A currency-issuing government is not revenue constrained. It is always able to purchase whatever is available for sale in its own currency. This simple reality is partially concealed by a variety of contrived hoops through which modern day governments require themselves to jump. There are at least two different ways in which we can see past the confusion. The easiest way is to stand back and look at the big picture, both from the standpoint of logic and by considering the monetary and fiscal authorities as two parts of the same entity, the consolidated government sector. For the eagle eyed, this approach may appear to overlook potentially consequential details in the way governments actually spend. In practice, the monetary authority plays one set of roles, the fiscal authority plays another, and many governments have introduced various restrictions on the way in which the two can interact. The present post begins with a bird’s eye view of government spending, and then turns to a more detailed consideration of the way in which self-imposed constraints and convoluted operational procedures complicate but do not undermine the sovereignty of a currency-issuing government. The case of the US government is taken throughout as an example, but much of the discussion is also broadly applicable to other currency-issuing governments.
I’ve been pondering whether it is possible to reconcile a number of notions within the same economic story about long-run growth and accumulation:
- An accelerator-type determination of private investment;
- A possible tendency, under laissez-faire capitalism, for profitability to fall as accumulation proceeds;
- Capitalism as prone to financial instability;
- A state able either to attenuate crisis tendencies or, cajoled by democratic pressure from below, push the system beyond capitalism;
- A capitalist state able to “manage”, to a degree, the rate of profit.
It is possibly a tall order. The following is intended as just a rough sketch of what I have in mind. I might go deeper into some aspects of the argument in future posts, as it raises various questions, but think it would be better to catch any glaring faults now before carrying the exercise further.
An effect of being trained in mainstream economics but then encountering alternative approaches is to experience a growing realization — or at least a creeping suspicion — that most of what has been taught is the opposite of the truth. Even when the story told contains some truth, it is likely to have been turned on its head. Thanks to Kalecki and Keynes, for example, it becomes clear that demand (spending) determines supply (income), including in the long run. Spending, in a monetary production economy, must come before production can commence. Thanks to Post Keynesians, it becomes evident that loans create deposits, not the reverse. There could be no deposit prior to the decision to extend the first private or public loan (unless through government spending). Thanks especially to Sraffians, it has been established that profit cannot be a remuneration for (marginal) productive contribution. We can conceptualize profit as unpaid labor (Marx) or due to ownership (Sraffians, Post Keynesians).
[Preface. If this post seems confused, it reflects my own confusion. If at times it seems pessimistic, it reflects a sense of pessimism that not often, but occasionally, afflicts me. If its conclusion seems wildly optimistic, it is because in the end I am optimistic.]
On the left, it sometimes feels as if we spend a lot of time in a losing battle. When the general population rejects or shows little interest in our latest set of progressive proposals and votes for political candidates even more right wing than the last, it’s common to engage in a little hand wringing, accuse ourselves of having failed to devise or effectively articulate a practical vision, and go back to the drawing board wondering how we can do things better next time. Meanwhile, the general population continues along a well trodden path of embracing war, environmental destruction, extreme inequality, mass unemployment and mean-spirited attacks on the poor along with policies tinged with racist or nationalistic overtones.
Most economies around the world have been in the doldrums since the Global Financial Crisis of 2007/8 and the Great Recession that followed. Unemployment in some European nations has been at levels not seen since the Great Depression. Although the situation is not as dire in all nations, economic activity remains well below potential virtually everywhere. The result is needless human suffering.
In a nutshell, the economy comes down to this: we have available labor time and natural resources with which we can produce some stuff and distribute it. Unemployment now means lost production now that can never be recovered in the future.
A diverse culture is best served by an economy that can cater to diverse needs and interests. In our societies, perspectives differ widely when it comes to (among other things) the following five areas:
1. Competition and cooperation. Some people enjoy competition in pursuit of external rewards. Others prefer cooperation and feeling a part of something bigger than themselves. Most enjoy both competition and cooperation, just in varying degrees.
2. Personal motivation. Some people would largely lose interest in productive activity if it were not for the potential of private profit or a high salary. Others prefer to work in a not-for-profit environment and are more or less unmotivated by material gain.
3. Attitudes on inequality. Some people want to have more than others. Some would prefer not to. Some care if others have more than them. Some don’t as long as everyone has enough and the inequality is not so extreme as to undermine democracy.
Often, in trying to get at the “essentials” of how a capitalist economy functions, we consider a simplified model of a closed economy without government. Through such models it is possible to make the argument that exploitation, instability, unemployment and/or demand deficiency (depending on the particular Marxian or Keynesian flavor of the model) are endogenous to a private market system in which production is for monetary profit. Not only is it then possible to hold that the problems are inherent to laissez-faire capitalism but also that their solution can only come from the “outside” – either through revolutionary overthrow of the system or reformist management by the state. In debate between the proponents of laissez-faire capitalism and its dissenters, the approach is useful and informative. Proponents of laissez-faire desire an economy in which the role of the state is minimized, and the simplified models take that line of thought to its logical conclusion and suggest it is untenable. However, it is also easy to lose sight of what is missed in abstracting from the state. A habit of thought tends to emerge in which the state is seen as peripheral to capitalism and perhaps even powerless to do much at all when faced with the supposed awesome might of private market forces and the realities of capitalist social relations of production. But the state is actually foundational to capitalism, and the current economic system would not exist, let alone function effectively, without it.
Critics frequently charge (no link found) that while we on the Left are prolific in identifying reasons things must change, our prowess in actually bringing about change is less impressive. I thought it might be of theoretical interest, or at least of idle curiosity, to reflect on the means of effecting change. Let’s sit ourselves down with a cup of coffee and conduct a thought experiment concerning what might be done. Dare we contemplate something more than change? Something as grandiose as social transformation? Yes, I say. Why not? This could prove to be an intriguing exercise indeed.
There has been discussion in the economic blogosphere recently, from a left perspective, about the merits or otherwise of employing an understanding of Modern Monetary Theory (MMT) in debates over policy and efforts to transform the economic system. There is an interesting post, for example, by Dan at Pruning Shears (h/t Tom Hickey) suggesting that MMT might be a “dicey bet for liberals”. In reading this and similar arguments presented elsewhere, I find myself agreeing on some (though certainly not all) points, but differing in the conclusion to be drawn from them.