Give, and it will be given to you

No, don’t worry, this is not a religious lesson. The relevance of the post title – drawn from Luke 6:38 – is the causation it implies between autonomous action and induced behavior. I have been reflecting on the current state of macroeconomic policy in which a purported commitment – a nonsensical one – to reduce the public “debt”-to-GDP ratio exposes an upside-down or back-to-front view of reality that is evidently widespread. The austerians exploit this confusion for their own class-interested ends, a point that Rodger Malcolm Mitchell has tenaciously and effectively hammered away at for some time now (for example, here). These class-interested ends include the breaking of organized labor, dissembling of the welfare state, and the intentional widening of the wealth gap between the 0.1% and the rest of us.

“Give” — autonomously, exogenously, without regard to a particular reward in return — and this act, we are told, will tend to induce a behavioral response from others that is conducive to our own well-being. “Forgive” — without first having been forgiven — and we “will be forgiven”. Our own attitude of forgiveness, non-contingent on the reciprocity of others, will nonetheless tend to induce an attitude of forgiveness in others. Likewise, rather than waiting for the world to conform to our ideal, “do to others” as we “would have them do” to us, and we will help to bring that ideal into existence.

It is the same in a monetary economy. From inception, the currency issuer must exogenously create money (spend or lend) before taxes can be paid. The currency issuer is in no need of outside funding and the notion that it can “save” or be burdened by “debt” in its own unit of account is nonsensical. If the currency issuer waited for the revenues it desired before first bringing them into existence, it would be waiting a long time.

Similarly, the issuer of private bank money must issue a loan before it can receive interest income in return. Private banks are not constrained in their lending by the possession of prior reserves. If they are adequately capitalized and perceive prospect of gain, they will issue a loan and simultaneously create a deposit. Any shortfall in reserves can always be made up either through interbank lending or by borrowing from the central bank. What matters to banks in this decision is the prospective flow of interest payments in relation to risk and the price of redressing any shortfall in reserves.

In the real economy, investment initiates production and generates income, before which nothing in real terms can be consumed or saved. Just as, according to Galations 6:7, we reap what we sow, the autonomous act of investment and production (sowing) brings forth income (a harvest), some of which can be put aside or saved.

Nature, too, follows this pattern. The earth gives and this tends to create the conditions for its own reproduction, the destructive tendencies of humanity notwithstanding.

It is true of art, music, film and literature, if viewed from the standpoint of creation (production) and appreciation (consumption). The artist takes a conscious decision to create, inducing a reaction in the audience. Their can be no coherent audience reaction before the work of art is exhibited. The musician composes and performs, generating feelings in the listener. A filmmaker executes a vision and a writer expounds upon a worldview in an attempt to connect with others and evoke an emotional response. The reception of a work of art, music, film or literature reacts back upon its creator, certainly, influencing future work. But there is a pause in the process unless the creator takes an autonomous decision to give birth to a new creation, just as there is a pause in the monetary circuit if there is an interruption in money creation.

The independent action (to create, invest, autonomously spend) induces a set of responses (to engage, consume, save).

The illogic of austerity runs entirely counter to the causation found in the monetary sphere, the real economy, nature, the arts, and scripture. The correct response to dwindling production and employment, the merchants of deficit hysteria tell us, is to hike tax rates, the effectiveness of which depends on income, while taking an axe to government spending, upon which income partly depends.

The austerians get the causality precisely wrong. Income (the harvest) is endogenous, induced by autonomous decisions to invest and produce (sow). Income has no independent existence and cannot arise of its own accord. It is dependent on a prior decision to initiate production, an action that is enabled through money creation (government spending/lending or private bank lending) or a decision to invest independently of current income out of retained earnings. In a depressed economy, where private credit creation and investment dry up, deficit expenditure is the only sure way to set the economy back on a path to recovery.

Similarly, the austerians tell us that the way to reduce the public debt/GDP ratio is to focus directly on the public debt (the numerator of the ratio) through cuts to government spending and tax hikes. But this results in stagnation or even an endogenous decline in GDP (the denominator of the ratio). The result, in all likelihood, will be a rise in the public debt-to-GDP ratio, not to mention horrendously high unemployment and immense suffering for many people. This has indeed been the experience in the current crisis, as Bill Mitchell’s most recent post highlights.

