More on Unemployment as Policy Choice

The previous post drew some interesting responses including a post by Cullen Roche over at Pragmatic Capitalism. (H/t to Trixie.) This response started as a comment and got too long, so I thought it would be better to turn it into a new post. First, I will respond to a question posed by Philippe. Second, I will respond to Edgaras. But there will be some overlap. The points can also be considered in relation to Cullen’s argument, since the comments were motivated by his post. Finally, I’ll respond to an aspect of Cullen’s post that didn’t crop up in the specific responses to Philippe and Edgaras.

 
1. In relation to my statement that the non-government cannot orchestrate an increase in overall spending power on its own, Philippe asked:

Say a bank extends credit by making a loan and creating a new deposit. … This is an increase in overall spending power, isn’t it?

Private loans, if spent, certainly add new demand and income to the economy.

The question is, first, whether private lending will occur in such a way as to enable the economy to converge on full employment (however defined) and, second, whether it will do so sustainably.

The answer to the first question is no, in general. There is no general tendency for this to occur.

The answer to the second question is also no. Not only does the private loan not add to net financial assets (NFA) in the initial instance, but the spending it enables, by adding to income, causes an endogenous increase in tax revenue, a movement of the government toward surplus and the domestic private sector toward deficit unless there happens to be an offsetting movement in the external sector. The domestic private sector is likely to become increasingly indebted over time. The unsustainability of this process was foreseen by Godley and Wray (for example, here) and others a decade or so before the onset of the crisis.

So, we in the non-government are not in a position to orchestrate an increase in our own overall spending power. We can borrow if we think we have the capacity to service our debt. In isolation, the effect of this over time is to reduce NFA and withdraw spending power, including our capacity to engage in sustainable private credit creation.

 
2. Edgaras asked how, “ignoring the job guarantee”, unemployment is a policy choice, and in particular how the government injecting net financial assets (NFA) could help achieve true full employment.

I didn’t actually ignore the job guarantee in my previous post, so it will come back in at the end of this section. Even so, the question as posed will be answered.

The effectiveness of injecting additional NFA depends on the targeting of the government spending (or tax cuts). If the government just hands over money to the wealthy without strings attached, there will be no (or very little) benefit in terms of demand and employment.

But a currency-issuing government is in a position to dictate the terms on which it spends and to decide on what it spends. Public consumption and investment add directly to demand and output. Transfers to the poor and middle class add indirectly to demand.

Such government spending and transfers not only add to NFA (‘spending power’) but add it in the areas of the economy where it is most likely to be put to good effect. Good effect includes not only spending but saving to pay off debt accumulated in the past.

Now, Edgaras appears to accept this, but asks whether government net spending on its own (without a job guarantee) could achieve true full employment (meaning that there is only frictional unemployment). The answer is yes, but in the absence of comprehensive wage and price controls, this could only be achieved alongside prohibitive inflation, or else through the use of other extreme measures, such as, for example, paying capitalist employers directly for hiring workers or heavily subsidizing them to do so.

Needless to say, such a policy is not suggested by modern monetary theorists or my post. It is clear that true full employment alongside low and stable inflation in the absence of comprehensive wage and price controls is best delivered with a job guarantee (JG). And with the job guarantee, full employment would be achieved irrespective of the level of NFA, the budget deficit or private-sector behavior.

But that does not mean that it is desirable just to let the economy go to pieces and send everyone into the job guarantee. The aim would still be to minimize the size of the JG cohort, subject to the intention of removing price pressures in the broader economy. Minimizing the JG cohort subject to the inflation constraint requires government net spending that is consistent with our spending and saving behavior. If we are willingly going into private debt to spend and this appears to be sustainable for the time being, the government can allow its budget to move into surplus endogenously. But since there is no tendency for us to spend and save in a manner consistent with any particular level of employment, it is up to the government to adjust NFA (and its composition) in such a way that our behavior is rendered consistent with strong employment in the broader economy and, of course, true full employment with price stability thanks to the job guarantee.

