Kalecki in Relation to MMT

I am interested in how MMT relates to other heterodox approaches to economics and political economy. There is usually considered to be a great deal of compatibility, for example, with the work of Keynes, Lerner, and Minsky. Individual MMTers no doubt also have other influences. Bill Mitchell, for instance, has cited the works of Kalecki and Marx. More recently, circuitist and horizontalist Post Keynesian theories of endogenous money seem compatible with the MMT perspective. Some key foundations of a coherent alternative to the neoclassical orthodoxy appear to be taking shape.

I have been reading (or re-reading) some of Michal Kalecki’s work lately and thought I might highlight certain aspects that are particularly relevant to the current economic and intellectual climate as well as being interesting from the perspective of MMT. I have only covered volume I of Collected Works of Michal Kalecki at this stage. His key theoretical works on the capitalist economy are contained in the first two volumes. The second volume was already on loan when I last visited the library, so I was “forced” to borrow the third volume instead, which is one of two volumes concerned with his work on socialist economies. I won’t touch on that volume in this post.

Being impatient, I skipped over Kalecki’s earliest theoretical studies in part 1 of volume I (rather an inauspicious start to my reading project) and went straight to part 2, which includes various essays categorized as forerunners to his theory of business cycles. It did not take long to realize that the various essays contained in volume I would resonate with current circumstances. The opening passage of his essay, “The World Financial Crisis”, is very topical:

The period which preceded the present economic crisis abounded in capitalist utopias. American economists in particular excelled in forecasting an everlasting era of prosperity and – what is most astonishing – themselves believed in these horoscopes.

Kalecki had not, of course, anticipated the current Global Financial Crisis and Great Recession three-quarters of a century ahead of time, or guessed that orthodox economists of the 1990s would proclaim the Great Moderation and an end to the business cycle. He was writing in 1931 and, needless to say, had an earlier crisis in mind:

The crash on the New York stock exchange at the end of 1929 dealt a fatal blow to these “theories”, which vegetated for a short time (nourished by Hoover’s optimism) until they passed into oblivion in 1930.

So the theories of Great Moderation passed into oblivion eighty years ago only to re-emerge decades later.

In the opening paragraph of his famous 1943 essay, “Political Aspects of Full Employment”, Kalecki writes:

A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plan to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.

Kalecki, as is well known, takes issue with this position. However, the reasons for his disagreement are based on political rather than economic factors, as he points out in a later essay (“Full Employment by Stimulating Private Investment?”, p.386). On the economics, he is in agreement with the “solid majority” of his day:

If the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved.

Kalecki’s analysis of public borrowing differs somewhat from MMT, reflecting the different monetary system of the period. Yet, as will become apparent, his conclusions concerning the impact of budget deficits on interest rates, inflation, private investment, and so on, closely resemble those of MMT and Post Keynesian economists. These points are dealt with mainly in part 6 on “Full Employment”, especially in two essays, the aforementioned “Political Aspects of Full Employment” and a 1944 essay, “Three Ways to Full Employment”. Since I will refer to these essays repeatedly, I will just call them “Political Aspects” and “Three Ways” for short.

Kalecki’s reference, in the above passage, to taxation adversely affecting private investment and consumption is, on one level, similar to Keynes’ analysis. That is, taxes subtract from aggregate demand. But for Kalecki there is another aspect. Capitalist expenditures (private investment and capitalist consumption), along with the budget deficit and net exports, determine aggregate profits in the current period. (I have discussed this previously, for example, here.) At the same time, private investment in the next period depends on expected profitability, which will be influenced by current profitability. Since taxation reduces the size of the budget deficit, it impacts negatively on aggregate profit, expected profitability, and therefore private investment in the next period.

Despite a “solid majority” of economists agreeing on the technical capacity of governments to use fiscal policy to deliver full employment, in further shades of today, Kalecki also identified a significant opposition:

Among the opposers of this doctrine there were (and still are) prominent so-called ‘economic experts’ closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives. (“Political Aspects”, p.349)

It is easy enough to identify examples of “obstinate ignorance” in the public policy debate of today. Cries of “the country can’t afford it!”, “crowding out!”, “inflation!”, and “crippling debt burden on our children!” have been common. A perusal of Kalecki’s essay, “Three Ways”, reveals that much the same examples applied then as now. The subheadings of section I of that essay are, in order, “Where does the money come from?”, “The rate of interest”, “The danger of inflation”, “The burden of the debt”.

