Situating MMT Theoretically: On the Issues of Expectations, Capacity Utilization, and the Comparative Efficacy of Public and Private Investments
As argued previously, Modern Monetary Theory (MMT) advances a set of propositions about macroeconomic policy management with a long theoretic history. These propositions are by no means objective and uncontested. Rather, the history of macroeconomic theorization, from John Maynard Keynes' General Theory in the 1930s through the Monetarist counterrevolution of the 1970s and on to the present, has constituted a battle between divergent and antagonistic theoretic perspectives. In this larger struggle, MMT occupies not entirely new ground, squarely in the camp of old Keynesian theory. This section attempts to play out the broader terms of the struggle between theoretic perspectives in reference to the key battlegrounds in this struggle: expectations on future economic conditions incorporating the effects of monetary and fiscal policy initiatives, the problem of capacity factor utilization as a matter of definition and policy consequences, and the ultimate virtues of fiscal investments by the government if we accept the proposition that economic activity and growth of national income must be grounded in private entrepreneurial behavior.
To begin, Keynes' introduction to the problem of expectations in Chapter 5 of the General Theory provides a good starting point in divining the perspective that underlies MMT. As a quintessentially Marshallian-influenced theory, this approach in grounded in empirically driven understandings of time (and, also, presumably, space). Keynes' discussion in this chapter largely constitutes a discursive explication of his ultimate mentor, Alfred Marshall's, perspective on the formation of shorter and longer term decisions by private entrepreneurs on the employment of production factors under conditions where expectations about the future, at divergent time frames, arise from imperfect knowledge. For Marshall as for Keynes, economic reality constituted the outcome of set of individually learned behaviors and institutionally constrained social environments, irreducible to a play of pure mathematical formulae. Certain decisions on factor procurement emanate from a strictly short term logic of present-time market conditions (especially the case with labor), while others involve a more considered analysis of where markets are going over time (i.e. decisions over the purchase of machinery or infrastructure that may have to be financed over several years). In some regards, the logic of (short run) business cycles is in play here, but so is a logic transcending the business cycle involving the broader transformation of production technologies and the practical organization of markets, on both a regional and interregional/international scale. Subsequent, Marxian-influenced schools of thought have applied the label social structures of accumulation to differentiate the latter, longer term manifestations of economic change from short run dynamics in aggregate demand (e.g. recessionary periods). If economic agents, both private and public, individual and collective, necessarily have expectations of the future that are shaped by these types of multi-level frames of economic time, with widely divergent degrees of practical predictability, then, it stands to reason, expectations must become a critical theme in how regional, national, and international economic aggregates evolve.
To the extent that this is the ultimate theoretic entry point for MMT and all Keynesian-influenced thinking, it isn't a bad place to step onto the stage. Taking this structuration of time frames in expectations a step further, monetary dynamics can become an important factor in the decisions undertaken, in particular, by entrepreneurs. Following the basic pre-Keynesian logic of the quantity theory of money, increases in the money supply for a monetary system not ultimately accompanied by an increase in real income/aggregate supply must generate an increase in the aggregate price level/price inflation. Any actions undertaken by a monetary authority that are, thus, apt to increase the money supply (e.g. open market purchases of government securities) must be considered by private sector firms in relation to the existing pace of economic activity (i.e. the current progress of the business cycle from expansion through contraction/recession) and the potential for longer term changes in economic activity (i.e. longer term transformations in regional economies, trade patterns, industrial/sectoral activity and competition). The potential for price inflation arising from the actions of the monetary authority must, by this reasoning, determine the willingness of the private sector to invest capital on both the short and longer term. On the other hand, this potential is shaped by the response of the economy as a whole to the actions of the monetary authority.
The operative question at this point concerns the overall importance of monetary dynamics in the expectations of private entrepreneurs. That is to say, will entrepreneurs see through an effort by the monetary authority to juice economic growth by lowering interest rates? Put another way, is there some objectively given, largely static rate of economic growth that is invariant in relation to monetary dynamics, against which any transformation of money supply growth will result in an axiomatic adjustment of market prices in order to negate any effect from monetary policy? The latter view represented the position of the pre-Keynesian "Classical" economic schools, succinctly labeled monetary neutrality. Monetary neutrality similarly shapes both Monetarist and New Classical approaches to monetary policy, with noteworthy differences between the particular ways in which these generally like-minded schools view expectations, differences that reflect the divergent theoretic origins of these approaches.
The fundamental point is that, in the long run, underlying non-monetary variables determine organization and growth rate of an economic system - monetary factors are window dressing that do not affect how much of each good and service consumers want and how much of each factor of production households are willing to supply in order to produce these goods and services. In a market-based economic system with flexible pricing structures, any adjustments in the money supply should result in an adjustment of prices such that increases in the money supply will raise prices and decreases in the money supply will lower prices. The key point of difference between the (Walrasian) New Classical school and the (Marshallian) Monetarist school concerns the speed at which prices will adjust to a change in the money supply (or an adjustment to the overall growth rate of the money supply, insofar as the money supply is constantly changing). And this difference in the speed at which economic agents adjust to a change in the money supply is reducible to a difference in expectations.
The Walrasian theoretic underpinnings of the New Classical school reinforce the notion that individuals always possess sufficient information to determine when changes in economic dynamics are real as opposed to purely monetary. To this extent, any transformation of the money supply by the monetary authority must generate an instantaneous or nearly instantaneous proportional adjustment in prices - a ten percent increase in circulating currency must instantaneously generate a ten percent increase in aggregate prices. If individual economic agents always understand this underlying relationship between the money supply, real economic processes of production and consumption, and market pricing, then they will apply rational expectations to adjust the prices at which they demand compensation for their factors of production and at which they are willing to pay for the goods and services they demand for consumption. General economic equilibria, in the Walrasian vein, arise strictly from the influence of underlying individual household preferences for consumption and for supply of production factors to firms. As a result, monetary policy will exert no influence on the real economic variables of an economic system.
Monetarist approaches, emerging from the same, empirically-driven Marshallian theoretic foundations as Keynesian thought, differ on the idea that monetary neutrality imposes itself instantaneously on an economic system through the rational expectations on economic agents. On the contrary, for the Monetarists, agents are no less rational or driven by an understanding of the real, non-monetary variables of an economy, but they are subject to the need to learn the effects of a transformation in particular economic variables and to adjust accordingly over time. Thus, when a monetary authority reduces interest rates in order to stimulate capital investment and enhance the rate of economic growth, it may take time for agents across the economy to adjust to the reality that the monetary authority is trying to pull the wool over people'e eyes and convince them to spend more money than they otherwise would have under prevailing economic conditions. Entrepreneurs may invest in more capital and hire more labor to handle increased demand for goods and services, but these expansions in activity will be short lived as prices slowly adjust to the reality that the underlying variables governing supply and demand for final goods and services and for factors of production have not really changed. In the end, monetary neutrality is the iron rule and the expectations of individuals toward changes in monetary variables are strictly adaptive. Monetary policy can be effective for a short time, but, eventually, any effort to increase the money supply without a permanent transformation of real economic preferences (unrelated to monetary variables) will only generate price inflation.
For Keynes and for subsequent Keynesian schools, including MMT, monetary variables are relevant parameters to the functioning of market economies, both because nominal market prices structure individual expectations at a given point in time and because nominal prices, at least in certain markets, exhibit differential degrees of rigidity, inhibiting instantaneous readjustment to monetary transformations. The latter characterizes, in particular, the dynamics of wage determination in labor markets. The ultimate point here is that facial realities in (nominal) market pricing are actually more important than the determination of relative prices, which figure centrally in the principle of monetary neutrality.
To begin, Keynes' introduction to the problem of expectations in Chapter 5 of the General Theory provides a good starting point in divining the perspective that underlies MMT. As a quintessentially Marshallian-influenced theory, this approach in grounded in empirically driven understandings of time (and, also, presumably, space). Keynes' discussion in this chapter largely constitutes a discursive explication of his ultimate mentor, Alfred Marshall's, perspective on the formation of shorter and longer term decisions by private entrepreneurs on the employment of production factors under conditions where expectations about the future, at divergent time frames, arise from imperfect knowledge. For Marshall as for Keynes, economic reality constituted the outcome of set of individually learned behaviors and institutionally constrained social environments, irreducible to a play of pure mathematical formulae. Certain decisions on factor procurement emanate from a strictly short term logic of present-time market conditions (especially the case with labor), while others involve a more considered analysis of where markets are going over time (i.e. decisions over the purchase of machinery or infrastructure that may have to be financed over several years). In some regards, the logic of (short run) business cycles is in play here, but so is a logic transcending the business cycle involving the broader transformation of production technologies and the practical organization of markets, on both a regional and interregional/international scale. Subsequent, Marxian-influenced schools of thought have applied the label social structures of accumulation to differentiate the latter, longer term manifestations of economic change from short run dynamics in aggregate demand (e.g. recessionary periods). If economic agents, both private and public, individual and collective, necessarily have expectations of the future that are shaped by these types of multi-level frames of economic time, with widely divergent degrees of practical predictability, then, it stands to reason, expectations must become a critical theme in how regional, national, and international economic aggregates evolve.
To the extent that this is the ultimate theoretic entry point for MMT and all Keynesian-influenced thinking, it isn't a bad place to step onto the stage. Taking this structuration of time frames in expectations a step further, monetary dynamics can become an important factor in the decisions undertaken, in particular, by entrepreneurs. Following the basic pre-Keynesian logic of the quantity theory of money, increases in the money supply for a monetary system not ultimately accompanied by an increase in real income/aggregate supply must generate an increase in the aggregate price level/price inflation. Any actions undertaken by a monetary authority that are, thus, apt to increase the money supply (e.g. open market purchases of government securities) must be considered by private sector firms in relation to the existing pace of economic activity (i.e. the current progress of the business cycle from expansion through contraction/recession) and the potential for longer term changes in economic activity (i.e. longer term transformations in regional economies, trade patterns, industrial/sectoral activity and competition). The potential for price inflation arising from the actions of the monetary authority must, by this reasoning, determine the willingness of the private sector to invest capital on both the short and longer term. On the other hand, this potential is shaped by the response of the economy as a whole to the actions of the monetary authority.