 
3. Regarding Cullen’s post, in addition to the points above I would add the following question and observations:

Does Cullen believe the economy automatically tends to the NAIRU or any particular rate of unemployment?

Calling the NAIRU in some sense “natural” under capitalism, as Cullen does, might connote such an automatic tendency.

I doubt he means this, because such a position was not sustained in the ‘Keynes and the Classics’ debate or the capital debates or in neoclassical general equilibrium theory.

And if he doesn’t think there is such a tendency, then we are in basic agreement over the lack of a tendency for private-sector activity to push the economy toward full employment, whether this is defined in the neoliberal way as the NAIRU or the MMT way as true full employment.

If, as is my guess, he agrees that there is no such tendency, then his remaining point seems to be that capitalists prefer there to be a positive amount of unemployment. As somebody influenced by Marx, I obviously completely agree with him on that point. Marx, after all, stressed the functional role of the reserve army of labor in disciplining the wage-determination process.

There is no doubt in my mind that capitalists loathe full employment. However, since I am also influenced by MMT, my view is that capitalists can loathe it all they like. A currency-issuing government has the capacity to implement the policies necessary for true full employment and price stability irrespective of what capitalists think of it. When such a government decides not to use this capacity, it is a policy choice.

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32 thoughts on “More on Unemployment as Policy Choice

  1. Thanks for the reply. Here’s a Kalecki quote on the last point about capitalists and full employment:

    “It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full empoyment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.”

  2. Good quote. Thanks. Kalecki is one of my favorite economists.

    In an old post I actually discussed this issue in relation to a paper critical of the JG by Peter Kriesler and Joseph Halevi (Joe was the person who first introduced me to Kalecki’s work while I was a student). A passage in their paper and a similar passage in Kalecki suggest the issue turns on what constitutes a “fundamental” reform under capitalism, considering that Kalecki maintained that full employment could not be maintained unless such a fundamental reform took place.

    Anyway, here is the post:

    Kalecki, the Job Guarantee and Future Society

  3. “So, we in the non-government are not in a position to orchestrate an increase in our own overall spending power. We can borrow if we think we have the capacity to service our debt. In isolation, the effect of this over time is to reduce NFA and withdraw spending power, including our capacity to engage in sustainable private credit creation.”

    Isnt this another way of saying that none of us have control over our own incomes. We all depend on someone elses spending for our incomes and spending power. The only entity that doesnt need someone else to spend for them to have income/spending power is the currency issuer

  4. Coming from a Marxist background, Kalecki recognized the role of power and poet structure in society and its institutions, hence also in economics and finance. TPTB are chiefly interested in maintaining power and expanding the existing power structure. That means for one thing suppressing workers in order to hold them in line. It’s also why they wish to minimize the role of government unless it serves their interests. Conventional economists either ignore this or are complicit in the charade of neoliberalism as a political stance based on economic liberalism as a policy determinant. Quite obviously, in an economically liberal environment the power structure will be able to dominate without constraint. Bottom line: neoliberalism is anti-democratic although it masquerades as the champion of democracy. However, freedom in their lexicon is negative freedom, i.e., freedom from constraint, rather than positive freedom as freedom to choose based on opportunity. That is reserved only for those who have the means to do so. Freedom for self-actualization? Forget about it. Whoever dies with the most toys and trophies and the largest asset base wins.

  5. “If, as is my guess, he agrees that there is no such tendency, then his remaining point seems to be that capitalists prefer there to be a positive amount of unemployment.”

    Indeed, and I’ve yet to see a convincing argument why maintaining a set of people idle and unable to demand is a superior system.

    Nor have I seen a good argument as to why ‘structural unemployment’ is always the fault of individual workers, for which they should be punished, rather than the fault of capitalists for failing to invest in technology and training that uses up the spare workers.

    Back in the Victorian era capitalists invented loom machines that could be operated by an illiterate farm worker kicking a plank. So it’s not beyond the wit of man.

  6. “The question is, first, whether private lending will occur in such a way as to enable the economy to converge on full employment (however defined) and, second, whether it will do so sustainably.”

