There are two problems, frequently discussed on this blog,
that are really distinct but are easy to confuse or intertwine, and earlier
today, I was brooding about them and thought a short post might be appropriate.
The first problem is this:
Why does America do so much worse a job of providing social services to
its citizens than other advanced post-industrial capitalist countries? Why is America the only such country without
some form of national health service?
Why do other countries provide paid family leave? Why is it that only in America college
graduates are burdened with crushing student loans? Why are unions so much weaker here than in
other comparable countries? And so
forth. These are the questions that
motivate the Sanders and Warren campaigns, that consume so much of my time and
attention and yours too, I imagine.
The second problem is really quite distinct and
different. It is the question first
posed by Marx more than 150 years ago and given dramatic statistical
underpinning by the work of Piketty and his associates: Why do all
advanced post-industrial economies exhibit grotesque inequalities of wealth and
income, inequalities that are relentlessly growing ever greater?
These really are different questions. To see that this is so, simply imagine that
America magically adopted the best health care system now in operation
anywhere, made higher education free to all, built generous family leave into
its employment practices, saw a rebirth of the union movement, and so on and
on. It would still be the case that the distribution of wealth and income was
wildly unequal, and was growing more unequal with each passing decade.
The use of the word “socialism” as applied to Sanders’
proposals is seriously misleading, for as I have often observed, the words “collective
ownership of the means of production’ seem never to cross his lips. I do not criticize him for this. He is running for President of the United
States, not, as a wag once said, for Chair of the Literature Department. But the most his proposals, or those of
Warren, could achieve if adopted would be to bring America in line with France
or Germany or Sweden, and if Piketty is right, as I believe he is, that would
perhaps slow but not at all reverse the steady accumulation and
intergenerational transmission of wealth by the wealthiest segment of society.
I find it helps to keep these questions separate in my mind.
41 comments:
Just today, I discovered this 'Scientific American' article about analyzing free markets with the tools of statistical physics. Even in models with absolute "equality of opportunity", wealth inevitably becomes concentrated in the hands of a few.
« ... after a large number of transactions, one agent ends up as an “oligarch” holding practically all the wealth of the economy, and the other 999 end up with virtually nothing. It does not matter how much wealth people started with. It does not matter that all the coin flips were absolutely fair. It does not matter that the poorer agent's expected outcome was positive in each transaction, whereas that of the richer agent was negative. Any single agent in this economy could have become the oligarch—in fact, all had equal odds if they began with equal wealth. In that sense, there was equality of opportunity. But only one of them did become the oligarch, and all the others saw their average wealth decrease toward zero as they conducted more and more transactions. To add insult to injury, the lower someone's wealth ranking, the faster the decrease. »
https://www.scientificamerican.com/article/is-inequality-inevitable/
The Oligarchy Game is based on the article.
http://brewster.kahle.org/2019/11/30/the-game-of-oligarchy/
http://hackerfactor.com/oligarchy-game.php
Bernie Sanders has mentioned the public ownership of the means of production only to reject the idea in his Georgetown speech (2015).
« So the next time you hear me attacked as a socialist, remember this:
I don’t believe government should own the means of production, but I do believe that the middle class and the working families who produce the wealth of America deserve a fair deal. »
http://inthesetimes.com/article/18623/bernie_sanders_democratic_socialism_georgetown_speech
Perhaps they are conflated because the answer to the second appears to imply the answer to the first.
As Marx attempted to show, capitalism is about capital accumulation, both real and financial financial. The capitalists' argument is that capital accumulation favors growth, so capital (property ownership) should be favored institutionally over labor (people) and land (environment). The rationale is based on "trickle down" from increasing GDP.
There seems to be no social-economic explanation on the table that is superior to this. Meritocracy, which is the explanation of the capitalist class, doesn't cut it. Too much asymmetry in the system. The Marxian analysis also accounts for the asymmetry.,
This asymmetry feeds itself over time. As capital accumulation increases the owners of capital gain more political power under bourgeois liberalism. They are able to shape legislation and regulation to further class interest. The capitalist class thereby gains more power not only economically but also politically and is able to capture the state.
Why is this exacerbated with respect to economic inequality in the US? Racism is at least part of the answer, since non-whites are disfavored culturally. This affects mostly the African-American and Native American populations, including Latins since non=white Latins are of African-American and Native American heritage and appearance.
The other big reason is the economic ideology imposed by the ruling class that favors a market state over a welfare state, which is in the interest of the wealthy who benefit most from the market. Neoclassical economics was originally devised as an antidote to the economics of Marx & Engels, and Henry George (land value tax). Interestingly, until quite recently, distribution was off the table for discussion on the assumption that "the market knows best" who deserves what. In addition, asymmetry of power has also been off the table for consideration. This is key, since neoclassical economics assume perfect markets, that is, minimal asymmetry that has basically no effect on outcomes.
Why has the property owing-class been able to effect this in the US to a greater extent that abroad? Possibly for two reasons: First, the middle class has been co-opted (as Marx foresaw) and secondly, Americans are just stupider, less culturally developed and less socially mature than Europeans. Perhaps this is owing to the frontier myth of rugged individualism, on one hand, and the effect of consumerism on the other (bread and circuses).
@ Anonymous.
1. The statistical result is predictable on economies of scale alone that result in increasing market power. Peter Drucker pointed this out
2. Bernie is properly called a social democrat and not a democratic socialist. He should switch his terminology.
The minimum for a socialist society is public ownership of the commanding heights. Bernie is not advocating for that.
