In one of the first classes I attended as an undergraduate economics student, a dynamic young (heterodox) lecturer made mention of the embarrassment he had always felt as a student when asked at parties what subject he studied. While others were receiving liberal educations or pursuing a vocation aimed at making life better in some way for others, he – like us, his students – was being indoctrinated into the neoclassical orthodoxy.
The lecturer’s remarks have always stayed with me. I certainly shared his unease in social situations. Apart from the politically repugnant ideas generally associated with neo-liberalism, the most awkward conversations usually concerned whether economists could actually be said to have added even one iota to society’s book of human knowledge. Having been exposed mainly to orthodox economics at this early stage of my “intellectual” training, invariably I could think of nothing worth mentioning.
Since then, I have had the opportunity to read around a bit in an effort to identify anything of note that might have been developed in the history of economic thought. I believe I have come up with a list that if not definitive, is at least a list.* Economists might have achieved something.
Let the parties begin!
Here I am mainly focusing on positive contributions to our understanding of the economy. A lot of the best work in economics has actually gone into a negative critique of the neoclassical (or “theo-classical”) orthodoxy, particularly its superstition of social determinism, professed in the far-fetched belief that the price mechanism will tend to ensure all resources are fully utilized, and the related special pleading that prices (including interest, rental returns, the rate of profit, and other heavenly transfers) reflect productive contributions. As important as these negative critiques have been in dismantling the not-so-inspired theo-classical doctrines, they would never have been necessary if everybody had refrained from preaching such self-serving, apologetic tripe in the first place.
In terms of positive contributions that shed light on the present economic system, I thought the following insights seemed sufficiently noteworthy to be recorded for posterity here at heteconomist:
1. The Chartal Nature of Money. The precondition for state money (vertical money) is the existence of a category of people who must obtain it. This category of people (taxpayers) is created through the imposition of a tax obligation payable only in the government’s money. With this obligation imposed, government spending or lending (state money creation) is logically prior to tax revenue (state money destruction). The government must spend or lend before anyone can get hold of its money (Chartalism, MMT). The government’s expenditures function like any other autonomous expenditure (Kalecki). It makes no difference to a business if its customer is a private-sector employee, a civil servant, the government, a welfare recipient, a foreigner, or another business.
2. Sovereign Currency Issuers Need Not Be Revenue Constrained. Since government spending creates state money and taxes destroy it, the non-government can only net save in financial assets denominated in the state money (i.e. save in aggregate) to the extent the government runs a budget deficit. If the government is a sovereign issuer of a flexible exchange-rate fiat currency, it need not be financially constrained in its capacity to do this. Provided the budget deficit is consistent with non-government net saving behavior, the additional creation of state money will not be inflationary, since it is demanded as a form of saving rather than for spending (MMT).
3. Unemployment is a Macro Problem. Unemployment arises as a logical possibility with the introduction of state money because the tax obligation creates a need within the non-government to acquire the government’s money. Some people who offer their labor services in exchange for the government’s money may not find a willing employer. Unemployment will occur, in general, whenever the budget deficit is insufficient to enable non-government full-employment net saving intentions. If the government leaves its fiscal settings unaltered in these circumstances, the unemployment will persist unless the non-government reduces its intended level of net saving (MMT). There is no automatic tendency – e.g. via the price mechanism – for non-government aggregate saving behavior to adjust to the level consistent with full employment (Kalecki, Keynes, Sraffians).
4. Class Relations and Wage Labor. The precondition for private-sector wage labor is the existence of a class of people who must sell their labor power to private employers to obtain money. Private ownership of the means of production creates this class and the private appropriation of surplus value reproduces it (Marx). To the extent the government does not employ all those needing to find employment, some people owning no means of production will be compelled to seek employment in the private sector.
5. Private-Sector Production. Capitalists initiate private-sector production through investment in means of production and the employment of wage labor. In funding their expenditures, they draw on private credit and past profits. They will only do so on the expectation that the production will be profitable (Marx).
6. Endogenous Money Circuits. Private banks, if sufficiently capitalized, are in a position to extend loans to credit-worthy borrowers, including capitalists seeking to initiate what is expected to be profitable private-sector production. In making new loans the banks create deposits (horizontal money). Banks’ lending decisions reflect risk-reward assessments, which in turn depend on the state of the economy. In this way, horizontal money is determined endogenously through the credit creation behavior of banks. While this horizontal activity leaves non-government net financial assets unchanged, it enables expenditures on real resources and real output while at the same time imposing debt burdens on the recipients of the loans (circuitists and other Post Keynesians). Since horizontal money can fund expenditure on real goods and services in the same way as vertical money, both impact positively on employment and carry the same inflation risk. However, if unemployment or inflation are problems, only the government, using its capacity as currency issuer, is in a position to alter net financial assets, thereby altering the basis for leverage (private credit creation) within the non-government (MMT).
