A Perfect Example

By J.D. Alt

Recent news reports lament the on-going collapse of America’s coal industry―specifically the spectacular loss of jobs which is devastating not only families but entire local economies and communities. On a PBS news report, a woman who’d worked for a local mining company for thirty years teared up and asked the reporter, “What in the world am I going to do?” At a recent event sponsored by Wyoming Public Radio, attendees were asked to fill out 5X7 cards with suggestions about how to answer that question—how to replace the lost coal industry jobs. Under the banner “How to Diversify Wyoming,” the cards were pinned on a bulletin board for everyone to see and discuss. The suggestions ranged from eco-tourism to pot-growing to space-flight support―all good, healthy, creative ideas, (with the possible exception, I think, of space-flight). What suddenly jumped out at me, however―like a jack-in-the-box on a spring―is that implicit in every suggestion written on those 5X7 cards lies a huge, overpowering, built-in assumption about the way the world has to work:

Whatever replaces the lost coal-industry employment has to be profitable.

Of course that’s true, right? In the market-driven, capital-for-profit world heralded by Adam Smith and ingrained in the rational construction of American ethics and reality, this is the only way things can, or should, get done, the only way things are made, or should be made, to happen. This “reality” is so invisibly woven into our mental constructs it might be worth trying to make it visible with some simple “architect’s” diagrams. Doing so, I’m thinking, might shed some light on at least one 5X7 card no one even considered pinning on that bulletin board. And who knows: maybe there are, I’m hoping, other strategies to weave an acceptable American reality.

Here’s the diagram that comes to mind:

jd1

Depicted are a series of “Action Operators” (people or organizations making something happen) linked together in a kind of chain. In each case, the “link” is a two-way arrow, with dollars flowing in one direction, and the product of action-operations (goods or services) flowing in the other.

Each “Action Operator” (AO) is motivated to produce the goods or services and send them off along the link by the fact that the dollars coming in from the other direction are greater than the dollars they spent in producing the goods and services. This “dollar-profit” is illustrated as being extracted from the AO as the “motivator”―what the AO gets for its efforts. To make the diagram more concrete, let’s make the AOs more specific:

jd2

On the left, we have a Widget Mfgr which sends dollars along a link to an Energy Producer. The Energy Producer, in exchange for those dollars received, sends electricity it has produced along the link to the Widget Mfgr who uses the electricity to manufacture the Widgets. The Energy Producer is motivated to do this because it receives more dollars from the Widget Mfgr than it costs the Energy Producer to generate the electricity it sends, creating its motivating “dollar-profit.”

Next in line, we have a Coal Co. which sends coal along its link to the Energy Producer. The Coal Co. is motivated to do this because the dollars it receives in exchange from the Energy Producer are greater than the dollars it spends to produce the coal, generating its own motivating “dollar-profit.”

Next in our economic chain comes the Miner who sends his labor along a link to the Coal Co. The Miner is motivated to provide his labor because the dollars he receives in exchange from the Coal Co. are greater than the dollars it costs to provide his labor. This difference provides the Miner with a net income (his motivating “dollar-profit”) some portion of which is then available for purchasing his necessary, or desired, widgets.

The chained loop is completed with a link between the Miner and the Widget Mfgr. Along this link, the Widget Mfgr sends its widgets to the Miner, and is motivated to do this, like everyone else, because the dollars it receives in exchange from the Miner are greater than the dollars it spends to produce the widgets― this difference, of course, being the Widget Mfgr’s motivating “dollar-profit.”

This chain of actions and motivations is a marvelous system. It makes things happen. It allocates resources and gets things done. It creates lots of jobs for people to do, and it provides them with the net income (dollars) they need to engage in the consumer spending which (as is made evident in the last link of the loop) is the connection that makes the system flow—like when you complete an electrical circuit by pushing a plug into an outlet. This is a dynamic, prolific, and happy diagram―until a thing being done or made to happen no longer generates a profit for one of the Action Operators.

jd3

When this happens, links are broken. Without its motivating “dollar-profit,” the AO logically stops producing its goods and services―and, in turn, it stops buying the things (like labor) it was using to produce the goods and services it was making.

We can now more easily visualize the plight of the coal industry employee in our diagram: The Coal Co. is no longer making a profit by producing its coal and selling it to the Energy Producer. So, logically, it stops producing coal. Two links are immediately severed: the link to the Energy Producer, and the link to the Miner. We’ll assume the link to the Energy Producer is replaced with a new link to, say, a profit-generating wind farm. This means the link between the Energy Producer and the Widget Mfgr remains intact. Whew! Great!