Kalecki’s answers to these questions are highly consistent with MMT. There are only minor differences attributable to institutional features of the monetary system that prevailed at the time.

In response to the question of where the money comes from when the government deficit spends, Kalecki argues:

In reality, the government pays for the services, not in securities, but in cash, but it simultaneously issues securities and so drains the cash off … (“Political Aspects”, p.348)

This is reminiscent of the MMT observation that, in effect, government bonds are purchased with the reserves created by the deficit spending.

Kalecki anticipates the next question:

Is it not wrong, however, to assume that private investment will remain unimpaired when the budget deficit increases? Will not the rise in the budget deficit force up the rate of interest so much that investment will be reduced by just as much as the budget deficit is increased, thus offsetting the stimulating effect of government expenditure on employment? (“Three Ways”, p.360)

This is the familiar claim that deficit expenditure will simply crowd out private investment. From Kalecki’s perspective, there are numerous flaws in this claim. For one thing, private investment for him is a function of profitability, not the rate of interest per se. If profitability is rising, a higher rate of interest will not necessarily impede private investment. (Kalecki discusses this aspect in his work on business cycles, for example “Essay on the Business Cycle Theory” in part 3 of volume I of his collected works, and “Essays in the Theory of Economic Fluctuations” in part 5.)

Kalecki also rejects the loanable funds doctrine, arguing that:

… the budget deficit always finances itself – that is to say, its rise always causes such an increase in incomes and changes in their distribution that there accrue just enough savings to finance it …

The reasoning is along virtually identical lines to Keynes. An exogenous increase in any injection – whether government expenditure, private investment, or exports – generates an increase in income that, irrespective of saving ratios, tax rates and import propensities, always results in leakages that match the increase in autonomous expenditure:

In other words, net savings are always equal to budget deficit plus net investment: whatever the general economic situation, whatever the level of prices, wages, or the rate of interest, any level of private investment and budget deficit will always produce an equal amount of saving to finance these two items.

This passage refers to a closed economy in which the government deficit equals net private saving. Causation, as in Keynes (and MMT) is regarded by Kalecki to run from the autonomous expenditures to saving and tax revenue. The self-financing nature of government expenditure and private investment demonstrates the inapplicability of the loanable funds doctrine, largely dispelling the crowding out argument.

But the similarities with MMT on the question of crowding out do not end there. In response to claims that deficit expenditure causes higher interest rates, Kalecki writes:

… the rate of interest may be maintained at a stable level however large the budget deficit, given a proper banking policy. (“Three Ways”, p.360)

And similarly:

… the rate of interest depends on banking policy, in particular on that of the central bank. If this policy aims at maintaining the rate of interest at a certain level, that may be easily achieved, however large the amount of government borrowing. Such was and is the position in the present war. In spite of astronomical budget deficits, the rate of interest has shown no rise since the beginning of 1940. (“Political Aspects”, p. 348)

As in MMT and Post Keynesianism, the rate of interest is therefore considered to be a policy variable. There is no such thing as a ‘natural’ rate. Interest is a share out of profit – a distributive variable – and can be set as a matter of policy at whatever level the central bank wishes it to be set.

Nor is this regarded by Kalecki as a special case:

The same method of keeping interest rates constant can be followed in peacetime. There is nothing peculiar in the wartime situation which makes this method easier than where a budget deficit is used for financing public investment or subsidizing mass consumption. We may thus conclude that, provided the central bank expands the cash base of the private banks according to the demand for bank deposits, and provided the government issues long- and medium-term bonds on tap, both the short-term and the long-term rate of interest may be stabilized whatever the rate of the budget deficit. (“Three Ways”, p.361)

I am glossing over some institutional features of the monetary system and details of Kalecki’s analysis that differ from the MMT understanding to highlight the more fundamental similarity in their treatment of interest as a politically determined policy variable under the exogenous control of the central bank. This makes clear that the sharp distinction between the neoclassical orthodoxy on the one hand and MMT and Post Keynesian economists on the other is also strongly evident in the work of Kalecki.