Interestingly, the CCP is using this metric in the Chinese economy and doing quite well at it in generating growth along with distributed prosperity.
'perhaps slow but not at all reverse the steady accumulation and intergenerational transmission of wealth by the wealthiest segment of society.'
I yank this from context, and interpret it a bit unimaginatively and literally, but nevertheless, I note that the steady accumulation and intergenerational transmission of wealth by the wealthiest segment of society seems like, all things being equal, a good thing. Wealth is of course a rather abstract concept being thrown around rather informally, here, but we don't want the steady accumulation and intergenerational transmission of poverty by the poorest segment of society, do we? A bad thing, and the opposite thing, so .. what do you want? It's just not spelled out, I have to guess.
Also, huge sections of the press are critical of the Elite and many popular music artists are extremely critical of the Capitalist system, so I'm familiar with this kind of thing, but I think it rather unserious to attribute the notion that 'The capitalists' argument is that capital accumulation favors growth', as if you are are either the real expert on growth, or else you just don't care about growth, but I have to guess which is it?
And this: 'so capital (property ownership) should be favored institutionally over labor (people) and land (environment)'
Doesn't even mean anything to me.
@ Danny
"Wealth is of course a rather abstract concept being thrown around rather informally,"
It only appears that way if you are unaware of the current major discussion in economics, economic sociology, sociology and political science.
Good heaven, even philosophers are discussing this, which should not be surprising since Adam Smith and Marx's training was in philosophy, not economics, which didn't even exists as a separate discipline then. The contemporary discipline of economics is a pseudo-science that is really most just bad philosophy based on ideological assumptions to contrive a result.
"Weatlh" aka "net worth" is defined as net assets on an entity's balance sheet. That is, it is a stock that is accumulated over accounting periods.
"Net income" aka "net revenue" is a flow on an entity's income statement in an accounting period that adds to net assets.
"Power" is a well-defined concept in economics ("market power") as well as more broadly in sociology and political science to include a society as a social system.
Based on the links the previous anonymous provided, the Oligarchy Game seems to be premised on a finite quantity of money!
Other commentators in this section, I think, are better qualified than yours truly to explain why that assumption is bonkers.
Or ask any MMTer. They aren't shy when it comes to explain that the Government (which I never saw mentioned in the Oligarchy Game) cannot run out of money.
-- Anonymous II
I am an MMTer and I would not be too concerned about the assumptions of the game, either Oligarchy or Monopoly (which are originally a teaching tool about Henry George's land value tax). They are teaching tools that make limiting assumptions to be tractable. Civilization (the game) is a lot more open-ended but it is not a parlor game either. A more open-ended game could be devised by the manufacturer chose to limit the scope based on the assumptions.
From the POV of philosophy of science, a model is bounded by its assumptions, which determine the scope and scale of the model. The model implies nothing beyond the scope and scale of the assumptions.
This is most of undergrad economics and a lot of conventional conventional economics based on assuming general equilibrium and rational agency in perfect markets, assumptions that do not hold beyond the models. This is why I call this pseudo-science and bad philosophy.
Teaching tools need to be simplified for tractability, but it also needs to be pointed out that their application is limited. Generally, a very simple model is introduced and then complication is added gradually. For example, in physics the law of falling bodies as a simple function only applies strictly in a vacuum, owing to the effect of friction for example. While the law is presented as a general case, it is actually only a special case as it stands without modification. The physics student gradually learns how to adjust the function to take other influences into account.
Regarding the fixed amount of "money" assumption, this assumption permeates neoclassically based economics, to the degree a loanable funds theory is posited. Noting wrong with assuming loanable funds as a teaching tool to keep the model tractable, as long as students are alerted that this condition does not apply to a contemporary monetary production economy supported by money & banking and finance as presently practiced.
It's not just that the government as sovereign currency issuer cannot run out of currency to issue as central bank liabilities, but also banks are not limited by either reserves or saving in extending loans that create "money" by adding to the MI money supply. Loans create the deposits that fund them initially on banks' books, and the central bank acts as lender of last resort to banks, insuring that all transaction clear in the payments system.
As an aside, a game that is more faithful to the facts that illustrates increasing wealth could be created by using the Kalecki-Levy Profit Equation. See The Corporate Profit Equation Derived, Explained, Tested: 1929-2013
@Tom Hickey
So you are an MMTer unconcerned with a model based on crazy assumptions. This is a first.
May I ask what is it about this particular model that makes its conclusions acceptable even though its premises are not?
A_II
I am not only an MMTer, but also a philosopher that has taught philosophy of science and thought about economics in terms of philosophy of science and philosophy of social science.
The chief issue with models internally is consistency. If a model is consistent with its starting points, then it passes the test of being a "good" model that is fit for some purpose. But what purpose it fits is not determined internally but rather in relation to what the model purports to represent. That is largely determined by the starting points, which determine scope and scale, for example, and generate hypotheses for testing the fit.
A model describes a possible world. The scientific question is to what degree the possible world described by a particular model corresponds to an an actual system in the real world. Internal consistency has nothing to do with this. Fit is determined by correspondence of the model with with the modeled as determined by observation, or instrumentally by providing useful information even though the starting points may not be shown empirically.
So the issue is what a model is used for. Is it fit for that purpose? How to know this? Do the claims for a model exceed the limitations of the model?