The operative question at this point concerns the overall importance of monetary dynamics in the expectations of private entrepreneurs. That is to say, will entrepreneurs see through an effort by the monetary authority to juice economic growth by lowering interest rates? Put another way, is there some objectively given, largely static rate of economic growth that is invariant in relation to monetary dynamics, against which any transformation of money supply growth will result in an axiomatic adjustment of market prices in order to negate any effect from monetary policy? The latter view represented the position of the pre-Keynesian "Classical" economic schools, succinctly labeled monetary neutrality. Monetary neutrality similarly shapes both Monetarist and New Classical approaches to monetary policy, with noteworthy differences between the particular ways in which these generally like-minded schools view expectations, differences that reflect the divergent theoretic origins of these approaches.
The fundamental point is that, in the long run, underlying non-monetary variables determine organization and growth rate of an economic system - monetary factors are window dressing that do not affect how much of each good and service consumers want and how much of each factor of production households are willing to supply in order to produce these goods and services. In a market-based economic system with flexible pricing structures, any adjustments in the money supply should result in an adjustment of prices such that increases in the money supply will raise prices and decreases in the money supply will lower prices. The key point of difference between the (Walrasian) New Classical school and the (Marshallian) Monetarist school concerns the speed at which prices will adjust to a change in the money supply (or an adjustment to the overall growth rate of the money supply, insofar as the money supply is constantly changing). And this difference in the speed at which economic agents adjust to a change in the money supply is reducible to a difference in expectations.
The Walrasian theoretic underpinnings of the New Classical school reinforce the notion that individuals always possess sufficient information to determine when changes in economic dynamics are real as opposed to purely monetary. To this extent, any transformation of the money supply by the monetary authority must generate an instantaneous or nearly instantaneous proportional adjustment in prices - a ten percent increase in circulating currency must instantaneously generate a ten percent increase in aggregate prices. If individual economic agents always understand this underlying relationship between the money supply, real economic processes of production and consumption, and market pricing, then they will apply rational expectations to adjust the prices at which they demand compensation for their factors of production and at which they are willing to pay for the goods and services they demand for consumption. General economic equilibria, in the Walrasian vein, arise strictly from the influence of underlying individual household preferences for consumption and for supply of production factors to firms. As a result, monetary policy will exert no influence on the real economic variables of an economic system.
Monetarist approaches, emerging from the same, empirically-driven Marshallian theoretic foundations as Keynesian thought, differ on the idea that monetary neutrality imposes itself instantaneously on an economic system through the rational expectations on economic agents. On the contrary, for the Monetarists, agents are no less rational or driven by an understanding of the real, non-monetary variables of an economy, but they are subject to the need to learn the effects of a transformation in particular economic variables and to adjust accordingly over time. Thus, when a monetary authority reduces interest rates in order to stimulate capital investment and enhance the rate of economic growth, it may take time for agents across the economy to adjust to the reality that the monetary authority is trying to pull the wool over people'e eyes and convince them to spend more money than they otherwise would have under prevailing economic conditions. Entrepreneurs may invest in more capital and hire more labor to handle increased demand for goods and services, but these expansions in activity will be short lived as prices slowly adjust to the reality that the underlying variables governing supply and demand for final goods and services and for factors of production have not really changed. In the end, monetary neutrality is the iron rule and the expectations of individuals toward changes in monetary variables are strictly adaptive. Monetary policy can be effective for a short time, but, eventually, any effort to increase the money supply without a permanent transformation of real economic preferences (unrelated to monetary variables) will only generate price inflation.
For Keynes and for subsequent Keynesian schools, including MMT, monetary variables are relevant parameters to the functioning of market economies, both because nominal market prices structure individual expectations at a given point in time and because nominal prices, at least in certain markets, exhibit differential degrees of rigidity, inhibiting instantaneous readjustment to monetary transformations. The latter characterizes, in particular, the dynamics of wage determination in labor markets. The ultimate point here is that facial realities in (nominal) market pricing are actually more important than the determination of relative prices, which figure centrally in the principle of monetary neutrality.
Concretely, if most economic agents configure their decisions in the pricing and purchasing of goods and services and in investment expenditures around the nominal pricing of an arbitrarily small handful of goods and services (e.g. their weekly paycheck, their average monthly living expenses, their accumulation of debt and repayment responsibilities, payroll obligations for their business), then any episodic tightening or loosening of monetary policy must exert uneven, perhaps delayed, effects on individual choices. Any price changes would have to radiate out from the financial sector to other corners of the economy, principally by means of changes in interest rates on short term commercial and consumer credit instruments. Even in this respect, certain rigidities, introduced by long term contracting, short term constraints on information transmission, or practical considerations on market competition may prevent changes in nominal pricing. In contrast to either the New Classical or Monetarist approaches, each grounded in monetary neutrality and its sense of inevitability, any faithfully Keynesian account of the effects of monetary policy on expectations regarding future economic conditions must be colored by certain degrees of uncertainty and the deployment of ad hoc heuristic methodologies by all manner of economic agents to steer the course of unpredictable dynamics.
For its part, MMT assumes a ready malleability, in particular, of investment and consumption demand with any acceleration of money supply growth, subject to an ultimate, inter-temporal factor utilization limit. The presence of a factor utilization constraint is key here, but so is the degree of trust accorded to the monetary authority and to government/fiscal authorities in regard to the management of government sector demand and the capacity of the government to over-stimulate demand in relation to macro-economic factor constraints. Returning, in part, to the theme that closed out my previous post in this set, the extent to which expansionary fiscal policies tend to undermine public faith in the value of monetary issues is unlikely to be wholly uniform across a larger (national) economic system the larger the system and its attendant monetary zone is. Even under conditions where independent fiscal and monetary policies are exercised at the same economic scale (e.g. in the US, the US Treasury/Congress and the larger Federal Reserve System), if the larger (national) economic system incorporates a large number of imperfectly integrated and extraordinarily diverse regional economic systems, then monetary policy will exert wildly divergent effects across economic space, perhaps, in some local economies, at the expense of price stability.
To summarize the issues at stake in the various, broad theoretic approaches outlined above with regard to expectations, if all the relevant variables considered by consumers and investors in an economic system are quantified in monetary terms, then any policy regime, orchestrated either by fiscal or monetary authorities, that impacts the growth of the money supply, impacting its value, will have a palpable effect on the way economic agents will form expectations about consumption and investment in the future. If I hold a certain quantity of currency in a fixed-rate interest bearing account, should I maintain a constant level of principle in the account or withdraw funds to purchase real, relatively durable non-monetary assets (e.g. real estate) under conditions where the relationship between the rate of interest on my funds and the rate of price inflation are expected to vary substantially in the future? The answer to this question comes back, in part, to the degree of faith I am willing to accord both the government/fiscal authorities and the central bank/monetary authorities relative to the process of money supply management. On the other hand, it also manifests a larger collective action problem in the degree to which other economic agents come to disagreement with me regarding our expectations of the future. This problem becomes more acute the larger the scale of the (national) economic system.
In still another sense, the decisions that individuals take toward consumption or investment under conditions of uncertainty rely on the degree to which other individuals, particularly those exerting an institutional capacity to shift policy variables, believe one or another of the above theoretic constructs regarding the relationship between monetary fluctuations and market pricing. Mass acceptance of particular conceptions in economic theory must, in some way, shape, or form, constitute the manner in which broader social formations approach monetary policy as a mechanism to transform the real economy, an insight further shaped by the basic dichotomization of real and monetary economics, per se. If Keynesian theorists have strenuously defended a disintegration of monetary neutrality as the theoretic firewall distinguishing real from monetary economic conceptions, then Monetarist and New Classical theorists have similarly fought strenuously to remind the world that the end purpose of economics is consumption and investment of real goods and that monetary valuations are superficial. On some level, even individuals who have never opened an economics textbook in their lives must ascribe to some theoretic understanding of a relationship between the pile of paper money in their wallets (or lack thereof) and their ability to consume the goods and services they desire or their ability to bring their ideas of enterprise to fruition. And like every other social process, the extent to which individuals ascribe to more faithfully Keynesian readings on monetary economy or more Monetarist/New Classical readings will determine how a broader economy reacts when the government accelerates public spending and/or the central bank starts buying up government debt and injecting fresh cash into the monetary system.
Much of the Keynesian (and, hence, MMT) argument hinges on factor utilization as the key determinant on the effectiveness of efforts to stimulate an economy through either fiscal or monetary initiatives. That is to say, assuming government enacts an expansionary fiscal policy through debt financing and monetary authorities undertake a complementary initiative to purchase open market government debt injecting fresh cash into the system, will adequate quantities of un-utilized or under-utilized factor resources exist to increase aggregate supply in response to both the autonomous increase in government expenditures and induced non-governmental increases in consumption and investment spending? The Keynesian case manifestly assumes that labor, land/natural resources, and capital almost always exist to be deployed in the interest of an expansion in gross output, and, more importantly, they are inferred to be in ready supply under circumstances when a rapid decrease in aggregate demand has involuntarily idled substantial quantities of labor and capital. Herein lies the classic Neoclassical-Keynesian synthesis contention that, given adequate efforts to utilize all of the macroeconomic instruments in the fiscal and monetary policy toolbox, recessions and hyperinflationary cycles should be a thing of the past! All you need to do is commit to a little deficit spending here, a tax cut there, a fiscal belt-tightening a little down the line, and an increase in interest rates still further, and, voila(!), we're in continuous full employment/capacity utilization with net balanced fiscal budgets and everybody is happy. If only it was this simple.
To get to the heart of the problem here, we need to come to terms with the larger question of why the owners of production factors would voluntarily withhold their resources at any given moment and, thenceforth, why they might be convinced/compelled to make these resources available. Walrasian theory has a clear and unimpeachable explanation in this regard. If you want to know why household owners of production factors are withholding their use, you should consult their utility functions. A household won't voluntarily supply their labor if the wages they receive are inadequate to offset the disutility they incur in working. A household that has capital to supply won't do so unless the rate of interest they would receive from investing, accounting for their level of risk, is inadequate to offset their disutility from parting with their savings. A household with natural resource holdings won't make them available unless their returns (rent) are sufficient to compensate them for the disutility of dispoiling their relatively or absolutely scarce resources.