Regarding the potential for inflation, Kalecki’s analysis once again closely resembles the arguments of MMTers and Post Keynesians:

It may be objected that government expenditure financed by borrowing will cause inflation. To this it may be replied that the effective demand created by the government acts like any other increase in demand. If labour, plants, and foreign raw materials are in ample supply, the increase in demand is met by an increase in production. But if the point of full employment of resources is reached and effective demand continues to increase, prices will rise … It follows that if the government intervention aims at achieving full employment but stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation. (“Political Aspects”, p.348)

Kalecki, like MMTers and Post Keynesians, rejects the arbitrary assumption of diminishing marginal returns and increasing marginal costs in most sectors and at the aggregate level. Much more typical, in his view, at the firm level, is a situation of constant variable costs over a wide range of capacity utilization, with sharp cost increases only emerging close to full capacity.

Turning to the question of whether public debt can be a burden, Kalecki observes:

In the first place, interest on an increasing national debt (as indeed on all the debt) cannot be a burden to society as a whole because in essence it constitutes an internal transfer. Secondly, in an expanding economy this transfer need not necessarily rise out of proportion with the tax revenue at the existing rate of taxes. The standard rate of income tax necessary to finance the increasing amount of interest on the national debt need not rise if the rate of expansion of the national income is sufficiently high … (“Three Ways”, p.363)

He then goes on to discuss various methods of taxation that could be used to service public debt without impeding output and employment in the event that his second condition was not met. Of course, this is somewhat different to the circumstance of a sovereign currency issuer facing no revenue constraint, but a similar consideration arises in modern monetary systems in terms of the potential inflationary effects of paying interest on the debt.

In a footnote, Kalecki reiterates that since the government controls interest rates, “nothing prevents the government from reducing the rate of interest” it sets on its debt. Even in a possible monetary system of the future in which interest were paid on reserves rather than bonds, the same reasoning would apply. The government ultimately controls how much interest it pays through the central bank’s interest-rate policy. Under most scenarios, provided the nominal rate of growth exceeds the nominal rate of interest, inflationary pressures will remain under control (see Interest, Money and Crisis).

There are other important components of Kalecki’s work, relating equally to MMT and Post Keynesianism, that I could have covered, but the aspects discussed above seem to be the most obvious in their relationship to MMT. There is his profit equation – with its close connection to the sectoral balances identity as well as to the insight shared by MMTers and Post Keynesians that profit is a function of aggregate demand – and his theory of distribution, in which nominal output is a mark-up over aggregate wages and indicates how incompatible nominal wage and profit claims are resolved through inflation.

There are also differences between Kalecki and MMT that could have been discussed in greater depth. Most notable, in this respect, is that Kalecki would undoubtedly take issue with the MMT view over the viability of a job guarantee program. Even so, as noted in the discussion, the reason for the disagreement on this issue relates to differing assessments of the political obstacles rather than technical considerations. Since MMT acknowledges the existence of political constraints and provides room for disagreement on these matters, the agreement over the economic analysis of full employment seems more reflective of the broad analytical compatibility between the approaches of Kalecki and MMT than do the differences in political analysis.

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21 thoughts on “Kalecki in Relation to MMT

  1. Interesting.

    One wonders what these old timer economist, living and working under a gold standard, would have thought about our fiat system.

    Especially the American dollar dominance and the euro creation. Think they would approve?

    They had their hands full with fascism and we are stuck with a world wide corporatocracy that takes no prisoners.

  2. Thanks. Very interesting. It’s reassuring to see a larger community of thought at work…

  3. Hi PeterC

    Very interesting and, to me, quite timely piece.

    I do have a couple of questions and a comment:

    Question 1:

    Based on this:

    [PETERC]: In the opening paragraph of his famous 1943 essay, “Political Aspects of Full Employment”, Kalecki writes:

    [KALECKI]: A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plan to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.

    [PETERC]: Kalecki, as is well known, takes issue with this position. However, the reasons for his disagreement are based on political rather than economic factors, as he points out in a later essay (“Full Employment by Stimulating Private Investment?”, p.386).

    As for me it’s difficult to get materials directly written by Kalecki (perhaps other readers would experience the same difficulty?) I’d like to know what were his political objections?

