A monetary economy needs spending for production and employment to occur. This is a truism. Spending equals income, by definition. One person’s purchase of a good or service is another person’s income. But it is also clear that causation, ultimately, runs from spending to income. More specifically, the creation of income requires a prior decision to spend. In a monetary economy, to paraphrase Michal Kalecki, each of us in isolation can decide how much to spend but we cannot choose the size of our income. Our personal income will depend not on our own spending but on the spending decisions of others acting somewhat independently of ourselves. Total income, of course, will depend on spending in aggregate – our own spending and the spending of others.
Despite some appearances to the contrary, I remain hopeful that Syriza will hold firm in its resistance to austerity. It may be that the Greek government is positioning itself so that, in the event of exit, it is seen to have been forced off the euro rather than to have willingly opted out. In the event of exit, it could make a significant difference to the response of others (such as the US, the IMF, not to mention the Greek people themselves) that Syriza is seen to have been pushed into a corner, left with no choice, rather than to have been enthusiastic in any break away from the common currency.
Warren Mosler (for example, here) has explained very clearly and succinctly the key steps involved in effectively introducing a currency such as the drachma. (See, also, Bill Mitchell’s recent post, ‘A Greek exit is not rocket science‘.) Fears of exchange-rate catastrophe would be unfounded if these steps were followed.
A notable quote (h/t Tom Hickey at Mike Norman Economics):
Germany’s Mr Gabriel said any debt relief for Greece is out of the question at this stage since it would cause a collapse of discipline across the eurozone, triggering copycat demands from other countries in distress. “It would blow up the euro,” he said.
I am no game theorist, but to me Mr Gabriel’s statement underscores that if Syriza holds firm, Greece will ultimately win one way or the other …
In a previous post, it was explained that enforcement of taxes (or some other financial obligation to the state) is fundamental to the viability of a national currency. Without such an obligation, widespread acceptance of the currency would not be assured. The currency might cease to serve as an effective mechanism for public provision of adequate infrastructure, education, health care, social security and much more.
It seems to me that those, including New Keynesians, who support the maintenance of a “balanced budget over the cycle” are either not recognizing or rejecting a number of points made by heterodox Keynesian (or Kaleckian) critics of such a policy approach, including proponents of Modern Monetary Theory (MMT) as well as many other Post Keynesian and Sraffian economists.
A modern money system, as that term is applied in Modern Monetary Theory, typically has three key features. Two of these features are always present. The third is optional but normally should be in place for the full benefits of modern money to be enjoyed:
1. The currency is a public monopoly. Government issues the currency and is the only entity allowed to do so.
2. The currency is nonconvertible. It is a fiat currency. The government does not promise to convert its currency into a precious metal or some other commodity at a set price.
3. The exchange rate is allowed to float. The government does not promise to maintain a fixed exchange rate with any foreign currency. Instead, the exchange rate is ‘flexible’ or ‘floating’. As already mentioned, this feature is usually operative, but not always.
Taking these three features together, we can say that modern money normally involves a ‘flexible-exchange-rate nonconvertible currency’, or ‘flex-rate currency’ for short.
A while back, Brian Arthur of the Santa Fe Institute wrote a short piece on complexity economics (h/t Tom Hickey). I find much of the work Arthur and others have done on increasing returns, path dependence and related phenomena very interesting. My doctoral supervisor’s doctoral supervisor (there has to be a less cumbersome way of expressing that) was Paul David who also had an interest in path dependence and the significance of history in economic development. My supervisor’s influence motivated me to devote chapters in my thesis to, among other things, an application of the theory of path dependence to the distribution of earned income and a consideration of the implications of cognitive limitations within the context of path-dependent economic processes. My (orthodox) postgraduate supervisor’s commitment to cross-disciplinary research also motivated me to integrate insights from liberal moral philosophy, policy history and institutionalism (new and old) into the analysis.
I’ve been reticent to offer thoughts on Syriza’s victory in the Greek elections. Quite simply, there are many others who, knowing much more about the institutional, legislative and cultural realities, are infinitely better qualified to comment on the technical matters involved. But not to comment at all on one of the more promising political developments in recent times might give the impression that I am uninterested or simply don’t care, which is very far from the truth. So what follows are some brief, scattered impressions, nothing of which is intended to be at all authoritative.
The Atlantic cites a 65-year study indicating that “tax cuts don’t lead to economic growth” (h/t Tom Hickey). On closer inspection, the study finds more specifically that tax cuts on the wealthy fail to promote economic growth while exacerbating inequality. This should not be surprising to anyone cognizant of basic macroeconomic principles, but to make that point is not to downplay the value of the study. Many have made claims contrary to the findings of the study. If we consider the effects of taxes more generally, our conclusion is likely to be less sweeping. The effects of taxation vary depending on what particular tax we have in mind and the context in which that tax operates. The matter can be considered both in terms of demand effects and so-called incentive effects.