There is nothing wrong with generating any model one may choose to. The relevant question is the use to which the model is put. Do the claims that the model implies not only follow from the starting points but also do they do what the user of the model claims.
Many economic models are simplified for mathematical tractability. That is OK in principle. But then the question arise as to whether the model is overly simplistic to do the job it is assigned.
It is assumed that teaching tools are highly simplified. No problem as long as this is not misrepresented either explicitly or implicitly.
There is no issue with ISLM as a teaching tool for thinking about the relationship of variables in a simple function. However, it is represented as either an explanation of Keynes' General Theory or as a model of how a modern monetary production economy functions in terms of finance, it is wrong. Continuing to make such claims after they have been refuted is illogical.
Take the Keynesian income-expenditure model that underlies macroeconomics. It is a highly simplified model of a national economy. However, it is based on accounting identities that must hold owing to the rules of double-entry that govern accounting statements. Depending on the ability to aggregate data, such models could be highly useful in understanding changes in stocks and flows based on balance sheets and income statements. See, for example, Godley and Lavoie, Monetary Economics.
Critics object to this approach as "just accounting identities." But these accounting identities insure the internal consistency of such models, called "stock-flow consistent models. Those using such models point out that conventional economic models are not stock-flow consistent, hence invalid inference.
Consider, for example, a game illustrating a labor theory of value using labor bargaining power as a variable. It could be a fairly simple exercise to illustrate a point rather than being an accurate representation of an actual labor market. Nothing wrong with this as long as it is made clear that it is just a game being used a teaching tool rather than a model of an actual labor market anywhere. In fact, the discrepancy might raise questions that would be opportunity for further teaching when used in an appropriate setting.
Those highlighted problems first posed are the ones me, along with probably all non Americans, have always wondered. Always a deep feeling of pity for them and a sense that I was lucky not to be born there.
Harsh maybe, and in no way meaning to be disrespectful, just honest feelings we have when growing up.
NP
@Tom Hickey,
I took me some time to read the link you provided. I will limit myself to a quick observation from that post.
I am sure you, as a philosopher, need not be reminded about the importance of definitions. So, let us begin with definitions, then.
This is how the anonymous author defines wealth (the italics are mine):
“Wealth can mean whatever you want it to mean, as long as the definition is applied consistently, and on a net basis. Usually, when we speak of wealth, we mean things that are of economic value to human beings, to include both real and financial assets. One’s wealth is constituted by the real and financial assets that one owns, net of one’s liabilities.”
The data used to derive the Kalecki-Levy equation come from the System of National Accounts, as you, having taught economics, surely know. (The author of that post implicitly recognises that as well. He/she refers, at the very beginning of the post, to GNP -a concept analogous, but not identical, to GDP).
My first observation is that financial wealth is not included in GNP (or GDP). That definition, however, ignores that. See the italics above?
The reason financial wealth is excluded is clear: GNP (or GDP) are flows, additions, to a stock of wealth. But financial assets and financial liabilities net out to 0: someone’s financial asset is someone else’s liability. They, in other words, do not add to that stock. That is particularly important with GNP, because in that case there is a rest of the world (as the author recognises).
So, no, I am sorry, but wealth cannot mean whatever one wants it to mean. In particular, it cannot mean financial wealth.
Moreover, take the example of the house, which the author used to explain the difference between hoarding (“a zero sum game”, the author writes) and investment (“a positive sum game”). This is how one may sum up the example: 1) I got a house in exchange for a meal. 2) My patron got a meal in exchange for a house. 3) My patron began and ended with $100.
The author calls that a positive sum game, because at the end of the day there is a house, where none was. But the author does not account for the meal. That’s no positive sum. Physical wealth did not just pop up magically as money exchanged hands.
Indeed, moving to a more realistic scenario, the market price of the house makes my financial wealth vary, without investment, saving, or hoarding. Ten years ago, the housing market collapsed. That financial wealth loss was not caused by dissaving, but by a change in market price.
I am afraid that link did not help your case.
A_II
@Tom Hickey, I'm rather flabbergasted to read your point that the contemporary discipline of economics is a pseudo-science that is really most just bad philosophy based on ideological assumptions to contrive a result. I mean, sure, I can stipulate that, at least. -- I wouldn't maybe insist that it is all gobbledygook like Marxism, but I can humor some skepticism about it. Why I am flabbergasted is because I'm trying to process this point about 'economics is a pseudo-science' as something that you offer as a *rebuttal* to my statement that 'Wealth is of course a rather abstract concept being thrown around rather informally, here'!
'"Wealth" aka "net worth" is defined as net assets on an entity's balance sheet. That is, it is a stock that is accumulated over accounting periods.'
I see, that this is abstract and informally stated. Maybe you figure that what is informally stated is something like 'an abundance of valuable possessions or money', and you have offered something more formal with your talk of net assets on an entity's balance sheet. Or again, 'a stock that is accumulated over accounting periods'. But I wonder if I can guess as to whether I am supposed to think that "riches" means only money? I might let go of the notion which I find eminently reasonable, that the definition of wealth is personal. Maybe it means something different to everyone, maybe the word wealth has many shades of meaning, but I might let go of that at your behest. You just need to actually stipulate a definition of the term for me. Have you done that?
I know that net assets is the difference between the total assets of the entity and all its liabilities. I wonder if there might still be room for equivocation in this, though. Consider:
'"Net income" aka "net revenue" is a flow on an entity's income statement in an accounting period that adds to net assets.'
