Production and then distribution, or distribution and production together — Branko Milanovic

Must-read! Branko Milanovic sums up the fundamental issue affecting political economy as economics in relation to society.

Neoclassical economic is like doing engineering with a total focus on efficiency and ignoring resilience. This approach views redundancy as inefficient. This is like eliminating the emergency brake on vehicles.

An economy is the material life-support system for a society and its culture. It is the welfare and progress of the society that set the priorities.

Neoliberalism is based on the view that society does not exist. Go figure.

As Branko Milanovic points out, following the classical economists and Marx, it's the endowments, stupid. This results in market asymmetries that determine who wins and who loses, not the assumed spontaneous natural order that arises spontaneously as a result of the operation of a free market that leads to equilibrium characterized by optimality

Global Inequality
Production and then distribution, or distribution and production together
Branko Milanovic | Visiting Presidential Professor at City University of New York Graduate Center and senior scholar at the Luxembourg Income Study (LIS), and formerly lead economist in the World Bank's research department and senior associate at Carnegie Endowment for International Peace

Timothy Taylor — Why Did Simon Kuznets Want to Leave Military Spending out of GDP?

Simon Kuznets (Nobel 1971) usually gets the credit for doing as much as anyone to organize our modern thinking about what should be included in GDP, or left out. But I had not known that Kuznets apparently argued for leaving military spending out of GDP, on the grounds that it wasn't actually "consumed" by anyone, but should instead be treated as an intermediate input that supported production and consumption. Here's how Hugh Rockoff tells the story in his essay, "On the Controversies behind the Origins of the Federal Economic Statistics," in the Winter 2019 issue of the Journal of Economic Perspectives. [Full disclosure: I work at JEP as Managing Editor.]...

Conversable Economist
Why Did Simon Kuznets Want to Leave Military Spending out of GDP?
Timothy Taylor | Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota

Ramanan — The Kaldor-Verdoorn Effect

Anyway, to conclude, cheering for productivity is not going to help the world economy. The solution is to increase production: productivity will rise when production rises. The standard story as told in Mankiw’s textbook is erroneous.

Mankiw has the causality reversed.

The Case of Concerted Action
The Kaldor-Verdoorn Effect
Ramanan

If All America Only Knew What Some Americans Used To Know ... We'd Never Have To Worry About Our Deficit In Fiat

   (Commentary posted by Roger Erickson)

Please America, listen up.

You can't miss this illuminating summary of Marriner Eccles found ... of all places ... buried in a neglected college textbook!

pp: 504-557 in

The Vital Few: The Entrepreneur and American Economic Progress (Galaxy Book)

I'm only part way through, but it's a bombshell of observations driving home the point that what some of us know can be totally neglected by the bulk of us ... for multiple generations! Early on it quotes Shakespeare's Polonius, and just keeps getting better.

This fascinating book-chapter carries common sense to new heights, and skirts on the edge of multiple system sciences, and even all the way out to pseudo-religions like orthodox macro economics.

Let's start with Polonius. "By indirection, find direction." That's meant as a sly double-entendre in a Shakespeare play, but it's used as a direct, methodological insight in this book chapter. It's also remarkably similar to a famous IBM mantra about software development: "For every intractable problem ... there is a solution, and that solution will involve another level of indirection."

Who knew that every single organizational task facing growing aggregates - including the organization of currency systems - involves re-organizing to employ expanding levels of indirection? Only people considering autocatalysis?

Maybe we should just abandon the old class-based or "Royal" approach to economics as methods by which elites manage the rubes? That's Central Planning by any other name. Let's just throw out economics, and replace it with the more fundamental approach of ecological autocatalysis. Please?

Now let's turn to Marriner Eccles himself. In 1930, as President of the Utah Bankers Association since 1925, and owner of multiple banks and businesses in Idaho and Utah, Eccles already knew that the entire US economy was imploding. To understand why, he felt compelled to ask himself tough questions, and to actively consider un-learning most of what he'd been taught.