The austerians claim, of course, that cuts to government spending will either encourage private investment or, through declining unit labor costs, generate additional net exports. Neither of these claims are credible.

The notion that weak economic activity will be conducive to private investment is fanciful. Firms that are already facing weak product demand and excess capacity are hardly likely to respond by expanding capacity further, no matter how large are the money hoards they currently possess.

The hope of export-led recovery is not a global solution, and is really just code for an attack on workers in the name of “international competitiveness”. The result is a race to the bottom on wages, working conditions, the social safety net, and public services.

The inevitable outcome of this focus on public debt rather than output and employment is a stagnation or decline in GDP that offsets or more than offsets the effects on the public debt-to-GDP ratio of the austerians’ pro-cyclical fiscal measures.

The truth is, we can have sustainable economic recovery the moment we put our collective foot down and insist upon the appropriate government policy response to the current situation. But recovery will only be brought about by getting the causation right. Focus has to be on what is directly controllable in a democracy: the government’s fiscal response – both its level and composition – rather than waiting and hoping for favorable changes in the behavior of the 0.1% to bring about our economic salvation.

Create, through autonomous action, the conditions conducive to the kind of behavior we wish to see and be a part of – productive investment, innovation, creativity, production – and the desired behavioral response will be forthcoming. Income, saving, tax revenue, even a stabilization of the public-debt-to-GDP ratio, as if it mattered, will follow.

19 thoughts on “Give, and it will be given to you

  1. Excellent piece.

    One minor quibble, and it’s not a criticism, just an observation based on the reality of entropic processes:

    “government spending, upon which income partly depends”

    Although income is partly dependent on government spending, the economic system is fully dependent upon it…”it is impossible for an effect to be greater than it’s cause” wrote Aquinas and the concept of entropy confirms this.

    Investment requires that the effect be greater than it’s cause because of an element inherent to capitalism…profit. Profit (in the aggregate) isn’t possible without net government spending (or lending) and the lending route is mathematically unsustainable, so in the end there can be only one (cause).

    Apologies in advance for the off-topic nature of my comment.

  2. No need to apologize, paul. Very intriguing comment! Thanks. You’ve given me something to ponder.

    I’m not sure I follow when it comes to private profit, which Kalecki shows would be the sum of capitalist expenditures in the case of no worker saving or budget deficit. Am I misinterpreting your meaning on this point?

  3. “. Profit (in the aggregate) isn’t possible without net government spending (or lending)”

    Unfortunately that is incorrect.

    Profit is perfectly possible without any government spending – because profit is how capitalists and bankers earn their living.

    Capitalists and bankers consume in precisely the same way as workers thereby driving the turn for another cycle.

    A stock of debt can cycle round the system several times in any particular time period. It is the velocity of turnover that determines whether the production system reaches a sustainable state.

    In the same way that miles are not the same as miles per hour, currency units are not the same as currency units per hour. Interest, profit and wages are measured in currency units per hour.

    Only when bankers, capitalists and workers fail to fully consume does the fun start.

  4. I don’t see any disagreement there, only different starting assumptions. Paul reverse engineers from the real world of leakages in the circular flow. Peter and Neil start with a model which assumes no leakages and build towards the real world from there.

    Both are legitimate ways to tell a story and would reach the same ending.

  5. “Only when bankers, capitalists and workers fail to fully consume does the fun start.”

    Neil, of course they will fail to fully consume…it’s called savings (of which profit is a component) and it is inevitable that people will save and accumulate dollar wealth. Never mind that perfect payment settlement isn’t possible either. Most of the dollars in existence are saved, and the levels of saving are and always have been on a continuous upward path. By saving I mean Net Exports, accumulation of after-tax corporate profit and private saving.

    The funds to make payments have to come from somewhere. Output in goods and services can’t pay your taxes and it can’t be used to make payments on our debts without collapsing the banking (and social) system.

    You are describing a system that has no friction, ie perfect settlement, no saving and where Peter can always borrow to pay Paul without constraint. That is as much in the realm of the possible as the proverbial perpetual-motion machine.