That's not abstract and informally stated? ;)
Well, but it occurs to me, that a balance sheet reports a company’s financial position on a specific date. And that's fine with me, if you are talking about a formal document that follows a standard accounting format. But where is the document? ;)
"Power" is a well-defined concept in economics ("market power") as well as more broadly in sociology and political science to include a society as a social system.'
The thing is, if you think mentioning 'the current major discussion in economics, economic sociology, sociology and political science' is the way to lock down a formal definition of anything, then I think you misunderstand the nature of my objection. Becoming more familiar with this stuff isn't going to mollify me.
Here is another example:
'"Power" is a well-defined concept in economics ("market power") as well as more broadly in sociology and political science to include a society as a social system.''
Well, I quibble here too. About what is 'well-defined'. At the very least, you seem to be considering 'market power' as a statistical term. And okay, perhaps I can be misunterstood, if I complain about what is abstract and informally stated here, as if a precise economic definition of market power cannot *possibly be put forward. That's not my issue, though, so much as the thought that the actual measurement of market power is not straightforward. I'll save you some trouble if your reply is, maybe, that pne approach that has been suggested is the Lerner Index, i.e., the extent to which price exceeds marginal cost.
However, since marginal cost is not easy to measure empirically, I wonder about alternative? Again I can save you some trouble -- an alternative is to substitute average variable cost. What if I am not satisfied? Well, I'm not the first, and fine, another approach is to measure the price elasticity of demand facing an individual firm since it is related to the firm’s price-cost (profit) margin and its ability to increase price.
However, this measure is also difficult to compute.. ;)
Going back to the op for something, I'm flabbergasted by this too:
'The use of the word “socialism” as applied to Sanders’ proposals is seriously misleading, for as I have often observed, the words “collective ownership of the means of production’ seem never to cross his lips.'
So I take it, that collective ownership of the means of production is the defining characteristic of socialism. I mean, if you say so. I mean, actually, I figure that socialism has a variety of definitions, and also, without having to guess, I already have Sanders noted as a self-described democratic socialist. If we are considering what socialism is according to Bernie Sanders, then I thought it clear that the adjective 'democratic' is added and used to distinguish democratic socialists from Marxist–Leninist inspired socialism. I also thought it clear that he's enflamed conversation about socialism across America.
Let us maybe agree, then, that leftists can be incredibly sectarian about obscure ideological points, but nevertheless, it seems to me that Sanders' proposal is unquestionably directly in the middle of the socialist tradition, and while we are at it, Sanders' plan has many moving parts. As to 'collective ownership', he would require all large firms to disperse 2 percent of their stock annually into a Democratic Employee Ownership Fund, until at least 20 percent of shares are owned by the workers. I gather that The campaign reckons this would be an *enormous* change — affecting 56 million workers etc. Sanders would also establish a $500 million fund to help workers buy up their own companies, grant workers first rights to buy a company if it goes up for sale or bankrupt, or if a factory is being outsourced (along with several other smaller items). I might add that I think there are a number of reasonable objections to Sanders' proposal, but my point here, is just to quibble about whether 'The use of the word “socialism” as applied to Sanders’ proposals is seriously misleading'.
I don't see the problems as being quite as distinct as Dr. Wolff. I can speak from experience regarding the first problem mentioned: "Why does America do so much worse a job of providing social services to its citizens than other advanced post-industrial capitalist countries?" The answer is Protestantism. There is an ethic embedded in public assistance law and policy: there are the "deserving poor" and the undeserving. We don't see the problem of poverty as a social one, rather it is an individual problem. AFDC, as it used to be called, is assistance to families with dependent children deserve help. Not enough to raise the family to the poverty level, though. Even the calculation of the poverty level is absurdly outdated but will not be revised as it would significantly increase the number of people officially designated as being poor, and the result would be politically problematic. Historically, some states are relatively generous, others not so much.
Once upon a time, when women were expected to stay at home and raise their family, assistance was not tied to work and lasted until the children were 17 yrs old. Then norms changed and the law changed. TANF, Temporary Assistance to Needy Families, tied assistance to work, or participation in education and training designed to prepare the parent for employment. The most important aspects of the law were the 5 yr. time limit on benefits, which republicans saw as a fundamental reassertion of the 'work ethic,' and public assistance was turned into a block grant, the favorite mechanism of republicans to underfund and kill social service programs. The law has been a disaster for poor families.
With respect to the second issue, the concentration of wealth and inequality, the problem seems to share some elements with the problem of public assistance, mainly law, and the assumptions behind it. The state can prevent the intergenerational transmission of wealth and redistribute wealth. It won't, just as it won't deal with poverty, because of the political hegemony of capital and the normative assumptions behind the law. Law protects, and equally important, hypostasizes the individual and property so much so that the corporation has now acquired the rights of natural persons.
Both issues, it seems to me, are bound up in the same ball of wax, the protestant ethic and capitalism.
A different anonymous:
Anonymous: surely you must know, as an anonymous commenter, that injecting pronouns into a foundational discussion of definitions — not to mention the needlessly self-congratulatory moralizing tone of "surely you must know" — is unlikely to lead to clarification.
I thought Sanders has proposed a Richard Wolff style policy to give the classes the means of production though. Something like the government would offer workers loans to buy out their company, to encourage more coops. Was I mistaken, or does this not count as socialism?
