Tomorrow the Labour Force data comes out in Australia and I will obviously be analysing that. Regular readers will note that of late I have been using Thursday and Friday to update you on the progress of our Modern Monetary Theory (MMT) text-book, which I am writing in liaison with my colleague and friend, Randy Wray. We are trying to get it completed for use in second-semester 2013 and so I am spending more time on it to meet that expectation. So today – it is text-book day given tomorrow we will be talking about how bad the labour market is (unless I am pleasantly surprised and the data is better than I expect). Today, I am moving on to develop the material on unemployment and inflation.
Chapter 12 – Unemployment and Inflation
12.1 Introduction
[Note: the Chapter order has been a juggled a little. This was formerly going to be Chapter 11 but we will probably take the Keynes and the Classics material out of this chapter and run it as a stand-alone Chapter 11 or even 10 - decisions are still to be taken]
In this Chapter, we will introduce the concept of inflation and discuss various approaches that seek to explain it. We will differentiate between inflationary pressures that arise from nominal demand (spending) growth outstripping the real capacity of the economy to react to it with output responses and, inflation that may arise from supply shocks – such as a rise in an imported raw material (for example, oil).
The first type of inflation has been termed demand-pull because excess nominal demand (relative to real output capacity) pulls up the price level. Sometimes you will encounter the expression “too much money chasing to few goods” as a crude simplification of this type of inflation.
The public debate about whether expansionary fiscal policy causes inflation, which we will deal with specifically in Chapters 13 and 19, are also predicated on the claims that fiscal stimulus runs the danger of causing the economy to overheat.
The second type of inflation is termed cost-push inflation because it originates from the costs of production increasing and pushing up the price level. We will learn that the mechanisms through which the supply shocks manifest as inflation are different to those that operate under demand-pull inflation.
However, both forms of inflation can be understood within a general framework whereby different claimants on real GDP and national income struggle to assert their aspirations. In this sense, we cast inflation within the general distributional struggle or conflict, that is elemental in capitalist economies, between workers seeking to maintain and achieve a higher real wage and firms seeking to maintain and expand their profit rate.
In other words, we situate the problem of inflation as being intrinsic to the conflictual relations between workers and capital, which are mediated by government. This mediation varies over the course of history and in more recent times has been biased towards protecting the interests of capital, particularly financial capital, at the expense of workers’ real wage aspirations. We will consider the consequences of that policy stance in this Chapter.
34 comments:
Pay workers with common stock and the distinction between capital and labor disappear.
But why "share" with the workers when a business (by virtue of being deemed "credit-worthy") can steal their purchasing power with loans from the government backed (government deposit insurance and lack of a risk-free government provided fiat storage and transaction service that makes no loans, a legal tender lender of last resort, etc.)?
correction: add "credit cartel" to end of last sentence.
"Pay workers with common stock and the distinction between capital and labor disappear."
How does that work?
Unless capitalists suddenly turn into charity workers, why would they choose to pay their workers more than they have to?
They would only replace paying money wages with some form of share-issuance if the latter were no more costly to them than the former.
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Let's imagine there's only one business, with one owner and a 100 workers, who own nothing and live off their wages, spending everything they earn.
The owner pays the workers with his IOUs. The workers produce the goods, which then belong to the owner. The owner then sells most of the goods to the workers in return for the IOUs, keeping a fraction of the goods produced as his profit.
At the end of this process the owner has all his IOUs back, plus some goods as his profit. The workers have consumed the rest of the goods produced and have spent all the IOUs they were paid with.
The owner would only choose to pay the workers with ownership shares in the business, rather than with his IOUs, if he thought it was more profitable/beneficial for him to do so. He would not voluntarily give up more to the workers without a reason.
If the owner were to pay the workers with shares instead of IOUs, the shares would have to be of a particular kind which didn't reduce the owner's potential future profit. I'm guessing the shares would have to be valid only so long as the worker was employed by the owner, and subject to all sorts of contractual clauses - to ensure the owner's potential profits were not reduced (compared to what he could have gained if he paid the worker with his IOUs).
Bill in the post: both forms of inflation can be understood within a general framework whereby different claimants on real GDP and national income struggle to assert their aspirations. In this sense, we cast inflation within the general distributional struggle or conflict, that is elemental in capitalist economies, between workers seeking to maintain and achieve a higher real wage and firms seeking to maintain and expand their profit rate.
