Truth and Lies About Government Deficits

There is a lot of misinformation spread by politicians and much of the media on the topic of fiscal policy, particularly when it comes to the role and impact of government deficits. When the level of economic activity collapsed in the wake of the global financial crisis, government fiscal balances around the world moved toward, or into, deficit. To a degree, in some countries at least, this occurred as a result of appropriate policy responses to the depressed economic environment. To a larger degree, it was due to the automatic effect of declining income on tax revenues through what economists refer to as the automatic stabilizers. These are fortunately in place to cushion households and businesses from the worst effects of a downturn. Currency-issuing governments, facing no revenue constraint, always have the capacity to run deficits as required.

While the move toward deficits was both necessary and appropriate – and for governments sovereign in their own currencies, unproblematic – lobbyists for the 1 percent, aided by ignorant or complicit politicians and media, soon bombarded the public with a series of alarmist and nonsensical claims. The public was told – falsely – that fiscal deficits would cause all manner of calamities, ranging from escalating interest rates and hyperinflation to crippling debt burdens on future generations.

Not only have these claims proved false, but they have been shown to be the opposite of the truth. In nations with sovereign currencies, interest rates have remained at historic lows. Deflation, rather than excessive inflation, remains the likelier danger. And currency-issuing governments face no risk of insolvency. Put simply, such governments cannot run out of the currency that they themselves issue.

For currency-issuing governments, the size of the deficit in itself is never an issue. What matters is that fiscal policy is tailored to the situation at hand. Even in normal times, a government deficit is usually appropriate, because it enables non-government (which, unlike government, is financially constrained) to maintain a financial surplus, spending less than its income and building some protection against uncertainty.

The situation is different in the case of the member governments of the Eurozone, who voluntarily and recklessly gave up their currency sovereignty to become mere users of a foreign currency, putting themselves at the mercy of the European Central Bank. However, even here, the democratically unaccountable European Central Bank, as issuer of the euro, always has the capacity to ensure a member government’s solvency. Of course, when it does so, strings are invariably attached (austerity, attacks on workers’ rights, fire sale of public assets, etc.) with democracy trashed in the process.

It is easy for media and politicians to confuse the public when it comes to these issues because there is little public understanding of the way in which a government’s fiscal outcome and the level of economic activity interact. On the one hand, a currency-issuing government has control of its policy settings. It can change its spending and taxing measures independently of what is happening in the rest of the economy, and such changes have an impact on total spending and therefore income. Government spending, like any spending, adds directly to income. Tax cuts leave more income in the hands of households and businesses. This enables higher levels of saving and paying down of private debts (which has been necessary for many households) as well as higher levels of private spending than would otherwise be the case. On the other hand, the level of economic activity affects the fiscal outcome. For given policy settings, tax revenues rise and fall automatically with income.

Economists understand this distinction perfectly well. They know that while the government can make exogenous changes to policy, the fiscal outcome itself (once policy has been set) is endogenous. To say that the fiscal outcome is endogenous is to mean that the ultimate size of the deficit depends on the level of income (because tax revenue depends on income).

Although this point is widely understood by economists, it can be a point of confusion for those not trained in economics. This makes it easy for charlatans and others with particular political agendas to make deceptive claims about fiscal policy and its effects.

Consider an economic downturn characterized by a collapse in private spending. Since spending equals income, by definition, the collapse in private spending will mean a decline in total income and employment unless appropriate policy is put in place.

Bad Policy Option 1: Inaction. Suppose a government makes no changes to its spending programs and tax measures despite the depressed economic conditions.

The collapse in income will result in lower tax revenue. Similarly, the collapse in employment will require higher welfare payments. As a result, the fiscal deficit will widen.

In short, government inaction in response to recession will result in a larger fiscal deficit alongside weaker income and employment.

To be clear, the widening of the deficit is not the issue. A currency-issuing government faces no revenue constraint. The problem is the weaker income and employment that has resulted from government inaction.

Lie: The lack of economic recovery proves fiscal policy doesn’t work. The fiscal deficit increased, yet the economy didn’t improve.

Truth: The fiscal balance widened as income weakened, as it is designed to do, to limit the negative impact on spending. Without the welfare payments and lessened tax burdens, the collapse in demand and income would have been even worse.

Lie: Private spending is weak because a widening fiscal deficit harms confidence.

Truth: Business confidence depends primarily on the level of spending (economic activity) and profitability, not the fiscal balance. Stronger spending means a bigger market to sell into. This gives businesses more reason to employ workers and, once recovery is underway, to expand their operations through investment. Similarly, consumer confidence depends primarily on the level of income and employment, not the size of the fiscal deficit.