I am not going to argue with this logic because, at some level, it is unquestionably correct. In a market-oriented economic system, operating at the behest of free household property owners, nobody can be forced to part with the possession or use of their property under conditions where the market rate of return is insufficient to compel them to come to market. On a broader level, an economic system remains a big collective action problem, where households demanding certain goods and services have to come to terms with the households supplying these goods and services to generate quantities that will satisfy demand and adequately compensate suppliers. In this respect, we are still working at the level of real, non-monetary economics - all of the goods and services in circulation are supplied by households that, in turn, receive the goods and services they demand through trade with other households. If we insert government into such an economy, then it simply constitutes an unproductive drain, sucking up a share of the total output that could have been produced for and consumed by households. Assuming that households would always be capable of coming to an equilibrium level of output, where everything households want to consume will be produced in quantities that are demanded, at relative prices that unsure that every household supplying goods and services is adequately compensated, then there is never a situation in which involuntarily un-utilized or under-utilized factor resources exist within the economy, and, as such, government can never improve on an equilibrium outcome by stimulating demand. Individual household preferences, underlying household utility functions, uniquely determine the equilibria that obtain within the larger economy. The only way you can change outcomes is by transforming the preferences of households such that they demand more and/or different sets of goods and services and are willing to provide a greater quantity of factor resources to get them. Herein exist the theoretic foundations that lead New Classicals and, to a lesser extent, Monetarists to conclude that any expansionary fiscal or monetary policy initiatives must only result in price inflation with no effectual change in aggregate supply.
The problem is that this constitutes a quintessentially abstract vision of a real economy. A Walrasian general equilibrium system is, fundamentally, articulated as a vast barter system, consisting of a collection of free, independent factor owning households who, by some magical, mystical mechanism, cooperate with each other, absent any overarching direction, to produce all the goods and services that are needed and to effect trades that will ensure that every household gets exactly the mix of goods and services they want. Institutional innovations, like firms and entrepreneurs, don't even fit comfortably within such a scheme, even if they are extremely important if we are trying to come to terms with how actually existing market economies function and how they respond to changes in overarching variables, like the money supply. On the contrary, if we legitimately have to come to terms with the preferences of individuals/individual households and how these preferences are impacted by fluctuations in economic activity, then we also need to recognize how these preferences get siphoned, steered, and directed through the institutional mechanisms of economies structured by firms/entrepreneurs, government policy makers, banks/financial sectors, mass media (e.g. advertising), collective action (e.g. labor unions, partisan politics), and popular culture. All of this is too malleable for a one-size-fits-all image of homo economicus.
It turns out that factor utilization decisions remain intimately tied to the questions on expectations of the future that led off this post. Moreover, factor supply decisions, especially with regard to labor, are never made in a social vacuum relative to the lives and livelihood of individuals. If the basic capacity of human beings to obtain a subsistence bundle of consumption goods and services without first offering up available factor resources does not exist, then, minimally, households that only possess their capacity to labor will be compelled under the pangs of starvation to turn to labor markets. Beyond this fundamental insight on the economics of social formations in which property in production factors (labor, land/natural resources, capital) is freely and exclusively held in individual hands, households reliant on their own labor can't necessarily afford to make day-to-day decisions on how and when and where they will offer their labor to produce goods and services anymore than households owning other production factors can afford to make day-to-day labor hiring decisions. The genius of the firm resides in its regular institutionalization of hiring and contracting decisions in order to offer households possessing diverse production factors some consistency in their expectations about what they will receive as compensation for production over extended periods of time.
Similarly, this sort of institutionalization commends itself to a bias in the interest of stability - households don't necessarily like having to pick up roots from one job to another job to still another while they are under the compulsion of feeding themselves and keeping a roof over their heads. If you can contract consistently, under consistent, generally nominal/monetary, terms with a firm, then you are less likely to drop everything and walk away if your wages do not rise to match a short term increase in price inflation as the monetary authority injects fresh cash into the economy. The more we deal with long term contracting or even short term contingent contracting where failures to renew contracts are relatively costly to individual contracting parties (e.g. between workers and firms, entrepreneurs and investors/lenders, etc.), the less an economy mirrors pristine Walrasian general equilibrium logic and the more Keynesian arguments on uneven price rigidities and involuntary unemployment of production factors become rooted in the play of institutional mechanisms.
With these considerations in mind, individual economic agents, in possession of a range of different production factors (e.g. diverse labor skill sets, accumulated savings/money capital, land holdings/real estate), must engage in a continuous decision-making process on how best to utilize their available factors to secure a decent living, acknowledging that this process is shaped by long-term contracting over, say, employment to a given firm and borrowing/lending of money capital to finance durable goods consumption or entrepreneurial activity. We might further add certain other institutions, like poor relief (e.g. food stamps), that mitigate the absolute necessity to rely on labor market activity to avoid starvation, even if such institutions carry an implicit social stigma. Finally, we might add the potential to gain income from labor and/or entrepreneurship in activities considered illicit (e.g. commerce in contraband, controlled substances, etc.), undertaken with either well considered or reckless evaluations of risk.
Putting all of these considerations together in particular reference to labor services, it seems unlikely that either the decision to voluntarily offer labor or to withhold it from potential employers would hinge on the announcement of a particular fiscal or monetary policy initiative, especially if such initiatives were not oriented to impact particular sectoral or regional labor markets. Labor markets are heterogeneous, and the development of labor resources for divergent fields of work involves a range of different educational and training processes to consolidate supplies of differently skilled workers. Skill development involves substantial degrees of path dependence, implying that, in most circumstances, individuals who have spent many years accumulating skills and experience for one occupational field tend not to voluntarily drop out of the field entirely and enter into some other completely different field, requiring the accumulation of an entirely different set of skills. Further, workers for certain employers become subject to captive, internal labor markets, within which long-term contracting with a given employer (remembering that a bias in favor of stability for both employees and employers explains, to a substantial degree, why such constructs exist) deflects the potential effects of external labor market fluctuations on the career choices of employees. The existence of an internal labor market within a given firm implies that the firm can prioritize internal labor force development, upgrading, and shifting of its own labor force, in order to respond to expansions or changes in market engagement, over dealings with individuals in outside labor markets.
As such, if the macroeconomic labor market is a sum of a wide range of individual, occupation/sector-specific, regionally-oriented labor markets in national economies the size of, say, the US, and, finally, internal/employer-specific labor pools, what exactly would it mean to say that a macroeconomic labor market is at a state of full employment/capacity utilization? The extended recovery from the "Great Recession" of 2007-2009, with its substantial degree of labor market withdrawal and movement of individuals to occupational fields for which they would be otherwise characterized as "over-qualified," reveals the extent to which macroeconomic calculations of unemployment rates are fairly meaningless at enabling us to come to terms with the extent to which the US economy is nearing capacity utilization with respect to labor. To some degree, macroeconomic labor markets have to contain a certain flexibility in relation to expansionary fiscal and monetary policy initiatives, allowing for some shifting and upgrading of workers already in the employed labor force, the addition of individuals currently unemployed (i.e. those seeking employment but not already employed), and the reintroduction of individuals who had previously abandoned the labor force, as new, attractive opportunities present themselves. To a great extent, capacity utilization of labor is less problematic than the question of capacity utilization with respect to capital markets.
To clarify, in discussing capital, I am alluding to a supremely amorphous concept on which economists of all schools lack a coherent definition. For my purposes, I mean to aggregate savings/money capital with the investments in durable equipment and facilities that such funds can finance, but I also need to consider the use of savings/money capital to finance consumer goods and services and investment of savings/money capital into securities markets, especially markets for recirculating equity instruments. As such, the root source for money capital will always be located in savings, whether that involves deferred consumption of incomes by households or it involves retained earnings of firms. The definitive characteristic of this money capital is that its presence as savings instantaneously presumes its utilization in order to obtain a future rate of return. The source of such a rate of return is widely variable, and, on this note, the ability to exact a rate of return from the use of money capital does not simultaneously necessitate the production of new output on a macroeconomic scale (i.e. an expansion of GDP or some other measure of output growth). In this regard, capital introduces a peculiar contradiction whereby the purchase of particular investment instruments can generate a rate of return without ever producing anything that will contribute to enhanced consumption or production possibilities for the macroeconomy. This particular quality underlies Marx's conception of fictitious capital, implying the use of money capital to purchase financial securities to redistribute equity claims to ownership in existing production processes or, otherwise, to redistribute claims to returns from the extension of credit/debt (i.e. bonds/debt instruments), where the sale and resale of such claims generate their own markets.
Some forms of capital investment are extremely path dependent. In particular, financing of facilities or durable equipment that require extended construction and integration periods, represent a long term commitment for owners of capital. For example, the construction of a new processing facility for livestock in the meat industry might take twenty-four to thirty months or longer, during which time the firm undertaking such an investment is tied down to complete its project, motivated by an anticipation that demand for its products will justify the facility's construction. A severe market contraction over the construction period, significantly reducing wholesale and/or retail market demand for meat products, might catastrophically devalue the investment. Similarly, the construction of facilities by competing firms over the same period or the introduction of productivity enhancements to existing facilities might broadly expand output quantities in the industry, placing downward pressures on market pricing, potentially devaluing the firm's investment. With these considerations in mind, any effort to break ground on a major capital investment by a firm is fraught with danger that economic conditions will change in such a way that it can never secure a rate of return that will adequately compensate investors, especially if the investment is externally financed. Furthermore, even if the investment is wholly financed internally through retained earnings, the risks inherent in any long term investment of this nature imply that the firm has to consider alternative, less risky uses for its retained earnings that will yield comparable returns. For corporate entities, where executive officers hold a legally binding fiduciary responsibility to act in the best interests of shareholders, the inherently risky nature of proprietary capital investments generates a conservative bias against investments that cannot, in some way, be insulated or insured through financial markets.
