currency. The provision of a basic income, just as with the payment of welfare, will reduce the average labor time required to obtain a unit of the currency, and hence will result in a one-off reduction in the value of the currency. But there is little reason to think that it would be a catastrophic decline almost to zero or one that would set off runaway inflation, let alone hyperinflation.

To compare with another area of economic analysis, there is a reason Marx argued that the value of a commodity depends on socially necessary labor time, not the minimum or the maximum amounts of labor time taken by producers of varying proficiency to produce a commodity under capitalist conditions. It was partly to avoid such strange conclusions as a commodity being more valuable if produced with the least efficiency (maximum labor time), or a commodity being valued below the level that could enable the viability of most production (based on the minimum labor time taken by the most efficient producer), that Marx emphasized the relevance of average (i.e. socially necessary) labor time.

None of this is to suggest that the value of the currency cannot be expressed in terms of JG labor time. We can think of JG labor time as involving ‘simple’ labor, conceptually reduce all other types of (‘complex’) labor to multiples of simple labor, and then express the value of the currency in terms of an amount of simple labor time. But it is not simple labor time, in isolation, that determines the value of the currency. It is the average that matters.

Since the payment of a basic income will reduce the amount of labor time performed in formal employment per dollar of income received, it can be said to reduce the average (socially necessary) labor time required to obtain a unit of the currency. However, this effect would seem to be of a similar order of magnitude to the effects of paying welfare under the current system, not some extreme (hyperinflationary) collapse in the value of the currency governed by “the margin”.

As an aside, this also suggests to me that the academic MMT argument against the BIG is not as strong as is often made out.

As far as I am concerned, the strongest argument in favor of the JIG is the freedom it makes possible for those who want wage or salary employment but are currently barred from it due to a deliberate government policy choice along with the freedom it offers to those who desire liberation from the compulsion of the wage labor relation in order to pursue vocations of their own choosing.

Lastly, I want to reiterate the main point of my previous post, which is that a JIG may well promote greater social productiveness. Even though the measured value of the currency may fall with the introduction of the JIG, it may be that social productiveness actually increases as those freed from the wage labor relation pursue productive activities of their own volition either individually or in voluntary combination with other like-minded individuals. It may be that true output (even though unmeasured) increases and the true value of the currency (even though unobserved) also increases.


43 thoughts on “Currency Value is Not Formed “at the Margin”

  1. “As an aside, this also suggests to me that the academic MMT argument against the BIG is not as strong as is often made out.”

    My feeling is that it is more to do with the dynamics. What is the underlying feelings behind the scheme.

    You can have a JG or even a JiG that is little more than a punishment regime. Arguably the UK’s recent New Deal programme was one of those – take a placement or lose your money.

    Similarly unemployment benefit is a BIG – so we have it now.

    So it then boils down to your motives for providing the operation.

    – Is it because you have to – and frankly you’d rather that the people died quickly or left the country
    – is it out of a sense of shame because the credit design you have in place creates unemployment systemically and you feel morally obliged to compensate the people left out, financially and socially
    – or are you trying to improve people’s lives by trying to break this idea that income can only come from hours sold.

  2. It is a price anchor Ralph. Fixed wages are. If prices go up less stuff gets bought and firms go bust, throwing more people onto the fixed lower wage putting firms under price pressure.

    Eventually the gap will get wide enough that it is worth using buffer stock people rather than continuing the bidding war. They are more work ready than the unemployed and therefore the gap will be a lot narrower than an unemployed buffer stock.

    The hiring risk basically boils down the the hiring a juggler example. You are likely to get a much better idea of whether a juggler can juggle if you see him performing first.

  3. This confuses me:

    > “Under a BIG, the amount of labor time required “at the margin” to obtain a unit of the currency is zero, which supposedly drives the value of the currency to an infinitesimally small value.”

    I may be missing a piece of the logic, but that sounds a bit weird.

    Imagine if any individual could obtain a unit of currency in zero time. Perhaps there would be a way to “keystroke” oneself an arbitrary amount of currency.

    Then yes, that would probably .. be somewhat hyperinflationary? 🙂

    But with a BIG/JIG, that is not the case. The time it takes to obtain a unit of currency would not be infinitesimal.

    Just needed to get that off my chest before continuing reading.

  4. Hugo: The authors are arguing that under a JG, if the wage is $10/hr, the value of a dollar is 1 hour divided by $10, or 6 minutes of JG labor time. That is, it takes 6 minutes of JG labor time to obtain a dollar.

    With a BIG, since the same $10 requires only slightly more than zero labor time (I would actually call this zero labor time), the value of a dollar would be slightly above 0 minutes divided by $10, or infinitesimally close to zero (I would actually say, by this logic, that it is zero).

    However, I am arguing that it is incorrect to say that the value of the currency is determined “at the margin”, i.e. in terms of the lowest paid individuals. What matters is the average labor time that is worked to obtain a unit of the currency. In that case, although a BIG reduces the average more than a JG, it is nothing like the catastrophic drop to near zero that is being suggested in the paper.

