John Kenneth Galbriath’s book, The Good Society: The Humane Agenda, creates a blueprint for a more just, prosperous and stable world. I’m re-reading it for the nth time because I continue to believe we might just get there one day. Indeed, I’m convinced we must.
Here are some excerpts:
While the economy must accord everyone a chance both to participate and to advance according to ability and ambition, there are two further requirements. There must be a reasonable stability in economic performance; the economic system cannot recurrently deny employment and aspiration because of recession and depression. And it may not frustrate the efforts of those who plan diligently and intelligently for old age and retirement or for illness or unanticipated need. The threat in this case is, of course, inflation — the diminished purchasing power of money — and with it the loss of provision for the future.
The flow of aggregate demand for goods and services must keep the economy at or near [full employment]. The failure to do so — resulting in cyclical or enduring unemployment — is inconsistent with the goals of the good society…
The stabilization of the flow of aggregate demand is the vital factor…There are three substantive lines of corrective action that will accomplish this, will increase the flow of aggregate demand as required…..
1. taxes can be lowered
2. interest rates can be reduced
3. the government can contribute directly to the flow of demand by new expenditure in excess of tax receiptsAction on interest rates, commonly referred to as monetary policy, has the highest establishment approval as an effective measure against stagnation and unemployment…
The serious flaw in monetary policy is that it may have little or no effect on the flow of aggregate demand. As noted, the lowered interest rates are assumed to work against depressive conditions by encouraging consumer borrowing and expenditure and business investment. The latter responds to the lower cost of borrowing and therewith the improved possibility for profit. But when times are poor and unemployment is high, lower interest rates do not reliably inspire consumer expenditure; depressive attitudes, including those which are the product of unemployment or uncertain employment, are in control. And at such times, excess business capacity being evident, business firms, old and new, may not be encouraged by low interest rates to borrow and invest and so contribute to the income flow; the larger prospect is too uncertain. There is also the adverse effect of low rates on those whose income comes from interest — a reduction in their contribution to aggregate demand. None of this, however, discourages faith in monetary action as a decisive economic instrument. Quasi-religious conviction here triumphs over conflicting experience.
Tax reduction is also celebrated as a way to sustain aggregate demand during recession…Here again the hope is at odds with reality; there is no certainty that the funds released by tax reduction will be invested or spent.
As a way to stimulate demand in times of negative growth or stagnation, there remains only one direct and active intervention by the state to create employment… the only true substantive action is for the government to move to provide jobs for those for whom unemployment is otherwise inevitable…
The deficit… must not be seen as a barrier to effective public action….When the economy recovers and public revenues rise, there must then be the discipline that brings stimulative expenditure to an end. Taxes must be kept at previous levels or increased as a counter to speculative excess and, at the extreme, the inflationary pressure of demand on markets.
There is nothing easy about this broad course of action. An influential body of opinion now dismisses it as beyond the collective intelligence of the modern polity. Once again the unfortunate fact asserts itself: there is no effective alternative. What is dismissed as functionally difficult, ideologically passé, is the only way to prevent recurrent periods of stagnation and unemployment.
The “influential body of opinion” remains too enthralled with monetary policy, too wedded to supply-side “solutions” and too focused on deficit reduction to allow us to build The Good Society. The rich and powerful, working through our elected officials, insist that There is No Alternative: we must spread sacrifice instead of prosperity, make tough choices rather than wise investments, focus on budget outcomes instead of human achievements. Theirs is a bleak world – at least for the masses – arrived at through the cultivation of fear and mysticism. The Good Society is out there, and while it may seem unachievable in this Plutocratic world, Galbraith offers this:
To identify and urge the good and achievable society may well be a minority effort, but better that effort than none at all.
Follow me on Twitter
JKG knocks it out of the park.
“What is dismissed as functionally difficult, ideologically passé, is the only way to prevent recurrent periods of stagnation and unemployment.”
And MMT analysis shows how in can be done.