"Night after night I would return home exhausted by the pretensions of knowledge I was forced to wear in a daytime masquerade."

That's where references to Cotton Mather and his commentaries about farming & industry, credit & currency, production & consumption crop up (pun intended).

Like others before him, who recognized that autocatalytic systems (e.g., social species, such as humans and their human cultures) cooperate, and gain the amazing, institutionalized return-on-coordination, Eccles soon concluded on his own that

actual savings = actual investment, when optimized, and that 

actual production = actual consumption when optimized.

Well Duh! say the ecologists, but then ecologists tend to ignore how much royalty-instilled economics our citizens must unlearn, to even start optimizing the adaptive rate of our own human cultures & our own economy. In Eccle's words,

"The very essence of capitalism implies a debtor-creditor relationship ... to save successfully, someone has to borrow what is saved ... bankers, the arch symbols of capitalism, are the greatest borrowers ..."

And that little trivia about optimal production = optimal consumption? For Pete's sake, one look at an ant colony or beehive reveals the power of teamwork among social species.

'When inventories rose there appeared to have been too much production, but that was "in reality, underconsumption when judged in terms of the real world instead of the money world." '

So even by 1930 some still realized that the "money world" was just a method for tracking and denominating parts, but by no means all, of the real world? 

Will prior blunders never cease! Why must grandchildren re-learn lessons their grandparents learned the hard way, and their parents either forgot, or weren't taught? How many times will this particular cycle repeat, before we decide to permanently capture this and other, easily learned, lessons?

A foolish population and their grandchildren's options are soon parted. 

That's the old lesson about parasites, about the divine right of crooks and scoundrels, and about the class-based hegemony undermining all democracies everywhere.

"What passed as a 'lack of confidence' was really nothing more than an investors recognition of the fact that new plant facilities ... [were] over built when judged in terms of the effective demand consumers could make on the output of that plant."

So supply and demand can appear to be uncoupled if feedback from consumers to producers is either too slow or merely under sampled? So much for supposed "business intelligence." Macro economics is mostly about how smart an aggregate allows its collective self to be.

'Moreover, the only way economic growth could could continue was if the changing balance of consumption and savings .. could "provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery." With this Eccles not only had grasped the bookkeeping essential of elementary macro economics, but he realized the dynamic properties as well. '

'The wrong ratios of consumption to savings could cause the growing system to plow itself into the ground. It was Roy Harrod's 1948 book on economic dynamics that first explained in formal terms the paradox of self-destructive macroeconomic growth.'

This is amazing. So common sensical bankers - and even a few ostracized economists - once wandered into the most basic axioms of all system sciences? What happened? The offending economists and bankers were later excommunicated by their brethren in the halls of ideological orthodoxy, for betraying the divine right of the aristocracy to be fundamentally wrong about EVERYTHING? 

ps: why pay $42 for a windbag to over-explain common sense, first practiced by a banker who didn't bother going to school, other than the school-of-hard-knocks? Why isn't such information freely available to all citizens, as an adaptive, aggregate necessity, not as a knowledge acquisition tax?

And here's another kicker.

'Eccles also figured out the "fallacy of composition." What was good for the bankers in a depression was bad for everyone else: "By forcing the liquidation of loans and securities to meet the demands of depositors, were we not helping to drive prices down and thereby making it increasingly difficult for our debtors to pay back what they had borrowed from us?" '

Gosh! When will US citizens be educated enough to realize that they are "prosumers?"

Eccles to the Utah Bankers Association: "... hard work means more production, but thrift and economy mean less consumption. Now reconcile those two forces, will you?"

Even by 30 pages in, there's much more, on the topic of nationalizing the Federal Reserve to balancing dynamic national budgets. There's too much to quote here, so I'll give a flavor of the insights in a summary quote.