In other words, we situate the problem of inflation as being intrinsic to the conflictual relations between workers and capital, which are mediated by government. This mediation varies over the course of history and in more recent times has been biased towards protecting the interests of capital, particularly financial capital, at the expense of workers’ real wage aspirations.
Emphasis added
Unless capitalists suddenly turn into charity workers, why would they choose to pay their workers more than they have to? y
Because they would no longer have a government backed credit cartel to steal the worker's purchasing power with. What part of a free market economy requires government deposit insurance and a legal tender lender for the banks? It doesn't make sense!
The owner would only choose to pay the workers with ownership shares in the business, rather than with his IOUs, if he thought it was more profitable/beneficial for him to do so. He would not voluntarily give up more to the workers without a reason. y
Of course he wouldn't but without the counterfeiting cartel to borrow from what are his choices? He can either pay free market interest rates (most likely high in real terms) for his workers' savings or "share" his profits and/or control of the business with them. Either way, the worker wins. It's win/win for everyone, actually.
where do the worker's savings come from, and what are these free market interest rates?
where do the worker's savings come from, y
From a universal and equal bailout of the entire population (including non-debtors) at least until all deposits are 100% backed by reserves or perhaps until all private debt is paid off. This would be compensation for previous theft of purchasing power by the banking cartel.
and what are these free market interest rates? y
These would be the interest rates prevalent after government privileges for the banks ended and the universal bailout started.
Just thinking out loud but wouldn't a business have to issue claims on it's production in excess of production in order to make a profit?
And wouldn't that be circular and self-defeating?
So no profit could be earned unless it accepted claims on other businesses products…which opens up a huge can of worms.
Profit has to come from somewhere.
In excess of the cost of production that is…
With common stock as private money, profit would accumulate in the value of the stock (quantity X share price). Stock splits would (ideally) keep the value per share from increasing so a person's yearly profit would be measured by increase in the number of his shares.
As for a "can of worms", business could always choose to pay honest interest rates for the population's savings in fiat instead of using their own common stock as private money.
"wouldn't a business have to issue claims on it's production in excess of production in order to make a profit?"
In my simple example, the owner gains a surplus - i.e. real goods, but doesn't make a monetary profit because all the money is in the form of his IOUs, issued by him when he spends/invests.
I don't know whether its a useful example or not. I'm trying to get my head round this stuff.
Kalecki's equation shows that in an economy without government deficit spending, profits come from investment and capitalists' consumption.
gross profits = investment + government deficit + net exports - workers savings + capitalist consumption
"These would be the interest rates prevalent after government privileges for the banks ended and the universal bailout started."
Sounds like the interest rate would be zero?
"profit would accumulate in the value of the stock (quantity X share price)"
That ignores the closed nature of the system.
Value is based on the ability of consumers to purchase production.
The value of the stock van't go up unless claims exceed cost.
Claims equal cost.
The value of production could never be greater than the stock issued because that's all that's available to purchase it…and even then it would require 100% turnover and efficiency in clearing.
There would be losses if anyone tried to save…resulting in unemployment.
Profit isn't possible as the scenario is laid out. The purchasing power to generate value above cost has to come from somewhere else.
Not that there's anything wrong with that but you see where this is heading…
The value of production could never be greater than the stock issued because that's all that's available to purchase it… paul
Who said that? The production could also be bought with fiat. Indeed, some fiat is needed to pay taxes with.
Sounds like the interest rate would be zero?
y
Real interest rates should be positive since there would be little counterfeiting by the banks to suppress them with.
HThe value of the stock van't go up unless claims exceed cost.
paul
Addition claims would be created - as stock splits and to purchase additional real capital. Purchasing real capital with new stock would tend to temporarily reduce the value of existing stock until the new capital started to pay for itself. After the new capital has started to pay for itself then its profit can be distributed as a stock-split or reinvested to purchase additional real capital or both as the shareholders or their representatives decide.
And like I said, business always has the option of borrowing fiat from the general population at honest interest rates.
"Real interest rates should be positive"
If you're going to saturate the economy with fiat money in a universal bailout, then the interest rate on fiat money will go to zero or thereabouts, I think.