The genius of financial markets emanates from the redistribution of risks across very large numbers of money capital investors through diversified portfolios in which losses from some investments can be balanced off by gains from others. On the other hand, the information requirements for capital investments in financial markets tend to become mountainous, as investors seek to better insulate themselves over given short term and longer term risks through ever more complex, esoteric investment instruments. In the end, as Keynesian theorists have long noted, future outcomes, especially over greater expanses of time, are innately unpredictable. The best that investors can do is apply heuristic techniques to hedge an educated guess and, given adequate financial methodologies to distribute risks, mitigate the potential for losses.
Given this portrait of an inherently amorphous factor of production, subject to continuous and variable risk of loss and devaluation, is it possible to reach a level of capacity utilization in capital markets? In effect, anything is possible, but this sort of inquiry may be something of a red herring. On one level, money, per se, constitutes potential capital to the extent that it is employed with the intention of deriving a larger quantity of money in the future. As such, when we talk about capital, we are, in some vague sense, talking about money, but only to the extent that we are talking about money used to make more money. As long as there are sufficient quantities of money available to serve these ends, then the macroeconomy has a reservoir of capital. The problem here is that there are obviously lots of ways to take money and make more money, but not all of them have a meaningful effect on macroeconomic output growth. Generally, if capital is siphoned through financial markets through which it is distributed in ways that will, to the greatest degree possible, insulate investors against losses, at least some of these distributions of capital may be employed to finance equipment, facilities, inventory growth, labor force development, and other purposes that will realize an overall increase in output/aggregate supply. On the other hand, some distributions of capital will simply feed diverse streams of credit that may stimulate demand for certain goods and services without actually adding anything to output. Furthermore, some distributions may just redistribute property claims from existing levels of output (e.g. by purchasing corporate equity shares or by enabling corporations to repurchase their equities in order to bolster the market value of remaining shares).
When it comes to the effects of fiscal and monetary policies on capital markets, our overarching concern involves investments that enhance macroeconomic productivity and lead to complementary increases in demand for land/natural resources and labor services. Under conditions of uncertainty, such investments have to be evaluated against other, less productive investments in regard to risk of loss and potential for overall returns. Moreover, we certainly need to consider the larger, complex interaction of diverse economic agents (e.g. savers/lenders, borrowers/entrepreneurs/firms, bankers/fund managers, etc.) involved in the assembly of capital through financial markets. If firms hold the ultimate responsibility to direct their available funds toward productive investments, then the existence of financial markets per se may steer capital entirely away from productive investments toward consumer lending or other areas that promise reliable, potentially less risky rates of return. In the end, the workings of financial markets, especially in relation to the effects of expansionary fiscal and monetary policy, represent a balancing act - capital flows need, on the one hand, to effectuate increases in aggregate supply through productive investments by firms and, on the other hand, to bolster aggregate demand by enhancing consumer lending (assuming, in this regard, that, under significant conditions of macroeconomic wealth and income inequality, consumer lending is an important vehicle for enhancing consumption by lower income groups). These considerations don't even take the redistribution of claims from equity and debt instruments, as a prominent and ultimately unproductive field of financial transactions, into account.
For its part, MMT assumes a ready malleability, in particular, of investment and consumption demand with any acceleration of money supply growth, subject to an ultimate, inter-temporal factor utilization limit. The presence of a factor utilization constraint is key here, but so is the degree of trust accorded to the monetary authority and to government/fiscal authorities in regard to the management of government sector demand and the capacity of the government to over-stimulate demand in relation to macro-economic factor constraints. Returning, in part, to the theme that closed out my previous post in this set, the extent to which expansionary fiscal policies tend to undermine public faith in the value of monetary issues is unlikely to be wholly uniform across a larger (national) economic system the larger the system and its attendant monetary zone is. Even under conditions where independent fiscal and monetary policies are exercised at the same economic scale (e.g. in the US, the US Treasury/Congress and the larger Federal Reserve System), if the larger (national) economic system incorporates a large number of imperfectly integrated and extraordinarily diverse regional economic systems, then monetary policy will exert wildly divergent effects across economic space, perhaps, in some local economies, at the expense of price stability.
To summarize the issues at stake in the various, broad theoretic approaches outlined above with regard to expectations, if all the relevant variables considered by consumers and investors in an economic system are quantified in monetary terms, then any policy regime, orchestrated either by fiscal or monetary authorities, that impacts the growth of the money supply, impacting its value, will have a palpable effect on the way economic agents will form expectations about consumption and investment in the future. If I hold a certain quantity of currency in a fixed-rate interest bearing account, should I maintain a constant level of principle in the account or withdraw funds to purchase real, relatively durable non-monetary assets (e.g. real estate) under conditions where the relationship between the rate of interest on my funds and the rate of price inflation are expected to vary substantially in the future? The answer to this question comes back, in part, to the degree of faith I am willing to accord both the government/fiscal authorities and the central bank/monetary authorities relative to the process of money supply management. On the other hand, it also manifests a larger collective action problem in the degree to which other economic agents come to disagreement with me regarding our expectations of the future. This problem becomes more acute the larger the scale of the (national) economic system.
In still another sense, the decisions that individuals take toward consumption or investment under conditions of uncertainty rely on the degree to which other individuals, particularly those exerting an institutional capacity to shift policy variables, believe one or another of the above theoretic constructs regarding the relationship between monetary fluctuations and market pricing. Mass acceptance of particular conceptions in economic theory must, in some way, shape, or form, constitute the manner in which broader social formations approach monetary policy as a mechanism to transform the real economy, an insight further shaped by the basic dichotomization of real and monetary economics, per se. If Keynesian theorists have strenuously defended a disintegration of monetary neutrality as the theoretic firewall distinguishing real from monetary economic conceptions, then Monetarist and New Classical theorists have similarly fought strenuously to remind the world that the end purpose of economics is consumption and investment of real goods and that monetary valuations are superficial. On some level, even individuals who have never opened an economics textbook in their lives must ascribe to some theoretic understanding of a relationship between the pile of paper money in their wallets (or lack thereof) and their ability to consume the goods and services they desire or their ability to bring their ideas of enterprise to fruition. And like every other social process, the extent to which individuals ascribe to more faithfully Keynesian readings on monetary economy or more Monetarist/New Classical readings will determine how a broader economy reacts when the government accelerates public spending and/or the central bank starts buying up government debt and injecting fresh cash into the monetary system.
Much of the Keynesian (and, hence, MMT) argument hinges on factor utilization as the key determinant on the effectiveness of efforts to stimulate an economy through either fiscal or monetary initiatives. That is to say, assuming government enacts an expansionary fiscal policy through debt financing and monetary authorities undertake a complementary initiative to purchase open market government debt injecting fresh cash into the system, will adequate quantities of un-utilized or under-utilized factor resources exist to increase aggregate supply in response to both the autonomous increase in government expenditures and induced non-governmental increases in consumption and investment spending? The Keynesian case manifestly assumes that labor, land/natural resources, and capital almost always exist to be deployed in the interest of an expansion in gross output, and, more importantly, they are inferred to be in ready supply under circumstances when a rapid decrease in aggregate demand has involuntarily idled substantial quantities of labor and capital. Herein lies the classic Neoclassical-Keynesian synthesis contention that, given adequate efforts to utilize all of the macroeconomic instruments in the fiscal and monetary policy toolbox, recessions and hyperinflationary cycles should be a thing of the past! All you need to do is commit to a little deficit spending here, a tax cut there, a fiscal belt-tightening a little down the line, and an increase in interest rates still further, and, voila(!), we're in continuous full employment/capacity utilization with net balanced fiscal budgets and everybody is happy. If only it was this simple.
To get to the heart of the problem here, we need to come to terms with the larger question of why the owners of production factors would voluntarily withhold their resources at any given moment and, thenceforth, why they might be convinced/compelled to make these resources available. Walrasian theory has a clear and unimpeachable explanation in this regard. If you want to know why household owners of production factors are withholding their use, you should consult their utility functions. A household won't voluntarily supply their labor if the wages they receive are inadequate to offset the disutility they incur in working. A household that has capital to supply won't do so unless the rate of interest they would receive from investing, accounting for their level of risk, is inadequate to offset their disutility from parting with their savings. A household with natural resource holdings won't make them available unless their returns (rent) are sufficient to compensate them for the disutility of dispoiling their relatively or absolutely scarce resources.
I am not going to argue with this logic because, at some level, it is unquestionably correct. In a market-oriented economic system, operating at the behest of free household property owners, nobody can be forced to part with the possession or use of their property under conditions where the market rate of return is insufficient to compel them to come to market. On a broader level, an economic system remains a big collective action problem, where households demanding certain goods and services have to come to terms with the households supplying these goods and services to generate quantities that will satisfy demand and adequately compensate suppliers. In this respect, we are still working at the level of real, non-monetary economics - all of the goods and services in circulation are supplied by households that, in turn, receive the goods and services they demand through trade with other households. If we insert government into such an economy, then it simply constitutes an unproductive drain, sucking up a share of the total output that could have been produced for and consumed by households. Assuming that households would always be capable of coming to an equilibrium level of output, where everything households want to consume will be produced in quantities that are demanded, at relative prices that unsure that every household supplying goods and services is adequately compensated, then there is never a situation in which involuntarily un-utilized or under-utilized factor resources exist within the economy, and, as such, government can never improve on an equilibrium outcome by stimulating demand. Individual household preferences, underlying household utility functions, uniquely determine the equilibria that obtain within the larger economy. The only way you can change outcomes is by transforming the preferences of households such that they demand more and/or different sets of goods and services and are willing to provide a greater quantity of factor resources to get them. Herein exist the theoretic foundations that lead New Classicals and, to a lesser extent, Monetarists to conclude that any expansionary fiscal or monetary policy initiatives must only result in price inflation with no effectual change in aggregate supply.
The problem is that this constitutes a quintessentially abstract vision of a real economy. A Walrasian general equilibrium system is, fundamentally, articulated as a vast barter system, consisting of a collection of free, independent factor owning households who, by some magical, mystical mechanism, cooperate with each other, absent any overarching direction, to produce all the goods and services that are needed and to effect trades that will ensure that every household gets exactly the mix of goods and services they want. Institutional innovations, like firms and entrepreneurs, don't even fit comfortably within such a scheme, even if they are extremely important if we are trying to come to terms with how actually existing market economies function and how they respond to changes in overarching variables, like the money supply. On the contrary, if we legitimately have to come to terms with the preferences of individuals/individual households and how these preferences are impacted by fluctuations in economic activity, then we also need to recognize how these preferences get siphoned, steered, and directed through the institutional mechanisms of economies structured by firms/entrepreneurs, government policy makers, banks/financial sectors, mass media (e.g. advertising), collective action (e.g. labor unions, partisan politics), and popular culture. All of this is too malleable for a one-size-fits-all image of homo economicus.