    After all, it is already the case in the current system that some people receive an income without performing labor. By the same logic, defining currency value at the margin, the value of the currency would already be infinitesimally small.

  5. Interesting back of the envelope calculation. If you pay EVERY SINGLE person in Australia a BIG/JIG/JG at full-time minimum wage (around 27000) a year it only amounts to 35% of GDP. If you’re only paying it to the unemployed, 1%. Net out the benefits they already get and we’re talking 0.5% extra spending. Hard to see where this leads to mucho inflation.

  6. Doh! Forgot to subtract taxes. Takes the net new spending for a BIG/JIG/JG down to 0.33% of GDP. Take home message – these are pretty inexpensive programs. I don’t know why anyone would expect them to crash the currency.

  7. … so I agree that they’re getting this wrong.

    Question: Is the JIG wage “universal”?

    I mean, in the BIG proposals I’ve seen, each and every citizen received the BIG-wage, not only the unemployed or so. (This is to ensure that the marginal effect of leaving unemployment is substantial.)

    And contrarily, the JG wage only goes out to JG workers, not to anyone else.

    How does JIG work?

  8. Hugo: Personally I don’t consider it critical that every citizen receives the basic income, although I certainly would not mind if that was the approach taken. The BIG proposals do in fact envisage that. I was sloppy in my terminology in earlier posts, in that to me the most critical point is that anyone who wishes to opt out of the labor force would be entitled to a basic income, which is not actually the same thing as a BIG.

    So, for me, I would be happy either with optional JG + BIG, or optional JG + basic income for those opting out of the labor force.

  9. @ peterc

    Yes, I understand where you want to go.

    I just wanted to note I get a little confused there before you even start 🙂

    W and T argues that the currency is defined by what you have to do to obtain it. With a JG, that amounts to a certain amount of labor (sorry, labour) time.

    With BIG, there is no labor time involved. But that certainly doesn’t mean that you can do nothing, and still obtain an arbitrary amount of currency. It does indeed take time to obtain currency, only not labor time.

    Just live-breathe-and-boondoggle-time! The currency is sort of pegged to human existence.

  10. No wait, hang on.. Let me remind myself of the MMT position..

    The currency issuer is a monopoly supplier of currency. And as such, it can fix price and let quantity float. Or vice versa. (It can also take some messy position in between, I guess.)

    For example, it can fix the price (of currency) to gold, and let quantity (of currency) float.

    1. It’ll have to be able to defend the peg by offering gold for those who want it – if they’re willing to part from the decided amount of currency. This prevents the value of the currency to fall (inflation).

    2. Correspondingly, it’ll have to offer to purchase gold that is “idle” (for sale) at the decided amount of currency. This prevents the value of the currency to rise (deflation).

    With JG, number 2 corresponds to the currency issuer offering to purchase labor that is “idle”.

    Number 1 corresponds to ensuring that there is labor available for sale at (a markup over) the decided amount of currency. The JG pool needs to be non-empty (damn, that sounds cynical), like pool of gold cannot be allowed to run out in a gold system.

    But what about a universal-BIG? In my previous comment, I indicated that the currency would be pegged to human existence. But – how does 1 and 2 apply to uBIG?

    The currency issuer offers “purchase” timeunits of “live-breathe-boondoggle” from anyone who does so. That is number 2. (You can have another job while you get paid for live-breath-boondoggle, the BIG is universal.)

    But I see no correspondance to 1..?

    So, this would be like offering to purchase gold – but not sell any.

    That does not then amount to a system where the currency issuer “fixes a price and let quantity float”.

    To fix a price, you’ll have to fix it both upwards and downwards. Both 1 and 2 are needed for that. But with uBIG, 2 is there but 1 is missing. With 2 the currency is prevented from gaining value (deflation). There is a limit to how severe a “currency deficiency” can be – with every human breath a few new cents are added to the economy as income.

    But since 1 is missing there is no anchoring effect that prevents the value of currency to fall (inflation).

    Fine. But that does not mean the currency immediately runs off to hyperinflation. They’re invoking the Zimbabwe argument the old sods – they should know better 🙂

  11. > Sorry for misinterpreting

    Oh, no worries, what I wrote was a bit terse to say the least

  12. Peter, I think you might be misinterpreting what Wray and Tcherneva are saying about the value of the currency being determined at the margin, although it is hard to determine from the purely verbal analysis they give in this paper. Given the shape of their whole argument, they are not saying that the purchasing power of the dollar goes to zero simply because the marginal number of hours needed to acquire the dollar goes to zero. The point is just that if the mean amount of labor-hours per person required to acquire a particular nominal wage is H/P, where H is the total number of hours worked and P is the size of the population, then if a new population of workers of size P’ is added to the workforce for whom the number of labor-hours per person required to earn that same nominal wage is H’/P’, then the new mean amount of hours per person needed to earn the wage will be (H+H’)/(P+P’). It follows logically that if H’/P’ is less than H/P, then (H+H’)/(P+P’) will also be less than H/P. So the direction changes in the price level are induced by what is happening at the margin.