@Another Anonymous
Oh dear. So you criticize my use of pronouns?! Really? What am I supposed to use instead?
What about my observations about that post?
A_II
Really? What am I supposed to use instead?
For: "The data used to derive the Kalecki-Levy equation come from the System of National Accounts, as you, having taught economics, surely know."
Substitute: "The data used to derive the Kalecki-Levy equation come from the System of National Accounts."
And so on. No need for an "oh dear!" either.
Another Anonymous.
Anonymous II, When discussing wealth inequality it makes sense to include the distribution of financial assets. Financial assets are a form of wealth, even if some of them can also be considered someone else's financial liability. A person who's only possession was a billion Dollars worth of US Treasury Bonds is also called a billionaire and is extremely wealthy. Even the most common financial asset- cash, is a form of wealth. And it is not entirely clear that the $20 bill in my pocket represents a liability to anyone else in any ordinary sense. It's not like the government has promised to convert it into anything else if I bring it back to the Treasury. But I can buy a pizza with it :) Maybe that's what I will have for dinner!
@Another Anonymous
Your defense of a crappy post is tantamount to proscribing words, phrases, and expressions,instead of, well, actually defending the crappy post.
I don't think it is such a good defense, but I will give you this: it's imaginative and entertaining. MMT is really breaking new paths. ��
Anonymous: what defense of a crappy post? I'm not "defending" anything, even implicitly. I'm beginning to wonder whether I am interacting with individuals from 55 Savushkina Street in Saint Petersburg, Russia. I would prefer not to be distracted by extraneous cognitive load. I'll get to the post.
Another Anonymous.
All this is in the accounting.
Wealth cannot mean "whatever one wants it to mean" other than in colloquial discourse, with which I don't believe we are concerned here. In academic disciplines and in finance, "wealth" can means different things but these meanings are specified in accounting terms.
In mercantilist times, national wealth was measured in the nation's stock of precious metals. Now it is in terms of accounting. See List of countries by total wealth/Wikipedia. (The data is largely from Credit Suisse reports.) "National net wealth, also known as national net worth, is the total sum of the value of a nation's assets minus its liabilities. It refers to the total value of net wealth possessed by the citizens of a nation at a set point in time."
But when we are talking about inequality of net income/revenue and net wealth/worth, this is deconstructed into is accounting statements of entities, firms and households. One of the paradoxes now is that "poor nations" are getting wealthier nationally but more unequal domestically owing to asymmetrical distribution of gains. So a poor person can be better off absolutely but poorer relatively, as former World bank economist Branko Milanovic points out.
Of course, it is possible to use "wealth" in a variety of ways and that is no problem as long as the various meanings are specified clearly and adhered to. But generally speaking, "wealth" is presumed to be the same a net worth. It is also true that the financial assets and liabilities of any financial system sum to zero as an accounting identity as a requirement of double entry. But the amounts on different entities books are different, and the assets on one balance sheet are balanced by the liabilities on another. The financial assets of non-government do not sum to zero, however, since fiscal deficits add to the stock of public debt, which is an asset of non--government on different entities books, but the liability lies with government. The accumulated public debt constitutes non-government net financial wealth (savings) in aggregate.
To take another example, in the games what we were considering above, the game can define terms as it chooses. But if the definition of "wealth" in such a game is too far from the meaning of wealth that people experience, the game won't serve well as a teaching tool.
Turing to another point, Piketty's book in entitled Capital in the 21st Century suggesting a connection with Marx's Das Kapital. But Matt Rognlie pointed out that wealth is not just capital but it includes land, and RE accounts for much of the rise in wealth inequality. (Land value tax, anyone?)
@ Jerry Brown
That dollar in your pocket says at the top Federal Reserve Note (FRN). The accounting clarifies. FRNs are liability of the Federal Reserve on its books. A commercial bank obtained it as vault cash by exchanging bank reserves for FRN. Bank reserves = the bank's reserve account + vault cash.
The Federal Reserve credits a bank's reserve account in the case of government spending, the central bank being the government's fiscal agent, or else lends to banks on a temporary basis. Banks then use their bank reserves to clear their liabilities in the payments system that is administered in the US by the Fed.
Vault cash is obtained by exchanging a bank asset (reserve balances at the Fed). Bank reserves are a Fed liability. To obtain vault cash the bank exchanges bank reserves (bank asset, Fed liability) for a Fed liability in the form of FRNs. This is the vault cash that the bank uses to meet window demand for cash.
Most people are unfamiliar with this, but the "Federal Reserve Note" printed at the top of a bill alerts them to it.
As Warren Mosler points out, that FRN is tax credit as liability of the federal government that can be used to in redemption of one's liabilities to the federal government — taxes, fines, fees, and tariffs. Yes, tariffs function like taxes in withdrawing net financial assets from non-government.
It's all in the accounting.
@ Danny
My comment about conventional economics being a pseudo-science that is really just bad philosophy was meant as an extension of Smith and Marx having been philosophers. Subsequently, the attempt was made to formalize economics to look like physics by introducing heavy math. The problem is several fold and I won't attempt to get into here. Volumes have been written in the controversies between conventional (orthodox) economists and "heterodox" economists, mathematicians, sociologists, anthropologists, physicists, biologists, etc. over the scientific credentials of conventional economics. Lets just say that much conventional economics is regard as more dogma than science by the opposition not only for being more intuitive and instrumental than empirical and causal, but also in asserting that the methodological debate is over and they will not entertain criticism other than on their own terms. Many conventional economists reject the view that economic is a social science rather than being a natural science. Samuelson, for example, posited ergodicity in this regard.