But the link to the Miner remains severed. And, as we can see, the larger loop, itself, is broken: Even though the Widget Mfgr can still buy energy to produce widgets, the Miner no longer has the net income to buy the widgets produced. The flow around the loop comes to a halt. The immediate pain is felt by the Miner, then the Widget Mfgr, but eventually all the AOs and links in the loop are affected.

What to do? According to the Saints of our economic orthodoxy, to repair the loop there is no other way than for the Miner to find a new link to a new Action Operator―a replacement AO driven, of course, by the prospect it will generate a motivating “dollar-profit.” Hence, we have the exercise of the 5X7 cards on the bulletin board―desperate fantasy searches for new, profit-making AOs who might come into the local community, start producing goods and services, and hire the former coal industry workers. Hence, also, we have politicians promising to attract new businesses with friendly “un-regulations,” big tax breaks, free land, mineral and water-rights, and so on―(anything that will help the ventures turn a motivating profit). The politicians get elected, the freebies are extracted, but the ventures, for the most part, fail to create the promised jobs. Profit-seeking capital, efficient and wondrous as it is in making things happen under the right circumstances, is a strange and fickle thing.

This all may seem obvious, but now let’s insert a hypothetical unorthodoxy into our diagram and see what happens. First, let’s take stock of the situation on the ground:

We have a Coal Co.—in business for generations—which now, because it is no longer generating profits, has stopped production. We have a community of people (the now unemployed Miners) who have nothing to do when they get up in the morning―except worry and scramble about how they’re going to find some net income to pay for their essential, life-supporting widgets. We have a local economy, which previously had been providing goods and services to the Miners, which has now lost its customers. And, finally, we have what is inevitably overlooked by our highly sensitive, profit-oriented awareness: a local, natural environment and ecosystem which has been despoiled, degraded, and polluted by decades of mining operations―in many cases, literally a vast series of wastelands, mountains flattened, forests obliterated, valleys and streams filled in with leaching, toxic debris.

So here’s the hypothetical unorthodoxy I’d like to insert into the diagram―just to see, diagrammatically at least, what happens: The Coal Co. is gone. Rather than wait, cajole, and even resort to various forms of bribery, in the slim hope of attracting some new profit-making business to replace the Coal Co., let’s try a different tactic. Let’s replace the Coal Co. in our diagram with a new “kind” of AO―an Action Operator which doesn’t have to make a profit in order to obtain the capital and cash-flow it needs to undertake the goals it decides to achieve. Let’s call this new kind of Action Operator a “Direct Sovereign Spending Venture” (DSV).

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As illustrated, the DSV replaces the “horizontal” link from the Energy Producer with a “vertical” link from the sovereign government (SG). Along this vertical link flow new U.S. fiat dollars issued―at will and as needed―by the U.S. sovereign government. (For a simplified explanation of how and why this can happen, and why it is NOT “spending taxpayer’s dollars) see this video.)

On the other side, the DSV replaces the broken link with the ex-Miners (who are now selling their labor to the DSV). This, in turn, repairs the crucial link between the ex-Miners and the Widget Mfgr. The profit-oriented chain is now flowing again―even though one of its “horizontal” links has been replaced with an unorthodox “vertical” one.

Now we get to the really important part: As the newly issued fiat dollars flow along the link from the sovereign government to the DSV (and hence to the ex-Miners) what are the goods and services that flow, in exchange, in the other direction―and who do they flow to? There are lots of possibilities, but in this particular example the most immediately rational one, from my perspective, is this: The DSV provides the necessary equipment and pays its new employees (the ex-Miners) to repair, de-toxify, and fully restore or reclaim the natural landscapes, waterways, and ecosystems despoiled by the decades of mining operations. This makes a lot of common sense for two reasons: First, the people being employed to do the work―the ex-Miners―are intimately familiar with the problems that need to be addressed, the local “lay of the land,” and the kind of equipment necessary to undertake the work. Second, they have an extra “motivation to excellence” because they are restoring and reclaiming the natural heritage of their own communities: they are restoring and improving their own property values and quality of life. We might call this particular example of a DSV the “Restore America Co.”

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Looking at our revised diagram there are now a couple of interesting things to observe and think about. First, will the direct sovereign spending of new fiat dollars to fund operations of the Restore America Co. generate inflation? The diagram suggests the answer is “no,” since the new dollars are simply replacing, in the diagram at least, dollars which previously flowed from a different link (the old link between the Energy Producer and the Coal Co.).