    Now that only means an initial one-time decrease in the purchasing power of a dollar. The inflationary trap, they argue, sets in if the government then continually ratchets the BIG payments up in response to the drop in purchasing power. This will create a cycle of further drops in purchasing power followed by further increases in wages.

    I have to say that I am not convinced by their argument. While I do think that there is some reason for thinking the BIG might be more inflationary than the JG, I don’t know if Wray and Tcherneva have put their finger on the reason in this paper. There are at least a couple of reasons why the JG is supposed to anchor prices. One is based on how it influences the labor market. Wages never fall (far) below the JG wage floor because to hire people away from the JG, private sector employers have to provide either more attractive wages or significantly more attractive work. And as the private sector wages begin to rise substantially above the JG wage, the JG program loses workers to the private sector, which acts to moderates the wage growth and inflationary pressures.

    But looked at from that standpoint, BIG and JG are just two different versions of the same policy approach. That particular mechanism for anchoring prices in JG, it appears to me, has nothing to do with what the people in the JG buffer stock are actually doing, so it really doesn’t matter whether they are working some substantial number of hours or not. So, so far, it doesn’t seem to me that there is a big difference between JG and BIG

    But it seems the JG does have an additional price stabilization mechanism so long as the people in it are producing some marketable goods and services. In that case – completely apart from the labor market effects – there is the added stabilization effect that comes from the increasing supply of goods and services in the market. The wages spent by the government into the JG program don’t just boost demand for existing goods and services, they are part of a process that is increasing the supply of goods and services as well.

    I also have trouble squaring the classical Marxian theory of money based on the labor theory of value, which seems to be deployed in this paper, with the MMT approach based on chartalism of some kind. I really don’t think the attempt to analyze the price level in terms of labor hours has proven to be very fruitful or empirically adequate.

    In comparing the two programs, I think a lot comes down to is how much of social value is produced by people when they are are simply given the freedom to do whatever they want to do versus a system in which their decisions about how to spend their time are subject to organized social constraints enacted via government.

  13. Thanks for your thoughts, Dan. I am not quibbling over arguments 1 and 2 (nominal price anchor and demand stabilization). I am taking issue with the suggestion in argument 3 that the value of the currency will be infinitesimally small as a result of “at the margin” providing people with an income without requiring a labor-time commitment. I have no disagreement with your characterization of this in terms of the effect of changes at the margin on the average but it is obvious that that average will not approach an infinitesimally small value for realistic values.

    Also, I have no problem with them defining the value of the currency in terms of labor time. I think it is a reasonable definition. But it is average labor time that matters, not what occurs at the margin. I understand you are saying they don’t mean this, but I don’t think the strength of their assertions on the inflationary impact of a BIG square with that.

  14. I just don’t think attempts to understand prices in terms of labor time have proven to be empirically adequate. These accounts aren’t just definitions. They are substantive empirical claims that attempt to analyze, explain or predict observable empirical results in actual economies. I don’t think any strong empirical correlation between labor hours, dollars and prices has ever been demonstrated.

  15. Dan: Are you referring to my example of Marx’s theory of (commodity) value or the MMT definition of the value of the currency? I might have confused matters by giving the former example in my post. I was just trying to give another illustration of where it is average rather than marginal labor time that is relevant.

    The MMTers don’t subscribe to Marx’s theory of value.

    But irrespective of the theory of commodity values or prices, I think the MMT definition of currency value in terms of labor time still makes sense. It just gives a measure of how much labor time, on average, people have to undertake in order to obtain a unit of the currency. There is no empirical requirement beyond that.

    Or maybe I’m misinterpreting your point. (?)

  16. Sorry, Dan, one more comment. Regarding this:

    In comparing the two programs, I think a lot comes down to is how much of social value is produced by people when they are are simply given the freedom to do whatever they want to do versus a system in which their decisions about how to spend their time are subject to organized social constraints enacted via government.

    I buy the MMT argument that the BIG would induce a bigger one-off price rise, and also provide a somewhat less effective price anchor, in terms of observable monetary outcomes. I accept that this would be the case even if the social productiveness of basic income recipients opting out of the labor force was actually high in real (but unobservable) terms. I am just doubting the argument that the BIG would be prohibitively inflationary because of the payment of an income “at the margin” not tied to wage or salary employment.

    I also share your doubts over the ratcheting argument.

  17. Like peterc, I am more interested in post-capitalism than capitalism, and the post-capitalist age will not be characterized by human labor being a factor of production and it is becoming less so already, which is resulting in problems due to “old thinking.”

    The purpose of productivity, and the innovation that leads to it is is ultimately to increase the opportunity for leisure. In a post-capitalist economy leisure therefore become a chief economic factor, whereas now it is largely ignored rather irrelevant other than as a causal explanation for involuntary unemployment in neoliberal economics.