'In 1937 [Treasury Secretary Morgenthau] gave a budget-balancing speech before the Academy of Political Science, which Roosevelt had actually helped draft. Eccles was outraged, beside himself at the duplicity and stupidity of it. The economy was diving and Eccles thought he had been bringing FDR around to some compensating deficit spending. ... On Nov 10, 1937, in the afternoon, FDR had seemingly approved of a shift in fiscal policy toward the deficit. That night Morgenthau dropped his bomb (to the accompaniment of some drunken laughter in the audience).

Eccles [later] wrote: "The contradictions between the afternoon and evening ... made me wonder at this time whether the New Deal was merely a political slogan or if Roosevelt really knew what the New Deal was. This is an ungenerous comment, yet it faithfully reports what I felt at the time."  

Shortly thereafter ... FDR turned and supported an increased deficit. ... [FDR] didn't care, because he didn't have to.'

Even half way through, this book chapter drives home the reality that those who don't know their grandparents own history, are easily condemned to repeat it.

“Isn’t it about time that we learned this simple truth? Is it so hard to understand that when an individual owes money, he generally owes it to another individual, but when a nation owes [its own currency] it owes it to itself?* When an individual pays a debt, he pays it to someone else. When a nation pays a [T-Bond] debt, it pays it to its own people.” Marriner Eccles, 1938 **

Isn't it time that all US students learn such a simple truth, by age 10?

Past time.

And finally, another useful image. Banksters throughout banking history have repeatedly been caught trying to control the net currency supply, for personal gain, regardless of how much it hurt the nation which such Control Frauds parasitize. They can always stash the supposedly valuable currency in off-shore accounts, even if the nation they parasitize collapses.

And once currency supply is emancipated, through adoption of fiat currency? Then, the same Control Frauds simply transition their game. Currency supply itself is not purposefully manipulated. Instead, the fraud narrows to a focus on unbalancing the distribution of incomes, so that the same effect is gained without disturbing the alarms raised when wild swings in currency supply occur. [And remember, old frauds may be easily revisited the instant a compliant electorate once again becomes ignorant enough to be duped in the same old ways, all over again.]

We're left with a recurring question. Is it true that Neo-Liberals can't understand the Fallacy of Scale? Or true that kleptomaniacs can't help themselves? The answer seems obvious, and we can again find direction through indirection. In a truly recombinant culture, there will always be some residual number of NeoLiberals, kleptomaniacs and other Luddites. It's our job to NOT promote concentrations of any sociopathy to overly infest positions of authority, where they can have excessively negative effects on emerging aggregate policy.

   ###

* ps: And then ONLY because we choose to peg currency issuance to sales of bonds - as a archaic, useless tax on currency issuance, no matter how small.

** ps: ps: The honest, intelligent banker Marriner Eccles never did see eye to eye with the American Bankers Association, as subsequent letters show. We need more people like Marriner Eccles. We have them, of course. We're just not sending them into government anymore, nor to run the ABA. There are always many things we have to start doing differently. History shows that there's no point in waiting to institute intelligent change, only harm. When we change, only 3 outcomes (worse, same, better) can occur, and two of them are bad ... yet change we must. Our task is to select wisely, not to fail or refuse to select.

Peter Cooper — Marx’s View of Production in Relation to MMT and Taxes

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 productive contribution. We can conceptualize profit as unpaid labor (Marx) or due to ownership (Sraffians, Post Keynesians).

An observation due to Modern Monetary Theory (MMT) that sometimes meets with resistance, though in my view is convincing, is that government spending or lending is logically prior to the receipt of tax revenue or government borrowing. This is a recognition that, from inception, government must issue its currency (spend or lend) before reserve accounts can be debited. 

