The Social Economy and the Potential Inherent in Currency Sovereignty

In any society, of whatever configuration, production at a given point in time is limited by certain ‘real’ (meaning non-monetary) factors. Notably, a society’s productive activity will always be limited by access to natural resources, the current state of its technology, and the skill, strength, size and imagination of its people. These and similar factors determine the absolute productive potential of a society. At a given point in time, these factors would apply even if, hypothetically, a society happened to be organized in a completely different way to its current form of existence.

But this refers only to the upper limit – the potential – of social production and reproduction, taken at a particular point in time and viewed in ahistorical and static terms. Under a particular societal form, production can easily run into barriers located well inside its real limits. This is certainly true of capitalism, a system in which nothing gets produced for exchange without an expectation of a monetary demand for the final product. The production may well be possible, and its product desired by a section of the community, but unless that desire is backed by both willingness and capacity to pay, the production will not take place.

Nor is the influence of ‘money’ (defined in the present context as currency plus deposits) confined to the short run. To the contrary, once we wish to consider more than society’s circumstances at a given point in time, divorced from social and historical factors, the influence of the monetary on the real can be long-lasting and far-reaching. The rate at which knowledge, technology and real productive assets can be developed from any given point in time will very much depend on the purposes for which money is created and the activities on which it is spent.

At the macro level, a lack of monetary demand in the present will result in unemployment or underemployment of workers who otherwise could be contributing to the development of technology and future productive capacity. At the micro level, a different composition of monetary demand results in different rates of development and types of development.

Because the levels of production in different parts of the economy adjust to meet monetary demand, and production in one sector entails a development of future capacity and consumption possibilities that differ from the development implications of production in another sector, a different composition of monetary expenditures influences the rate, direction and social nature of economic growth and development from now into the future. The division of demand into public and private expenditure, into consumption and investment, into investment in infrastructure and investment in technical development, into investment in this type of technical development or investment in that type of technical development, and so on, has long-term implications.

It is not just a matter of how much is produced, but of what, for whom, by whom, in what manner, and through which mechanisms these and related questions are decided upon.

Clearly, there are various social forms that could be developed. Currently, capitalism is the predominant system. This entails certain property relations, administered and enforced by the state through legal, police and, in the final instance, military means. Above all, a small minority own the means of production. A vast majority have little to sell but their capacity to work for a capitalist or capitalist government.

Historically, the system has been supported by smaller social units, especially the nuclear family, which has helped to reproduce – and, to a degree, has been reproduced by – capitalist social relations. By reinforcing a power imbalance between income recipients and their dependents, wage and salary recipients who are controlled by employers in the industrial sphere in turn are in a position to exert more or less control over dependents not included in the formal labor force. Work outside the labor force, being unpaid, is in one sense “priced” at zero. In another sense, it is “priced” indirectly, implicitly and inexactly as a component part of wage and salary income. The “pricing” is arbitrary, with the dependent of a wealthy person normally faring much better than the typical dependent.

Prevailing social conventions make it appear as if unpaid work is of zero worth and funded out of the pocket of waged and salaried workers. Few, presumably, actually believe this to be the case, and it is obviously not the case, but in accepting the prevailing social arrangement we in effect act as if it is the case.

The relation of dependents to income recipients is just one manifestation of the more general point that, under capitalism, nothing gets produced for exchange unless a capitalist expects an effective demand for the potential output. The likelihood of monetary demand being sufficient to justify production of a particular commodity will depend on many factors including the distribution of income and wealth. A highly equal distribution is likely to induce strong private consumption demand for mass produced commodities. Extreme inequality of income will limit demand for mass produced commodities while creating demand for luxury items for the affluent minority. In this way, distribution will influence the composition of demand and therefore the composition of output, and because of the enduring effects of expenditure decisions made now, the rate and direction of economic development into the future.

Government plays a central role in all this and underpins capitalist economies. Government’s role goes far beyond the foundational aspects pertaining to the creation and enforcement of property rights. Governmental decisions over the general direction of economic development, the construction of social infrastructure and policies pertaining to distribution of income and wealth all strongly influence the kinds of market and non-market activities that will occur and create context for those activities.

An emphasis on developing a road network, for example, favors a market for cars, both on the demand and supply sides. Expansion of a road network will make cars more useful to potential car owners, boosting demand. The expanded market for cars helps to justify their mass production, bringing economies of scale, lower unit costs and the profitable supply of a greater quantity of cars.

Many productive roles in our societies only exist to the extent that they do as a result of actions taken by government. A plumber or builder might resent being taxed to make way for non-inflationary government expenditures on hospitals, schools, public transport systems and other infrastructure as well as benefit payments and pensions, but without prior governmental decisions to green-light the formation of suburbs and development of a wide array of public infrastructure, the capacity of the plumber and builder to profit from their trades would be severely curtailed. The same would go for teachers and doctors if access to education and medical treatment had remained limited to individuals who could pay out of their own pockets. And the same could be said for pretty much any occupation or line of business we might care to mention.

In the prevailing economic system, money matters. Not only will production for exchange fail to occur when demand for future output is expected to be weak, but production will typically not even take place until monetary expenditure has occurred. In most lines of business, capitalist firms need to pay wages before the production process is complete and output sold. Raw materials and necessary plant and equipment will likewise need to be purchased or rented prior to final sale.

It is not just that, by definition, spending equals income. It is that spending, logically, is the determiner of income and income the mere result. For spending to occur, finance must be available. Under capitalism, money comes in right from the start.

We know, of course, where the money comes from. There are essentially only two origins: lending (whether public or private) and government spending. The money, from inception, must be created ex nihilo for capitalist production actually to take place.

If businesses don’t think they will be able to sell what they could technically produce, they won’t seek to produce it in the first place. Nor will they seek a loan or draw on retained earnings (ultimately made possible by prior lending or government spending) to set that level of production in motion.

If businesses think the demand is there but banks differ in their assessment, loans may not be forthcoming on the terms necessary to make what is possible to produce profitable.

If at the same time governments refuse to spend sufficiently to maintain overall output at its potential level, society will fail to reach its productive potential.

Basically, this is why money holds such significance when considering capitalist economies, and why, in Modern Monetary Theory, so much weight is attached to currency sovereignty and whether a currency-issuing government acts in a sensible fashion both in terms of its own money creation/destruction and its oversight and regulation of the banking system.

Above all, a currency-issuing government’s capacity to override profit imperatives makes possible a broadening and enriching of social life, a reshaping of the workplace and resetting of economic priorities, but the potential can only be realized if the community is both informed of the significance of currency sovereignty and prepared to hold its elected representatives to democratic account.