    Please define “sustainably”.

    Is there a proof that continuous injections of NFA will achieve it sustainably?

    My answer to this question would be a NO. Why? Because economy is a dynamic and living thing. No structure is sustainable unless it is adopting. It concerns both private sector alone as well as private sector + NFA combined. We might play with constant level of NFA (even zero) but work on improving efficiency of its distribution within the private sector.

    Moreover, why do you define your No.1 economic goal as full employment? Slavery is full employment as well but it is not what you have in mind. And yet you still redefine the No.1 purpose of economy.

  7. PeterC, Phillipe, and others,

    Regarding Philippe’s question, I believe there is an easier and more direct way to argue Peter’s case, so allow me a little comment (it also addresses Roche’s third argument, on “the entire point of endogenous money”).

    True, bank loans add to the spending power of the non-government, as seen in TV and explained by endogenous money. The question is: is this addition sufficient to get an economy out of recession?

    Peter’s statement:

    “We as the non-government, in contrast, cannot orchestrate an increase in overall spending power on our own. Private loans are always offset by private debt.”

    Should be interpreted as answering that question in the negative: “no, the addition of bank money is not sufficient and to all practical purposes it may be ignored”.

    ——————

    Let’s assume, contra Peter, the addition is sufficient. That is, bank loans by themselves provide enough spending power to take the non-government out of recession.

    If that were the case, depressions would not happen and there would be no need for the government to deficit-spend: bank loans are enough, after all, aren’t they?

    But that, evidently, is not the case. Depressions happen and both Roche and Peter recommend deficit spending as a way out.

    But this means that bank loans, by themselves, do not provide enough spending power to the non-government, as Peter says.

    Cheers.

  8. @Sergei

    As the question of definitions popped up, I hope you’ll understand if I also ask for clarifications.

    For instance, in what sense can one say the economy is a “living thing”? And how can slavery possibly be considered full employment?

  9. Sergie: You touched on a number of points: sustainability of private debt; altering distribution to improve employment outcomes; economic and social adaptability; and the sense of considering full employment a worthy goal.

    Taking each in turn:

    On the unsustainability of private-debt creation, the key distinction is that the non-government is financially constrained and the currency issuer is not. Greg expressed this in a very nice way in his above comment. If the domestic private sector runs continual deficits (spends more than its income) there will eventually be an excessive buildup of private debt. I think it is very clear that this occurred in the period preceding the current crisis.

    I very much agree that a better distribution can help economic performance. The question is whether the private sector on its own tends to effect a redistribution such that the economy gravitates to full employment however defined. Clearly, the answer is no, in general. Government can help the appropriate distribution to come about through fiscal policy, and should be doing so in my opinion. That is, it is not just about the level of spending power but its distribution. With better distribution, higher employment will be achieved with a smaller domestic private sector surplus.

    I would argue that the adaptability of the economy is highly dependent on government. Dan Kervick had a good post on this recently.

    You ask why I prioritize full employment. Actually, I give it equal weight to a basic income, and I think of both in terms of liberty and freedom as well as equality. Unemployment by definition means that some people who want to participate in the economy through paid employment are unable to do so. In aggregate, this occurs through no fault of the unemployed. It is a macro problem and policy choice. But I also consider the freedom to opt out of a job and still receive a basic income as equally important, because this would remove the economic compulsion of the wage-labor relation. This is why I support a ‘job or income guarantee’ (JIG). With a JIG, nobody would be forced to take a job they didn’t want in order to receive an income and, equally, no one would be denied the opportunity of a job if they wanted one.

    Note that I’m not downplaying the importance of the non-government’s activity. In some ways, it is the reverse. A currency-issuing government is in a position to enable greater space for the non-government to behave in the way it sees fit. That includes allowing the domestic private sector to run a surplus if it wishes yet still have access to the employment opportunities it desires. It also involves maximizing the opportunity for all of us in the non-government to develop our potential.