I often ponder this and other aspects of MMT in relation to Marx. In this regard, a statement made by Yanis Varoufakis in a fascinating presentation recorded in May 2013 caught my attention. Here, I will use it as a springboard for a brief consideration of Marx in relation to MMT on the question of fiscal policy, without intending to imply that Varoufakis would necessarily agree with the interpretation (or with MMT, for that matter).

heteconomist
Marx’s View of Production in Relation to MMT and Taxes
Peter Cooper

Kimball Corson — Capitalism in America Has Failed

Capitalism does a reasonably good job of efficiently organizing the production process and using limited resources efficiently and effectively to produce the goods and services. With some glaring monopolistic pricing exceptions, deriving from various sources, it does a pretty good job with such organization and efficiency. (Before the demise of the antitrust laws, the monopolistic pricing exceptions were much rarer.) However, capitalism has a serious problem everywhere it is practiced in the world these days.

It fails badly on the distribution side. The income derived from the production process is not well distributed to the population for the purchase of the goods and services produced. It becomes concentrated in the hands of too few and excessive income inequality arises, aggregate demand is compromised, the economy is compromised and together with such inequality, monopolistic pricing becomes more widespread and prevalent. Just what we observe in the United States today.

Wandering the Oceans: SailBlogs

Capitalism in America Has Failed
Kimball Corson

Izabella Kaminska — Property bubbles and ghost cities

I have a working theory about the premium property bubble in capital cities like London. There’ll be a post about it on AV soon. (Have been a little under the weather so it’s taken a while.)
In a nutshell, the idea is that the economy is plagued by a glut of misvalued capital — which is seeking preservation for as long as possible and at all costs. The preservation is not really about the dollar sum of that capital, but about preserving the position on the social hierarchy ladder that it provides for....


But, as per my German sun lounger analogy, owners of abstracted financial capital have lost perspective on what their capital rights represents. They wish to preserve not the wealth provided for by the means of production, but the superior social position that this used to entitle them to.
The truth, however, is that they are no longer entitled to that. Also, what they misunderstand is that they are no less well off as a result of losing that claim. It’s everyone else who is elevating to their wealth.
Nevertheless the search for the preservation of their past superiority continues — the days when they were adding social value — continues.
Consequently this capital flitters from one idle asset class to the next, avoiding at any cost an opportunity to invest in something productive — out of fear this might expose them to the sort of risk that might lose them their superiority claims forever. It’s worth noting that the constant speculative flittering is damaging in its own right.

Dizzynomics
Property bubbles and ghost cities
Izabella Kaminska

In a healthy capitalism, the purpose of real capital is production for consumption and financial capital is for further capital formation from gains from production, that is, for productive investment. When financial capital is accumulated as financial wealth for it own sake, neither for consumption not productive investment, rentierism and power, then capitalism becomes dysfunctional.

Dani Rodrik — The New Mercantilist Challenge

Short summary of mercantilism v. liberalism.

Project Syndicate
The New Mercantilist Challenge
Dani Rodrik | Professor of International Political Economy at Harvard University’s Kennedy School of Government

Neoliberalism combines features (and bugs) of mercantilism and liberalism.

Noah Smith asks, "How can debt affect GDP?"

Progress!

The problem is this: The way Salmon talks about debt, and debt's effect on GDP, seems to reinforce a common quasi-fallacy in pop economics - the idea that debt can create temporary but "fake" or "artificial" growth.
As Paul Krugman is fond of pointing out, the economy is not like a household. A household can temporarily increase its consumption by borrowing money.

But then Prof. Smith starts slipping off the rails.

But how can a nation artificially increase its maximum possible production by borrowing money? A nation's total productive capacity is determined by things like how many workers it has, how good their skills are, how much physical capital it has, what kind of production technologies it has, etc. How can borrowing money increase any of these things?

First error — currency issuers fund themselves directly. According to the MMT analysis of monetary operations, there is no need for a government that issues its own non-convertible floating rate currency to borrow at all. What looks issuance of interest bearing securities looks like borrowing but it is actually not a fiscal operation at all, but rather a monetary one that drains excess reserves so the cb can hit its target rate.  It works simply by adjusting the composition and term of non-government net financial assets without changing the amount.

