IS-LM and MMT The core issue at the heart of debates between the heterodox Modern Monetary Theory (MMT) approach and more mainstream macroeconomics is how the financial economy and the real economy interact. As a consequence we see Keynesians of various hues attempting to illustrate their response to MMT with the standard orthodox Keynesian IS-LM model of the economy, which attempts to illustrate this interaction graphically.
The IS-LM model, as elaborated by various economists after Keynes, consists of upward and downward sloping curves in income (Y) and interest (r) space. (See Figure 1) The downward-sloping IS curve illustrates the inverse relationship between the cost of physical capital (summarised by r) and GDP (Y) where investment is assumed to be the major variable in the latter. The upward-sloping LM curve is a somewhat more complex concept but essentially proposes that given a fixed supply of money, a higher Y leads to a higher interest rate on bank deposits. This interest rate is assumed to feed through to the price demanded for financial capital in such a way that it can be considered as variable r for the purposes of the model. The model is thus somewhat vague in what r is really standing for. Further criticism is that a fixed supply of money is an unrealistic concept; the quantity of money supplied in a modern monetary economy being endogenous to its demand. It is also pointed out that the model mixes up stocks (of money) and flows (of income). Despite these criticisms, the IS-LM structure has been used to characterise MMT ideas in terms of the slopes of the two curves – in its extreme a vertical IS curve (implying investment as independent from any rate of interest) and a horizontal LM curve (implying a technically unlimited supply of money).
A Matching Flows Approach A better way of approaching the real/money interaction might be to work from the viewpoint of two linked flows – that of money and that of its exchange counterparts. We start off with the economy in a steady state, with constant flows of money on one side and of real goods and services and speculative assets on the other. (See Figure 2) There is no distinction between consumer goods and services and productive capital goods in this model, since this is regarded as an arbitrary distinction between goods that have a spectrum of durability and of the timing of flows of utility and/or monetary return. What we will distinguish are goods purchased for use, and those (speculative assets) purchased for resale at (expected) higher prices.
Darren McGarvey’s Poverty Safari (Luath Press, 2017) is a very honest and powerfully written account of growing up and surviving amid poverty, addiction and violence in Glasgow. Darren draws from these experiences to make insightful observations about poverty, social deprivation, their causes and potential solutions. Of particular impact on his life was the addiction and violence of his mother, who died of alcoholism at the age of 36. He has escaped economically, if not emotionally, from these circumstances by turning a talent with words into a career as a writer and rap artist.
Violence both inside and outside the home affected the way he thought and behaved, and Darren outlines the role chronic stress, particularly emotional stress, leads to poor lifestyle choices and behaviours in the seeking of brief emotional reprieve. As he says:
A vulnerable family living in constant economic uncertainty, job insecurity or subject to an inhuman sanctions regime often lacks the capacity to absorb, process and practically address life’s unpredictable adversities.
Everyone in British politics, right and left, is now talking about inequality and social justice. But there is much confusion and obfuscation. Specificity is required. Social justice has rather different implications depending on whether it comes from the right or the left of the political spectrum. Leaving aside issues of capital ownership, right social justice essentially relies of the economic concept of the ‘marginal productivity of labour’ (MPL). An individual’s share of society’s material rewards should exactly represent his or her individual contribution to the output of society (usually in effect the output of their employer). Continue reading Equality of Voice – An Introduction→
Thomas Piketty’s “Capital in the 21st Century”, published in 2014, played an important role in directing attention to the issue of inequality in the developed economies of the 21st century. The book was both praised and criticised from many parts of the political and economic spectrum. Least controversial was his laying out of the evidence that inequality of both income and wealth has increased markedly since the 1970s, particularly in the US and the UK. A little more controversial is the suggestion that this increasing inequality is harmful to the societies of those countries. Most controversial, and more technical, was Piketty’s espousal of a ‘fundamental law of capitalism’ that when the return on capital (r) exceeds the rate of economic growth (g) inequality will increase.
The chart below shows the change in the fraction of total income going to the top 10% of the distribution for 1900 – 2010.
What is it about ideological free marketeers and their shaky relationship with the facts? Everyone likes markets and free exchange is one of the best manifestations of human co-operation there is – so why tell lies about their limitations and the infrastructure required to make them work for our benefit?