  10. Magpie: I basically agree with your comment. But just to be clear, I certainly don’t suggest bank money should be ignored. Endogenous money clearly plays a highly significant role in a capitalist economy. I would never suggest otherwise.

    But ‘spending power’ includes our capacity to engage in private credit creation (endogenous money creation). The more indebted the domestic private sector becomes, the less capacity it has to continue this credit-creation process, because there will be an increasing incidence of bankruptcy and debt stress.

    So, yes, private loans when spent add directly to demand and income. But that capacity to take out the loan was present whether the loan was taken out or not. Some individuals and enterprises with the same capacity may be choosing not to take out similar loans.

    There is no tendency for private credit creation to occur at just the right level to sustain full employment because there is no tendency for the domestic private sector to exercise its ‘spending power’ in the right degree to bring this about.

  11. To go off on a bit of a tangent, not directly related to anyone’s comment in particular, the cause of weak private demand can have various causes. To name just a few, it can be due to over-indebtedness, distribution (e.g. extreme inequality) or institutional features of the economy (e.g. Japan’s lack of a safety net definitely encourages more private saving than alternative institutional arrangements).

    One policy approach is for the government to allow these factors (distribution, institutions, etc.) more or less to persist and inject additional NFA. Another solution is to tackle the maldistribution, institutional structure and so on, thereby altering the composition of NFA and the spending and saving propensities of the non-government. Right now, a combination of both approaches is required.

    Note MMT does address both aspects. In addition to injections of NFA it suggests distributional and institutional change is important. Redistribution can enable higher demand for given NFA. The JG is an institutional change that separates the level of employment from NFA altogether. As argued in the post, this does not mean that the level of NFA is immaterial, because it will still affect the size of the JG cohort. There is also the matter of financial regulation and possibly bank nationalization. All MMTers favor tight financial regulation. At least one (Mitchell) favors bank nationalization.

    Tymoigne and Wray mention these points in a recent paper. Here are a few excerpts from pp.44-45:

    The government should be directly involved continuously over the cycle, by putting in place structural macroeconomic programs that directly manage the labor force, pricing mechanisms, and investment projects, and constantly monitoring financial developments. Because those programs would be permanent and structural, rather than discretionary and specific to one Administration, they would be isolated from the political cycle and political deliberations. All this eliminates problems of lags, credibility, and time inconsistency that Friedman and others have complained about.

    However, this does not mean that the government should apply a rule blindly when implementing its policy; discretion is still possible within each program to make sure that it works. …

    MMT … recognizes the role of a “rightly distributed” demand in addition to the right level of aggregate demand (Keynes 1937), and aims at combating the inherent instability of market mechanisms.

  12. The purpose of a capitalistic economy is accumulation. Money is invested in capital goods in order to increase money. M > C > M prime. Production, distribution and consumption are merely means in this framework that has accumulation as it end.

    If all profit is spent on consumption and investment and workers don’t save either, then circular flow results in full employment since all income is someone else’s expenditure and vice versa. so Y = GDP at FE if there is no monetary saving. This is essentially the definition of a barter economy in which commodities are produced for sale iaw Say’s law.

    This presumption of Say’s law underlies neoclassical economics, which see the economy as a barter system and money as a neutral veil.

    Keynes pointed out why this is not true in a monetary production economy due to monetary saving resulting in demand leakage. All profit is not distributed and spent on consumption, or reinvested in capital goods, but rather there is a tendency to accumulate wealth including financial wealth.

    This hoarding at the top as well as prudent saving by workers will disrupt circular flow and there will be less than full employment since not all goods capable of being produced at full employment will find a buyer at the price offered.

    Neoclassical economics says that price adjustment will correct for this, but that has not been the case with administered prices. Not only are firms reluctant to cut prices but also falling prices mean falling wages and that is deflationary. Since debt is priced nominally, falling income leads to debt-deflation and default.

    Rising unplanned inventory will result firms cutting production and this will result either in lower wages and falling prices unless there are layoffs. Firms choose to layoff their less desirable workers in order of their productivity contribution. So UE rises with workers having less knowledge or skill bearing the brunt of the contraction.