  6. the proverbial perpetual-motion machine

    This is the fundamental problem with matching modeling with events. Tratable social models abstract from frictions and there is more noise in the real system than signal. Models are all pure signal

    Nothing wrong with that as a heuristic device, but then to go on an apply the model as if it were representational is just daft — tantamount to asserting a perpetual motion machine in physics. Economics isolated itself from the other social science in the effort to become a “pure science” like physics and then it makes the most fundamental mistake in physics, ignoring friction, which amounts to being in denial of thermodynamics.

  7. ‘Give and it will be given to you’ (with fingers crossed behind their backs)!

    More honest is Ghandi’s: ’Be the change that you wish to see in the world.’

    A global interpretation of Galatians 6:7 is ‘karma’ – wherever in human history there has been oppression of the human spirit, eventually the bonds are broken. Time is a river washing everything away, back to its source. Same old story in a modern setting.

    To me, people who want to turn this earth into just a factory or a warzone where human beings are bound by force (or ideology and monetary system, or coloured blocs on maps) do not see the Beauty in anything. They hate freedom and creativity, knowledge and inspiration, cooperation and solidarity. They do not see the humanity in human beings. What they call power is just darkness (an absence). Everything they do is veiled. This is the underbelly of concepts.
    ‘The human spirit is like a little bird caught long ago in a cage. Relentlessly it beat its wings against the cage – at the risk of damaging its own feathers, trying to be free, trying to be free – resting only to try again, try again. Now, when the door is open – do you think it will fly free’? [PR]

    I don’t know how much attention people pay to the young people of this world, but like that little bird when it first finds itself in the cage, they are trying more than anyone else to breathe freedom back into this world (problem is they don’t know what freedom is)? Everybody is bound head and foot, floating on the river. The oldies are busy decorating the cage walls and putting up their curtains, installing broadband …..!!!! (am just paraphrasing Kabir here) ….. somewhere, amongst the stars – laughter is to be heard!

    I guess if the little fiat bird flew free, that would be a start. Breath is a perpetual motion machine ….!

  8. Paul,

    I am not sure I understand this:

    “Although income is partly dependent on government spending, the economic system is fully dependent upon it… ‘it is impossible for an effect to be greater than it’s cause’ wrote Aquinas and the concept of entropy confirms this.” (Your comment at 2:26 AM)

    After all, an increase/decrease in government spending is supposed to be greater than the corresponding increase/decrease in income, due to the multiplier effect. The change in government spending would be the cause, the change in income would be the effect.

    Further, the reference to entropy it’s not obvious to me.

    Could you please elaborate?

  9. If I’m following, I think paul’s point (correct me if I’m wrong, paul) is that for a closed system such as the global economy, no government (equivalent to a constantly balanced budget) would imply zero net private saving. However, the private sector would want to net save. It wouldn’t be able to. Some (creditors) would try to get themselves into a net-saving position by pushing others (debtors) into spending more than they earn. But the attempt of the private sector, in aggregate, to net save implies a deflationary spiral and unsustainable private debt accumulation.

    Even if the private sector in aggregate was willing to zero net save, the distribution of the debt burden over time would get out of whack and prove unsustainable.

    In the absence of government, there would be no sector (however defined) willing and able to feed net financial assets into the system indefinitely. In a monetary economy, there has to be a sector that is capable of creating net financial assets for the private sector indefinitely rather than issuing private assets that are always matched by private liabilities.

  10. Thanks Pete. I understand now..

    By the way, there was a typo in my previous post: “After all, an increase/decrease in government spending is supposed to be NO greater than the corresponding increase/decrease in income, due to the multiplier effect”. Sorry!

  11. paul,

    The net-saving issue doesn’t just affect profit. It affects all forms of income – profit, interest and wages.

    Government spending is really just part of the last resort functions required in a money production economy. For the work/income/resources distribution design to work effectively for all there has to be a lender of last resort, investor of last resort and employer of last resort.

    But it is only required if you believe that everybody should partake in the economy. In other words if the goal of the economy is full engagement/employment and price stability.

    If the goal is something else then you don’t need those functions. Excess savings will eliminate via capital destruction and depression and the excess population will eliminate via the diseases of poverty.

    Austerity does work – but it is a psychopathic solution. Be careful of your implicit assumptions.

  12. The fundamental problem with capitalism is that the money flows to the top. It cannot work without sufficient redistribution economically to obviate social problems that will result in political problems that will change the system.