    The issue in establishing currency value is a numeraire as a real good that serves as a measure of real value wrt nominal value. While an hour of labor time might be appropriate under capitalism, it is not under post-capitalism, as anyway, nowhere near a appropriate. We need new thinking on this as we enter the digital age of money, AI, IT, automation, and robotics that is transforming society and its material infrastructure in economics. It is also transforming collective consciousness through the knowledge revolution, and we need to adapt our thinking to new realities.

  18. But irrespective of the theory of commodity values or prices, I think the MMT definition of currency value in terms of labor time still makes sense

    That’s what I’m confused about Peter. This is the first time that I have ever encountered the idea in MMT writing that the value of the currency is to be analyzed in terms of labor time. I never understood that to be a component of MMT thinking about the contemporary monetary system. My understanding in the past was that MMT combines what is essentially a version of the quantity theory of money with chartalism or similar versions of the state theory of money, along with some thinking about the nature of the modern payments system, the role of state monetary sovereignty or currency monopoly, and the scheme of sectoral balances. They provide no simple reductive statement of the varieties of factors that determine either the price level or the degree of value people assign to the acquisition of a unit of currency – which are surely related.

    I’m a little puzzled by this idea of “defining” the “value” of the currency in a way that might be independent of prices. You can use currency in the modern world to extinguish tax liabilities, extinguish other debts and to purchase goods and services. All of these are in effect prices. And we are willing and seek to acquire currency because we want to do the things that require paying these prices. And yes, the degree to which people value an additional unit of currency, along with the degree to which they value or disvalue a particular expenditure of labor, determines how much currency they are willing to accept in return for that expenditure of labor. But that doesn’t mean that they are putting a monetary price on a simple time measurement of that labor (hours worked) or any other merely quantitative measure of their labor. The precise kind and nature of the labor, including its inherent and pleasurableness or unpleasantness, all play a role in determining the dollar price people put on their labor.

  19. I also have dreams of alternative future economic systems, some that can be achieved in the relatively near term, others on much more lengthy time scales. I don’t like to use the labels “capitalism” or “post-capitalism” in describing these changes, because I’m never sure what people regard as part of capitalism, and what they don’t regard as part of capitalism.

    On the one hand, capitalism has something to do with the authoritarian structure of the capitalist enterprise, and the practice of delivering large shares of the added value from production to absentee owners of the enterprise who own the enterprise and its assets, but contribute no work. It also tolerates large discrepancies in living standards. I see these things as capable of being changed, and have hope that we can change them.

    On the other hand, capitalism also involves a social system in which people exchange things contractually: that is, they make explicit of tacit agreements about what they will provide to others in return for something being provided to them. I’m not inclined to think that this aspect of our social existence will ever go away, even if it evolves away from small interpersonal exchanges based on notions of private property to encompass more communal or social exchanges. Some notion and application of contract, reciprocity, mutual obligation, claim etc. seems universal in human society.

    The concepts of “leisure” and “work” are in themselves difficult. The best I can understand is that they mark the difference between activity we find pleasant versus activity we find unpleasant. Both sorts of activity can be productive or merely consumptive in that they are adding to or subtracting from our store of value. We currently perform a lot of activity we find unpleasant in order to acquire the opportunity to engage in the activity we find pleasant.

    I’m skeptical about the idea that we can ever, through the employment of technology, achieve a society in which people have and are satisfied with an active life consisting of leisure alone. I’m inclined to think that however much we have, we will always set our sights on something more. (I’m influenced by the Buddhist notion that life is inherently filled with dukkha – unsatisfactoriness).

  20. Dan, this is not the only paper in which MMTers define the value of the currency in terms of the labor time required to obtain it. For example, here is an accessible introduction to neo-chartalism that discusses the same approach:

    Chartalism and the tax-driven approach to money

    I have discussed this in an early post. As I’ve indicated, I think the basic approach is appropriate.

    Regarding Marx’s theory of (commodity) value, which is a separate issue, and your comment about a lack of empirical evidence, in Marx’s theory prices should not reflect value. Rather, price should exceed value in sectors where the composition of capital is above average and be below value in sectors with below average composition.

    Actually, some Marxists have claimed to have found a strong correlation between value and prices, but others have argued the results are based on spurious correlation. The strong correlation claimed by some Marxists would not actually be consistent with Marx’s theory.

    But, in any case, this is not necessarily connected to value of the currency.

  21. Dan Kervick, “rational” agents always valued in terms of everything else. In our expended understanding of “rational” in the light of cognitive science, we now realize that even animals are rational to some degree, even one that a considered pretty low on the evolutionary scale.

    The way that rational agents do this is computational in some but the overriding aspect of fairness. Animals know a fair deal from an unfair one. This is basis of “value.”

    Fair value” is used in economics and accounting for determining the value of something that the market has not or cannot price. Moreover, traders and investors attempt to discern when price is out of line with relative value because they realize that this will self-correct if they are fight in their estimation.