    A modern monetary economy requires government to intervene through appropriate policy if there is to be permanent full employment. Less that full employment at optimal output is economically inefficient. Therefore, it behooves government to address the issues as a matter of economic policy as well as social policy. UE, especially persistent, is hugely wasteful of national resources.

    The empirical evidence is that capitalism is infected with boom-bust economic cycles and bubble-crash financial cycles and so far policy has not addressed this adequately owing to failure to understand Keynes and his legitimate successors, that is, those who do not adopt a neoclassical synthesis or framework. But even many of Keynes’s followers have failed to appreciate the significance of different monetary regimes and their operational potential. As a result the world economy is laboring under lagging demand and performing under potential.

  13. Peterc, thank you very much for your response, I now see that there wasn’t anything difficult at all and it’s rather my mind that couldn’t bend to see what you were reffering at.

    Tom Hickey, but what is implicit in your comment is full employment as a starting point. In other words, savings and other leakages from a circular flow result in a move away from full employment only if the economy was at full employment before these leakages occured. Because if circular flow is limited to 10 people and others are initially unemployed, government injecting NFAs to keep up with the desire of these 10 people to net save won’t result in full employment in general, but will simply maintain the status-quo as it is, i.e. 10 people employed and the rest being unemployed. I think I got this right, didn’t I?

  14. “Because if circular flow is limited to 10 people and others are initially unemployed, government injecting NFAs to keep up with the desire of these 10 people to net save won’t result in full employment in general, but will simply maintain the status-quo as it is, i.e. 10 people employed and the rest being unemployed. I think I got this right, didn’t I?”

    How much unmet saving desire that is resulting in demand leakage that government chooses to offset will result in the employment rate. Government can choose to offset all demand leakage or only part of it, as in the US right now. There is no obstacle to government increasing spending to bring under-utilized resources on line. As MMT economists say in answer to what the government’s fiscal stance should be, “The length of the unemployment line shows how more needs to be added, and continuously rising price level shows how much it needs to be cut back.” They also say that the length of the employment line (UE rate) is an observable, while price level is not — it is the result of an arbitrarily constructed index that is just a rough estimate. Why let a rough estimate like this dictate economic policy, which is what monetary policy of interest rate setting does, when UE is a sure indicator of the level of economic performance in terms of efficient use of resources, which can be tightly targeted with fiscal measures.

  15. Edgaras: You’re welcome. Glad it helped to clear things up. Thanks again for joining the discussion along with Philippe. Both your questions identified helpful points to clarify.

  16. How do you prevent the JG from simply becoming government-subsidized employment in the private sector? After-all, if one of the purported benefits of the JG is that it increases production and not just demand, then one has to make sure that it does just that; but centralized bureaucracies are notable for their failure to allocate labor where the economy needs it most, except when it comes to basic infrastructure and common goods. Of course, the capitalists will say: we know how to use that (government fiat-paid) labor, and we can guarantee that it will increase production! Surely, that business sector will try to convince politicians to allow business to use the labor of JG workers. So…what is to prevent that from happening?

  17. “How do you prevent the JG from simply becoming government-subsidized employment in the private sector?”

    You bar the private sector from the scheme.

    For very good reason – productivity improvements in the private sector depend upon labour being constantly scarce. Nobody is going to bother with a digging machine if you can have five thousand men with shovels for free.

  18. The problem is excess capacity/productivity with lagging demand as a result, including demand for labor. This resluts into only in stagnant to falling wages but also increasing UE and underemployment.

    See Randy Wray’s recent post, Bow to down the Bubble
    http://neweconomicperspectives.org/2013/11/bow-bubble-larry-summerian-endorses-bubbleonian-madness-paul-krugman-embraces-hansenian-stagnation-thesis.html

    The JG soaks up excess labor by providing “a transitional job” in a buffer stock of employed rather than employed.