Bad Policy Option 2: Austerity. The government cuts spending and/or increases tax rates or adds new taxes in a misguided attempt to reduce the deficit or even impose a surplus (which would mean, by definition, a deficit for non-government, requiring households and businesses either to draw down past savings or borrow in order to meet tax commitments).

Effect of Austerity: Cuts to government spending exacerbate the downturn in total spending. Income and employment weaken further. This has an additional negative impact on the already soft private spending. Tax hikes fail to deliver a strong increase in tax revenues because of sluggish or even negative income growth. The government, in all likelihood, remains in deficit, though again, the fiscal balance in itself is not an issue for a currency issuer.

The result of austerity is usually a fiscal deficit alongside weaker income and employment.

Lie: There is still a fiscal deficit because the government failed to deliver on its promise to impose austerity. It needs to get serious about imposing austerity, and this time properly.

Truth: Even if it was desirable to balance government spending and tax revenue in a downturn (which it isn’t), it is difficult to do so through spending cuts and tax hikes. These policies weaken income and work against the effort to raise tax receipts. Cuts to welfare mean the poor and unemployed spend less, adding to the problem.

Appropriate Policy Response: Expansionary Fiscal Policy. The government should increase its spending and/or cut taxes. These measures help to offset the temporary collapse in private spending and maintain total spending, income and employment. This will cause a widening of the fiscal deficit in the short term.

The short-term effect of fiscal expansion is a larger deficit alongside better outcomes for income and employment.

Lie: The government is being irresponsible and imposing an unsustainable debt on our children and grandchildren. The country will go broke. We’ll all be ruined.

Truth: Solvency is not an issue for a currency-issuing government. It can never run out of money. The issue is potential inflation caused by excessive spending. This is the risk of any kind of spending, whether public or private. But keep in mind that the fiscal expansion has occurred in a period of weak spending. There is no danger of inflation from too much spending when the economy is depressed. Instead, the higher level of spending helps to maintain income and employment until private households and businesses are ready to start spending again. Even then, as already mentioned, government deficits will and should be the norm so as to enable the non-government to maintain a financial surplus as protection against uncertain future events.

Effects in the Longer Term: Fiscal expansion helps to maintain income while households and businesses focus on getting debt burdens under control. By maintaining the level of spending, it also helps to foster an economic environment that is conducive to the eventual recovery of private spending. Once households and firms have paid down debts to more manageable levels, they will be in a position to start spending again.

The eventual recovery of private spending will boost income and employment. Tax revenues will rise automatically (that is, endogenously) because incomes are higher and more people have jobs. The fiscal deficit will narrow automatically. Any temporary government spending programs or tax breaks that were designed to tide the economy over during the period of private-sector weakness can be discontinued to prevent excessive spending. Here, the narrowing of the deficit, though neither good nor bad in itself, occurs because non-government balance sheets are in better shape and households and firms are in a stronger position to spend.

The longer term effect of fiscal expansion is to foster a private-sector recovery that brings about an automatic shrinking of the fiscal deficit.

Lie: The shrinking of the fiscal deficit that occurs in the recovery proves that austerity works. The economy improved because the fiscal deficit narrowed.

Truth: Improvement in the economy is what enables the fiscal deficit to narrow. This required expansionary fiscal policy (and widening of the fiscal balance) for a time until private spending recovered. The expansionary fiscal policy helps to maintain stronger spending, making it more viable for businesses to employ workers and eventually begin to invest again. Without the expansionary fiscal policy, private spending and production can remain depressed for a long time.

Let’s Not Fall For the Lies

The above points are well known to economists. Unfortunately, they are points that – understandably – are not so obvious to anyone who has not studied at least introductory macroeconomics. Some politicians and members of the media take advantage of this and choose to spread misinformation about government spending and fiscal deficits.

There is a basic distinction that needs to be kept in mind to avoid falling for the lies. It is that although changes in government policy have an effect on the economy, the final fiscal outcome depends on what happens, partly as a result of those policies, to income and employment. This is why a larger fiscal deficit can occur alongside either weak income and employment (a “bad deficit”) or strong income and employment (a “good deficit”).

In reality, a currency-issuing government’s fiscal position is not important in itself. What matters is that the government’s fiscal policy is appropriate to the economic circumstances. During a period of economic weakness, the important point is to facilitate a sustained recovery. Once recovery is underway, incomes and tax revenues revive. The fiscal deficit narrows automatically as a result, although this is really neither here nor there. What matters is the strength and sustainability of the economic recovery.


13 thoughts on “Truth and Lies About Government Deficits

  1. This is a very good summary.
    It is why I despair of many politicians who should be educating people but instead enhance and exploit ignorance.

  2. I’ve spent quite some time delving into MMT before I started reading up on Marxist economics by which time I put MMT on the shelf (for the time being at least). Now, I remember that you in this blog quite uniquely try to combine both approaches, i.e. you write about both things (MMT and Marxist economics).