What everybody seems to assume is that there is no alternative for distributing purchasing power to the majority of the society other than through employment. When we take a realistic look at the last 200 hundred years of progress, it becomes obvious that the thrust of the endeavours has been to produce more with far less human effort. In other words, progress has been aimed at putting people out of work and providing them with more leisure time to enjoy the fruits of their inherited advancement. Unfortunately, Governments, and societies around the world, have been totally unable to grasp this simple fact. Politicians have been enslaved by the doctrine of ‘full employment’ because it used to be the mantra of the financial industry that the only way a person can justify their existence is to work for their living. Too many people work on the principle, ‘There is no such thing as a free lunch’, but they ignore and take for granted, all the benefits they have inherited from past innovation, inventiveness and achievements of their forebears.
Under the current financial system, the employee on wages can never have sufficient purchasing power without going into debt.
This is easily illustrated in what is known as the A+ B theorem. Where A = the wages received by the employee less income tax deductions and any superannuation deductions, if applicable, and B = all the ancillary costs in producing any product, such as, the cost of raw materials, an amortised proportion of the capital costs, overhead costs, taxes and a profit margin.
A realistic proportion of wages to the above group of production costs is in the order of 25 to 30%. Thus, the purchasing power of the employee will always be about a quarter, or a third, of the total price of any product.
Because wages represent the principle purchasing power of the majority of the population, there can never be sufficient to purchase the goods produced. As a consequence, the population is forced into perpetual debt to the Banks in order to achieve the standard of living that is constantly thrust upon everyone through media bombardment.
This provides a very powerful incentive for the Government to maintain the status quo in coordination with the Banking industry. It also represents a major problem in equating production with consumption because that revolves around the need for sufficient purchasing power to acquire the products at their nominated price. That problem is offset by encouraging people to go into debt. By acting in concert, the Banks and the Government aim to make it as easy as possible for the consumer to tie the rope around their own neck.
‘Full’ employment has many side benefits for a Government and, in particular, the financial industry. ‘Full’ employment provides a tax flow to the Government and thus an effective control over the people of the nation. However, the last 200 years of industrial history is in direct conflict with a policy of maintaining ‘full’ employment. The aim of increased efficiency has resulted in greater production at significantly reduced labour costs. Automating the industrial process, especially through the introduction of the computer chip, has advanced this aim. As a result, ‘full’ employment is no longer a viable, necessary or possible aim for a community, except at the expense of wasted energy and resources. This has a number of dire consequences for the society in not only reducing the potential tax revenue for a Government, but more importantly, greatly reducing the purchasing power of the unemployed people. This directly impacts on consumption levels, as unemployed people are reluctant, or unable, to go further into debt.
This situation creates another conflict for the finance industry which has perpetuated the ‘holy grail’ of increasing consumption through the provision of interest bearing credit to all and sundry, via the ubiquitous credit card. In recent times, that conflict has been overcome by the creation of questionable financial products which have allowed the banks to make huge profits without the necessity of supporting the manufacturers and employers. With the government stepping in to underwrite the widespread gambling that has occurred in the derivative market, there has been less need for the big banks to worry about defaulting loans or increasing unemployment. Prudent banks have always been reluctant to make loans when the repayment potential is in question.
Because this myth of ‘full employment’ is unquestionably accepted around the world, the developing nations have enticed overseas investors to set up business through the promise of cheap labour and quick profits.
C H Douglas foresaw all this back in the 1920’s, but he has been totally ignored ever since. Maybe, it is time to re-visit his ideas on the economy and this question of “full employmewnt”.
Thank you for your comment. MMT economists are not all on the same page about the desirability of full employment & a job guarantee program, and that might be a good thing. As plutocratic political minions force feed austerity and increasing wealth inequity on those they govern, the young look at habitat destruction and recognize that economic systems must support sustainability, not growth & full employment; to conserve the habitat. Soon, everyone will demand prosperity without habitat destruction & without wage slaves. Major Douglas offered a real alternative, ignored by nearly everyone. Today, with climate change at the tipping point, a federal guaranteed citizen’s income might be more desirable than either a job guarantee or a social credit system – especially if the income payment was linked to the ecological footprint of the recipient. (If your mode of transportation is a bike, you receive a bigger payment than someone whose mode of transportation is a Hummer.)
MMT economists are not all on the same page about the desirability of full employment & a job guarantee program, and that might be a good thing.