Second, the diagram seems to suggest, very clearly, that it is possible (and quite rational) to replace an underperforming, damaged, or failed link in the market-oriented, capital-for-profit economic chain with a “vertical” direct sovereign spending link. Diagrammatically, it appears that doing so not only doesn’t damage the larger, profit-oriented flow, but reinforces and repairs it. It also seems visibly clear that it is logically possible to insert direct sovereign spending links and ventures without “socializing” major portions of the entire economy. DSVs, in other words, can easily be compatible with―and helpful to―a national market-based, capital-for-profit economic system.

History buffs might point out that what we have done here is simply create a diagram of FDR’s New Deal. But I think we’ve gone a bit further. In the 1930’s the U.S. was not operating with a near 50 year history of pure sovereign fiat money as it is today. FDR’s measures were seen as emergency operations to be replaced, once things started “working” again, with “business a usual.” (That opportunity, of course, didn’t come until after WWII.)

The diagram we’ve just created suggests, I think, the possibility of a new “business as usual” that can, in fact, restore a faltering American Dream. Imagine America’s over-arching, diverse and complex capital-for-profit economic chain being strategically augmented with vertical links to direct sovereign spending ventures. These not-for-profit DSVs will act to repair, strengthen, and make the larger, profit-driven chain more sustainable.

What our diagram has made visible is the fact that with an exclusively “horizontal” capital-for-profit economic chain, the things that are undertaken, or made to happen, can only be those things for which the capital-for-profit business model works. This is not always―or maybe even mostly always―best for the capital-for-profit business model itself. If something doesn’t fit within that model―even if it’s something essential for the collective good―the profit-seeking economic chain will NOT make it happen.

Inserting direct sovereign spending ventures and links into the chain, then, enables collective society to undertake and accomplish a greater diversity of goals―and to achieve things which not only otherwise wouldn’t happen, but which could provide enormous and critical benefits to local communities, economies, and collective society as a whole. What would those strategic, vertically linked DSVs undertake to accomplish? Our diagram’s “Restore America Co. is a perfect example.

15 Responses to A Perfect Example

  1. But why blame Adam Smith for the economic malfunctions you indict? Smith was as explicit as anyone, including Marx, on the evils of an economic system motivated only by profit and on the essentiality to a civilized society of the “moral sentiment” we call *empathy*. And he was just as explicit that as a society moves from “barbarism” to “civilization” the proportion of socioeconomic activity provided through *government* must increase in direct proportion to our progress toward civilization. You have said nothing that Adam Smith would not assent to.

    • fosforos, Yes, that is certainly true. But the dominant and “popular” understanding of Smith is the invisible hand of the profit-motive as guiding principle of modern economics. Government certainly spends money, and people understand that, but they don’t like it conceptually―even if that money might end up in their own back pocket. It goes against the guiding principle. I’d like to imagine a “popular” idea emerging that direct sovereign spending to achieve specific goals is just as valid―and rationally compatible with―the profit motive. The KEY to this is understanding that direct sovereign spending is NOT the spending of “taxpayer’s dollars.” I’m not certain that Adam Smith directly perceived that.

  2. Howard Switzer

    I like the diagrams showing how to make lemonade out of a lemon (coal disappearing) by implementing sovereign money. What is missing in the ‘existing system’ diagram is the banks role in this, along with the profits they extract from the system, as well as the governments slavish role. Perhaps it makes the thing too complicated to grasp?

    • Yes, the role of the banking industry should be added to the diagram. I’m going to try to do that at some point. In that regard, what is also interesting to consider is that because the profit motive is such a dominant model, capitalist governments see their only “lever” being interest rates: If we want a new industry to replace the lost coal-related jobs, the ONLY way to make that happen is to lower interest rates to encourage some venture to borrow bank dollars to create the new jobs. How low are we going to push interest rates in the banking industry before we realize there are a lot of other reasons businesses aren’t starting up to undertake the things we need to accomplish?

      • Blue Pilgrim

        No need to fiddle with interest when the government can fund new industries directly, even in the existing system, although it would be better to adopt a different paradigm.
        I imagine a group of pioneers arriving at their new land, wanting to build a town, start farms, etc., but being stymied because they forgot the bring gold or money with them and are imprisoned within a bad economic paradigm.

        Even in the diagrams above it is not necessary to only measure things in money: cleaning up environment, generating electricity with wind, and any other useful production could be valued in terms of the things themselves. Even if we had no inches or rulers we can see a stack of lumber and it’s value, and it can be used to build things in square by cutting pieces of cord, making all the pieces of wood for the uprights the same as the length of the ‘upright cord’ without a conception of ‘how long’ the cord is in some system of unit measurement — or even by direct comparison of one piece of wood to another. The abstraction of measurement systems is convenient but not critical.