It turns out that factor utilization decisions remain intimately tied to the questions on expectations of the future that led off this post. Moreover, factor supply decisions, especially with regard to labor, are never made in a social vacuum relative to the lives and livelihood of individuals. If the basic capacity of human beings to obtain a subsistence bundle of consumption goods and services without first offering up available factor resources does not exist, then, minimally, households that only possess their capacity to labor will be compelled under the pangs of starvation to turn to labor markets. Beyond this fundamental insight on the economics of social formations in which property in production factors (labor, land/natural resources, capital) is freely and exclusively held in individual hands, households reliant on their own labor can't necessarily afford to make day-to-day decisions on how and when and where they will offer their labor to produce goods and services anymore than households owning other production factors can afford to make day-to-day labor hiring decisions. The genius of the firm resides in its regular institutionalization of hiring and contracting decisions in order to offer households possessing diverse production factors some consistency in their expectations about what they will receive as compensation for production over extended periods of time.
Similarly, this sort of institutionalization commends itself to a bias in the interest of stability - households don't necessarily like having to pick up roots from one job to another job to still another while they are under the compulsion of feeding themselves and keeping a roof over their heads. If you can contract consistently, under consistent, generally nominal/monetary, terms with a firm, then you are less likely to drop everything and walk away if your wages do not rise to match a short term increase in price inflation as the monetary authority injects fresh cash into the economy. The more we deal with long term contracting or even short term contingent contracting where failures to renew contracts are relatively costly to individual contracting parties (e.g. between workers and firms, entrepreneurs and investors/lenders, etc.), the less an economy mirrors pristine Walrasian general equilibrium logic and the more Keynesian arguments on uneven price rigidities and involuntary unemployment of production factors become rooted in the play of institutional mechanisms.
With these considerations in mind, individual economic agents, in possession of a range of different production factors (e.g. diverse labor skill sets, accumulated savings/money capital, land holdings/real estate), must engage in a continuous decision-making process on how best to utilize their available factors to secure a decent living, acknowledging that this process is shaped by long-term contracting over, say, employment to a given firm and borrowing/lending of money capital to finance durable goods consumption or entrepreneurial activity. We might further add certain other institutions, like poor relief (e.g. food stamps), that mitigate the absolute necessity to rely on labor market activity to avoid starvation, even if such institutions carry an implicit social stigma. Finally, we might add the potential to gain income from labor and/or entrepreneurship in activities considered illicit (e.g. commerce in contraband, controlled substances, etc.), undertaken with either well considered or reckless evaluations of risk.
Putting all of these considerations together in particular reference to labor services, it seems unlikely that either the decision to voluntarily offer labor or to withhold it from potential employers would hinge on the announcement of a particular fiscal or monetary policy initiative, especially if such initiatives were not oriented to impact particular sectoral or regional labor markets. Labor markets are heterogeneous, and the development of labor resources for divergent fields of work involves a range of different educational and training processes to consolidate supplies of differently skilled workers. Skill development involves substantial degrees of path dependence, implying that, in most circumstances, individuals who have spent many years accumulating skills and experience for one occupational field tend not to voluntarily drop out of the field entirely and enter into some other completely different field, requiring the accumulation of an entirely different set of skills. Further, workers for certain employers become subject to captive, internal labor markets, within which long-term contracting with a given employer (remembering that a bias in favor of stability for both employees and employers explains, to a substantial degree, why such constructs exist) deflects the potential effects of external labor market fluctuations on the career choices of employees. The existence of an internal labor market within a given firm implies that the firm can prioritize internal labor force development, upgrading, and shifting of its own labor force, in order to respond to expansions or changes in market engagement, over dealings with individuals in outside labor markets.
As such, if the macroeconomic labor market is a sum of a wide range of individual, occupation/sector-specific, regionally-oriented labor markets in national economies the size of, say, the US, and, finally, internal/employer-specific labor pools, what exactly would it mean to say that a macroeconomic labor market is at a state of full employment/capacity utilization? The extended recovery from the "Great Recession" of 2007-2009, with its substantial degree of labor market withdrawal and movement of individuals to occupational fields for which they would be otherwise characterized as "over-qualified," reveals the extent to which macroeconomic calculations of unemployment rates are fairly meaningless at enabling us to come to terms with the extent to which the US economy is nearing capacity utilization with respect to labor. To some degree, macroeconomic labor markets have to contain a certain flexibility in relation to expansionary fiscal and monetary policy initiatives, allowing for some shifting and upgrading of workers already in the employed labor force, the addition of individuals currently unemployed (i.e. those seeking employment but not already employed), and the reintroduction of individuals who had previously abandoned the labor force, as new, attractive opportunities present themselves. To a great extent, capacity utilization of labor is less problematic than the question of capacity utilization with respect to capital markets.
To clarify, in discussing capital, I am alluding to a supremely amorphous concept on which economists of all schools lack a coherent definition. For my purposes, I mean to aggregate savings/money capital with the investments in durable equipment and facilities that such funds can finance, but I also need to consider the use of savings/money capital to finance consumer goods and services and investment of savings/money capital into securities markets, especially markets for recirculating equity instruments. As such, the root source for money capital will always be located in savings, whether that involves deferred consumption of incomes by households or it involves retained earnings of firms. The definitive characteristic of this money capital is that its presence as savings instantaneously presumes its utilization in order to obtain a future rate of return. The source of such a rate of return is widely variable, and, on this note, the ability to exact a rate of return from the use of money capital does not simultaneously necessitate the production of new output on a macroeconomic scale (i.e. an expansion of GDP or some other measure of output growth). In this regard, capital introduces a peculiar contradiction whereby the purchase of particular investment instruments can generate a rate of return without ever producing anything that will contribute to enhanced consumption or production possibilities for the macroeconomy. This particular quality underlies Marx's conception of fictitious capital, implying the use of money capital to purchase financial securities to redistribute equity claims to ownership in existing production processes or, otherwise, to redistribute claims to returns from the extension of credit/debt (i.e. bonds/debt instruments), where the sale and resale of such claims generate their own markets.
Some forms of capital investment are extremely path dependent. In particular, financing of facilities or durable equipment that require extended construction and integration periods, represent a long term commitment for owners of capital. For example, the construction of a new processing facility for livestock in the meat industry might take twenty-four to thirty months or longer, during which time the firm undertaking such an investment is tied down to complete its project, motivated by an anticipation that demand for its products will justify the facility's construction. A severe market contraction over the construction period, significantly reducing wholesale and/or retail market demand for meat products, might catastrophically devalue the investment. Similarly, the construction of facilities by competing firms over the same period or the introduction of productivity enhancements to existing facilities might broadly expand output quantities in the industry, placing downward pressures on market pricing, potentially devaluing the firm's investment. With these considerations in mind, any effort to break ground on a major capital investment by a firm is fraught with danger that economic conditions will change in such a way that it can never secure a rate of return that will adequately compensate investors, especially if the investment is externally financed. Furthermore, even if the investment is wholly financed internally through retained earnings, the risks inherent in any long term investment of this nature imply that the firm has to consider alternative, less risky uses for its retained earnings that will yield comparable returns. For corporate entities, where executive officers hold a legally binding fiduciary responsibility to act in the best interests of shareholders, the inherently risky nature of proprietary capital investments generates a conservative bias against investments that cannot, in some way, be insulated or insured through financial markets.
The genius of financial markets emanates from the redistribution of risks across very large numbers of money capital investors through diversified portfolios in which losses from some investments can be balanced off by gains from others. On the other hand, the information requirements for capital investments in financial markets tend to become mountainous, as investors seek to better insulate themselves over given short term and longer term risks through ever more complex, esoteric investment instruments. In the end, as Keynesian theorists have long noted, future outcomes, especially over greater expanses of time, are innately unpredictable. The best that investors can do is apply heuristic techniques to hedge an educated guess and, given adequate financial methodologies to distribute risks, mitigate the potential for losses.
Given this portrait of an inherently amorphous factor of production, subject to continuous and variable risk of loss and devaluation, is it possible to reach a level of capacity utilization in capital markets? In effect, anything is possible, but this sort of inquiry may be something of a red herring. On one level, money, per se, constitutes potential capital to the extent that it is employed with the intention of deriving a larger quantity of money in the future. As such, when we talk about capital, we are, in some vague sense, talking about money, but only to the extent that we are talking about money used to make more money. As long as there are sufficient quantities of money available to serve these ends, then the macroeconomy has a reservoir of capital. The problem here is that there are obviously lots of ways to take money and make more money, but not all of them have a meaningful effect on macroeconomic output growth. Generally, if capital is siphoned through financial markets through which it is distributed in ways that will, to the greatest degree possible, insulate investors against losses, at least some of these distributions of capital may be employed to finance equipment, facilities, inventory growth, labor force development, and other purposes that will realize an overall increase in output/aggregate supply. On the other hand, some distributions of capital will simply feed diverse streams of credit that may stimulate demand for certain goods and services without actually adding anything to output. Furthermore, some distributions may just redistribute property claims from existing levels of output (e.g. by purchasing corporate equity shares or by enabling corporations to repurchase their equities in order to bolster the market value of remaining shares).