    The reason that markets work as well as they do is that the “invisible hand” is the sense of value. Everyone is constantly assessing relative value in choosing among options, although they are probably doing this intuitively rather than computationally. Sellers know this and do their best to create perceived value for their wares that is above real value. I had a friend who was a very astute world traders and he said that the whole trick is finding out what something is really worth. He said that it can take years and one still makes money along the way, but when one finally get to the real value it may be fifty times less than the item can be sold for on the basis of perceived value. Americans in general have no idea of real value and they overpay from most things, which are now imported. People would be shocked if the knew the reality.

    The idea of a numeraire is that relative value can be assessed more easily and accurately using a single criterion the value of which is known by some measure. One of the first standards of value was grain. However, grain is perishable so it was not ideal. Precious metals had many advantage that other criteria did not have and it was also scarce. The problem with it was and it that has no use value to speak of other than vanity.

    When Classical economists started thinking about it rigorously, people (like Marx) realized that the arbiter of value is the real wage. Workers hate inflation because prices rise faster than wages, lowering the real wage relatively. So an hour of work became the standard. Of course, it is a relative standard depending on one’s income and wealth. So it is not perfect either. But it does have the advantage of being the way that people think intuitively about price wrt value.

    Behavioral economists and cognitive economists are investigating this phenomenon of price v. value, and quite a bit of work is going into examining fairness. Fairness begins to answer why price and value converge, and cognitive biases as well as deception explain in part why they diverge temporarily until more clarity is gained.

  22. Bring this around to the value of currency, value is real and price is nominal. A currency is first and foremost a unit of account for setting price. Nominal price is arrived at through exchanges of financial assets and real assets and goods in markets. Sure, sellers can set prices, but that is always just an offer until accepted by a buyer in a transaction, and sellers that don’t have pricing power have alter prices. Virtually no seller has absolute pricing power.

    How do buyers and sellers, borrowers and lenders, and savers and investors make decisions in terms of the nominal unit of account relative to real stuff or proxies for real stuff (financial assets)? One one level one takes everything into consideration and arrives at opportunity cost. but one another level there are lot of cognitive-volitional-affective operations going on in the background subliminally, the cost of the nominal token (currency) to oneself being to the fore. For most people in most situations, that’s what they had to do to get that unit, and that generally amounts to work expended. We all realize at some level, explicitly or implicitly, that in working we are trading our real lives — time, knowledge energy and skills — for a certain nominal amount denominated in the unit of account, and we take that into relative account in assessing real value v. nominal price. What does it mean when someone who can afford something that would like to have says that it costs too much? The price is inconsistent with the perceived value based on some standard in which they are figuring the fairness and reasonableness of the exchange.

  23. I wish I hadn’t given the example of Marx’s theory of value in my post. 🙂 It was just an attempt to provide a different example – relating to a separate issue – where the average rather than marginal labor time is what is relevant. Although it would be possible to agree both with the MMT definition of the value of the currency and Marx’s theory of the value of a commodity (I might fall into that category), this is not necessary, and to my knowledge no Modern Monetary Theorist thinks of price determination in terms of Marx’s value categories.

    The relevant issue for my post is the value of the currency.

    One rationale for considering the value of the currency in terms of labor time – as the Modern Monetary Theorists do – is that this indicates how difficult it is to extinguish a given tax obligation. If it took little labor time to extinguish the tax obligation, there would be little need to do work for the government’s money rather than for alternative private monies or non-monetary rewards. The government’s ability to transfer resources from the private to public domain would be diminished.

    This should make clear that what matters, when considering the BIG, is the size of the tax obligation relative to the issuance of government money (i.e. the size of the deficit). It is not convincing, in my view, to argue that because the amount of labor time required to obtain the currency “at the margin” is zero, this will create prohibitively high inflation or hyperinflation. What matters is the average labor time.

    It is true that the BIG may well provide a less effective price anchor than the JG, because the unemployed would not be kept as “job ready”. But it is a stretch to jump from that observation to supposing the receipt of income without a labor time commitment “at the margin” will be hyperinflationary. It is already the case that “at the margin” some people receive income without a labor time commitment, and it is already the case that the nominal price anchor is less effective than that offered by a JG. So where is the hyperinflation?

    (My comment is not directed at the exchange between Tom, Dan and myself on the side issue of commodity value. My intention is just to clarify the point of my post.)

  24. The marginal theory of price is limited to markets, especially those like financial markets were the margin is known, i.e., the last price that came across the ticker (flow), which determines the worth of the entire stock. Taking that (nominal) price as representative of (real) value is naive.

    As peterc observes, the labor market is even more skewed since at the margin some people (bottom) are not labor constrained with a BIG or JIG and would get “free money.” Well, top end (rentiers) are not labor constrained either, and they too get work-free money. They hate “redistribution,” but work-free money for them is fine in their view. No problem with inflation here; keep moving, nothing to see.