    Beyond that the issue is labor share v. profit share. Profit share has been increasing due to decreasing bargaining power of labor. The result is growing inequality and a double standard of living dividing haves and have-nots, which is then resulting in a new privileged class that has captured government and the levers of power, cementing their dominance. This is the priority issue that needs addressing or nothing else will change given the power structure.

  19. Yes, but how do you bar the private sector from the scheme, when they’ll be clamoring to be let in on it?

  20. Funding is key. The currency sovereign needs to fund the program(s) but doesn’t need to administer. That can be contracted out with government oversight.

    In principle this is supposed to be how banking works, with banks having access to the monetary system in order to contract out risk management for a fee (banks’ spread), but the banks got the upper hand and for all practical purposes have captured the state. How to prevent this from happening is the 64 dollar political question as yet unanswered in capitalism.

  21. “Yes, but how do you bar the private sector from the scheme, when they’ll be clamoring to be let in on it?”

    By stating that it is contrary to the capital development of the economy for them to be taking part. The job of the private sector is to invest capital and replace labour with machines or bid the labour away from the alternative public sector use.

    Competition for labour is vital for the advancement of the economy and the society. The Job Guarantee ensures that competition happens in a controlled fashion – defeating both wage spirals and capital investment strikes with one mighty sword.

  22. “No, slavery is slavery”

    Unemployment is zero which is equivalent to full employment.

    I am less than convinced that continuous NFA injections achieve anything sustainable. Growing NFA either mean growing inequality (a-la slavery in the extreme) or equal distribution and growing average level of wealth. Well, the former is something noone would advocate while the latter is something that has little sense. What particular purpose does this idea serve? I am well aware that NFA injections is the cornerstone of MMT. But this is also its weakest link imho.

  23. “I am less than convinced that continuous NFA injections achieve anything sustainable.”

    You either inject NFA, or you ban saving in excess of investment – which requires confiscation. Effectively money with a shelf life.

    People like to hold financial savings. It makes them feel warm and fuzzy protected by their rainy day fund. And that opens wallets.

  24. PeterC

    You said: “weak private demand can have various causes. To name just a few, it can be due to over-indebtedness, distribution (e.g. extreme inequality) or institutional features of the economy”.

    Then, you said: “One policy approach is for the government to allow these factors (distribution, institutions, etc.) to more or less persist and inject additional NFA. Another solution is to tackle the maldistribution, institutional structure and so on, thereby altering the composition of NFA and the spending and saving propensities of the non-government. Right now, a combination of both approaches is required.”

    Does this mean you see a role for income/wealth inequality in the genesis of the crisis or only as a factor contributing to its duration? In any case, could you elaborate?

    ———-

    PS: I’m a slow reader and it will take me some time before I can comment on your new post.

  25. My point in those passages you quote was that it is not necessarily desirable simply to inject additional NFA if it is not addressing distributional issues. If it just goes to the 1 percent, mostly to be saved, it will exacerbate existing inequalities and enable the further undermining of democracy without having much positive impact on demand.

    To address your question though, I can’t say I’ve come to a firm position on the fundamental cause of the crisis. Consider what follows mere thinking aloud.

    I think all the usual suspects (profitability, demand, financial instability, etc.) come into play in one way or another. Extreme inequality can impact negatively on demand if the government is not net spending sufficiently to offset the high saving of the wealthy and also contributes to financial instability to the extent that low and middle-income recipients are enticed into deeper indebtedness.

    At the fundamental level I tend to see it in terms of the falling profit rate argument of the TSSI economists, except I remain uncertain because profitability and demand seem to be two sides of the same coin, as suggested by Kalecki’s profit equation. But it could be argued that Kalecki’s equation relates to realized profit rather than extraction of surplus value in the production process, and so is not at the fundamental level. I tend to think realized profitability is what matters most for investment. The amount that can be extracted in production will not help investment prospects all that much if capitalists don’t think the surplus value can be realized in exchange.

    That is not at all intended to imply that surplus value creation in production is less important. I think it is extremely important. It shows the origin of profit is surplus labor.

