History: Modern Money Theory and Stagflation

Australian Real Progressives has written about full employment and the job guarantee many times previously.  What follows is a historical analysis of how the mythical NAIRU came into being and why Full employment, in the truest sense, was abandoned.

Via Bill Mitchell

Full employment gave tremendous advantages to the working class and allowed for upward inter-generational socioeconomic mobility – where children born into poorer families could aspire to transcend that social class and enter the more secure middle class.

And as capital became more concentrated – through takeovers etc, and, trade unions became more powerful, the two conflicting forces obviously gained increasing price setting power.

Firms set prices according to markups which reflected their expected profit return on capital and unions, representing their workforces, could exert power to gain wage increases.

As a result real wages mostly grew in proportion with productivity growth which reduced the likelihood of a realisation crisis (expenditure lagging behind production) but also reduced income inequalities and allowed workers to fast track into middle class life (and mass consumption).

But that increase in ‘price setting’ power brought a new propensity to crisis relating not to unemployment but rather to inflationary biases.

The – 1973 OPEC Oil Crises – triggered an inflationary spiral driven by the ‘battle of the markups’ (the conflictual struggle between capital and labour for real income shares).

The existing Keynesian policy consensus had really only constructed inflation threats in terms of demand pull events – where nominal spending outstrips the capacity of the economy to respond by producing more real goods and services.

There was some delay among policy elites in grasping what a raw material price hike (particularly one that is imported – such as the oil shock) meant when it interacted with the distributional conflict between labour and capital.

The point was that nations as a whole had to take a real income loss because an essential raw material they imported now took a larger share of nominal income.

So who would take that loss?

Capital didn’t want to take it, and, rather tried to pass it onto workers by increasing their markups and pushing up prices, thereby reducing real wages and the purchasing power of workers.

But strong trade unions were not keen to accept that profit push and ‘real wage resistance’ became a force, which was expressed in increased wage demands – thereby restoring the real wage cuts resulting from the price rises.

As both sides had price setting power, a price-wage spiral was easy to trigger and that is what happened.

Before long, inflation was accelerating away and governments, under the influence of the emerging Monetarist paradigm in macroeconomics, sought to cut net spending.

This resulted in rising unemployment coinciding with accelerating inflation, which we called ‘stagflation’ – the twin evils.

The rising unemployment was devastating but airbrushed by the Monetarists as being an essential ‘natural’ adjustment that we just had to tolerate to stabilise inflation.

And so the ‘natural rate of unemployment’ or NAIRU (non-accelerating-inflation-rate-of-unemployment) entered the picture and governments were told that there was no longer a choice to use discretionary fiscal expansion to reduce unemployment.

The only thing that would result from this strategy, we were told, was that inflation would continue to accelerate and only stabilise when the natural rate of unemployment was reached.

You can read more at Bill’s blog.  This is the most lucid explanation of stagflation from an MMT point of view.  It makes it clear that conflicting classes business and labour both had price-setting power and coupled with a supply shock that caused 70’s stagflation.  We are a far cry from that conflictual relationship today.

Markets are a Social Construction of the State

Money not only precedes markets and real exchanges as they are understood in the mainstream economy but also emerges as a social mechanism of distribution, usually by the power of some authority (be it an ancient religious authority, a king, a colonial power, a modern nation-state, or a monetary union). Money, it can be said, is a “creature of the state” that has played a key role in the transfer of real resources between the parties and the distribution of the economic surplus.

Pavlina Tcherneva, Money Power and monetary regimes 2016

The market is not a natural phenomenon, it does not have fixed and unavoidable characteristics. The market is a social construction whose functioning can respond both to the general interest and to the exclusive advantage of particular interests. Behind the violence of the market and, in particular, behind the unemployment that afflicts the so-called “labour market” – the system of sale and purchase of the labour force – there are hidden political options regarding the extent to which to leave the economic fabric is inactive, options that always go through decisions in the field of public spending and taxation Rigorous and arbitrary limits to the deficit, such as those in force in the EU, a priori compromise the outcome of people’s economic life. Also of those most deserving and capable.

The MMT illustrates how the markets in the various specific currencies, the generalized systems of sale of labour, goods and services in exchange for an established currency, are public social constructions . Constructions erected in a collateral way from the power to impose on residents in a given territory a tax denominated in a specific thing , generating in the population the job offer of people and goods and services of the companies to the monopoly political authority of the currency and whoever has obtained its currency, thus giving rise to the market, which in fact is thus one of the products of this artificial social construction, and therefore does not exist under “natural” conditions.

The existence of a market is based on the existence of a specific currency that makes exchanges necessary The “confidence” on the part of the agents when accepting the currency as “endowed with value” is based on the fact that this currency will be the only means accepted as payment of taxes by the political authority that imposes the taxes. This is the foundation of the “value” of the currency. Taxes give rise to the market.

Coins and their markets are state creations. The Swiss franc and the Swiss franc labour force trading system did not exist before the Swiss state conceived it, and the same is true for the Norwegian crown or any other state currency.

The preconditions for the market in a certain currency are imposed by the creator of that currency, and no one has a spending capacity equal to that of his monopolist. The currency is in fact imposed by the state as a mechanism to obtain part of the economic production.

No one is financially more solid than the sovereign state in the area of ​​what is denominated in its currency. A state endowed with its own currency in a fluctuating exchange rate, not linked to the currencies of other states or precious metals (or any other merchandise), will never stop paying its debts denominated in the currency of which it is the monopolist. 

“This is the truth that the oligarchies hide to preserve control over society.”

When it comes to euros, no one is stronger than the European Economic and Monetary Union (EMU), and all the financial limits that the EMU imposes itself, as do the US and many other monopoly political authorities of the currency itself, are self -impositions. They are political options justified with a false narrative, they are the plague.

The monopoly state of the currency always has the possibility of ensuring that there is sufficient spending in the economy to fully activate the productive capacity and the labour force present on the territory. The United States, the United Kingdom, and technically also the EMU as any monopoly subject of the currency, always have the possibility of eliminating unemployment and eliminating the monetary bottleneck to full economic and social development, to the full expression of social potentialities. and economics of the towns.

The monopoly state of the currency has the possibility of configuring what characterizes capitalist systems, the sale and purchase of labour power, putting out of the market jobs characterized by remuneration below the poverty line and degrading conditions, simultaneously maximizing price stability.

States can nevertheless – and frequently do – decide to self-limit their own space of action by linking the use of their currency to specific exchange rates with another currency or commodity or, directly, by limiting public spending.

To the best of my knowledge this post first appeared in Spanish on RedMMT Espana