That’s not correct. They ALL agree on that. Even most of the mainstream pays lip service to the goal of full employment, as they purvey nonsensical theories about why this very easy goal in unattainable. The MMT academics, Mosler, the UMKC & Australians would say and have said that any “MMTer” who said “I agree with MMT but not the JG & full employment” would be misappropriating the label “MMT”. Wray aptly characterizes such a position as agreeing that a remedy is a perfect cure for a disease (and many, many other consequent problems), but that thinks it should not be used. (Disagreeing with the fact that the remedy is in fact the cure is just plain illogical and wrong, and even further from MMT.)
In the real world, contra Guggzie, the financial sector, the economic predators are the most ardent opponents of full employment. The goal of full employment is supported because MMT thinkers understand economics rather better than Major Douglas. The superiority of the full employment / JG alternative is not an assumption, but a logical conclusion.
I find it surprising that, as part of that write-up on the blind spot in trying to mop up industrial production by the purchasing power created as a side-effect of said production, you seem to ignore a) anything non-physical, e.g. services, education, care, environmental reclamation etc, and b) that a government with a sovereign, freely floating currency doesn’t need to make a profit but can in fact swallow any additional costs instead of passing them on in the price of any of its “products”, or even “produce” things that are not being “bought” per se. After all, the population wouldn’t typically buy some units of police protection or a day of forest.
Given the repeated mentions of MMT on this site, I find this direction therefore a bit surprising.
Just to clarify a point BigRed, the productive capacity of a nation does include all the services that go with a modern society, and the same criteria applies to them – the fundamental purpose of production is consumption – if the product, or service, is not going to be consumed – either now or in the future – there is no point in producing it. Production for the sake of production, without relating it to the consumption capacity of the nation, is a waste of time, energy and resources. Overproduction will ultimately be mopped up by destruction – either trade wars or physical wars.
As long as a valid link is maintained between production and consumption, especially in relation to the money supply, inflation would not be a problem.
A’ight, so you have included any kind of services in “A+B” – my bad – then you only need to explain why employees wages are always stuck at 25-30% of the price of products (especially when the price is 0 as in the case of many existing and possible public services) and I guess your analysis holds.
Actually, BigRed, the price is never zero for any public service – somebody always pays, somewhere along the line. But the 25 to 30% does apply to the private sector, just as it applies to the large bulk of the public employees who have to buy from the private sector.
When we talk about perpetual debt I include housing, the purchase of furniture and cars; very few people can afford to buy these things without borrowing. Of course, given a stable economy and rational management of a househod budget, a lot of people can live with the accumulated debt, and over time, pay it off. The point is, they can never afford the standard of living they want if they had to rely on wages.
“Actually, BigRed, the price is never zero for any public service – somebody always pays, somewhere along the line.”
Yeah, you know, it’s this kind of blanket assertion that leaves me a bit unsatisfied. It would have been great if you’d picked up one of my simple examples and argued why those have to be paid for.
But, ok, let’s make this explicit. Let’s say that there’s an environmental reclamation project – and mind, I don’t know anything about this issue so this example might be extremely contrived – in which a couple of public employees remove some polluted soil, clean it up (if possible), and plant a bunch of trees. Machinery is bought or rented, fuel for that machinery is bought, saplings bought, the people doing the physical work paid, as well as some people who planned this, oversaw it, did the paperwork. At the end of this there’s a forest that at the least gives people the chance to take a stroll, and probably has some other positive effects such as protection against erosion, and of course the polluted soil is gone and will therefore not seep into groundwater or such. So a bunch of people got money directly or indirectly and the “product” is free of charge.
At what point does the “payment along the line” come into play?
And thinking about this, I also realized that your private sector example is a slight bit problematic:
“Where A = the wages received by the employee less income tax deductions and any superannuation deductions, if applicable, and B = all the ancillary costs in producing any product, such as, the cost of raw materials, an amortised proportion of the capital costs, overhead costs, taxes and a profit margin.”
The cost of raw materials goes to someone who supplies this, so if your assumption holds then in addition to the 25-30% direct wages, another 25-30% of the raw material costs are paid in wages somewhere. In the same manner, the “overhead” is probably administrative or maybe has to do with marketing and advertising, which means that someone gets paid in those sectors/departments. The profits go to some capitalist who will spend at least some of it. So the purchasing power will be quite a bit higher than a quarter or a third.