    So please forgive me, if my question will be something that you have already dealt with somewhere (in that case a link would suffice) or is even too naive to be worth a response, but after my delving into Marxist economics, I became increasingly disillusioned by MMT (or more precisely Keynesianism in general) and for a very precise reason: namely, that it ignores the law of value or to put in more simplistic terms, the profit-motive in general.

    I mean, my problem is very specific: what happens with expansionary fiscal policy when the problem is not so much decrease in aggregate demand per se, but rather a crisis of profitability? What happens when in order for private investments too pick up, i.e. for profitability to be restored, capital has to be devalued (or wages to be decreased, etc.), which expansionary fiscal policy precisely prevents from happening? You give money to people to increase demand, but what if nobody is there to supply, because it is not profitable enough to do so in the first place?

    Just to give an example from the top of my head: the majority of the population is employed in the manufacturing sector. Now it just so happens that manufacturing becomes unprofitable (or unprofitable in comparison with speculating on futures or whatever). Capital flies from manufacturing to speculation in futures, people are being laid off, etc. Now, you use expansionary fiscal policy to increase aggregate demand and subsequently get people back to employment and so on. But will they be hired considering that manufacturing (the major industry in the example) simply isn’t profitable anymore? Even if you use something like JG and employ people directly, what exactly people are going to spend money on, if there is no manufacturing goods in the first place (since nobody produces them due to [at least comparative] unprofitability)?

    Do you get my point? Interestingly enough, after my engagement with Marxism I came to appreciate MMT (more precisely: its insights into capacities of the currency-issuing government) for its potential of organizing roughly post-capitalist society (or transitory society or whatever), where the power of the law of value (and political power of the bourgeoisie) would be severely diminished and so on, but I simply don’t see how it could work smoothly in the context of capitalism as we have it now. So I see MMT’s ignorance of the law of value (and politics in general: remember, as Marx taught us, economics is always political) as a blind spot.

    But since you are well-versed into both MMT and Marxist economics and you still are sympathetic to both, I am led to the conclusion that I am simply confused. May you help me out on this one?

  3. Edgaras, I think your comment is very insightful. Thank you. It almost seems a response to the post immediately following this one (on austerity in relation to Marx’s falling profit-rate tendency). If so, I can move our discussion to the comments section of that post. But it is also fine here. Up to you.

    Before getting into the crux of your comment, you may be aware that some of the first-generation MMTers have written academic papers about Marx (L. Randall Wray and Mathew Forstater) and Bill Mitchell often notes the influence of Marx and Kalecki on his thinking (for example, here). The academic Scott Ferguson has some recent writings about Marx in relation to MMT (such as here). There are also other bloggers who have discussed Marx and MMT. For instance, Magpie has several excellent posts, including here and here.

    My own view on Marx and MMT may differ quite a lot from the view of the academic MMTers. My understanding of Marx most closely corresponds to the temporal single-system interpretation (TSSI) in which Marx’s aggregate equalities and his falling profit-rate tendency all hold.

    The simplest way to illustrate your point about profitability is to consider the maximum possible rate of profit. If Marx is correct that labor is the sole source of value, then the new value added in the current period will be L = v + s, where L is total employment measured in hours of abstract, socially necessary (i.e. average) labor. For Marx, the amount of value created by an hour of average labor is always the same, invariant to changes in productivity. This implies that if the level of employment is constant from one period to the next, the amount of new value created will be the same in each period. Hypothetically, if workers were paid zero (living on air) and all value was appropriated as surplus value by the capitalists, we’d have L = s. The maximum rate of profit r* would be this amount of surplus value divided by total capital C invested in production:

    r* = L / C

    If from one period to the next, investment causes C to be increased by, say, 2 percent (implying positive net investment), then r* will fall unless capital devalues by 2 percent. If it doesn’t, but net investment continues – due to strong demand, maintained through government spending, and an acceptable (to capitalists) profit rate – then C will continue to accumulate. Let’s say this continues for a couple of decades, with net investment causing C to rise by 2 percent each period. Then after twenty years, C will have increased by about 50 percent. Surplus value, on the other hand, will still be limited to the new value created, equal to L. For r* to be restored to its former level, one-third of capital needs to be wiped out.

    In this example, there is no other way of restoring the rate of profit. The reason for this is that surplus value is at its maximum (equal to L) and variable capital is at its minimum (equal to zero). Basically, new value creation is limited to L, whereas C can accumulate. Of course, tapping new sources of labor can expand L, but will also require more C.