    The idea that the invisible hand of the market will solve all social, political and economic problems, as neoliberalism and Austrian economics assume, is without foundation. The reason is that the presumption is that there is a science of economics with economic laws similar to classical physics.

    The search for universal economic paradigm similar to physical science, which is ergodic, has been a failed project, if it is possible at all, which institutionalists deny because economics is a social phenomenon and different societies produce different institutions and therefore different economics. Societies are complex adaptive (non-ergodic) systems in the first place, and secondly they are organized on different principles based on different eras, environments, tendencies and choices, so the systems can be fundamentally different in construction.

    Institutional economists have shown why this is the case by taking sociology into account in economics. Adolph Lowe is a case in point, and he suggested that the economic system needs to be designed institutionally for the desired outcome.

    See “Adolph Lowe’s Paradigm Shift for a Scientific Economics” by Richard X. Chase.

    http://www.jstor.org/discover/10.2307/3486635?uid=3739640&uid=2&uid=4&uid=3739256&sid=21101888706947

    BTW, JSTOR now provides free online reading with registration.

  13. peter, yes that’s pretty close to what I’m saying. I look at the flow of funds in the nominal sense…the only discrete dollars in the system are entered there either by Congress (net government spending) or through bank lending. TINA.

    The dollars entered into the system are represented by entries on balance sheets…GDP or money multipliers do not affect the level of dollars in the system.

    It’s significant that the derivation of the sectoral balances identity…from equations that include GDP and consumption spending…eliminates those parameters from the final equation…they are functions of spending the same dollar multiple times. The remaining terms are expressed as nominal sums. Accounting is based on simple addition and subtraction operations.

    Other entries on balance sheets…real asset values and net worth adjust up and down by economic activity but the level of dollars is constant unless changed by a loan or government purchase.

    However, there’s more to it than that.

    Divide the economy into two groups within the closed system, business entities and households. Assume no government spending, only private credit or debt. There is no prior saving and no money in the system.

    Then take an individual business, any business. The business entity spends some amount X (which would have to be borrowed from banks) into the economy which I will call expenditure, representing wages, payments to suppliers and subcontractors, plus financing costs.

    Following this, there is only X level of dollars in existence in the system, but in order to make a profit, the business has to receive some amount of revenue greater than X. The necessary funds don’t exist, so households would have to borrow to fund normal consumption. If some households (like mine) refuse to borrow to consume then others must borrow more to make up for our share or the business will lose money.

    Further, the business must earn back every dollar it spent or it will be unable to repay it’s loans from the first cycle.

    It follows that what is true for the individual business is also true for all businesses combined in the aggregate in a closed system. Some businesses may succeed at the expense of others, but that results in defaults and unemployment.

    Now add in a leakage like Net Exports where much of the expenditure is paid to workers and vendors that won’t be buying your products. There is no amount of consumer borrowing that could ocercome that. Every addition leakage causes more drag on the system flows that can’t be sustainably financed through private borrowing.

    The government must net spend for capitalism to work.

    We could follow the money through all kinds of rabbit holes in various scenarios but in the aggregate the result will always be the same.

    The problem is ultimately one of imbalanced distribution and the fact that most money ends up being saved in one way or the other. It’s part of human nature and the way capitalism works. It’s a feature not a bug. We rubes just aren’t supposed to know how it works.

    The asset side of debt accumulates as financial wealth among a very few and the liabilities remain with the borrowers, never to be reunited. The funds have to come from somewhere to make payments or the credit system fails.

    “Austerity does work – but it is a psychopathic solution. Be careful of your implicit assumptions.”

    Neil, don’t know where you got the idea I support austerity…quite the contrary…I’m certain it can’t succeed in any meaningful sense of the word. Nor am I opposed to credit systems. One must however be aware of the limitations.

  14. “Following this, there is only X level of dollars in existence in the system, but in order to make a profit, the business has to receive some amount of revenue greater than X.”.

    Stock flow mismatch error.

    Profit is dollars per unit of time. It’s not miles. It’s miles per hour. It’s the speed of the turn that matters.

    I wrote a big article on it here: http://www.3spoken.co.uk/2011/12/double-entry-view-on-keen-circuit-model.html

    This has household saving in it and everything.