Price or cost? The government must pay for its products or services (a cost) but it doesn’t have to charge a price for them. Then there is the question of who pays the costs. According to MMT revenue does not fund sovereign government expenditures if the currency is fiat and fee floating without ties to a commodity or other currency. Taxes have their purposes, but funding expenditures is not one of them.
Thanks for making the very important point about the effects of advanced technology on growth and productivity. It reminds me of a recent comment I received from someone in India, who pointed out how they had made a huge mistake, by thinking high technology was THE path to economic prosperity. They spent a fortune training people for that sector but found it provides employment for only a small handful of engineers who are so productive, just a few of them and many low skilled workers are required because of the high degree of automation and control in todays industry. Even technicians are in little demand as equipment has become relatively disposable due to low production costs.
It’s not just that people can’t afford to buy what they produce; it’s that they can’t even participate in producing what they are told they need to be buying anymore.
Honestly we should all be living in a virtual utopia today; however, clinging tenaciously to old deeply entrenched ideas about relations among factors of production and who gets to define and reap the rewards of “progress” are really holding us all back.
Peak production of fossil fuel will give us fresh opportunity to rethink the meaning of progress. I think more and more we are going to find that sustainability will become the new “growth”.
Even though the Galbraith/MMT/Post-Keynesian agenda is not politically viable at the moment, it’s important that we maintain a positive vision of where we want to go.
“…. the only true substantive action is for the government to move to provide jobs.”
Agree with direct job creation, just keep in mind that can mean many things in addition to the not-so-inspiring MMT proposal to create temporary minimum wage jobs.
For example, it could mean creating permanent skilled public sector jobs, instead of waiting for the private sector to hire skilled workers out of a JG labor pool. We don’t need more temp jobs, we need more stable jobs.
It could also mean that we choose to stop exporting our skilled jobs. If we stopped exporting jobs, then we would have less need to create new jobs.
Please remember that “jobs” are a relatively modern, capitalistic creation. Native Americans did not have “jobs” and they got along pretty well. Pre-industrialized rural US and Europe did not necessarily have “jobs.” We need to rethink the whole “job” thing.
I’m really averse to the entire idea of having “the government move to provide jobs”. Technology and the organization of production are an ever evolving tandem. Yet, political pressure to maintain rentier jobs that add no real productive value delays creative destruction and holds back improvements in the standard of living. I prefer having “the government move to provide demand”. If jobs are destroyed by improving productivity, this is GOOD. It frees up people to provide something else. Seeing to it that the production of that “something else” provides sufficiently distributed income to consume both existing and new production is a product of tax law and employment regulation. Seeing to it that “something else” comes to pass is a product of R&D legislation and industrial policy. Government can’t know what that “something else” is but it can create an environment where those who dream can make it happen and where those seek to sell fairy dust are properly charged and imprisoned.
JKG wrote: “The deficit… must not be seen as a barrier to effective public action….When the economy recovers and public revenues rise, there must then be the discipline that brings stimulative expenditure to an end. Taxes must be kept at previous levels or increased as a counter to speculative excess and, at the extreme, the inflationary pressure of demand on markets.”
I never fully understood MMT’s position on this sort of statement. Do MMTers agree? Specifically, should deficits ultimately be “proactively” halted or even “proactively” reverted? I know that an economy will go a long way to naturally balance itself… a sort of “reaction” to the deficits: demand picks up, and tax receipts consequently rise. But JKG alludes to the likely need of a more “proactive” effort on the part of policy makers.
MMT clearly points out that inflation has to be monitored, and that it is this metric which determines whether deficits are excessive. However, I go back to the “reactive” vs “proactive” point above. Does MMT agree that there needs to be “discipline” and proactive actions to “counter speculative excess”? Can deficits lead to inflation that takes a while to materialize… a sort of pent-up inflation. Is that maybe why some economists like JKG reference the need to be proactive when it comes to unwinding some of the effects that deficits may bring about?