    Turning to the actual rate of profit rather than the maximum rate, the foregoing suggests that, eventually, there is no way to restore the rate of profit other than through a collapse in the prices of the elements of constant capital. Once the rate of surplus value cannot be raised any further (either due to hitting physical subsistence limits or as a result of class struggle), a collapse in C is the only means of reviving r.

    This collapse in C (which is the amount of capital invested in production) can occur either through (i) a crisis or (ii) the government nationalizing part of C. Option (ii) constitutes a move toward less private ownership of the means of production and a shrinking of the private sector (expansion of the public sector). This approach would tend to bring about what some consider to be state capitalism, others a form of socialism, along the lines of the Soviet Union. Even so, we know from the dissolution of the Soviet Union that once something is nationalized, it can subsequently be gifted back to the capitalists (through a fire-sale privatization). So, avenue (ii) seems to involve a tendency toward either state ownership of the means of production or crony capitalism.

    A would-be saver of capitalism, informed by MMT, might instead resort to avenue (i). That is, let the private-sector go into crisis and allow capital to devalue. The job guarantee shelters the affected workers from the temporary mayhem in the private sector. For those who believe in “heroic entrepreneurs” and “creative destruction”, this might be the preferred path. In my opinion, it is government, under capitalism, that drives whatever economic progress is achieved. It drives basic research, adoption of new technologies and growth through autonomous spending. Any protections (for the environment, workers, consumers, etc.) also come through government. Even so, avenue (i) is an option simply because the job-guarantee mechanism ensures full employment irrespective of demand. In principle, you could have the most dire austerity and still maintain full employment. In all likelihood, private investment would remain weak until government spending picked up. But if you needed austerity to precipitate a crisis in the private sector, you could do so alongside full employment. (Incidentally, I don’t think you would necessarily need austerity to bring on a crisis. It is probably enough simply not to bail out failed enterprises.)


    The above is rather grim. My reason for being enthusiastic about MMT is more along the lines of the point you make in this passage:

    Interestingly enough, after my engagement with Marxism I came to appreciate MMT (more precisely: its insights into capacities of the currency-issuing government) for its potential of organizing roughly post-capitalist society (or transitory society or whatever)

    I agree with this entirely, and this is what excites me about MMT (see, for example, Modern Monetary Theory is Relevant to More than Just Capitalism). Actually, this was my main motive for starting heteconomist. In the first “welcome to heteconomist” post, there is a statement to that effect (in the second-last paragraph).

    I think MMT applies to socialism just as much as to capitalism and that the understanding it enables would pretty much enable a move to communism other than there being a continued existence of fiat currency. (At that point, we could do away with currency altogether if we wished.) For instance, the MMT understanding of fiat currency would seem to apply in a straightforward way to a labor-certificate system of ‘lower form communism’.

    For me, the MMT analysis of fiat currency shows how we can override the profit imperative and, if we wish, do away with capital altogether.

  4. Peter, feel free to move our discussion to whatever place you seem to be necessary, I certainly don’t mind. Although, I am not sure for how long this discussion can last since we seem broadly in agreement. If I may, however, I only want to add a couple small things (they may as well be ignorant, for my knowledge of both MMT and Marxist economics is rusty at the moment, but nevertheless…).

    As for the engagement between MMT and Marxism, yes, I am quite aware of it (and thanks for the links). But I always saw it as a sort of cosmetic engagement, if you know what I mean. For instance, Bill Mitchell might say this or that about Marx, but he nevertheless engages in the rhetoric that fiscal policy is some sort of silver bullet for all the problems (along the lines of Mosler’s mantra “there is no crisis so deep that big enough fiscal stimulus wouldn’t solve it” or whatever). As it is put in one of the links you provided, MMT treats money as a public utility, while Marxism treats it as an expression of value. And I think that no matter the engagement between these two schools of thought, one has to choose either one or another. Either money is an abstract public utility (grounded only in people’s accepting it, through the force of taxation or whatever), which can then be used quite unproblematically for public goods within any context whatsoever (e.g. as Bill Mitchell recently put it [as he always does]: private sector makes its spending and saving decisions and government then simply intervenes to make sure that everything is alright, that economy is restored to order.). So either this, or one realises that money is not an abstract public utility, but is concretely rooted in material processes, i.e. is a concrete expression of value. In which case the one can’t really treat it unproblematically as a public utility to be used by fiscal policy to achieve any ends under any circumstances. Just to give you an example from my memory: I recall Bill Mitchell making a comment along the lines of “well, if it doesn’t work for the some of the private sector, we will simply nationalise it and the problem is gone!”. But it seems like it puts a cart before the horse, for if we are dealing on this level of abstraction, ignoring all the concreteness of money’s grounding, some sort of socialism (or at least a full-blown nationalisation) is a logical conclusion of MMT.