    So if we were to take the argument about the margin seriously, there is a lot more work-free money at the top than there ever will be at the bottom — a lot more. Maybe if we are concerned about marginal effects, we should “euthanize the rentiers” as Keynes starkly put it.

    But as long as most people’s income is gained from work and goods are rationed by market price, this will be the way people think about it, even through it is no longer necessary to do so. but that is another, longer story.

    The point is that we are looking at this the wrong way in order to get where we want to go, which is a higher standard of living with distributed prosperity, including greater opportunity for leisure made possible by increased productivity — or as Bucky Fuller put it, “doing more with less.”

    This discussion of currency value is basically a normative problem, since it is bound up with value, and values imply norms (rules and criteria). Every ideology and worldview is based on a foundation of norms that serve as rules and criteria for applying them.

    Human being are in charge of the rules that they set and they establish the criteria, too. They are not completely free in doing this, since reality is the ultimate criteria, but reality can be approached in many ways, and which view gets adopted has broad consequences in shaping life. The existing system is one way, and there are many such systems operative in the world, some closer in form to each other and others farther apart.

    Too often Americans think that their way is the best way or even that it is the only way. The thinking is that others just don’t get it and have to be shown — or forced. In fact, as great deal of the resistance to the JG in the US is due to European “socialism.”

    So I think that MMT is looking backward toward the past as perpetuated in the status quo in regard to the JG and justifying it in terms of work, rather than looking forward toward crafting a possible future that transcends current perceived limitations, when “having to work” is a norm rather than a necessity for all, so that economics based on old thinking becomes moralizing.

    OK, agreed that one has to start somewhere and MMT is better than the status quo, but it is just an elaboration of the status quo, rather than a transformation of it. I am a future-oriented person and a visionary, and looking around I don’t think that were are using available very efficiently and effectively given both the daunting challenges we face and the promising vistas that are open before us. Let’s not get bogged down.

    I think that the JIG idea has more promise in that the BIG frees people from the necessity to basically prostitute themselves for subsistence. The optional JG that has to be something more attractive than leisure and the only thing that is more attractive to most people than leisure is creative expression alone or together with others in community.

    If people are concerned about inflation, then let them cut the bloated military, which is hugely inflationary, and get rid of economic rents that are parasitical on production.

  25. Neil, You claim (2nd comment above) that given rising prices, JG people who are on a fixed nominal wage become progressively better value for money from the employers point of view. True. But all that is happening here is that the JG wage is falling in real terms.

    One can always induce JG people (and the unemployed, come to that) to search for regular work more diligently by cutting the JG wage or unemployment benefits in real terms. Plus the lower the JG wage and unemployment benefit, the more attractive such labour becomes to employers, because said labour is liable to be begging for work.

    A real test of the “price anchor” hypothesis involves making the “all else equal” assumption: in particular assuming that benefits and the JG wage stay constant relative to the average wage for regular work. (Actually is a very realistic assumption because governments just don’t let benefits in the real world change much relative to the average wage from one year to the next.)

    In the latter scenario, and given excess demand, all and sundry will bid up the price of labour, materials and everything else, and I just don’t see what the existence of JG or a few million unemployed can do to stop this inflation, assuming unemployment is at NAIRU or Bill Mitchell’s “inflation barrier” level, to give it a different name.

    Alternatively, if unemployment plus the number of JG people are unusually high, then of course JG and the unemployed act as a price anchor, but that’s not the revelation of the century.

  26. “and I just don’t see what the existence of JG or a few million unemployed can do to stop this inflation, ”

    That’s because you are using the usual line:

    “assuming unemployment is at NAIRU or Bill Mitchell’s “inflation barrier” level, to give it a different name.”

    That assumption is key. NAIRU is like light speed. You can’t get to it.

    We don’t get to the NAIRU by magic in one leap and we don’t stay at it. We have to move from where we are now to near there in a continuous motion and then bounce up against it, but never quite reaching it, and down again.

    The key difference between JG and unemployment buffers is when hiring is tight, but not impossible. That is when the anchor is at its most powerful.

    I need to draw a picture to illustrate this.

  27. @ Neil

    Please draw one 🙂

    I don’t think I follow you.

    Assume a non-JG economy. Do you mean to say that unemployment can’t come down to NAIRU? But surely it can, if the government spends?

    NAIRU is the lowest level of unemployment consistent with non-accelerating inflation, right? Why would it not be possible to go there – with general aggregate demand stimulus?

  28. “Why would it not be possible to go there – with general aggregate demand stimulus?”

    Because you don’t know where it is. It cannot be measured. It is a theoretical construct.

    Therefore with ‘general government spending’ do you think they will back off

    (i) once they are absolutely sure that they at the NAIRU
    (ii) at the first sign of inflation trouble

  29. Post-capitalism ~ Post-economics?

    Hi peter, if you really want to go post-capitalism what about the old Tibetan wisdom, constitution, and evolution of man.