    A static analysis will give you the wrong impression. This is a dynamic system where the same dollar ends up going through the same hands several times in a given time period. The trade cycle is tight. You get smelly money (http://www.davidmcwilliams.ie/2013/01/07/smelly-money-is-still-money)

    The private circuit can operate entirely on its own – Steve Keen has proved that beyond a shadow of a doubt – but it is unstable – prone to booms and bust.

    Government action acts to dampens the booms and bust and allow a build up of net-savings that are not destroyed in a bust.

  15. Great post Peter… this is what everybody should be discussing….

    Neil:

    Perhaps Paul’s statement would be better worded: ““Following this, there is only X level of dollars in existence in the system, but in order to have increased savings at year end, the business has to receive some amount of dollars greater than X.”.

    And then please take another look at this statement here:

    “The private circuit can operate entirely on its own – Steve Keen has proved that beyond a shadow of a doubt – but it is unstable – prone to booms and bust.”

    ie How can it be “operating” while at the same time “unstable” and prone to “busts”? Typically when we design things we want to avoid failure mode or “back to the drawing board”.

    I believe Paul’s larger point is that due to these design deficiencies and the subsequent inevitable and predictable failure mode, the system is best termed “non-operational”.

    I see some “reverse invisible hand” in Minsky’s “Financial Instability Hypothesis” and Keen may be getting caught up in that… iow, the “FIH” assumes no one is in control, iow “the system is unstable by nature not by law” to an extent.

    rsp,

  16. “Perhaps Paul’s statement would be better worded: ““Following this, there is only X level of dollars in existence in the system, but in order to have increased savings at year end, the business has to receive some amount of dollars greater than X.””

    No, I don’t think so. Business is always going to receive more than X dollars in a relevant time period. That’s what turnover is all about. A business with a stock turn of 1 on average margins is going to struggle to survive.

    What you see instead is the actors spending less than their income.

    Then when you have under-consumption you get a build up of savings and inventory which unless offset by government action will cause a cascade failure as production is cut back in response to the demand collapse. That then forces a liquidation event and we start again.

    “Typically when we design things we want to avoid failure mode or “back to the drawing board”.”

    As I said earlier it depends what your objectives are. Volcanoes are unstable systems. They go bang every now and then and wipe out everything around them. But that doesn’t stop volcanoes operating. Because volcanoes obviously don’t care about the things around them.

    Similarly with a pure private monetary circuit. It works fine, then it goes bang and you start again. If your life fits in the fine part and you make sure you have real assets at the end of it, what do you care? With individualist thinkers, they don’t.

    It’s only if you care about full employment and price stability for everybody that you want a different system where the extremes are dampened.

  17. Neil yes I agree with your assessment of the flows…

    But would offer that our system of legal arrangements is not like a volcano… iow TINA to volcanoes but we do have alternatives as far as our legal arrangements between each other…

    iow the FIH seems to suggest TINA , ie the system is like a volcano, we dont get to choose if/when one erupts, the system is controlled by nature not by law…. this is very “gold standard” type thinking imo…

    Under a FFNC we DO get to choose if/when the monetary economy blows up… a FFNC system is controlled not by nature, but by law. This is very predictable if one just monitors the $NFA flows to the net liability cohort and assesses if they are being maintained at an adequate rate to meet legal financial liabilities and savings desires … this is not hard to do with the IT we have available to us today.

    Paul in my view is a Mechanical Engineer not used to working on buildings that are designed to collapse and fall down….

    rsp,

  18. From Tom’s link above to “Adolph Lowe’s Paradigm Shift for a Scientific Economics” by Richard X. Chase:

    “…. some desired end-state is first consciously and systematically determined. Then economic means are instrumentally employed to bring about the economic and social behaviour necessary to obtain and maintain that end-state”.

    In other words, washing out the Augean stables and starting again with something new (the Herculean fables as analogies for the aspirant man). I don’t think it is going to be ‘scientific’?

    I think no less is due because of the nature of creativity in human beings: ideal >> ideas >> icon. I think only the human heart can instill passion and compassion in those ideals.

    Whether blood is spilt or not to ‘wash our feet’ is one of our choices.

  19. Neil: Stock flow mismatch error.

    It is actually worse than that. That is why complete financial statements have 3 parts and not just two parts.

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