    So I simply think that despite whatever dialogue there can be between Marxism and MMT, they are working on quite different levels of abstraction, if I may put it this way. For instance, as a Marxist, I would have no problems saying that of course MMT is right in all it says on the functioning of the economy, on our monetary system and so on. My issues begin when we try to root this abstract knowledge in concrete circumstances (and here I am not only talking about economic problems, for applying MMT so abstractly leads to disastrous political conclusions, like advocating for dissolution of the EU, because from the perspective of MMT it is dysfunctional and so on).

    Or to put it in yet another way: take it when MMT says that we are not limited by money, but only by real resources that are available at a particular moment. Well, of course this true, and that is entire point of Marxism, i.e. that there is nothing beyond human practice that there are only “self-imposed”, superstitious limitations to achieving a self-conscious society (i.e. communism). But Marxists seem to realise that you need to ground this knowledge under concrete circumstances and analysis a particular context of capitalism in an attempt to overcome such limitations and so on, while MMTers simply see that the only problem is “ignorance” or “right-wing propaganda” or whatever. And ultimately, in a way, that was the source of my question to you in the first place. I hope you see what I am trying to say.

    Secondly, while I don’t feel I am in position to engage in the finer points of the discussion, I just want to put a small question with regards to what you said in your post on austerity. You seem to be arguing that crises are caused be a decrease in the rate of profit (along the lines of Andrew Kliman)? But I always found this incredibly unconvincing. If we are to be looking at crises through the lens of decrease in profitability, wouldn’t it be more accurate and convincing to argue that crises are caused not by a global decrease in the profit rate, but rather by a decrease in the profit rate in a particular sector, which up until then had drawn significant amount of capital into it?

  5. @ Edgras

    It’s a matter of strategy for getting from here to there. The dogmatic Marxist solution is revolution, which is rather radical to say the least. The MMT solution is to move gradually to democratic socialism through first establishing social democracy within a mixed economy by substituting MMT-based policy for neoliberalism as a political theory and neoclassical economics as its economic basis.

    The issue with revolutions is that they are hard to control, as Marx and Engels knew based on the differences between the American and French Revolutions. But at the time they were alive, political reality was still very much influenced by the old feudal order with monarchies and aristocracies ruling in Europe and limited liberalism in Great Britain, where Marx took refuge and Engels was working.

    The results of the Marx-Engels-Lenin inspired revolutions were not greatly encouraging either, turning out more like the French Revolution rather than the American.

    So MMT proponents encourage gradual development that is less likely to veer off course.

    There is also the argument that more Marxian views — social, political and economic — could be combined with MMT financial and economic analysis.

    Some MMT proponents are onboard with that and some MMT and allied economists have signaled that these issues need to be raised by raising them and suggesting ways of dealing with some of them economically.

    However, many of the issues that need addressing are social and political in addition to economic or rather than economic. So, strictly speaking they fall beyond the purview of economics and reach into the territory of political economy and beyond.

    Not all MMT economists are willing to venture there since it is out of their field. However, many MMT proponents who are not academic economists are willing to do so.

  6. Edgaras, no worries, we can keep the comments in this thread. They fit here well enough.

    As I see it, the falling profit-rate tendency, if it exists, is a central consideration. Either:

    (i) the falling profit-rate tendency does apply, and fiscal policy plus tight financial regulation will not be sufficient to ensure the long-term viability of managed capitalism in the absence of major capital devaluations or nationalizations; or

    (ii) the falling profit-rate tendency is inapplicable, and fiscal policy plus tight financial regulation will be sufficient to ensure the long-term viability of managed capitalism.

    We do seem to share broad agreement, but it appears that I view the profit-rate tendency differently from you. To me it’s very much an aggregate constraint (if it exists). From a Kaleckian/Keynesian/MMT perspective there is not necessarily any difficulty caused by some sectors suffering low profitability if the average rate of profit for the economy as a whole is above the rate considered acceptable by capitalists. For instance, Luigi Pasinetti emphasized the efficiency role that can be played by wages growing in line with productivity (through centralized wage determination) in an unbalanced capitalist growth process. Even though fiscal policy helps to induce demand and supports income growth, declining industries will find it increasingly difficult to compete, because they will be required to pay wages in line with more viable sectors. Over time, the declining industries die out and new ones take their place. Persistent growth in government spending will not necessarily prevent the failure of industries as and when this is appropriate. (Of course, if the industries are socially necessary, government will need to support or nationalize them.)

    I have tentatively been playing around with a simple growth model. A preliminary post is this one. My hope eventually is to modify the model to consider various real-world (or possible real-world) complications, including Marx’s falling profit-rate tendency. Eventually, I also want to link demand-determined output more closely with Marxian value creation. There is an elementary sketch of what I have in mind here.