    In their system, eventually, the consciousness in man expands and elevates, through contact with the energy within that is absolute. From a haiku I adapted:

    “I can see you fly…
    You are an angel, high above the ground – looking up, looking down!
    Above a star, threaded to the sun …”

    For the first time, consciousness becomes truly self-conscious and other-conscious in its own realm. Looking down it sees the personality in which it is embedded: mental body (mind and ego), emotional body, energy-physical body (like a rider commands and relates to a horse)! Looking up it sees its own star, that fragment of energy that is itself, shot from its Central Sun. Looking within it sees itself for what it is – ‘Light’ is the closest most literal word.

    The bit that I find really funny about all of that is that intellect is not the superior aspect in man. “The mind is the slayer of the real”. The capacity to FEEL contains within it the
    royal road from the personality to the soul. The soul enlightens the lower mind from the moment contact is made. Then intellect can be used as a finishing tool!

    So dawns the realisation of the difference between the plans that man as a personality makes for himself, and the plans of the soul that are aligned with that primal energy (which by the way embodies within
    itself everything we have ever felt of kindness, intelligence, power, grace, sacrifice and love. The same primal energy that brought the whole finite universe into existence, driving its evolution on, and all
    within it (even the doubters who declare this infinite energy ‘dead’).

    So, if all of the ideation and complexity surrounding the social, economic and political problems of the world get too much for you at times, just remember, at least in the old Tibetan system: “Life is what happens to you (and economics) as you are busy making other plans”. [John Lennon] Life could be far more magical than the newspapers, universities and entertainment industry tell us ….

    However, granted, back on earth – the human persona is an excellent creator of miasma, disaster, drama and fiasco!! An excellent chaser of dreams and doubts, (who dares to Hope) …..

    It’s very hard to fix problems with the same tool that creates them (mind). But of course we need to try, working with what we have. The personality life needs by its own nature, to be organised, rhythmic, at peace too; content. In the Tibetan system, creativity and concentration of any kind help create in man the tools he needs to walk the ‘rainbow bridge’.

    I don’t think people really understand the value of contentment and certainty in this busy world. Today’s illness needs a doctor of today; not one that will live in the future, or one that has passed us by! We need to fix todays problems Now, so I am sympathetic to any step taken in the right direction in terms of our systems. My take is always, human beings need as a priority, to get back in touch with themselves first; feel their own existence. Learn to enjoy Being themselves and Being alive! Learn to appreciate the beautiful gift of Life: we are so much more than a JIG or a political system. One lifetime passes very quickly.

    When human beings are happy, they are the most productive and creative in every way. They even get along with one another a lot better!

    Regardless, even if the above is all unverifiable nonsense – just for fun, and a sense of anything is possible! Maybe there is more to evolution than Darwin surmised! I’ll put this on an older post so it won’t annoy the pragmatists!!

    A friend says:

    Next time you go to the beach
    Pick some sand up, put it on the palm of your hand
    Take it all away, ’til there is one grain of sand left on the palm of your hand
    And then look around
    See all the sand that there is
    Then look at the one that’s on the palm of your hand, and know
    That one is different to all the other ones …..

    Unique! Unique!

    There is no grain of sand like this one, anywhere in the world
    Check it out
    That’s who YOU are
    You are unique! Distinctly unique!

    There has been no one like you on the face of this earth before, and there won’t be again
    Never. Ever
    What that means? Never!

    This drama of this person, of this human being, will never play out again
    It is unique!
    The universes may come and go, this is not happening again

    The way you can appreciate something nobody else can
    The way what makes you smile, is your signature

    The pallette isn’t this planet earth, the palette is the heart.

  30. jrbarch, you are in fine form.

    Thanks for such a great comment. I agree about supporting what can be done now. Feels constraining, though. 🙂

  31. Hugo, you may be on to something here in terms of defining the value of the currency in a post-capitalist, though still monetary, society in which income and labor time are completely separated. Perhaps a good definition would be the one you suggest: the amount of time per dollar received. We would be remunerated simply for living, both productively and in leisure.

    I’ll think about it some more. Any thoughts?

  32. Peter, seems to me you could take up the median/average wage case as representing the value of the currency more than just the JG wage. It seems you almost got there in the post, and maybe that’s what you were implying. For example, if the JG wage is 8.00 but the median or average wage is 18.00, then the JIG or BIG would merely reduce the median/avg. wage say to 14.00 as total hours worked declined in relation to total amount of currency outstanding. This makes the value of the currency substantially higher than “just above zero.” But I am only an egg.

  33. Hi, dave. Yeah, I think you’re right. Under capitalism, the value of a unit of the currency could be considered the average amount of labor time required to obtain it. So, as you say, an hour divided by the average wage rate would give a measure of the value of the currency. Alternatively, the average amount of labor time could be reduced to a multiple of simple labor.

    If the average wage rate is $60/hr, to make the numbers easy, it means a capitalist or the government could command 1 minute of average labor with a unit of the currency.