Sam Bowman of the Adam Smith Institute is keen to adapt the often pejorative label of ‘neoliberalism’ to his cheery brand of paid-for market propaganda, and promotes it under this banner in an article in the online i newspaper. He defines a neoliberal as
Having recently had the opportunity to visit China and combine that with some reading about the country, I’ve come away with some inevitably fairly superficial thoughts about how the Chinese and the West do things differently. While the Chinese government sets limits on voiced or organised challenges to the Communist Party’s control of the country, it seems that most Chinese are able to pretty much get on with their lives as they wish. Having visited the great open spaces at the centre of London, Paris, New York, Berlin and Madrid, it felt disturbing to be shooed off Tiananmen Square at dusk, but otherwise despite the presence of police and soldiers at nearly every turn in central Beijing, I felt able to move around and take photographs pretty much as elsewhere.
I suspect the vast politically apathetic majority of Westerners would feel no restriction of their freedom under the Chinese regime. If the rise of Donald Trump and apparently popular strongmen such as Russia’s Vladimir Putin and Turkey’s Recep Tayyip Erdo?an, along with Brexit, show that the ability to vote is not enough to sustain government by reason then Mao Zedong’s Great Leap Forward and Cultural Revolution show that the lack of a democratic buffer leads to the deaths of millions.
After defeat at the 2015 UK election Labour talks about appealing to the ‘aspirational’ and David Cameron pledges before his cabinet ‘to give everyone in our country the chance to get on’. If we accept the premise that speaking to material self-interest is what politics is now all about, we still need to point out that neither party has any analysis or policies that make their proffered goals more likely. Powerful economic forces are splitting apart the have-more from the have-less, with these forces accelerated by the way in which discrepancies in wealth inevitably lead to discrepancies in political power and voice. In a way it makes sense for the electorate to choose the party that is more comfortable with managing this process, revealingly accepting that ‘the dignity of a job’, and ‘the pride of a paycheck’ may be the limited best it can offer its citizens – since any promises over the quality and security of that job and how far that paycheck might stretch appear beyond modern governments to fulfill. Continue reading Beyond Defeat for Labour in the UK→
Independence is Nominal – long-gestated thoughts given birth to in response to Brian Barder’s blog post on the lack of post Scottish referendum preparedness and the need for the UK coalition government to resign if there is a ‘Yes’ vote.
Here I am, up in Scotland and strangely detached from the debate. (For comparison I was very active for the Yes side in the devolution campaign.) This detachment is partly due to personal events over the last 18 months, but also to a difficulty in getting a handle on what it all means. Continue reading Independence is Nominal→
The causes of unemployment make it a moral issue. Radical solutions are required.
In an earlier post I noted some features of unemployment from a UK perspective. The main thrust was that a fairly constant proportion of the population in employment (around 72% of those of working-age) hides a serious decline in the availability of adequate work, due mainly to the increase in women in the workforce and the fall in the ratio of full-time to part-time work. In a paper I wrote and referenced here on welfare I hinted at a moral dimension to the issue of unemployment in a capitalist economy (by which I simply mean an economy where physical means of production tend to belong in more or less concentrated hands).
I have now written a rather more formal paper (pdf 198kb) which I presented to the Post-Keynesian Study Group annual workshop in May this year in which I expanded on why we have a persistent problem with unemployment, and why this has a significant moral implications in our attitude to the unemployed. In this light of this I review the inadequacy of current policy and look at some of the more radical solutions proffered. The following is a non-technical summary of the paper. Continue reading Unemployment – Morality, Money and Increasing Returns→
Charles Moore is the official biographer of Margaret Thatcher, former editor of the Daily Telegraph and an Old Etonian. He has nicely epitomised the indifference, evident intentional ignorance and convenient innumeracy of a particular type of Conservative. Writing in his column in ‘The Spectator’ magazine (May 4th) he devotes a mere 262 words to writing-off the problems of those on low incomes in Britain.
[T]he people who best understand how welfare works are either its recipients or those who work on low wages and are scarcely better off for doing so
he writes. So far so reasonable. He goes on:
These people recognise that being on welfare is — in effect, though not morally — like having a job. There is a wage for it, plus various equivalents of overtime and fringe benefits, and the task is to get as much of these as you can.
There’s a half-truth in there. If work seems like an impossibility, or hardly worth the candle given its poor rewards and insecurity, self-interest would suggest that you look for all the benefits you might be entitled to – although many don’t. But he continues:
One effect of this has been to destroy the working class. Its more enterprising members have become middle class and the rest have discovered that they can live by not working.
At a stroke of his expensively-educated pen, Moore dismisses the existence of all those struggling to make ends meet in low-paid jobs. Four million Britons over 18 are in jobs that pay £7 per hour or less; seven million in ones paying no more than £8 per hour. (The minimum wage is set at just over £6.) They cannot reasonably be said to have joined the middle class, and if they could ‘live by not working’ they certainly choose not to. Continue reading The Callousness of a Conservative→