    In its current simple (and unrealistic) form, the model basically traces out what demand-led growth might look like in the absence of complications such as a falling profit-rate tendency or sectoral imbalances/financial fragility. Financial fragility, in the absence of a falling profit-rate tendency, could be tackled with tight financial regulation and/or public banking. In contrast, the falling profit-rate tendency would necessitate crises. As mentioned in my previous comment, it would still be possible for capitalism to function by allowing crises to occur in the private sector while protecting workers through the job guarantee. But I don’t think that crises could be avoided other than through outright cronyism or a move toward some form of socialism (in particular, more and more nationalizations).

    Regarding a couple of the academic MMT arguments you mention:

    – I think Bill Mitchell and Warren Mosler are correct to say that there is no crisis so deep that fiscal policy can’t solve it. But by solving it, I don’t think they mean bailing out “too big to fail” banks and other corporations. They seem to mean: let the chips fall where they may so far as the financial crisis goes, but ensure sufficient demand (or at least full employment through the job guarantee) in the real economy. If Marx’s falling profit-rate tendency is a reality, then there does need to be devaluation of capital. But you don’t need viable firms to go under as well, which would happen if you went down the road of liquidationism.

    – It is true, as you say, that the MMTers have not thoroughly worked value theory into their approach. There is a notable similarity between Marx and MMT when it comes to currency value. MMT’s interpretation of currency value as the amount of minimum-wage labor necessary to obtain it does seem akin to Marx’s treatment of the ‘value of money’ under a gold standard, where this value was regarded as being determined by the amount of socially necessary labor required to produce a unit of gold. As Magpie has pointed out on his blog and also in comments here, the MMT approach to maintaining currency value is basically to anchor it to the commodity labor-power (rather than gold) via the job-guarantee mechanism. This theoretical connection seems close to me, especially when it is acknowledged that the rate at which a unit of the currency exchanges with gold under a gold standard is ultimately at the discretion of the state. Although the MMTers have not (at least yet) worked value theory into their approach more generally, I will note that Bill Mitchell, in his blog posts, does appear broadly to accept Marx’s view that profit is unpaid labor. I’m not sure how that can be concluded unless, like Marx. you think that labor is the sole source of value. The falling profit-rate tendency is a bit different because, to be logically valid, it is also necessary to interpret value theory temporally. It would be possible that the academic MMTers (or a subset) accept labor as the sole source of value but not the falling profit-rate tendency. Or perhaps they mostly reject Marx’s value theory. I don’t know.

  7. Thanks for chiming in, Tom. I just want to mention that I hadn’t seen your comment before posting my most recent one. Cheers.

  8. As far as the “labor” theory of value goes, where else can economic value come from?

    Nothing in nature “has value” unless it enters the human ambit. Otherwise, everything just is. A stick isn’t firewood until picked for use as such.

    Potential use is not value. “In the beginning,” value arises from use as “use value” (Marx).

    Use involves “labor” as human action upon something of potential value, even if just gathering it.

    Value implies a relation among valuers, processes of valuation and objects of value. Prior to human action on something of potential value to human life, its value remains potential.

    “Labor” means real economic value created by human action on an object of potential value for use or exchange.

    For example, raw land gets value as “territory.” Primitive tribes contested territory of hunting, for example.

    There is a value chain from potential value to actual value that includes everything that figures economically in a society. For example, the potential value of land becomes actual value when enclosed as territory, which implies control. Initially, this was use value for subsistence societies and land was still commonly held. Price came much later since it depends on a transferable title.

    Economies and economics may be said to be begin with exchange, when commodities are produced for exchange rather than for use in subsistence.

    Monetization of exchange results in nominal price. Price is the subjective value of commodities in markets.

    The question is whether subjective value as price is the same as objective value or “real” value.

    Conventional economics says it is the same. All prices are “fair” in the economic sense, which is conflated with the normative sense.

    Marx contends that real value is value added by human action on resources. Real value (production cost) is not necessarily the same as market value (price)

    Subjective valuation in terms of price depends on real value that is added to resources to produce commodities for exchange (costs of goods sold and cost of sales, scarcity of commodities and supply and demand in flexible markets and administered prices in rigid markets.

    Price reflects the different between subjective and objective value, that is, between monetary valuation as price and the total cumulative cost of production in terms of human action.

    Part of the production cost is value added by human action in producing materials for production of commodities and also the value added in the actual production of commodities, which together account for cost of goods sold. Total cost includes cost of sales. This can also be deconstructed into human action.

    In the accounting there is one set of accounts reflecting all the value added from human action in producing commodities for markets and another reflecting subjective value in markets based on price. The accounting difference is “profit,” that is profit (loss) on an income statement. Profit is considered “return on investment” in a period, which is owner’s share simply as a matter of ownership.

    The difference between subjective and objective value is economic rent.