    In a post-capitalist society that retained money, the value of the currency might be the amount of time per dollar received. If we received $1 per minute, the currency issuer would receive in return the knowledge that we would live our lives as we saw fit for that minute. 🙂

  34. I posted Part Seven of my JG and the MMT Core series yesterday:

    It reproduces a dialogue with Warren Mosler on my Part Two post in the series. Part of the dialogue dealing with the JIG proposal is quoted below. In it I also disagree with the view that the value of the currency “is defined by, at the margin of need, what you must do to obtain it from the issuer.”

    Peter Cooper’s JIG Adds Freedom

    Above, I said that I find the MMT argument for JG as a core component nearly a decisive one, provided, of course that one accepts that full employment with price stability is an important component of “public purpose” or “the general welfare,” and that also one thinks that the Government’s fiscal policy ought to fulfill the the public purpose. However, as part of the general debate over the JG, Peter Cooper has proposed a JG, supplemented by a Basic Income Guarantee (BIG), as a better alternative than the JG alone, because net/net it would increase personal freedom since people could choose either JG or BIG based on their needs, while still fulfilling the requirement of having an employed buffer stock as an automatic stabilizer.

    Warren Mosler: BIG is an ‘optical illusion’ that’s an unstable equilibrium at best, capable of rapidly degenerating into hyper inflation at any time.

    It reminds me of this Monty Python skit in ‘the life of brian.’

    The currency is defined by, at the margin of need, what you must do to obtain it from the issuer.

    So if you can get a living wage from the issuer for doing nothing, there is nothing that can stop the currency from being worth nothing once it heads in that direction from an accelerating flight to BIG

    Joe: I think your reasoning isn’t compelling here. 1. People choosing the BIG aren’t “doing nothing”. They’re just not doing what anyone in the Government or the private sector has specified as having societal or market value as the case may be, other than consuming (which, btw, is an important function in our economy). However, the individuals choosing BIG, may be doing very valuable things, just as people who get nothing at all may be doing very valuable things for people. 2. Surely, the amount of currency people are getting here is relevant to your claim that there would be hyperinflation.

    If private sector people get more currency, than JG people who, in turn, get more currency than BIG people, it seems to me that the value of the currency will still be maintained, because people don’t just want to live. They want to prosper. They want to acquire assets beyond those required for a basic living. So, most people will still work on either private sector or JG jobs.

    Additional dialogue on the JIG is in the post at Correntewire.

  35. Thanks, Joe. I’ll check it out. I am suspicious of any sentence that contains “at the margin” in it. 🙂

    More seriously, I think the MMTers are wrong on this particular point, even though I fundamentally agree with their approach.

  36. Regarding Mosler’s response:

    So if you can get a living wage from the issuer for doing nothing, there is nothing that can stop the currency from being worth nothing once it heads in that direction from an accelerating flight to BIG

    By the same logic, we would have hyperinflation already. An accelerating flight to unemployment benefits.

    Most people seem to desire much more than just a basic income and/or derive satisfaction from their jobs. To receive more than the basic income or retain their source of satisfaction, they need to resist the urge to take accelerating flight to the unemployment benefit. And they do resist. They fly in droves in the other direction.

    Incidentally, there are traces of marginalism in this argument as well: the “marginal disutility” of work, etc. There is a mistaken belief that what happens at the margin is somehow determinative of the aggregate. In this case, some jobs are unpleasant and at current pay few would wish to do them rather than accept a basic income. Therefore, everyone would quit their jobs if a basic income guarantee was introduced. But, of course, it doesn’t mean that at all. It just means that pay and conditions for those particular unpleasant jobs would need to rise or instead be done with more mechanized production processes.

  37. Yes, I agree. I still think the JIG is promising. I also wonder about the variations in the proposed JG wage rate among various MMT proponents. It has the feel of a failure to simulate the alternatives and figure out the range that is most likely to produce full employment with a JG living wage with price stability. What a living wage is, and how important that is vs. the possibility of inflation is dividing the group and they haven’t been talking about it. See my latest:

  38. The inflationary argument ignores the opportunities that are created by a universal income. Opportunities allow innovation. A universal income allows labour the freedom to self-organise. There are opportunity benefits as well as costs.

    The income support that we have in the UK says that you receive the benefit as long as you do less than 16 hours of activity in a week. It’s literally money for doing nothing. If you do something then you don’t get the money, hence there are no opportunities created by current UK income support.

  39. Prior to 2008, the banks were attempting to create an asset backed currency but the assets they chose were subject to marginal utility, whereas the debt required exponential utility. If only they’d chosen assets with a network effect then maybe it would have worked. The problem with fiat money is that there isn’t normally enough to keep up with exponential growth in opportunities. The more security that governments provide, the less demand for debt. My guess is there’s a bigger risk of deflation.

  40. Just to clarify, governments would also need to provide real security as well, e.g. housing.

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