    ==========================

    Question 2

    [KALECKI]: In other words, net savings are always equal to budget deficit plus net investment: whatever the general economic situation, whatever the level of prices, wages, or the rate of interest, any level of private investment and budget deficit will always produce an equal amount of saving to finance these two items.

    [PETERC] This passage refers to a closed economy in which the government deficit equals net private saving. CAUSATION, AS IN KEYNES (AND MMT) IS REGARDAD BY KALECKI TO RUN FROM THE AUTONOMOUS EXPENDITURES TO SAVING AND TAX REVENUE. THE SELF-FINANCING NATURE OF GOVERNMENT EXPENDITURE AND PRIVATE INVESTMENT demonstrates the inapplicability of the loanable funds doctrine, largely dispelling the crowding out argument.

    I have no issue with the MMT/Kalecki logic in what refers to government expenditures, particularly in the case of a government able to issue its own fiat currency.

    What I find troubling is the assertion that the same is true for the business sector and investment. Could you explain this?

    ==========================

    Comment:

    So, the idea with investment is that profitability is the primary motivation for capitalists; only to the extent that interest rates eat into this expected profitability is that central banks can affect interest rates, according to MMT and Kalecki.

    Clearly, if central banks increase interest rates to a level that affects expected profits, then investment and aggregate demand should fall and employment with them.

    This could explain Dean Baker’s position that central banks have helped keep employment lower.

    Incidentally, wouldn’t interest rates also affect aggregate demand by constraining private consumption?

    Thanks!

  4. Hi Magpie. I started to answer your first question and it turned into a post. I’ll put it up separately tonight. I am at the proofreading stage.

    What Kalecki means by investment financing itself is simply that it generates an equivalent amount of saving (thinking in terms of the simplest two-sector model). That is, investment leads to income and saving. This means private investment does not require a prior pool of saving, since it can be financed by private credit creation and the loan repaid once the income is generated from the investment. He is not suggesting that the private firm faces no revenue constraint. The firm either needs to obtain the funds through borrowing or draw upon retained earnings. In light of the recent discussion on the Lavoie paper, I won’t compare with the case of government spending and debt issuance …

    Regarding interest rates and profit, Kalecki has a dynamic process in mind. If expected profitability is high (due to confidence, for instance), private investment will be high and so too will profit in the current period (since in the simplest model, as you know, P = Cp + I). Since profit is high this period, it will impact positively on expectations of future profitability, driving further investment. In an expansionary phase of rising investment and profitability, rentiers will be able to charge higher interest since demand for loans is strong and profitability is strong (and interest is a share out of gross profits).

    Kalecki’s business cycle analysis, which is interesting, discusses how he sees the expansionary phase turn into a contractionary phase. I won’t get into it for now, but he has investment decisions affect investment with a lag which in turn affects delivery of investment goods with a lag. At some point in an expansion, investment “over-reaches” in that productive capacity expands too much for current demand for output. This reduces the rate of capacity utilization and profitability (Kalecki rejects the neoclassical assumption of rising marginal cost in most sectors until almost full capacity is reached). This lower profitability reduces profit expectations, negatively feeding into investment. The reverse happens at the bottom of a slump.

    In terms of the effects of interest rates, they are complex. When interest rates rise, rentiers and people on fixed incomes enjoy higher spending power, but firms face higher costs of borrowing (if the interest rate rise applies also to the longer rates) and home owners with variable rate mortgages will suffer a loss of spending power. So the overall effect is ambiguous. It also depends on the different spending propensities of the various social groups. Empirically, it might be found in specific instances that one effect dominates the other.

    Kalecki did not consider interest rates to be an important determinant of investment. The reason for him (this was before the capital debates) was that he considered the long “investment” rate to be very stable, and also because profitability was the prime determinant of investment in his view, with interest simply an income share out of gross profits (similar to Marx).

  5. “and also because profitability was the prime determinant of investment in his view, with interest simply an income share out of gross profits (similar to Marx).”

    That’s clearly the case for anybody who has ever tried to build a business. You want a big fat profit margin, because then funding is easy.

    With tight profit margins bankers get cold feet.

  6. Thanks PeterC (very didactic, by the way) and Neil.

    Food for thought.