When it comes to the effects of fiscal and monetary policies on capital markets, our overarching concern involves investments that enhance macroeconomic productivity and lead to complementary increases in demand for land/natural resources and labor services. Under conditions of uncertainty, such investments have to be evaluated against other, less productive investments in regard to risk of loss and potential for overall returns. Moreover, we certainly need to consider the larger, complex interaction of diverse economic agents (e.g. savers/lenders, borrowers/entrepreneurs/firms, bankers/fund managers, etc.) involved in the assembly of capital through financial markets. If firms hold the ultimate responsibility to direct their available funds toward productive investments, then the existence of financial markets per se may steer capital entirely away from productive investments toward consumer lending or other areas that promise reliable, potentially less risky rates of return. In the end, the workings of financial markets, especially in relation to the effects of expansionary fiscal and monetary policy, represent a balancing act - capital flows need, on the one hand, to effectuate increases in aggregate supply through productive investments by firms and, on the other hand, to bolster aggregate demand by enhancing consumer lending (assuming, in this regard, that, under significant conditions of macroeconomic wealth and income inequality, consumer lending is an important vehicle for enhancing consumption by lower income groups). These considerations don't even take the redistribution of claims from equity and debt instruments, as a prominent and ultimately unproductive field of financial transactions, into account.
In these respects, the problem of capacity utilization in capital markets can be largely framed through the division of productive and unproductive investments. The issue for policy makers in the government and the monetary authority, thus, involves developing mechanisms to steer capital into productivity enhancing investments, demand-side initiatives to enhance credit available to consumers, or, ideally, a judicious mix of such investments in lieu of fictitious capital investments that will simply redistribute existing property claims. Explicit fiscal spending initiatives might, in this manner, develop infrastructures that will "crowd-in" private investment (e.g. transportation improvements, targeted measures in higher educational spending, etc.). Alternatively, mechanisms to enhance the creation of money capital in lieu of discretionary consumer spending (i.e. steering available household discretionary incomes toward investments rather than consumption) also address the problem of capacity utilization with regard to capital markets. In a most obvious sense, interest rate management by the monetary authority, as a means of bolstering savings rates, would certainly achieve such ends, if simultaneously placing constraints on borrowing and, thus, both investment and extension of consumer credit. The larger point here is that, again, there is a space of flexibility for policy makers in the generating and directing capital. It would be fatalistic to regard the total mass of capital available to a macroeconomy at a given moment in time as completely and rigidly fixed based some abstract calculus of utility functions. Conversely, it would be a mistake to assume that the total capital available at a given moment is perfectly flexible in relation to policy variations.
Land/natural resources introduce still different problems with regard to capacity utilization. If natural resources are, in some respect, rigidly (if not absolutely) fixed in quantity, then their utilization and (relative) replenishment depends on levels of depletion over time and this depends, to a substantial extent, on the degree to which use rights can be excluded (i.e. privatization and/or restricted extraction of resources from common pools). This might bring us back to the old "tragedy of the commons" problem, but, as with everything else, the capacity of government, acting in the interests of the state/the polity, to regulate the use of publicly held natural resources (e.g. public lands, hydrology, hydrocarbon deposits, fisheries, etc.) maintains a lever to mitigate over-utilization. If we, thus, consider natural resource use as a dimension in the broader discussion of capacity utilization, with due consideration of the maintenance of publicly held resources, then we can constitute the terms of debates over natural resource policies in the interest of both conservation and macroeconomic growth. How much of a country's existing hydrocarbon reserves should be put out to bid to oil companies, especially under circumstances where global demand for crude oil and derivative products is declining? To what extent should rights to exploit populations of a given species in fisheries be controlled in the interest of preventing long term population collapse, even under circumstances where such controls will be detrimental to the short term economic health of local extractive economies? Should households undertaking free use of public lands for, say, cattle grazing be compelled to pay for long term improvements and/or basic ecological maintenance relative to the intensity of their usage, even if such impositions make ranching operations substantially unprofitable?
In these terms, natural resource constraints introduce a wide range of problems that Keynesian theory, in general, and MMT, in particular, don't necessarily and clearly address in their accounts on expansionary fiscal and monetary initiatives. Particularly, to the extent that natural resource reserves exist in the common hands of the state through the stewardship of government, any efforts by the government to undertake expansionary fiscal policy has to take access of commonly held natural resources into account if stimulation of aggregate demand compels some expansion of land/natural resources on the supply side. If the government expands access to publicly held natural resources, will overuse and depletion be adequately mitigated? What long term consequences will ensue if particular patterns of resource use become embedded within a structure of substantial private capital investments, the cancellation of which would depress particular local economies (e.g. free exploitation of hydrocarbons in the Bakken shale formation of North Dakota, Montana, and southern Saskatchewan, including investment in pipelines)? Anytime the government decides to run out and spend money, however it finances such spending, its spending patterns will have consequences because they will stimulate/crowd-in particular forms of private capital investment, and, unless the government opts to steer and regulate such investments, the larger structure of the macroeconomy, over the long run, will be partly shaped and determined by the government's decisions.
This theme of public resource management, in relation to expansionary fiscal policy, naturally leads us to the larger problem of public spending priorities and, more generally, to the problem of whether public spending is intrinsically inferior to private capital investments, especially in relation to the (somewhat false) premise that public and private spending can be viewed as dichotomous alternatives in the construction of aggregate demand. In the strictest sense, public and private investment spending do constitute dichotomous categories in the calculation of aggregate demand. The questions, especially for Keynesian, Monetarist, and New Classical theorists, involve whether more public spending necessarily means less private investment, and, further, whether public spending must necessarily be of inferior value to the long term development of a macroeconomy than private investment. More pointedly, for MMT and at least some other approaches in Keynesian theory, does public investment enjoy some greater virtue than private investment spending that might be stimulated by autonomous expansionary monetary policy?
We can quickly dispense with responses to these questions from both the New Classical/Walrasian perspective and that of Monetarist theory. For Walrasian general equilibrium thinkers, the most that can be said for government is that it can help resolve certain market failures arising from externalities/third party effects and public goods (i.e. goods and services the enjoyment of which cannot be excluded to paying customers). On the other hand, most Walrasian theorists who have spent much time taking these exceptions to the economically barren character of government have found themselves in the camp of Neoclassical-Keynesian synthesis theory (ISLM) or, more recently, the New Keynesian school. For the New Classicals, government constitutes a more or less pure drain on the economic primacy of factor-owning and commodity-demanding households. If the end purpose of all economic activity is to maximize the utility of households through consumption of desired goods and services and if suitable mechanisms exist to negotiate relative prices and allocate the costs arising from externalities through free markets (i.e. the Coase theorem), then the existence of some entity called government sitting outside of the realm of utility maximizing economic activity is a sterile imposition to be minimized. The most profound service that should ever, in this view, be left to government is enforcement of the property rights and market freedoms of households. According a role of government in supporting aggregate demand through fiscal policy is as asinine as according a role to the monetary authority to regulate the money supply in the interest of growth when money is, in real economic terms, neuter.
Furthermore, even to the extent that the theoretic foundations of Monetarism are different than those of New Classical theory, the uneconomic character of both fiscal and monetary policy is a shared conclusion. Fiscal policy cannot add anything, but can skew free market mechanisms to create inefficiencies that will raise the production costs for the goods and services that consumers demand. In relation to capital markets, in particular, this manifests itself in the form of the crowding out of private investment by government spending. If the government borrows a dollar of money capital through the sale of debt issues, then private investors are deprived of that dollar that could have been spent to bring their own ideas to fruition, and, beyond this, to the extent that money capital becomes scarce, interest rates charged to private borrowers are elevated. In effect, private and public investment are not potentially complementary but mutually exclusive competing alternatives. Government spending, in this manner, can only ever pervert the legitimate functioning of capital market mechanisms, to raise the price of capital relative to what would obtain if only private investment projects competed for the attention of lenders.
To address, in particular, the argument on crowding out, we need to explicitly query the assumptions advanced both from the Keynesian/MMT camp and those of their New Classical and Monetarist opponents. The proposition that every penny of government spending is a penny wasted that could have been consumed or invested by the private sector is an untenably extreme position. It would, in this sense, be a pure caricature of the Monetarist and New Classical/Walrasian cases relative to government expenditure. The production of public goods, like road networks and public safety (e.g. police and fire), where it would be difficult, on the one hand, to exclude the benefits from non-paying customers through free market mechanism and, on the other hand, if we were to rely exclusive on market mechanisms, inadequate private investments would result to satisfy broader social needs, constitute a possible starting point in identifying legitimate public investment priorities. Problems arise when we stretch the logic of the public goods argument. For example, it would make sense to argue that national defense is a public good - its benefits cannot readily be excluded to paying customers in order to generate a private rate of return through markets, ensuring that if the private sector was left to perform investments in national defense such investments would perpetually be neglected. On the other hand, if the government, as the legitimate investor in national defense, is left to define its own limits on necessary expenditures, then how can be sure that such investments will represent an efficient allocation of money capital (i.e. that they won't excessively crowd out private investment)? If we grant that the answer to this question is fundamentally partisan/political and contextual in relation to geopolitics, then we effectively have to transfer the logic of a particular segment of public expenditure from the liberal calculus of efficiency in free markets to spheres of political theory, deliberation, and democratic consensus. Can we argue that it is alright for the US government to crowd out private investment expenditures by allowing national defense spending to balloon in the 1980s if, simultaneously, such expenditure patterns contributed to the collapse of the Soviet Union? I don't think that any of the theoretic approaches referenced here can provide a satisfactory answer to this question.
Moreover, the broader terms introduced by the question of national defense spending become complicated still further when we integrate the logic of crowding in - in order to produce all of the goods and services collectively bundled in the institution of national defense, government pays lots and lots of private investors to produce guns, missiles, portable latrines, and meals-ready-to-eat. Still further, at least some of these private investment initiatives to produce national defense goods and services lead to the development of goods and services that can be consumed by private households and by firms involved in other consumer goods industries. It would be very hard to argue that any government investment project, however limited the aims, constitutes a perfect drain for money capital that will have zero long term expansionary impact on private, free market economies.
On some, more nuanced, level, the Walrasian argument against government expenditure, at least as it emerges within the New Classical school if not across Walrasian theory proper, must, thus, resolve itself to the case that any government investment will steer the productive resources of a market economy away from the priorities that would have obtained had private households been left to their own devices with the totality of their available resources. In its purest sense, it isn't an argument against either the static or dynamic efficiency of public investments relative to private ones quite as much as it is a quintessentially liberal argument against the collective nature of public investment. Government spending is bad because it is undertaken on the behalf of the whole/society rather than on the behalf of and under the direct and undiminished consent and direction of the individual/households. Collective institutions can never precisely represent the consent of individuals or validate and respect the existence of dissent. Somewhere at the roots of Walrasian theory, thoughtfully applied, exists a classical liberal critique against all government as the source of creeping infringement on the rights of free individuals, rights most effectively defended, in this view, in the workings of free markets.