Those knowing nothing about this controversy, which has raged for at least a hundred of years, might start with the Wikipedia article on heterodox economics for a quick overview.
My deleted comment was slightly garbled. Here is a corrected copy.
Sonic wrote: "I thought Sanders has proposed a Richard Wolff style policy to give the classes the means of production though. Something like the government would offer workers loans to buy out their company, to encourage more coops. Was I mistaken, or does this not count as socialism?"
"Socialism" is variously defined. The broad definition is "social ownership of the means of production." This would include worker ownership.
Advocacy of some employee owned business doesn't make Bernie's program "socialist" however. The way he has presented it, it would be a pretty aspect of overall. He is really more about the expansion of the welfare state and the paring back of the market state that has occurred since the Reagan revolution and especially since the Democratic Party largely abandoned the New Deal and became GOP-lite. This is social democracy rather than democratic socialism.
As I said, for a true socialism to dawn, there has to be at least public control (not necessarily ownership) of the commanding heights of the economy and society to prevent excessive asymmetries leading to distribution that is highly skewed from the normal curve.
But this would likely be more a bourgeois regime than a worker one. Still it would be a great step in the right direction, but not yet governance of, by and for the people.
I think Bernie would be better advised to push for social democracy rather than democratic socialism, since I see the path as from neoliberalism to social democracy to democratic socialism. A jump from neoliberalism to democratic socialism is unlikely without a preparatory transition. Anyway, that's not going to happen as a result of the 2020 election even if Bernie should win. Bernie couldn't mandate it and the foundation for it is not there yet anyway.
Yes Tom, I'm familiar with the argument- but cash being possibly used as a tax credit is not a liability in the ordinary sense. At least in my sense of 'ordinary'. In any event, it is a financial asset and is part of my 'wealth'. Which was the main point I was making.
Agree, Jerry. Your main point was correct.
I also realize you are familiar with the accounting I set out, but lots of others aren't so I thought it needed saying in some detail.
I’ll beg RPW’s and his regular readers’ indulgence for some personal reminiscences. My hope is that they may be of some use or at least of modest interest. (My apologies for using those pesky and unlawful pronouns).
I was an early adopter of the Internet. I’m talking about some 30 years’ experience, maybe more.
When I began, email, bulletin boards, mail servers, and mail lists were the latest. It was the time of FTP, Gopher, Jughead, Veronica and Archie (I kid you not), America Online, Betamax, Blockbuster video shops, fax. The WWW and web-directories, CDs, DVDs were in the future (to say nothing of the “Cloud”). Connection was only through dialup, from desktop computers, using old-fashioned copper landlines, which one’s PC shared with one’s phone. One did not speak of “applications”, let alone of “apps”, but of “programs”. Cellular phones or “cell phones” (or mobile phones) were “dumb”, heavy, the size of a small brick and one did not use them to “surf the net” (another rather old term).
Don’t get me wrong. I never really delved deeply into the technical side of the Internet, much to my present regret. I was a garden-variety user.
But even as a user one did learn new things. A useful thing one learned early on is that on the Net potentially anyone one interacts with is, in one way or another, a “Nigerian prince” (those young or naive enough, Google it).
(A useful, often related, Internet-slang term is “sock puppet”).
On the Net anyone can claim expertise and many do. It’s easy: talk is cheap. “Experts” of all stripes populate Wikipedia, for instance. And, what do you know, sometimes they are really experts. Often, however, they aren’t.
It’s up to their audience to do their own due diligence. Paraphrasing Obi-Wan Kenobi: Use your noodles, Luke. :-)
A_II
@Jerry Brown
You are absolutely right, Jerry. Financial wealth is indeed important. I am not only not arguing otherwise, but I am actually more than happy to agree with you.
But that importance does not justify the anonymous author of that post to ignore the fact that financial wealth is not included in GNP and cannot be dealt with the Kalecki (and Levy?) equation.
And I am also happy that you mentioned wealth inequality, for the K-L equation is of limited usefulness to determine income inequality. It deals with what is usually known as "functional distribution of income": income distribution by class. That is undeniably important. But it is not enough.
The K-L equation has nothing to say about "size distribution of income", a la Piketty. RPW mentioned Piketty explicitly in his text above.
A short explanation of the terms "functional distribution of income" and "size distribution of income".