    But it may be that what occurs in production is also on the other side of the coin to demand. Driving up the rate of exploitation (s/v) has ramifications for profit realization. Although, in principle, capitalists could simply produce investment good A to produce investment good B to produce investment good A in a circle that is largely pointless other than from the perspective of surplus value, this does not appear to be what occurred in the period leading up to the crisis. Instead, workers were enticed into private debt to sustain consumption demand. The process hit its limit when the level of debt became too much for workers to service out of their incomes, which were stagnant due to an increase in the rate of exploitation over the neoliberal period.

    Even so, the TSSI view may still be correct since the falling profit rate is due to a rising c/v. Attempts to drive up the rate of exploitation can’t offset this. What I would say, though, is that government, in principle, can offset it. The reason is that the government can cut the prices of the elements of c by public investment in technical advancement, the fruits of which are then basically handed over to capitalists; i.e. sold to them at bargain-basement prices or benefiting them at no or little cost in the case of infrastructure. (I’m not saying that’s a good thing.) One of the TSSI economists, Alan Freeman, has argued that this is basically what happened after WWII. I discuss this here:

    How Much Fiscal Stimulus Will It Take?

    Now, is this a process that is unconnected to demand? On the one hand, it involves the government net spending, thereby adding to demand and profitability (profit, P). But, on the other hand, it involves the government targeting its spending at research and development as well as gifting the private sector new infrastructure (reducing capitalists’ required fixed investment, K). Are these two sides of the same coin? Or can we separate out the impact on c (and K in P/K) as the more fundamental? I’m not sure. But it seems, in principle, that the government through its fiscal policy can overcome the falling profit rate tendency by addressing both the level of demand (prospects for profit realization) and its composition (e.g public investment that lowers the costs of investment for capitalists).

    Maybe at the most fundamental level, the crisis is a government policy choice?

    As indicated at the outset, if I seem non-committal in the above, it’s because I am stilling mulling over it all.

    BTW, I’d be interested in reading your preferred perspective(s) on the fundamental cause(s) of crisis if you have the time.

  26. Seems to me that Bill Black has pretty well established a criminogenic environment coupled with perverse incentives in both Wall Street and the City as the fundamental factors that lead to the financial crisis. It was the Ponzi phase of a Minsky cycle, and it really was Ponzi to the max with the real culprits (CEOs running control frauds) holding a get out of jail free card.

  27. Pete,

    Like yourself, I am not entirely committed to a particular explanation, although (unlike yourself) I tend to go more for the underconsumptionist view, which you expressed very well and succinctly here:

    “Extreme inequality can impact negatively on demand if the government is not net spending sufficiently to offset the high saving of the wealthy and also contributes to financial instability to the extent that low and middle-income recipients are enticed into deeper indebtedness.”

    ———

    For what it is worth, while I know it’s possible in theory, personally, I find the tendency of the profit rate to fall hard to fit in with a growing inequality scheme: if I were a capitalist, I wouldn’t be too bothered with this falling profit rate, because right now things don’t look too shabby for me.

    “But it seems, in principle, that the government through its fiscal policy can overcome the falling profit rate tendency by addressing both the level of demand (prospects for profit realization) and its composition (e.g public investment that lowers the costs of investment for capitalists).”

    Although I believe Kliman sees fiscal deficit as only delaying the destruction of capital (therefore keeping the rate of profit low), the above seems possible; however, we should keep in mind that inequality has been increasing with or without fiscal deficits.

    ———

    Needless to say, I don’t have a better explanation, so maybe this is just an example of Richard Dawkins’ “Argument from Personal Incredulity”.

  28. Tom @ 3:59 PM

    The problem is not the lack of NFAs. It is a consequence. Unemployment is a consequence of even lower order in the hierarchy of problems. Injections of NFAs do not address any reasonby definition. Moreover, in the MMT parlance such reasons are typically hidden behind some cozy feelings in the wallet. I just do not buy that. I.e. such approach. It does not mean such approach can not be efficient. Maybe it can. Sometimes. It all depends.

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