    In ownership-based societies based on private property, economic rent is a privilege of ownership that exists as institutionally mandated. Control of resources is based on “title” in feudal societies, where economic rent was essentially the portion of the surplus over subsistence that owners commandeered institutionally.

    As Michael Hudson has observed, classical economics was about accounting for economic rent in the transition from a chiefly feudal system to a chiefly capitalist one. Ricardo provided a bourgeois explanation that Marx criticized and provided another account for.

    Neoclassical economics essentially dismisses economic rent under the perfect competition it assumes; rent only occurs under asymmetry of market power.

    Bourgeois (liberal) economics asserts that market power arises from government intrusion and can be reduced or eliminated by limiting government. The liberal ideal is a market state in which the government plays the role of “night watchman,” only providing security, protection of private property, necessitating national defense, domestic security, and a legal system.

    Marx held that economic rent could only be reducing or eliminated by reducing or eliminating class structure and class power through social leveling, which requires political and economic leveling as well, ergo socialism that would result in prioritizing the common good and general welfare.

    This is still the historical dynamic, or “dialectic.” It’s not just economic but also social and political.

    In summary, it seems to me that an LTV is intuitively obvious and the objection seems to be lack of “adequate” formalization based on rules dictated by a power center.

    The retort is to show one thing of intrinsically value independent of human action upon it. That cumulative action is “labor.”

    Even know thing something is suitable for firewood requires application of knowledge. Knowledge alone is not power but rather the ability to use knowledge. That is the basis of labor power.

  9. Not just Marx. Here is an interesting passage on the relation of capital and labor from Abraham Lincoln’s first inaugural address:

    It is not needed nor fitting here that a general argument should be made in favor of popular institutions, but there is one point, with its connections, not so hackneyed as most others, to which I ask a brief attention. It is the effort to place capital on an equal footing with, if not above, labor in the structure of government. It is assumed that labor is available only in connection with capital; that nobody labors unless somebody else, owning capital, somehow by the use of it induces him to labor. This assumed, it is next considered whether it is best that capital shall hire laborers, and thus induce them to work by their own consent, or buy them and drive them to it without their consent. Having proceeded so far, it is naturally concluded that all laborers are either hired laborers or what we call slaves. And further, it is assumed that whoever is once a hired laborer is fixed in that condition for life.

    Now there is no such relation between capital and labor as assumed, nor is there any such thing as a free man being fixed for life in the condition of a hired laborer. Both these assumptions are false, and all inferences from them are groundless.

    Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. Capital has its rights, which are as worthy of protection as any other rights. Nor is it denied that there is, and probably always will be, a relation between labor and capital producing mutual benefits. The error is in assuming that the whole labor of community exists within that relation. A few men own capital, and that few avoid labor themselves, and with their capital hire or buy another few to labor for them. A large majority belong to neither class–neither work for others nor have others working for them. In most of the Southern States a majority of the whole people of all colors are neither slaves nor masters, while in the Northern a large majority are neither hirers nor hired. Men, with their families–wives, sons, and daughters–work for themselves on their farms, in their houses, and in their shops, taking the whole product to themselves, and asking no favors of capital on the one hand nor of hired laborers or slaves on the other. It is not forgotten that a considerable number of persons mingle their own labor with capital; that is, they labor with their own hands and also buy or hire others to labor for them; but this is only a mixed and not a distinct class. No principle stated is disturbed by the existence of this mixed class.

    Again, as has already been said, there is not of necessity any such thing as the free hired laborer being fixed to that condition for life. Many independent men everywhere in these States a few years back in their lives were hired laborers. The prudent, penniless beginner in the world labors for wages awhile, saves a surplus with which to buy tools or land for himself, then labors on his own account another while, and at length hires another new beginner to help him. This is the just and generous and prosperous system which opens the way to all, gives hope to all, and consequent energy and progress and improvement of condition to all. No men living are more worthy to be trusted than those who toil up from poverty; none less inclined to take or touch aught which they have not honestly earned. Let them beware of surrendering a political power which they already possess, and which if surrendered will surely be used to close the door of advancement against such as they and to fix new disabilities and burdens upon them till all of liberty shall be lost.

  10. I guess that’s why when workers down tools, they send in the police to beat them up. The first thing to disappear is profit; then subsistence.

    The dream is to persuade the workers to work for themselves, share, and be responsible; and offer a shovel to the capitalists (?) Maybe wait until capitalism blows up in everyone’s face first. Or, for capitalists to be kind.

    I like the idea of a society where the focus of the human being is human potential. 200,000 years out of Africa – what do we want?

  11. Tom, I don’t think I have given any context to discuss revolutions or what have you, so I apologize, but I am simply not ready to engage in this discussion. Neither, for that matter, I am ready to engage in a discussion about the nature of Value.