Accepting, in this sense, that there are really fundamental philosophical differences between the New Classical/Walrasian (classical liberal) position on public investment and those of the more broadly empirical and utilitarian macroeconomic schools that emerged from Marshallian thought (both Monetarism and the Keynesian schools), we can go further to say that, following from the consideration on monetary sovereignty in my previous post, MMT seizes precisely on the collective, democratic nature of public investment as a positive virtue in prioritizing a leading role for fiscal policy in macroeconomic management. It is emphatically the presence of institutions to establish and enact collective consent and oversight of public policy makers that makes fiscal policy, as developed through democratically elected legislatures, superior to monetary policy, as developed by generally unelected central bankers. Within the broader structure of Keynesian thought, we might further add Keynes' own postulate that fiscal policy makers stand in a better position to negotiate obscurities in the long term calculation of returns on private capital (see The General Theory, closing paragraph of Chapter 12). If neither private sector investors nor government fiscal policy makers enjoy a perfectly clear crystal ball divining the course of future macroeconomic development, then the government at least stands in a position to purposefully and intentional prioritize the maintenance of stability to counteract the latent conservatism of private entrepreneurs and bolster sagging aggregate demand. More than anything else, these principles constitute the points of departure for MMT and like-minded approaches in Keynesian theory, determined to emphasize fiscal policy as the primary lever of macroeconomic policy management.
For the Monetarist perspective, the problem of expansionary fiscal policy remains essentially consequential. If private economic agents, especially entrepreneurs, are effectively adaptive in their expectations of macroeconomic development over time, then the private economy can weather any short term fluctuation in activity by itself, without the intervention of fiscal policy. If we allow relative price flexibility in relation to short term expansions and contractions of aggregate demand, relative to the totality of currently employed factor resources and currently existing inventories, then pricing structures can just adjust to reflect changing circumstances, and agents will realize, over time, how such circumstances have changed and act according. If prices in certain sectors or regional economies are rising because consumer demand is not be adequately satisfied at existing levels of production, new entrepreneurial activity will find its way into relevant fields to restore pricing stability and satisfy demand. For the Monetarists, there is simply no way that government can improve on this process. Perhaps fiscal policy makers can speed up the adjustment process, but at what cost? Aggressive public spending will just contort the natural functioning of private macroeconomic development in the hopes of undermining destabilizing price fluctuations, which, factually, contribute important feedback effects on the private economy.
I want to argue, in this manner, that the Monetarist counterargument here conveys something important to any critique of the larger corpus of Keynesian thinking with regard to fiscal policy. To offer the perpetually paraphrased argument of Keynes on the speed of the adjustment process, yes, in the long run prices will readjust in the face of significant short term fluctuations in aggregate demand, but in the long run we're all dead. This is, emphatically, a 1930s political argument, forged in the Great Depression and in the face of impinging fascism, both threatening the vitality of Western liberal democracy and free markets. Context really is everything here. When is the stability of macroeconomic growth so important that it cannot be wholly left to the devices of private entrepreneurs? If we aren't stranded on the precipice of barbarism, can't we just wait for free markets to adjust to changes in sectoral demand, especially if such changes offer to private entrepreneurs an essential learning opportunity pointing the economy forward toward new markets, new technologies, and new modes of economic and social existence? Or, on the contrary, is it a positive good for the government to step in point the way forward, even if, in its prognostications, fiscal policy initiatives generate short run inefficiencies in allocations of factor resources relative to what might obtain under a more gradual, privately-orchestrated process? Moreover, if we expand the larger tableau of the macroeconomy to take in important details on income inequalities and uneven potentialities for entrepreneurial vitality, can government intervention point us toward better future outcomes than those that would have obtained if we just allowed the private sector to exclusively determine the future? Again, neither the Keynesian schools nor the Monetarists can advance any iron-clad answers to these questions, or, at least, not answers that don't evince strong elements of political bias.
To detail some of these political biases from our subject perspective, both the theoretic and political advocates of MMT might argue that government financed free college tuition is a good thing, both because it would bolster the overall earning capacity of wider segments of a national population and enable college graduates to substitute other post-graduate consumption and investment choices for repayment of educational debt. In this manner, yes, the fiscal expenditures involved in such an initiative would contort the course of macroeconomic development that might be likely to obtain if free college tuition was not available, but, for defenders of such initiatives, the possible outcomes of a macroeconomy characterized by free access to higher education would be manifestly better than those in which access to higher education would be constricted by privately borne tuition expenses. Furthermore, yes, the fiscal provision of free college tuition would be expensive to taxpayers, who, in the long run, would have to cover the expenses for debt servicing when the government pays for the initiative by taking on more debt (i.e. by inducing the monetary authority print more money), but, over the long run, transformations of macroeconomic growth might offset some of the associated burden by enhancing tax revenues. Finally, and fundamentally, if such an initiative arises as an outcome of democratic consent, then free college tuition and its attendant long term macroeconomic effects would constitute a collective choice in the direction of the macroeconomy toward a fundamentally uncertain future outcome, shaped in turn by particular collective public investments.
It would be entirely conceivable to construct a long list of counterarguments to each of the above inducements favoring free college tuition from an MMT perspective. One such counterargument that I might be inclined to start with would center on the innate problems associated with treating the higher educational process as an exclusive tool for income mobility. Fundamentally, however, I would simply want to conclude this post by reemphasizing the innately partisan character not only of such an initiative but also of the larger body of economy theory in which such initiatives appear as largely unvarnished good solutions to manifest social problems. However much I might support free college tuition, single-payer health insurance reform, and a large scale restructuring and strengthening of social retirement insurance, arguments in favor of such initiatives must emanate from contested theoretic foundations, emphasizing different visions of macroeconomic development, the importance of fiscal and monetary management of instabilities, and the relevance of unfettered economic freedom for individuals.
Land/natural resources introduce still different problems with regard to capacity utilization. If natural resources are, in some respect, rigidly (if not absolutely) fixed in quantity, then their utilization and (relative) replenishment depends on levels of depletion over time and this depends, to a substantial extent, on the degree to which use rights can be excluded (i.e. privatization and/or restricted extraction of resources from common pools). This might bring us back to the old "tragedy of the commons" problem, but, as with everything else, the capacity of government, acting in the interests of the state/the polity, to regulate the use of publicly held natural resources (e.g. public lands, hydrology, hydrocarbon deposits, fisheries, etc.) maintains a lever to mitigate over-utilization. If we, thus, consider natural resource use as a dimension in the broader discussion of capacity utilization, with due consideration of the maintenance of publicly held resources, then we can constitute the terms of debates over natural resource policies in the interest of both conservation and macroeconomic growth. How much of a country's existing hydrocarbon reserves should be put out to bid to oil companies, especially under circumstances where global demand for crude oil and derivative products is declining? To what extent should rights to exploit populations of a given species in fisheries be controlled in the interest of preventing long term population collapse, even under circumstances where such controls will be detrimental to the short term economic health of local extractive economies? Should households undertaking free use of public lands for, say, cattle grazing be compelled to pay for long term improvements and/or basic ecological maintenance relative to the intensity of their usage, even if such impositions make ranching operations substantially unprofitable?
In these terms, natural resource constraints introduce a wide range of problems that Keynesian theory, in general, and MMT, in particular, don't necessarily and clearly address in their accounts on expansionary fiscal and monetary initiatives. Particularly, to the extent that natural resource reserves exist in the common hands of the state through the stewardship of government, any efforts by the government to undertake expansionary fiscal policy has to take access of commonly held natural resources into account if stimulation of aggregate demand compels some expansion of land/natural resources on the supply side. If the government expands access to publicly held natural resources, will overuse and depletion be adequately mitigated? What long term consequences will ensue if particular patterns of resource use become embedded within a structure of substantial private capital investments, the cancellation of which would depress particular local economies (e.g. free exploitation of hydrocarbons in the Bakken shale formation of North Dakota, Montana, and southern Saskatchewan, including investment in pipelines)? Anytime the government decides to run out and spend money, however it finances such spending, its spending patterns will have consequences because they will stimulate/crowd-in particular forms of private capital investment, and, unless the government opts to steer and regulate such investments, the larger structure of the macroeconomy, over the long run, will be partly shaped and determined by the government's decisions.
This theme of public resource management, in relation to expansionary fiscal policy, naturally leads us to the larger problem of public spending priorities and, more generally, to the problem of whether public spending is intrinsically inferior to private capital investments, especially in relation to the (somewhat false) premise that public and private spending can be viewed as dichotomous alternatives in the construction of aggregate demand. In the strictest sense, public and private investment spending do constitute dichotomous categories in the calculation of aggregate demand. The questions, especially for Keynesian, Monetarist, and New Classical theorists, involve whether more public spending necessarily means less private investment, and, further, whether public spending must necessarily be of inferior value to the long term development of a macroeconomy than private investment. More pointedly, for MMT and at least some other approaches in Keynesian theory, does public investment enjoy some greater virtue than private investment spending that might be stimulated by autonomous expansionary monetary policy?
We can quickly dispense with responses to these questions from both the New Classical/Walrasian perspective and that of Monetarist theory. For Walrasian general equilibrium thinkers, the most that can be said for government is that it can help resolve certain market failures arising from externalities/third party effects and public goods (i.e. goods and services the enjoyment of which cannot be excluded to paying customers). On the other hand, most Walrasian theorists who have spent much time taking these exceptions to the economically barren character of government have found themselves in the camp of Neoclassical-Keynesian synthesis theory (ISLM) or, more recently, the New Keynesian school. For the New Classicals, government constitutes a more or less pure drain on the economic primacy of factor-owning and commodity-demanding households. If the end purpose of all economic activity is to maximize the utility of households through consumption of desired goods and services and if suitable mechanisms exist to negotiate relative prices and allocate the costs arising from externalities through free markets (i.e. the Coase theorem), then the existence of some entity called government sitting outside of the realm of utility maximizing economic activity is a sterile imposition to be minimized. The most profound service that should ever, in this view, be left to government is enforcement of the property rights and market freedoms of households. According a role of government in supporting aggregate demand through fiscal policy is as asinine as according a role to the monetary authority to regulate the money supply in the interest of growth when money is, in real economic terms, neuter.
