[This post was written by Associate Professor Philip Lawn, currently a research officer with the Southgate Institute for Health, Society and Equity at Flinders University and visiting lecturer in economics at the University of Adelaide. This is an informal review of 1000 Castaways: Fundamentals of Economics that he kindly agreed to share.]
“Some comments, starting with me wearing an MMT hat. I very much liked the way you described the monetary side of the economy and the storyline you have used to explain the development of a monetary system and the building up of an economy’s productive capacity. The System One (horizontal money) and System Two (vertical money) dichotomy is especially useful.
Now, wearing my Ecological Economics hat. Without wanting to sound too critical, I had two problems with what you said regarding ‘real’ resources and their full utilisation. I had a problem with you lumping all real productive inputs together as if they are homogenous and substitutable (your box illustration), although I do realise that you may have been trying to keep things simple in order to focus on the MMT principles.
Ecological Economists consider natural resources to be very distinct from capital and labour. Capital and labour are the resource-transforming agents of the production process. Natural resources constitute the stuff we transform via production into useful goods and services (including new capital!) We tend to use capital, labour, and natural resources (K, L, and R) in relatively fixed proportions, which only gradually changes over time with new technology.
In the short-run, if we want to produce more output, we use more K, L, and R in relatively fixed proportions (a vector of inputs). The limit to what we can produce (maximum productive capacity) is determined by the most limiting of these three production factors (Keynes recognised this in his “How to Pay for the War”, pages 18-19). If we run out of natural resources to transform into new goods and services, then the remaining K and L go unutilised. Labour tends to be the limiting factor of production (LFP) for most countries—although, sadly, these countries leave a lot of labour underutilised—only because most countries extract natural resources from the environment at a greater rate than the ecosphere can regenerate them. Most countries have an Ecological Footprint (EF) (resource use rate or resource demand) greater than their Biocapacity (BC) (sustainable resource supply). At the global level, the global Ecological Footprint (EF) is 70% greater than global Biocapacity (BC). Hence the global economy is operating at ecologically unsustainable levels. If ecological deficit countries were to confine their rate of natural resource use (EF) to their Biocapacity, many would find that natural resources would be the limiting factor of production (LFP), not labour.
Regardless of what the limiting factor of production LFP is, it is unlikely that all available factors of production will be completely used (i.e., we wouldn’t use up everything inside the box you talk about in your book). It doesn’t matter too much if what goes unused is a log or a hammer. It matters a lot if what goes unused is a human being (labour). The aim must therefore be to ensure: (i) that labour is the LFP; and (ii) that spending levels are sufficient to ensure all labour is employed.
I believe (although some MMT people don’t like me talking in these terms) that the Job Guarantee can serve a dual function. Firstly, where a country is operating well within its ecological limits, and thus where an increase in its real output (GDP) will be ecologically sustainable, the JG can achieve full employment of labour by automatically increasing govt spending to the level required to achieve and maintain f/e. This is the standard position of JG advocates.
In the second case, where a country has to reduce its rate of natural resource use (and therefore reduce its GDP – referred to by some people as degrowth) to bring its Ecological Footprint into line with its Biocapacity, the JG can ration the restricted GDP through paid work and thus bring the full employment level of GDP into line with an ecologically sustainable level of GDP.”
[Professor Lawn continues…]
“In the first, more conventional view of the JG, the JG increases GDP up to the full employment level of GDP, thereby closing the unemployment gap. In the second instance, the JG closes the unemployment gap by shifting the full employment level of GDP back to an ecologically sustainable level of GDP. Either way, the beauty of the JG is that ensures labour is always the LFP, which is necessary to achieve the full employment of labour. We end up using all the labour in your box but not necessarily all capital and available natural resources.
The second issue relates to whether we in fact want to, or should operate at the ecologically sustainable level of GDP. The JG ensures that whatever level of GDP we operate at, there is full employment. Hence, we can put the full employment issue aside knowing that is automatically resolved. There are benefits and costs associated with producing a given level of GDP. The Genuine Progress Indicator (GPI) that I presented at the conference seeks to measure these benefits and costs at the macroeconomic level. It may well be, and in fact probably would the case, that the level of GDP that maximises the GPI is something considerably less than the maximum sustainable rate (sometimes referred to as the ‘optimal macroeconomic scale’). If so, even fewer natural resources and capital will be needed, although all labour would be used, assuming there is a JG in place. Hence, even less of what would be inside your box would be used. May I say, in the case of capital, if a lot less is required than we currently have at our disposal, then it is likely we wouldn’t accumulate so much to begin with. There’s no point accumulating far more capital than is required, which would be a significant cost in itself.
I feel like I’ve been a bit harsh on you [Note: He hasn’t been harsh at all 🙂 ]. I am equally if not more critical of almost all MMT-based books. I guess my overall point is that there is some irony about MMT and many of its advocates. MMT is in many ways about highlighting that the constraint a nation faces is not financial (so long as its central government is a monetary sovereign). The constraint a nation faces is its limited productive capacity. Yet I’m not sure many MMT people understand what the limited (sustainable) productive capacity is. They tend to overestimate it. I believe it is a lot less than many believe, which makes it even more difficult to deal with unemployment by conventional means (i.e., via GDP growth), thus increasing the need for a JG. Many of our problems, especially environmental problems, are due to the fact that there are too many people on this Earth and we are collectively producing and consuming far more than the planet can sustain.
Putting aside my Ecological Economics based criticisms, If I had to direct someone to a book in order to learn some MMT principles, I could choose any one of a very small number of books. Having read your book, I would include it in that short list of books. If your book is read by a lot of people, it will do a great service.”
[This post was written by Associate Professor Philip Lawn, currently a research officer with the Southgate Institute for Health, Society and Equity at Flinders University and visiting lecturer in economics at the University of Adelaide. This was an informal review of 1000 Castaways: Fundamentals of Economics that he kindly agreed to share.]