7. Financial Instability. Because bank loans and capitalists’ investment decisions are subject to uncertainty, bad loans and bankruptcies occur intermittently. Over an expansionary phase of capitalist growth, demand expectations are frequently confirmed, raising the level of confidence. This tends to encourage increasingly risky lending and, in the absence of effective regulation, eventually ponzi and fraudulent behavior, precipitating a financial crisis (Minsky). Although confidence generally increases over an expansionary phase, the underlying rate of profit tends to fall due to a rise in the organic composition of capital. As profitable productive investments become harder to find, speculative activity increases in search of higher returns (Marx). Fiscal austerity contributes to this declining profitability and the precariousness of private-sector balance sheets (Godley influenced Post Keynesians, MMT).
8. Value is Created in Production. Once production is initiated, income or value is produced through the application of labor in combination with the means of production. The source of new value is labor (Classicals, Marx). Commodity value partly reflects new value and partly reflects a transfer of the value of means of production that was produced in a separate production process or in a prior period (most clearly depicted by Marx). It follows that surplus labor is the source of surplus value, and all forms of profit income (profit, rent, interest, etc.) are merely a share out of this surplus value. There is no ‘natural’ determinant of the shares going to rent or interest (Marx) and they do not reflect productive contribution (Sraffians). They are socially determined shares of income, reflecting class and power relations (Marx, Sraffians, Post Keynesians).
9. Profit is Only Realized in Exchange. Although surplus value is created in production, profit can only be realized to the extent that the sum of capitalist expenditures, the budget deficit and net exports minus saving out of wages exceeds aggregate wages (Kalecki). This aggregate mark-up over wages determines total price (the sum of all prices) and the distribution of income between wages and gross profits. Profitability therefore depends critically on demand (Kalecki, Post Keynesians).
10. Output and Employment are Demand Determined. The extent to which production is carried out, and the level of income (output) that is produced, depends on the level of autonomous demand. It is the autonomous decisions of economic actors – the government, capitalists, foreigners and to some extent consumers – that determine the level of income and therefore saving, tax revenue and imports. In particular, investment is logically prior to saving and generates a corresponding level of saving. The rate of interest is not involved in any systematic way in this response of saving to changes in investment or in the determination of the level of investment (Kalecki, Keynes, Sraffians).
11. Private-Sector Activity is Unstable. Since output and employment depend on the autonomous demand decisions of different economic actors, who are acting on the basis of expectations formed under uncertainty, and who are subject to the possibility of losses on investments, bankruptcy or unemployment, the level of non-government activity is subject to sharp fluctuations (Kalecki, Keynes, Marx in some respects). Any stability in demand conditions will require the government to act in a countercyclical manner. The better designed this countercyclical response, the more seamlessly government net expenditure can be adjusted to the temporal needs of the non-government. Timely responses require effective automatic stabilizers.
12. Income Security and Price Stability. Governments who are issuers of their own floating exchange-rate currencies always have the capacity to purchase available resources, including labor services, at current prices. This means they have the capacity to act countercyclically to the appropriate extent. In the case of unemployed labor, which currently has no bid in the regular economy, the government could offer a guaranteed job at minimum wage. By not competing on wages with employers in the regular economy, job-guarantee employment would vary inversely with regular employment, acting as an automatic stabilizer (MMT). Other fiscal policies could be used to manage any inflationary demand pressures elsewhere in the economy. Alternatively, the government could provide a basic income guarantee to all and allow unemployment to remain. Or some combination of the two policies could be introduced: a guaranteed basic income but also a guaranteed job for those who desired employment when laid off in the regular economy.
To sum up in one sweeping motion the economic knowledge gleaned so far in the history of economic thought, … I would say that the economic outcome is not deterministic – i.e. predetermined by supply-side factors – but rather the result of a social process characterized by power differences and struggles, class-interested behavior, and decisions that are made under uncertainty. Nevertheless, a sovereign currency issuer has within its capacity the maintenance of full employment alongside price stability.
* Special Note: Needless to say, some (all?) of the theoretical contributions listed in this post are contestable. It will therefore not be surprising if readers find themselves disagreeing with some (surely not all?) of them. However, I stand defiantly by my opening statement that even if the list is not definitive, it is a list.