        This is the ‘hidden’ idea in barter, so many shirts as good as so many chickens as good as so many loaves, etc., all things in terms of the tangibles with no abstraction — conceiving of wealth without any money. I can even value things in terms of abstract chickens: “I’d give you two chickens for that shirt if I had any chickens, but since I don’t will you take two chicken’s worth of potatoes or beans?”

        We run into problems when we mistake the primary existence of value in terms of high level abstractions instead of the tangible goods or services we actually need. Trade commodities like gold are usually abstract; value of gold in terms of money is a higher order abstraction; value of interest (projection into the future) and derivatives even a higher abstract order, and such abstractions can be increased in value even if the goods they are supposed to represent are not because they are real only in the human mind, not in the physical world.
        See
        https://www.youtube.com/watch?v=A-7zYBKgzfs
        Alfred Korzybski – The World Is NOT an Illusion

  3. Thomas Haupt

    Thank you. I have been following MMT for a few years now. I am Joe Q Public but it makes perfect sense to me. Loved your early analogy to the Monopoly game. I use that often whenever the discussion of economics come up. Rather depressing that it is so difficult to change the current Austrian/Hayek/Friedman group think. We can either go the MMT way or the way of Greece. Based upon current leadership and trends, Greece here we come. I’m an old guy and it may not effect me much. I feel sorry for the young people. I thank you and all the MMT folks that keep pluggin away though. (I’m a regular billyblog follower too.)

    • It would be very easy to change the current Austrian/Hayek/Friedman group think, with sufficient financing of a truth oriented media empire. Such a media empire would need to buy expensive in-depth marketing research to determine how to spread the truth as far and as wide as the lies and distortions are being spread by Faux News, Clear Channel etc. Faux News has only been around for about a decade, and a huge percentage of the political and economic swing to the Right has been caused by their efforts. If we had an equal but opposite force, political and economic views would shift a lot.

  4. What you propose is operational at the national level by the currency issuing power of the consolidated central bank. But state and local governments are currency users. Are there ways – TANs– or local development banks capitalized by taxes, that can assist local governments to acquire the ability to engage in DSV?

    • B. Finger, the General Revenue Sharing program that Richard Nixon created had the effect that you suggest. It transferred funds that Congress had appropriated to state and local governments on a formula basis, that they could use for a wide variety of things. In his wisdom, Ronald Reagan killed this program in order to reduce dependency on the federal government.

  5. James Cooley

    Having recently driven through Kansas, Colorado, Wyoming, Washington, and Oregon, I can attest that there are thousands of wind turbines erected and operating in these states. These turbines , although durable, need constant repair and replacement to function properly, as do their transmission lines. Site access, erection, repair and maintenance of this infrastructure can and has replaced some of the lost employment in the extractive energy sector with well paying jobs. More can be done along the lines suggested, but the outlook is far from hopeless.

  6. It’s a great concept.

    But the mistake is to see profit as a drain. It isn’t. It is simply the wages of capitalists, or if you want to take a different view the wages of the manager class.

    And capitalists consume too. So they take their profit and they spend it into the flow the same as anybody else spends their wages.

    All of which then works fine – until capitalists earn so much that they start saving. Then your ‘P’ values start to cause a problem.

    So logically either you bring the capital share down so low that the capitalists are forced to spend everything, or you offset their desire to save in some other manner.

    Saving is great for individuals. It makes them feel secure in a system that has limited social security. But all that saving is a systemic risk that has to be addressed to make it work – either by improving the social security so people don’t feel the need to save so much, or by accommodating the savings.

    • Neil Wilson, thanks, I agree completely. My intention was not to portray the extracted profit as a “drain,” but only as a “motivator.” Diagram needs some help there, I guess. The point about when “profit” goes into saving rather than spending, is moot, however, isn’t it, if the saved dollars are replaced by a direct sovereign spending venture? From my perspective, rather than worrying about dollars out there, themselves–whether they’re being spent or stuffed under a mattress–we should be worrying about the things we need to be building and doing that capital-for-profit schemes simply aren’t going to make happen.

    • Blue Pilgrim

      Thee is another problem. When some people make lots of money, even if they spend it they tend to drive prices up because they don’t much care if they spend $7.99 for a pound of some kind of flour in a fancy looking package labeled ‘natural’ and ‘organic’, or they spend $20 for a ‘designer’ baseball hat : price gouging is supported and the so-called competitive market is disrupted.
      Some of these wealthier people do spend all they get in because they don’t do comparison shopping, balk at something overpriced, or care too much if they have to go buy a new thingy next month because the one they just bought falls apart. (On a larger scale we get F-35s and ships the Navy doesn’t even want — and, of course, apocryphal “$400 hammers” which probably do have some basis in reality.)