If you're going to saturate the economy with fiat money in a universal bailout, then the interest rate on fiat money will go to zero or thereabouts, I think. y
During the bailout period, credit creation by the banks would be banned and the bailout would be metered to just replace existing credit as it is repaid so the total money supply (reserves + credit) would remain constant. I see that as a wash wrt interest rates.
what do you mean by "replace existing credit as it is repaid"?
what do you mean by "replace existing credit as it is repaid"? y
With the government backed counterfeiting cartel (the banks) "loans create deposits." Thus loan repayment DESTROYS deposits. So if the banks are forbidden from creating additional deposits, the repayment of existing credit debt will be massively deflationary UNLESS it is countered with, say, a universal bailout with new fiat, metered to just replace existing credit as it is repaid.
ok, but those additional reserves will drive the interest rate to zero unless the government issues bonds or pays interest on reserves, or if the CB drains reserves into time deposit accounts.
Not necessarily. If the banks are forbidden (at least during the bailout period) from creating new deposits then interest rates (in fiat) will be determined by the supply of and demand for fiat.
Would banks only be able to lend out money held in time deposits/savings accounts?
Would banks only be able to lend out money held in time deposits/savings accounts? y
Yes, else the bank is creating money, not simply lending it. However, a metered universal bailout of the entire population (including non-debtors) should provide all the fiat needed for honest lending.
F.Beard
Seems to me sound underwriting eliminates most of the problems you are trying to solve.
If a solution doesn't remove human judgement from the equation you haven't really changed anything...just shifted the responsibility to different humans.
Those different humans will quickly become the same people you were trying to avoid.
So from where I sit you are trying to solve the wrong problem.
"Sound underwriting" does not solve the unethical nature of our money system so ultimately "sound underwriting" is not sound.
Why else has central banking caused enormous problems despite over three centuries of attempts to perfect it?
"Yes, else the bank is creating money, not simply lending it."
Not necessarily. Say I put money in a deposit account, so long as that money is available when I want it, there's no need for the bank to 'create money'.
If they just leave the money sitting in a 'vault' and do nothing with it, they'll probably charge me for 'storage'.
Problem is, most money is just numbers so this all gets a bit strange.
Banks create an obligation to repay principal with interest in return for a promise to provide liquidity on demand, either cash at the window or indirect settlement, .eg., through check or electronic withdrawal
OK to call those figures in ledgers "money" as long as one keeps straight what the word means. But "money" is an ambiguous term and is best avoided in technical usage. Like KISS, SWYM (say what you mean).
Why else has central banking caused enormous problems despite over three centuries of attempts to perfect it?
Because it is managed by people. The problem is the management not the system.
Whatever system we come up with it will be gameable by the people managing it.
We can try to decentralize banking but to date no one has come up with a workable system.
We had few problems with the banking system between the 1930's and the 1980's…when we deregulated and let banks do as they pleased.
The outcome should not be a surprise to anyone.
Well, if 97% of the money supply is created by the banks then I reckon it is loosely correct to call bank credit "money."
Btw, if the banks create 97% of the money supply then 97% of the concern about inflation should be directed at the banking cartel, no? So why isn't it?
We can try to decentralize banking but to date no one has come up with a workable system. Paul
Your error is to assume that banks are even needed. The monetary sovereign certainly does not need them and as for the private sector, it can certainly come up with private money solutions that 1) cheat no one 2) do not require government privileges such as the banks now enjoy.
Btw, if the banks create 97% of the money supply then 97% of the concern about inflation should be directed at the banking cartel, no? So why isn't it?
Most people think that "the money" (as in cash) comes from the government. Remember Hans-Hermann Hoppe
"little bits of paper" question to Paul Krugman posted recently?
I don't really know enough about full reserve banking... I thought the Benes&Kumhof paper was fascinating though. Wray's paper 'What should banks do?' is also good on banking reform, from a non-full reserve perspective.
"I don't really know enough about full reserve banking"
I haven't spent a lot of time thinking about it either but…
Anything that reduces liquidity or increases risk is going to…reduce investment.
Maybe we don't need as much investment of the kind we have had, I don't know…
Maybe the government can step in and take up the slack…
The consequences of full-reserve banking are an unknown in my view.
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