https://www.slideshare.net/SandreaButcher/size-and-functional-distribution-of-income
A_II
Something about this lament, attributed to Marx, that advanced post-industrial economies exhibit grotesque inequalities of wealth and income, inequalities that are relentlessly growing ever greater. No I'm not that impressed by Piketty, and attitude towards Marx boils down to my wanting to debunk him, but I think he's fascinating for a couple of reasons. His sheer influence and popularity is fascinating -- all the Marxists running around. I mean, no, really, if you look at the past century, at events in the Soviet Union, China, and so forth, I think it really stimulates the imagination. I ponder state-backed initiatives to promote Marx to young people in China, for example. I heard about a TV show, 'Marx Got it Right'. I wonder about the views of President Xi Jinping, who came of age when Marxist concepts dominated national discourse. Last year he affirmed Marxism was 'totally correct' as a national ideology. He obtained a doctorate in Marxist legal theory in 2002 and has encouraged the study of “dialectical materialism”. It is puzzling that the Communist party is stepping-up promotion of Marxist thought when about 80 per cent of urban workers are employed by private companies. It is rendered more confusing by a recent crackdown on self-declared Marxist students at elite universities. Students are finding out the hard way that there is a huge gap between pure Marxism and the Chinese brand. So what does the party want Marxism to mean? I haven't thought about it much, never been to China, but of course they had a revolution-fueled bloody civil war. As I picture this, the CCP continues to rhetorically champion the cause of the less fortunate, but also, the party has turned into a club of billionaires and millionaires. At present there are more than 100 billionaires in the upper echelons of Chinese leadership. Now, of course there are the diplomatic niceties and official rhetoric, and what happens from a polemical standpoint may not line up with a practical reality check, or, I mean, maybe there is a rift between rhetoric and reality. One the one hand, we have the ideals of communism or such, and on the other hand we have a state that calls itself socialist, and either way, the CCP regime decides which ideology is legal and which interpretation is correct -- with a monopoly over political power.
I think it's *interesting*, though maybe not for the right reasons. And statements like 'the communist regime in Beijing is not really communist in the true sense of the term', strike me as being interesting, maybe not for the right reasons..
The video gives something from the position of philosophical theory of communism, even though for me this is hardly going to be the last word..
I said 'the video', when I mean, what I see, in the rhetoric and the diplomatic niceties contained in the official statements. I was pondering communism for the one party-state, like, as both a sword and shield with which it can attack or defend depending on the target and situation. Call me cynical, if there is any of attitude to take towards the video or such, of the Chinese people under the supreme leadership of the Communist Party, and of a version of Marxism that I guess should not be misunderstood as to actively promote core principles like social justice and equality. I'm not sure there is a place for the true practice of Marxist ideas, of course, which up the thread I did label as 'gobbledygook', but hey, call me cynical.
'That dollar in your pocket says at the top Federal Reserve Note (FRN). The accounting clarifies. FRNs are liability of the Federal Reserve on its books.'
I am willing to perhaps blame myself, but ultimately, I'm not sure what is being clarified in this discussion. There is more:
'The Federal Reserve credits a bank's reserve account in the case of government spending, the central bank being the government's fiscal agent, or else lends to banks on a temporary basis. Banks then use their bank reserves to clear their liabilities in the payments system that is administered in the US by the Fed.'
And more:
Vault cash is obtained by exchanging a bank asset (reserve balances at the Fed). Bank reserves are a Fed liability. To obtain vault cash the bank exchanges bank reserves (bank asset, Fed liability) for a Fed liability in the form of FRNs. This is the vault cash that the bank uses to meet window demand for cash.'
And .. honestly I clean do not grasp a point here, even though I see that a point has supposedly been made when I encounter this next:
'Most people are unfamiliar with this, but the "Federal Reserve Note" printed at the top of a bill alerts them to it.'
What exactly are most people unfamiliar with? Of course all people, and not just most people, are familiar with money. What are they missing? I see some dots here, concerning the accounting of changes in the Fed’s balance sheet, but I don't know how this is relevant to anything. Thus, sure, when the Fed makes loans or buys assets, it creates both an asset on its balance sheet (loans and securities) and a deposit liability (reserves). And again, the asset side, is 'making direct loans and purchasing long-term securities'. I mean, the asset sid of the Fed’s balance sheet. And the reserves at depository institutions, these are Fed liabilities. I ask how this is relevant to anything, and I see that it was offered in reply to the point that:
'Even the most common financial asset- cash, is a form of wealth. And it is not entirely clear that the $20 bill in my pocket represents a liability to anyone else in any ordinary sense. It's not like the government has promised to convert it into anything else if I bring it back to the Treasury.'
This is being contradicted? Is it, or is it not, like the government has promised to convert the $20 bill in my pocket, into anything else, if I bring it back to the Treasury? It seems to me that this refers to a familiar point that fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. Thus, The value of fiat money is not derived from the worth of a commodity backing it as is the case for commodity money. Your reply seems merely to allude to some details of how the relationship between supply and demand and the stability of the issuing government, is maybe what the value of fiat money is derived from. Be that as it may, though, this apparently, though I take myself to be concentrating very hard on following you here, I think this actually seems to contradict *nothing* of the point that:
'Even the most common financial asset- cash, is a form of wealth. And it is not entirely clear that the $20 bill in my pocket represents a liability to anyone else in any ordinary sense. It's not like the government has promised to convert it into anything else if I bring it back to the Treasury.'
You disagree with not a word, then?
Danny@2:04
"Your reply seems merely to allude to some details of how the relationship between supply and demand and the stability of the issuing government, is maybe what the value of fiat money is derived from."
No. The argument is based on the demonstrated ability of governments to impose and enforce tax obligations that can be settled with the fiat currency the government issues. If you accept that the government does that, then it is not much of a stretch to call these tax obligations 'financial liabilities' of the populace that are a type of 'financial asset' for the government. If you get it so far, then whenever the government spends forth its currency, it is also issuing a promise to accept that back as partial payment of the tax the populace already owes- and in that sense the currency is a liability of the government. That it promises to accept it back for the obligations it imposes on you or someone else is the liability associated with the currency.
Which is why a $20 bill is no ordinary liability. But we have really strayed from the original post by Professor Wolff .
Off topic: I wonder if you, Prof. Wolff, have seen nthe critique of the 1619 Project at WSWS? If so, your thoughts?