      Capitalist consume differently than us peasants do.

  7. I think Dr Edward de Bono would approve your approach. In that vein, I offer an intermediate-impossible for your consideration.

    Your contrasting views of “…has to be profitable” vs “DSV” both lack the time dimension; if I introduce that, these become something like “…has to be profitable now and indefinitely” vs “…need not be profitable for the duration” (I hope I don’t misrepresent your thinking). This leads me to the intermediate “…need not be profitable *now*”.

    There are valuable hardwood trees which from planting need two decades or more before you can think of harvesting. Your scenario has the “miners” remaining substantially in place, as this would. A family anecdote on miners-to-farmers suggests that only one in three can adapt to such radical retraining, but that may be sufficient, as I think you’re restricting your scenario to replacement of a single core activity by another. Your activity then expands from mere remediation to “natural” (whatever that is), to rehabilitation capable of supporting a resource and its industries.

    Accusations that your new dollars are funding make-work and would better be spent elsewhere can now be countered; this isn’t spending, but investment on a timescale that only national government has the resources (and policy) to address.

  8. madcapMongoose

    I like the diagrams and thoughtful descriptions but the time/spatial dimensions of government job programs do raise a number of questions I’d be interested to get an MMT take on:

    i.) What happens when the bioremediation work is completed? Does the Sovereign then let the community go under or does it come up with something else to pay the former miners-turned-remediators to do? Suppose that the whole reason there was a community there in the first place was because there was a coal mine. After the coal mine closes and the damage from the mining is cleaned up should the Sovereign still keep the town afloat?

    ii.) How does the Sovereign set the price for the bioremediation work? If these wages are significantly lower than those paid by the Coal Company then the community will not be made whole. If the point is to keep the flux through the diagram going (i.e. keep local economy going), then according to the diagram the Sovereign must inject as much money into the community as was lost when the Coal Company closed. If they don’t then the Widget Maker and others will suffer losses and likely layoff workers. As I understand it, this loss of wages is a big part of the issue with closing coal mines in West Virginia and elsewhere– many of the mining jobs pay quite well and anything the former miners are likely to find or be retrained for pay significantly less.

    iii.) What happens if a private company offers to do the bioremediation work for less than what the Sovereign injects? Does the private company even get a bid? If the point is to maintain the flux through the diagram then it’s not clear that they should even get to bid. Why save the money if it reduces the flux?

    iv.) Similarly, what happens if new technologies are made available that reduce the cost of doing the bioremediation work? What is the incentive for the Sovereign or bioremediation workers to see to it that they are used? Again, if the point is to maintain the flux through the diagram why would they ever want to use these technologies in they reduce the flux? Perhaps the Sovereign will invest in these technologies and pass the savings on to the local community to maintain the flux, but push this to its logical extreme: What happens if robots are able to do all the work of the bioremediation (no humans needed)? Should the Sovereign then allow the community to fall apart? Should it come up with other jobs for people to maintain the flux? Should it simply just give people the money for nothing (i.e. helicopter drop money on the town)?

    v.) A related point to iv.: Can the bioremediation workers go on strike? How do the workers bargain for better wages/working conditions?

    vi.) More generally, how does the Sovereign decide where to intervene and where not to? Here you offer an example with a local community but suppose the problem is more diffuse. Suppose that in every town across the country there are workers in a particular sector of the economy who are losing their jobs or experiencing downward pressure on their wages. Should the Sovereign prop the workers in these sectors up? In recent decades, the internet and software has eroded many formerly stable, decent paying jobs in publishing, journalism and the music industries. Should the government make a job program for former workers in these industries? What happens if there is no easy transition for workers in a sector that is contracting to make? For example, if over the next couple decades driverless cars and drone delivery systems wipe-out truck, taxi and delivery drivers should the government have jobs programs for these workers (~3 millions jobs not counting all the related industries that support them)? What work will be on offer from the government that people who were once professional drivers can easily transition to?

    I don’t have the answers to these questions but am guessing you and others have thought about them. I will say though that my general feeling is that there are limitations to a direct job creation approach that MMT advocates should acknowledge. MMT advocates should have more tools in their toolbox to address these limitations– perhaps some MMT advocates do but the emphasis is always seems to be on direct job creation. In my view, more funding for job retraining/education, relocation assistance and at least a partial basic income are well worth considering as adjuncts to direct job creation.