Second error, and where Prof. Smith goes off the rails. According to MMT-based macro, government injection of net financial assets into non-government through deficits is appropriately used to offset non-government saving, which results in demand leakage and economic contraction if not addressed by the only entity that can offset changes in non-government saving desire — government.

To maintain output at capacity and full employment, thereby optimizing productive resources, government must accomodate changes in non-government saving by adjusting its fiscal balance in offset. Unless the cb either pays IOR or sets the interest rate to zero, then the Treasury needs to issue securities to drain the excess bank reserves injected by deficits. In this way, the federal debt in the US is properly conceived in terms of national savings rather than as public debt that obligates the government as currency issuer in the same way that private debt obligates currency users.

Yes, there is a macro relationship among full employment, price stability and production and productivity such that they constitute a self-augmenting system if kept in balance by maintaining a full employment budget. The sectoral balance approach and functional finance show the way to achieving this.

Interestingly, the congressional mandate to the Fed states that the Fed should use monetary policy to optimize production in order to maximize unemployment and maintain price stability within tolerance. This is based on the loanable funds doctrine underlying the use of interest rates to adjust saving and investment, which doesn't apply under the current monetary system.

The reality is that effective demand must be managed to ensure optimal use of national productive resources. This is accomplished through intelligently designed fiscal policy that look to employment as an indication of the efficiency and effectiveness of an economy's chief resource, its human "capital."

Less than full employment is a signal that effective demand is lagging owing to demand leakage, and the role of economic policy at this point is to inject net financial assets into non-government to offset this leakage. The appropriate size of the deficit is given by the sectoral balance approach, and it is empirically confirmed by the employment rate. The inflation rate shows when demand is exceeding the capacity of the economy to expand to meet it, necessitating adjustment of non-government net financial assets downward.

In this way, economic policy is consistently geared to a full employment budget along with price stability, which ensures optimal use of national resources since it directly addresses idle resources. MMT-based macro also uses an employer of last resort program to create a buffer of employed to mop up residual unemployment and a floor wage that serves as a price anchor against inflation. According to MMT the only "structural" unemployment is frictional, so the "natural rate" of unemployment is in the area of 1-2% rather than 4-6%, or even more as in the "new normal" of 6-8%.

What about the intertemporal government budget constraint (IGBC)? Not to worry. See Scott Fullwiler, Interest Rates and Financial Sustainability (2006).

Read it at Noahpinion

How can debt affect GDP?

by Noah Smith

Robert Vienneau — Nell's Diagram Of A Capitalist Economy by Robert Vienneau

I like the clarity with which monetary flows and commodity flows are distinguished in this approach. It is not the case that capitalists own blast furnaces sitting in their backyard, which they then loan to firms. Mainstream economists are deliberately and consistently obfuscating on this issue, from introductory teaching to beyond. Perhaps there's a reason for this widespread confusion:

"From the point of view of Political Economy, however, the most important fact is that while wages are paid for work, and one can (and in some circumstances should) think of the wage bill, equal here to Worker Consumption, as reproducing the power to work, profits are not paid for anything at all. The flow of profit income is not an exchange in any sense. The Samuelson [circular flow] diagram...is fundamentally misleading; there is no 'flow' from 'household supply' to the factor market for capital. The only flow is the flow of profit income in the other direction. And this, of course, leads straight to that hoary but substantial claim that the payment of wages is not an exchange either, or at any rate, not a fair one. For Wages plus Profits adds up to the Net Income Product; yet profits are not paid for anything, while wages are paid for work. Hence the work of labor (using the tools, equipment, etc., replacement and depreciation of which is already counted in) has produced the entire product. Is labor not therefore exploited? Does it not deserve the whole product?" -- Edward Nell

Read the whole post at Thought Offerings (short)
Nell's Diagram Of A Capitalist Economy
by Robert Vienneau

Federal Reserve's Mandate

Matt Franko notes in the comments:

Section 2A of the Federal Reserve Act:

"Section 2A. Monetary Policy Objectives

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." [emphasis added]