    I now understand the “self-financing nature of (…) PRIVATE INVESTMENT” thing. I’ll need to reflect on this, but it does make sense, now.

    “At some point in an expansion, investment ‘over-reaches’ in that productive capacity expands too much for current demand for output.”

    Kalecki’s story on investment and interest rate, at the other hand, while I am sure may have some grounding, seems to me somewhat less convincing, though.

    The alternative is simpler and thus, ceteris paribus a priori preferable (by Ockham’s razor); additionally, it sounds not only intuitive, but consistent with what one observes in the media (and with what Dean Baker says).

    I take it PeterC lives in Australia. In such case you must have noticed the eagerness with which the “experts” call for interest rate hikes (and how dutifully the RBA complies), arguing an imminent inflation (often blamed on increasing wages) that invariably fails to materialize.

    However, in a few months we have employment slowing down. So, if it’s not inflation that these interest rate hikes are really aiming at, does it sound excessive to imagine it’s actually employment and wages growth?

    You mentioned: “Empirically, it might be found in specific instances that one effect dominates the other.”

    Are there studies (accessible to a non-specialist level) on this?

  7. Sorry, I forgot to delete this quotation:

    “At some point in an expansion, investment ‘over-reaches’ in that productive capacity expands too much for current demand for output.”

    It doesn’t make sense in the context of the message.

  8. Magpie: There is no doubt that many monetary authorities during the neo-liberal period have come to regard their interest-rate policy in terms of inflation targeting, although they view this as consistent with employment objectives in the long run (neoclassical thinking about automatic tendency to the NAIRU) and providing flexibility over the business cycle (in which they view a short-term Phillips Curve tradeoff).

    So, by their way of thinking, in the neoclassical short run, inflationary pressures that require a higher interest-rate target are likely to be consistent with the “need” to dampen employment and output (back to the NAIRU). In the neoclassical long run, they think low, stable inflation is conducive to growth.

    I gather there is not much evidence for their claim of low inflation being conducive to growth. The neo-liberal period has not had a strong growth performance. For example, in the US, the growth rate of real GDP averaged 3.0% from 1951-1973 and only 1.1% from 1974-2003. These figures are according to Andrew Kliman. You can find the post by scrolling to the bottom of this page. I’m pretty sure, despite the usual rhetoric in the UK about the “bad old days”, that the difference in growth performance was similar there as well. Maybe Neil can confirm or correct if he reads this. I don’t have a link handy. I would also observe, without evidence at hand, that some of the strongest growth performances in the post-war period have tended to come from the least neo-liberal economies (e.g. China).

    The question of whether inflation targeting has proved more effective than alternative approaches is also open to debate. Here is a billy blog post, which partly discusses evidence on this question.

    You mentioned: “Empirically, it might be found in specific instances that one effect dominates the other.”

    Are there studies (accessible to a non-specialist level) on this?

    I don’t have any ready references on this. But I just meant that the overall effect of an interest rate change will depend on the specific circumstances. I don’t think much can be said in general about the overall impact of interest rate changes on the macroeconomy. That is not so much based on Kalecki as on my understanding of Post Keynesians, leading MMTers such as Mosler, and the apparent implications of the capital debates.

  9. The UK between 1951 and 1973 averaged a real GDP growth of 2.11% and between 1973 and 2003 a real GDP growth of 2.32%

    That has dropped to 2.03% measuring 1973 to 2010.

    (From table ABMI: GDP: Chained volume measure: seasonally adjusted at the Office of National Statistics).

  10. Thanks, Neil. Not sure what I had in mind there. I think I heard a different comparison made fairly recently. Maybe it was cherry picked. Not sure.

  11. “So, by their way of thinking, in the neoclassical short run, inflationary pressures that require a higher interest-rate target are likely to be consistent with the “need” to dampen employment and output (back to the NAIRU). In the neoclassical long run, they think low, stable inflation is conducive to growth.”

    No, PeterC and Neil, my point is slightly different.

    Yes, they say all those things, alright.

    And I’m sure there are students at the universities and technicians and mostly low-ranking analysts at the RBA and banks that really, honestly believe that. But I doubt (and I’ll admit it, that’s mostly a guess) that’s the real reason.