    Peter, sorry, but we might just talked past each other. You seem be talking about the long-term viability of capitalism in light of tendency of the profit rate to fall. I have no issue with you conclusions. I was simply questioning whether *a* crisis can and should be explained by the global, aggregate tendency of the profit rate to fall.

    At any rate, in light of my admittedly rusty knowledge of economics I don’t find myself in a satisfactory and comfortable position to engage further in this discussion (even though I would like to disagree on certain aspects of your response). But be as it may, I will be coming back to these questions and your blog is on my to-read list when I finally do that.

  12. Without wishing to negate any of the Peter’s posts or the discussion above, but looking at things from another angle …

    In today’s world, with tensions rising between nations as a direct result of an obvious bid to fulfil greed and a lust for power, there persists the duty in the human being to step back and THINK; strive for clarity: – take stock of the basics before we get swept away by the chaos and confusion prevalent in the world today and foul our planet completely.

    One way of doing this is through the sense of scale and time; the frame rate we use.

    No one knows how large the universe is because the light arriving from perceived edges is still coming. Besides, it may be just a dot in an almost infinite array of dots, in a beautifully infinite Space. Our solar system lives happily in a quiet little corner, far away from unimaginably gigantic cataclysms and explosions; our earth a mere 4.5 billion years old. And we haven’t been around for a day in comparison. We humans are ‘new kids on the block’, not even out of our diapers – we know nothing. Of our existence:- the reason why a consciousness like us, each one absolutely unique, arises in an assemblage of the same atoms that make up everything else in the universe; why it is so different in each human – we have no clue. Why Life sustains everything we have no clue; why that same Energy that brings everything in the universe into form and system; generates, operates, destroys; has created us, we have no clue. Because when the sub atomic particles disappear into their fields, taking all the laws of the material world with them, we can say goodbye to our material investigations or ‘truth’. One day the sun and moon and stars will be no more – so, what is this game we play on earth?

    And yet we have a personality. And that personality identifies itself as male or female, belonging to a race, belonging to a nation, belonging to a class – and so few know the Self to which we truly belong. We are very very simply, a tiny spark, dancing in its graceful flame. And yet we wonder where we came from and where we should go – what to do? How to grow and unfold? How to be fulfilled?

    Sitting on the Southbank, Brisbane or Melbourne, gossiping with friends, watching the buskers and people passing by on the promenade; everyone busy busy busy with what is going on between the ears – why not slow the frame rate down, slow the movie and turn the volume down? We have one life: – there is a wall that we pass through when we arrive and there is a wall that we pass through when we leave; we have no clue what is on either side. We live out the life of the personality and have our little measuring sticks, measuring everything in the world around us, and ourselves. We write it all down in our records. One thing a human being has is the most colossal ego; that is what we think is our forte: – but it is weakness, not strength. We identify with the mind, the ego – we think that is who we are. We do not know the Self within; appreciate the Self within. And so we live in the illusion of the personality. Because of this, human beings are absolutely, chock full, of BS. It’s only when the far wall gets closer, when you can smell it, feel it, do we begin to wonder who we really are; or even why we came. What is our existence?

    And this is the problem we humans have, with all of the ‘Xperts’: – I do not care whether it is Marx looking for a politic-philosophic-economic solution to the personality life, or a cosmologist looking for the origin of the universe, or a quantum theorist looking for the smallest particle of matter. What we all need to understand is what we are looking for is already inside of us. None of us are ‘self-made-(wo)men’. We are children of this Energy that created everything, and our truest nature arises from it. The Light, propagates itself and withdraws itself. This quest, to know this Energy, this parent, this Life and Being, is the engine that drives the human existence, while everything else is a ring-in. The challenge to find the Self in the human heart is the greatest and most noble, most ancient, most fulfilling of them all. It arises out of the reality of our existence. All Knowledge, all Love, all Power begins with the Self. True knowledge is experience. The human being can never create anything that will make any ultimate sense to everyone, unless it comes from the Self. We are a part of the universe and we need to understand our creative role. It is, I feel, profound; far far deeper than any of us could even imagine or dream of. All knowledge, all experience, all love and all of intelligence culminates in the Self.

    As an existence, our greatest creative act is the human personality itself; and to perfect that, we need to be conscious. Through the Self comes clarity; creativity through love, intelligence, born of Life. This is what the world needs – Life! I think Peter is right in that if we do ever grow up, we will not need $money; but while we do, $money first and foremost should minister to the human being, and bring about those conditions on this planet whereby people can begin to focus on what really matters.

    A human being should not be fooled by the noise and chaos in this world, but seek the Self. This is not selfish. Nor is it a waste of time or unimportant. It is the essence of our reality and creativity.

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