Furthermore, even to the extent that the theoretic foundations of Monetarism are different than those of New Classical theory, the uneconomic character of both fiscal and monetary policy is a shared conclusion. Fiscal policy cannot add anything, but can skew free market mechanisms to create inefficiencies that will raise the production costs for the goods and services that consumers demand. In relation to capital markets, in particular, this manifests itself in the form of the crowding out of private investment by government spending. If the government borrows a dollar of money capital through the sale of debt issues, then private investors are deprived of that dollar that could have been spent to bring their own ideas to fruition, and, beyond this, to the extent that money capital becomes scarce, interest rates charged to private borrowers are elevated. In effect, private and public investment are not potentially complementary but mutually exclusive competing alternatives. Government spending, in this manner, can only ever pervert the legitimate functioning of capital market mechanisms, to raise the price of capital relative to what would obtain if only private investment projects competed for the attention of lenders.
To address, in particular, the argument on crowding out, we need to explicitly query the assumptions advanced both from the Keynesian/MMT camp and those of their New Classical and Monetarist opponents. The proposition that every penny of government spending is a penny wasted that could have been consumed or invested by the private sector is an untenably extreme position. It would, in this sense, be a pure caricature of the Monetarist and New Classical/Walrasian cases relative to government expenditure. The production of public goods, like road networks and public safety (e.g. police and fire), where it would be difficult, on the one hand, to exclude the benefits from non-paying customers through free market mechanism and, on the other hand, if we were to rely exclusive on market mechanisms, inadequate private investments would result to satisfy broader social needs, constitute a possible starting point in identifying legitimate public investment priorities. Problems arise when we stretch the logic of the public goods argument. For example, it would make sense to argue that national defense is a public good - its benefits cannot readily be excluded to paying customers in order to generate a private rate of return through markets, ensuring that if the private sector was left to perform investments in national defense such investments would perpetually be neglected. On the other hand, if the government, as the legitimate investor in national defense, is left to define its own limits on necessary expenditures, then how can be sure that such investments will represent an efficient allocation of money capital (i.e. that they won't excessively crowd out private investment)? If we grant that the answer to this question is fundamentally partisan/political and contextual in relation to geopolitics, then we effectively have to transfer the logic of a particular segment of public expenditure from the liberal calculus of efficiency in free markets to spheres of political theory, deliberation, and democratic consensus. Can we argue that it is alright for the US government to crowd out private investment expenditures by allowing national defense spending to balloon in the 1980s if, simultaneously, such expenditure patterns contributed to the collapse of the Soviet Union? I don't think that any of the theoretic approaches referenced here can provide a satisfactory answer to this question.
Moreover, the broader terms introduced by the question of national defense spending become complicated still further when we integrate the logic of crowding in - in order to produce all of the goods and services collectively bundled in the institution of national defense, government pays lots and lots of private investors to produce guns, missiles, portable latrines, and meals-ready-to-eat. Still further, at least some of these private investment initiatives to produce national defense goods and services lead to the development of goods and services that can be consumed by private households and by firms involved in other consumer goods industries. It would be very hard to argue that any government investment project, however limited the aims, constitutes a perfect drain for money capital that will have zero long term expansionary impact on private, free market economies.
On some, more nuanced, level, the Walrasian argument against government expenditure, at least as it emerges within the New Classical school if not across Walrasian theory proper, must, thus, resolve itself to the case that any government investment will steer the productive resources of a market economy away from the priorities that would have obtained had private households been left to their own devices with the totality of their available resources. In its purest sense, it isn't an argument against either the static or dynamic efficiency of public investments relative to private ones quite as much as it is a quintessentially liberal argument against the collective nature of public investment. Government spending is bad because it is undertaken on the behalf of the whole/society rather than on the behalf of and under the direct and undiminished consent and direction of the individual/households. Collective institutions can never precisely represent the consent of individuals or validate and respect the existence of dissent. Somewhere at the roots of Walrasian theory, thoughtfully applied, exists a classical liberal critique against all government as the source of creeping infringement on the rights of free individuals, rights most effectively defended, in this view, in the workings of free markets.
Accepting, in this sense, that there are really fundamental philosophical differences between the New Classical/Walrasian (classical liberal) position on public investment and those of the more broadly empirical and utilitarian macroeconomic schools that emerged from Marshallian thought (both Monetarism and the Keynesian schools), we can go further to say that, following from the consideration on monetary sovereignty in my previous post, MMT seizes precisely on the collective, democratic nature of public investment as a positive virtue in prioritizing a leading role for fiscal policy in macroeconomic management. It is emphatically the presence of institutions to establish and enact collective consent and oversight of public policy makers that makes fiscal policy, as developed through democratically elected legislatures, superior to monetary policy, as developed by generally unelected central bankers. Within the broader structure of Keynesian thought, we might further add Keynes' own postulate that fiscal policy makers stand in a better position to negotiate obscurities in the long term calculation of returns on private capital (see The General Theory, closing paragraph of Chapter 12). If neither private sector investors nor government fiscal policy makers enjoy a perfectly clear crystal ball divining the course of future macroeconomic development, then the government at least stands in a position to purposefully and intentional prioritize the maintenance of stability to counteract the latent conservatism of private entrepreneurs and bolster sagging aggregate demand. More than anything else, these principles constitute the points of departure for MMT and like-minded approaches in Keynesian theory, determined to emphasize fiscal policy as the primary lever of macroeconomic policy management.
For the Monetarist perspective, the problem of expansionary fiscal policy remains essentially consequential. If private economic agents, especially entrepreneurs, are effectively adaptive in their expectations of macroeconomic development over time, then the private economy can weather any short term fluctuation in activity by itself, without the intervention of fiscal policy. If we allow relative price flexibility in relation to short term expansions and contractions of aggregate demand, relative to the totality of currently employed factor resources and currently existing inventories, then pricing structures can just adjust to reflect changing circumstances, and agents will realize, over time, how such circumstances have changed and act according. If prices in certain sectors or regional economies are rising because consumer demand is not be adequately satisfied at existing levels of production, new entrepreneurial activity will find its way into relevant fields to restore pricing stability and satisfy demand. For the Monetarists, there is simply no way that government can improve on this process. Perhaps fiscal policy makers can speed up the adjustment process, but at what cost? Aggressive public spending will just contort the natural functioning of private macroeconomic development in the hopes of undermining destabilizing price fluctuations, which, factually, contribute important feedback effects on the private economy.
I want to argue, in this manner, that the Monetarist counterargument here conveys something important to any critique of the larger corpus of Keynesian thinking with regard to fiscal policy. To offer the perpetually paraphrased argument of Keynes on the speed of the adjustment process, yes, in the long run prices will readjust in the face of significant short term fluctuations in aggregate demand, but in the long run we're all dead. This is, emphatically, a 1930s political argument, forged in the Great Depression and in the face of impinging fascism, both threatening the vitality of Western liberal democracy and free markets. Context really is everything here. When is the stability of macroeconomic growth so important that it cannot be wholly left to the devices of private entrepreneurs? If we aren't stranded on the precipice of barbarism, can't we just wait for free markets to adjust to changes in sectoral demand, especially if such changes offer to private entrepreneurs an essential learning opportunity pointing the economy forward toward new markets, new technologies, and new modes of economic and social existence? Or, on the contrary, is it a positive good for the government to step in point the way forward, even if, in its prognostications, fiscal policy initiatives generate short run inefficiencies in allocations of factor resources relative to what might obtain under a more gradual, privately-orchestrated process? Moreover, if we expand the larger tableau of the macroeconomy to take in important details on income inequalities and uneven potentialities for entrepreneurial vitality, can government intervention point us toward better future outcomes than those that would have obtained if we just allowed the private sector to exclusively determine the future? Again, neither the Keynesian schools nor the Monetarists can advance any iron-clad answers to these questions, or, at least, not answers that don't evince strong elements of political bias.
To detail some of these political biases from our subject perspective, both the theoretic and political advocates of MMT might argue that government financed free college tuition is a good thing, both because it would bolster the overall earning capacity of wider segments of a national population and enable college graduates to substitute other post-graduate consumption and investment choices for repayment of educational debt. In this manner, yes, the fiscal expenditures involved in such an initiative would contort the course of macroeconomic development that might be likely to obtain if free college tuition was not available, but, for defenders of such initiatives, the possible outcomes of a macroeconomy characterized by free access to higher education would be manifestly better than those in which access to higher education would be constricted by privately borne tuition expenses. Furthermore, yes, the fiscal provision of free college tuition would be expensive to taxpayers, who, in the long run, would have to cover the expenses for debt servicing when the government pays for the initiative by taking on more debt (i.e. by inducing the monetary authority print more money), but, over the long run, transformations of macroeconomic growth might offset some of the associated burden by enhancing tax revenues. Finally, and fundamentally, if such an initiative arises as an outcome of democratic consent, then free college tuition and its attendant long term macroeconomic effects would constitute a collective choice in the direction of the macroeconomy toward a fundamentally uncertain future outcome, shaped in turn by particular collective public investments.
It would be entirely conceivable to construct a long list of counterarguments to each of the above inducements favoring free college tuition from an MMT perspective. One such counterargument that I might be inclined to start with would center on the innate problems associated with treating the higher educational process as an exclusive tool for income mobility. Fundamentally, however, I would simply want to conclude this post by reemphasizing the innately partisan character not only of such an initiative but also of the larger body of economy theory in which such initiatives appear as largely unvarnished good solutions to manifest social problems. However much I might support free college tuition, single-payer health insurance reform, and a large scale restructuring and strengthening of social retirement insurance, arguments in favor of such initiatives must emanate from contested theoretic foundations, emphasizing different visions of macroeconomic development, the importance of fiscal and monetary management of instabilities, and the relevance of unfettered economic freedom for individuals.
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