I think that the policy regarded as “ideal” is to run deficits which are so large that although they rapidly conclude the depression, an opposite policy is needed to prevent inflation at full employment. This is in opposition to relying on the current automatic stabilizers to create a smaller deficit which ends the depression only slowly but which disappear of their own accord as employment and tax receipts increase. There’s no reason the stabilizers couldn’t be redesigned to be more extremely anti-cyclical though.
Many MMT scholars seem to stress this point in order to defend themselves against the (false) accusations that they think “deficits don’t matter” or just want to “print tons of money.”
reve_etrange wrote: “I think that the policy regarded as “ideal” is to run deficits which are so large that although they rapidly conclude the depression, an opposite policy is needed to prevent inflation at full employment.”
Thanks for the answer and I see how what you say could make sense… at least on paper. The issue is that it is very difficult to know when tp take the foot off the gas. Assume especially and for example a deficit that is “balanced” (thinking of the sectoral balances) with a trade deficit. The deficit will not generate inflation until foreigners start exchanging their dollar balances for real goods and services. That could take years or even decades, but eventually logic would suggest the trade should be unwound; ie eventually foreigners exchange real goods for real goods. There could be called what I refer to as “pent-up” inflationary effects. Gauging those may be very difficult.
Alex Seferian –
I too have pondered this issue. Perhaps my current (not quite MMT) take may help:
A balanced budget has the function of stabilising the economy in its current state. This means that population, employment, and standard-of-living don’t change, also inflation and innovation are zero. Any improvement in one is at the cost of another.
An increment in any (all else equal) requires a proportionate injection of “permanent” money – a state monopoly. A continual change requires a continual injection – an aggregate deficit.
Should government overdo the injection, it can withdraw the excess by operating a temporary surplus (in practice, probably a reduced deficit) – I think this is your “proactive” action. Note that a relatively large error in a deficit may itself be small.
Unless government gifts the money (which I suspect always ends in tears), it can only introduce the money by purchasing what it needs – infrastructure, communications, healthcare, etc. An added value is that government can dictate the prices it pays.
This process should permit effective management of the money supply to match the evolving needs. I don’t see any major intrinsic delays in this, so perhaps “proactive” in practice simply means “prompt”.
Dr Skelton – If the problem and its solution have been well-characterised for generations, how is it no one has done the experiment?
This analysis may hold for a manufacturing economy, but I think it breaks down when an economy is largely a professional-service one. And then there is the effect of government transfers and subsidies, especially to the elderly, youth, and disabled.
This comment was in reply to Guggzie’s post, and essentially echos BigRed’s comment.
Pingback: Stephanie Kelton: The Good Society: Lessons Not (Yet) Learned « naked capitalism
Pingback: Stephanie Kelton: The Good Society: Lessons Not (Yet) Learned – The News Doctors
“An influential body of opinion now dismisses it as beyond the collective intelligence of the modern polity. ”
Nothing has changed.
We will get there. After all, we got there once before, and some of us – a growing number – know the way back. If we are halted for a time, we will try again. If we can’t make it happen in America, maybe we can help make it happen in Ecuador – or Italy. Once it is seen to work in even a single place, the opportunity to widen the frame and spread the movement will take on a whole new momentum. This is the logic of movements, and this logic doesn’t change. It is also in the nature of movements that they both ebb and flow. But they leave institutions in their wake – like Social Security and Medicare. Even the mini-movement that elected Barack Obama has left Obamacare in its wake. And no one should knock it for what it isn’t – it will get better. One of the priorities of an MMT-aware social and political movement will be to make it better.
Many of us will not live long enough to see a society that lives “wisely, agreeably and well”, as Keynes once put it. But it’s also a relative thing. We still have wars, but they aren’t World Wars. We still do bad things to the environment, but it doesn’t go unnoticed or unopposed. Empire isn’t having things all its own way. And if the arc of history bends at all, it bends toward better.
And I’m all for a Skidelsky-style remap of what that word exactly means, too. But first things first – let’s wipe the smirk off of a few good “neo-classical” mugs. JMK and JKG can both teach us a lot about how.
Paul Krugman’s faith in low interest rates as a decisive economic instrument is not discouraged by “the adverse effect of low rates on those whose income comes from interest — a reduction in their contribution to aggregate demand.” Krugman should take a closer look at the strong economic growth of the 1990s, which occurred in concurrence with elevated interest rates.