    In other words, I believe all this mumbo jumbo is mainly rhetoric, rationalization for public consumption.

    So, who gains from this higher interest rates?

    One possibility I see is that rentiers are the real beneficiaries of this policy and that any ensuing unemployment is at worst, just a collateral damage, at best a bonus.

    But somehow this doesn’t sound convincing enough.

  12. Good comment. Sorry to misinterpret. I don’t know the answer, but like you, I do think pressure from rentier interests is a significant factor driving the neo-liberal policy approach.

  13. Matías Vernengo at Naked Keynesianism links to an interesting review of a new book on Kalecki.

    I found this excerpt from the review particularly interesting:

    A third reason to value this book is its clear statement of the scope of price theory in capitalism in general, and in Kalecki’s analysis in particular. In Kalecki’s analysis of capitalism, profits are determined by capitalists’ consumption and their investment, plus the fiscal deficit, plus the trade surplus, if we leave aside workers’ saving. The function of the price system is to distribute that surplus among the capitalists and firms in the economy. This is a key point that distinguishes Kalecki’s theory from that of many Ricardian Marxists, and Post-Keynesians, for whom profits are a mark-up on labor costs, so that the price system determines the distribution of income between wages and profits. López and Assous even cite (p. 197) a nice quotation from Marx, from Volume III of Capital in which the great political economist states clearly that the price system distributes profits around the economy, rather than determining those profits.

    This does seem reminiscent of the idea in volume III of Capital that aggregate profit (equal, for Marx, to aggregate surplus value) is unaltered in magnitude and merely redistributed in exchange. The ‘degree of monopoly’ plays a key role for Kalecki whereas for Marx it is the composition of capital. Intuitively, it seems to me that there might be a connection in that greater monopoly could be expected to come with greater capital intensity. (This is just an idle thought on my part. It is not discussed in the review.)

    The notion of an aggregate determination of profit (and by identity surplus value) is also consistent with the ‘temporal single-system interpretation’ of Marx’s theory of value, in which aggregate profit is determined in production prior to its distribution in exchange.

    It seems that a key difference remains in the explanation of the determination of aggregate profit. Kalecki emphasizes capitalist expenditures, the budget deficit, the trade surplus and saving out of wages. Marx and TSSI economists emphasize labor time. It makes me wonder if these two explanations can be reconciled in a useful way. One explanation involves expenditures expressed in price magnitudes (Kalecki). The other involves a sum of value magnitudes (Marx, TSSI). According to Marx and TSSI economists, in aggregate the price sum (aggregate profit) and the value sum (aggregate surplus value) should amount to the same total, expressed either in money or labor-time terms. Are they just two ways of looking at the same thing? Not sure, but I’m curious.

  14. Peter,

    Thank you for providing space for, seeding and moderating very interesting MMT-related debates.

    Let me add one more question to this interesting topic. You mentioned Kalecki. What about his direct intellectual successors? I would mention prof Kazimierz Laski and Leon Podkaminer from WIIW (Vienna).

    The recent paper on the European crisis gives an excellent example of applying Kaleckian analysis.

    http://www2.euromemorandum.eu/uploads/ws5_podkaminer_laski_paradigm_change.pdf

    What is great about these people is they have quantitative models and use a unique method of analysis and modelling which I instantly recognize as an engineer.

  15. Adam, thanks for the link to such an interesting paper. There are a lot of aspects covered. To my understanding, most of the analysis – as with Kalecki’s own work – seems highly compatible with MMT. There seem to be some differences in interpreting the position of nations with currency sovereignty, particularly the US and Japan, although even on this point there is a degree of similarity in that the authors highlight the lack of fiscal and monetary coordination in the EMU member nations.

    One aspect that struck me, although it was not expressed in these terms in the paper, and I may be reaching, is how it would be helpful for labor as a whole if German workers were able to push successfully for wage increases and stronger deficit expenditure in Germany. German wage growth in excess of improvements in productivity would raise unit labor costs in Germany relative to the periphery and seem to offer a preferable way of boosting competitiveness of the periphery rather than relying on wage reductions and austerity outside of Germany to reduce non-German unit labor costs.