@Jerry Brown: 'But we have really strayed from the original post by Professor Wolff .'
I note that you attempted a reply, didn't give me the last word. I'm rather perplexed, but I'll stifle the temptation to pursue it, and go with your hint that we have strayed from the original post -- these remarks about about Sweden, Finland, Norway, Denmark, Iceland. These countries are mentioned as being some of the world's most equal on a number of measures, or somesuch. The Nordic countries are all social-democratic countries with mixed economies. Now, personally, I'm all for appreciating all the angles, here, it's interesting stuff. I'm not an expert, haven't been to these countries, but one thing that interests me is that women are more likely to work part-time and they invest more hours in housework or caring for elderly relatives than men. Thus, there are still surprisingly few women in senior private sector roles. Juxtapose the point, that the region has a glowing reputation as the best place in the world when it comes to gender equality, thanks to welfare states that support working families and promote parental leave, and legal, political and cultural support for the goal of gender equality. The way that I picture these things, I'm struggling to imagine Lutheran modesty, peasant parsimony and so forth, and probably, these societies function well for those who conform to the collective median, but they aren't much fun for tall poppies. My understanding is that schools rein in higher achievers for the sake of the less gifted; "elite" is a dirty word; displays of success, ambition or wealth are frowned upon. If you can cope with this, and the cost, and the cold (both metaphorical and inter-personal), then I'm especially curious about Sweden and its distinctive brand of totalitarian modernism, which curbs freedoms, suppresses dissent in the name of consensus. My guess is that the myriad successes of the Nordic countries are no miracle. I admit that comparing these countries to the United States or, what, the United Kingdom, Germany, Japan, strikes me as a quibble because they have plenty of 'capitalism', even compared to Mexico. I guess that's the point, but is it a point for a communist to be making?
'The argument is based on the demonstrated ability of governments to impose and enforce tax obligations that can be settled with the fiat currency the government issues.'
You mention that the government doesn't only print money, but also it taxes money. Heck, you didn't mention that it borrows money too, but that's the bigger picture. All these things have some deleterious consequences, if that's relevant, and are not just 'free money'. I kind of want to focus here on a preliminary sort of point, that money is so very familiar and yet there are some really odd things about it. So beyond that, I don't have any particular thing that I want understood as my point. Unless it is that money has value only because people agree to give it value. That's thought provoking, I think, but a very preliminary sort of shot. A user-friendly guide to understanding key financial concepts would be a chance for me to learn something myself, somewhere along the way. Especially I am fascinated that currency and financial accounts might not have any value on their own, but money becomes valuable when everybody agrees to use it. Most modern money has no inherent value. I see that you are comfortable with the jargon, when I introduced how Government-issued money is known as “fiat” money. Just for review, nothing controversial, but only to clarify where we might disagree, I'll add that currencies like the U.S. dollar, they’re valuable because the government issues money and declares it to be legal tender—nobody in the nation can refuse to accept the currency for debts and obligations. And, big big subject of course, but I think we both admit that ce-linking the dollar and gold allowed the government to manipulate the economy and the value of U.S. currency. Without needing to mine or buy physical gold, governments can create money out of thin air by printing more currency. To do the electronic equivalent, they can flood the markets with money by buying securities from investors. Governments can also increase the money supply by influencing interest rates or changing bank reserve requirements.
I am not sure precisely where you might be making a specific point about this stuff that I am missing. I don't think we share enough premises to be able to resolve everything with a debate. Not that you're a crackpot, but just that I am cynical about people talking past each other in debates. Not that you're not a crackpot, either, but I'm saying things myself that I think sound wonderfully weird, like that money only has value when everybody thinks it’s valuable. But perceptions can fade..
"Why does America do so much worse a job of providing social services to its citizens than other advanced post-industrial capitalist countries?"
It probably doesn't do much worse than Canada. Here, if you're destitute and looking for work, the government will give you, on average, $600 per month until you find a job (many, many homeless people live on our city streets, most of whom are on social assistance). If you have a disability and can't work, it will give you about $1200 per month.
"Why is America the only such country without some form of national health service?"
Canada does have a national health service, but it's comically overrated. E.g., it doesn't cover dental work or eye care. What is more, prescription drugs, which are often absurdly costly, aren't covered. An ambulance visit will cost approximately $300-$500, even if you're not actually treated by paramedics or taken to the hospital. Most Canadians don't like the "national health service" and don't risk depending on it. We buy provincial health insurance coverage and/or get coverage through our employers.
"Why do other countries provide paid family leave?"
Canada does not provide paid family leave. You may be eligible for paid family leave here, but employers aren’t required to pay wages or benefits during leave, unless stated in an employment contract or collective agreement.
"Why is it that only in America college graduates are burdened with crushing student loans?"
It's false that only American College graduates are burdened with crushing student loans. While undergraduate tuition is still relatively inexpensive in Canada (approx. $7000-$15,000 per year), law schools, medical schools, and other professional schools routinely charge students $20,000-$30,000 per year in tuition (sometimes a lot more). When I finished law school, I was over $150,000 in debt.
"Why are unions so much weaker here than in other comparable countries?"
I doubt unions are much weaker in the U.S. than in Canada. Some are getting bigger here without getting better, and the weakening state of labour unions generally has been well-known in Canada for at least three decades.
Danny @2:21, you can read a user friendly guide of the basic argument here
http://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-drive-money.html
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