    Although the establishment frames this as nonsensical on the grounds that it would entail Germany deliberately reducing its competitiveness, from the perspective of labor, increased competitiveness per se is not a good goal, especially under a common currency arrangement, since it is simply code for wage growth falling short of growth in productivity, and a resulting redistribution of income from labor to capital.

    It seems that, for some time, German workers have been “persuaded” to accept wage stagnation for the sake of competitiveness which has merely resulted in less German domestic consumption and only modest export-led growth. In real terms, this amounts to German workers producing a surplus (in real goods and services) beyond their own consumption that goes both to capital and non-German consumers. In the context of a common currency, the associated trade deficits in the periphery then jeopardize the German banking system. This leads to the apparent German preference for only bailing out the periphery (but indirectly the German banks) on the strict proviso that austerity is unleashed in the periphery with the aim of cutting wages, reducing unit labor costs and raising competitiveness in these nations.

    It seems that it would be much better from the perspective of labor (both German and non-German) to push for German wage growth and no austerity in the periphery, in fact deficit expenditure to enable strong employment and income growth throughout the EMU.

    As an outsider looking in, it is hard to understand exactly why workers in Germany went along with the export-led growth path (perhaps they didn’t willingly?), and why organized labor across Europe is not working together more closely (perhaps it is trying to?). It seems that nationalistic prejudices are being successfully exploited by establishments to push through the austerity, which helps neither German nor non-German workers.

    Another alternative, of course, would be for individual nations to exit the EMU and reassert currency sovereignty. Again, as an outsider it is not entirely clear why workers especially in the periphery are not supportive of such a move. Perhaps there are other factors I am not seeing.

    If you have the time, I would be interested in your take on this.

  16. “It seems that it would be much better from the perspective of labor (both German and non-German) to push for German wage growth and no austerity in the periphery”

    There’s an interview somewhere where Randy Wray puts exactly the same point.

    The response in the room was exactly the same as if he’d suggested they all murder their first born.

  17. Peter, I am afraid that the trade union movement in Europe is totally atomised and unable to mount any challenge to the prevailing paradigm. In Poland (the country where I was born) virtually everyone is happy that the Germans build factories and hire workers – remembering that unemployment rate was much higher before joining the EU because austerity had actually been pre-applied there about 10 years ago. Nobody cares about relatively low wages. Of course Polish workers undercut the German workers. The German and Dutch (Danish etc…) investors are more than happy to invest in Central Europe – they own a lot of assets like companies, banks etc. But this is nothing new. The Poles think that they can benefit from these processes in the long run.

    In the late 19th / early 20th century there was an attempt to Germanise the Western part of Poland belonging to the German Empire. (First it was the policy of Kulturkampf then the activities of the so-called HaKaTa). The result of the fierce competition was the economic strengthening of the Poles who had to work harder than the Germans. After the reunification of Poland in 1918 the Western part became the economic powerhouse. Even now the difference between Great Poland / Pomerelia and some other Central European regions is striking and these lovely eight hundred years (or more) old towns and villages look as clean and neat as if the wars and 45 years of communism never destroyed anything there.

    This is what happened about 100 years ago:
    “the [German] Settlement Commission throughout the 27 years of its existence managed to plant about 25,000 German families on 1,240 km² (479 mi²) of land in Greater Poland and Pomerania. However, at the same time the reaction of Polish societies resulted in about 35,000 new Polish farmers being settled in the area of roughly 1,500 km² (579 mi²) of land. Similarly, the attempts at banning the teaching of religion in Polish language met with a nationwide resistance and several school strikes that sparked a campaign in foreign media.”
    http://en.wikipedia.org/wiki/German_Eastern_Marches_Society

    NB the current Prime Minister of Poland is Kashubian himself what should explain his pragmatic attitude towards the Germans and Mrs Merkel in particular.

    Obviously what I wrote is very oversimplified and only scratches the surface but a lot of people there genuinely believe in austerity and working harder and harder every day. On the other hand some young people believe in Western consumerism. Either way – anything remotely resembling state intervention in the economy is instantly dismissed as a communist policy.

    Yes I know… I wrote a few emails – I even got a very polite response from one of the newly elected left-wing members of the parliament.

  18. Thanks for the explanation, Adam. Much appreciated.

    Neil, I might see if I can track down that interview. Sounds interesting.

    Cheers.

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