Ultimately, real resource availability constrains prosperity

There are many misconceptions about what a government who understands the capacity it has as the currency-issuer can do. As Modern Monetary Theory (MMT) becomes more visible in the public arena, it is evident that people still do not fully grasp the constraints facing such a government. At the more popularist end of the MMT blogosphere you will read statements such that if only the government understood that it can run fiscal deficits with impunity then all would be well in the world. In this blog I want to set a few of those misconceptions straight. The discussion that follows is a continuation of my recent examination of external constraints on governments who seek to maintain full employment. It specifically focuses on less-developed countries and the options that a currency-issuing government might face in such a nation, where essentials like food and energy have to be imported. While there are some general statements that can be made with respect to MMT that apply to any nation where the government issues its own currency, floats its exchange rate, and does not incur foreign currency-denominated debt, we also have to acknowledge special cases that need special policy attention. In the latter case, the specific problems facing a nation cannot be easily overcome just by increasing fiscal deficits. That is not to say that these governments should fall prey to the IMF austerity line. In all likelihood they will still have to run fiscal deficits but that will not be enough to sustain the population. We are about to consider the bottom line here – the real resource constraint. I have written about this before but the message still seems to get lost.

First of all here is a totally general statement about the capacity of a currency-issuing government that applies to any nation and is a fundamental principle of MMT.

Accordingly, such a government can always use its currency-issuing capacity to ensure that all available productive resources that are for sale in that currency, including all idle labour, can be productively engaged.

That is, such a government can always, without exception, ensure there is full employment.

There is no financial constraint on such a government who desires to achieve that desirable policy goal.

While that might sound salutary, and, by comparison with the ambitions of most governments in this neo-liberal era, is light years ahead on any well-being index, it somewhat evades a further question as to whether achieving this desirable goal moves a nation out of poverty.

So, second, here is another totally general statement to complement the first. The worst-case scenario for a nation, irrespective of its government’s currency-issuing capacity, is defined by the real resources that such a nation can access.

If a nation can only access limited quantities of real resources relative to its population, then no matter what capacities the government might have, that nation, in all likelihood, will be poor.

The ultimate constraint on prosperity is the real resources a nation can command, which includes the skills of its people and its natural resource inventory.

Thus, even if the government productively deploys all the resources a nation has available, it will still be poor if its resource base is limited.

Clearly, productively deploying all resources is a necessary condition for prosperity. And that remains the responsibility of the currency-issuing government after all of the non-government sector spending decisions have been made. But it is not a sufficient condition. A nation has to have sufficient resources to be prosperous.

The problem in this neo-liberal era is that currency-issuing governments use the myth that they are financially constrained to avoid fulfilling the responsibility to achieve full employment no matter how resource rich the nation might be.

So we have the obscene situation where even resource rich nations are succumbing to elevated levels of mass unemployment and increasing poverty rates amidst the ‘plenty’ because the ideological currents at the moment that has spawned an obsessive neo-liberal Groupthink are intent on shifting national income distribution in favour of those at the top end at the expense of everyone else.

Please read my blog – Bad luck if you are poor! – for more discussion on this point.

Moreover, world poverty is not being solved as multilateral institutions such as the World Bank, the UNDP, and the IMF, who remain locked in the grip of the neo-liberal myth that austerity leads to prosperity – or should I say, are principle instruments of that myth.

I was at a United Nations Development Program (UNDP) workshop some years ago to discuss employment guarantees.

While the main focus of the two days was meant to be employment guarantees, the conversation appeared to be dominated by discussions about fiscal space. Almost every presenter (bar me and one other) had several slides covering the topic as if it mattered.

The UNDP appears to be obsessed with the concept and it conditions the way they think about macroeconomics and constrains the way they construct the development agenda.

Their policy vision is so constrained by this erroneous thinking that their capacity to eliminate poverty is limited. Countries will never be able to create the requisite number of jobs necessary to fully employ the available labour while they are being advised by ‘experts’ who operate in the neo-liberal macroeconomic paradigm.

I was heavily criticised at the Workshop for daring to marry my advocacy for the Job Guarantee with Modern Monetary Theory (MMT) logic. One UNDP official claimed I had performed a “dis-service” (quote) to the proceedings by talking about macroeconomics in the context of employment guarantees.

He claimed that any discussion of employment guarantees should be de-coupled from the ideological debate about macroeconomic theory. He was warmly clapped by the audience (with notable exceptions). It was an appalling experience. I packed up at the end of my session and drove a few hundred kms south to Washington D.C. where better waters lay!

The problem is that the UNDP are obsessed with macroeconomics.

In its 2004 publication – Making fiscal policy working for the poor – we read:

Macroeconomic policies represent a key ‘entry point’ for the UNDP’s activities to foster human development. In order to present programme countries with viable macro policy options, UNDP seeks to support access to policy advice that presents a menu of feasible options and alternative analyses.

The link between macroeconomic theory and poverty alleviation goals is undeniable. We have to get the former right before we will make significant progress in eliminating poverty.

But both the UNDP and the IMF push a flawed macroeconomic line, which reduces, perhaps negates their ability to meet their stated charters.

The IMF defines – Fiscal space – as the

… room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability – making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.

The UNDP also talks about fiscal space a lot. In its 2007 publication – Fiscal Space for What? Analytical Issues from a Human Development Perspective we encounter this definition in the first paragraph:

… is the financing that is available to government as a result of concrete policy actions for enhancing resource mobilization, and the reforms necessary to secure the enabling governance, institutional and economic environment for these policy actions to be effective, for a specified set of development objectives.

While the UNDP always exudes a sort of higher moral ground relative to the IMF when discussing economic development, when it comes down to it, there is not much difference at all between the two.

The UNDP and IMF both assume that government has the same constraints that restricted governments during the gold standard when currencies were convertible and exchange rates were fixed. These definitions, despite their subtle differences, could have been written in 1950.

In a fiat monetary system, whether the nation is rich in real resources or poor, the concept of fiscal space is not captured by these ‘financial’ constraint type approaches.

MMT teaches us that:

  • A sovereign government is not revenue-constrained which means that fiscal space cannot be defined in financial terms.
  • The capacity of the sovereign government to mobilise resources depends only on the real resources available to the nation.

There are hundreds of developing countries that enjoy currency sovereignty which means they can enforce tax liabilities in the currency that the government issues. It doesn’t matter if other currencies are also in use in those countries, which is common.

For example, the USD will often be in use in a LDC alongside the local currency and be preferred by residents in their trading activities. But, typically, the residents still have to get local currency to pay their taxes. That means the government of issue has the capacity to spend in that currency.

And that brings us back to the real resource constraint which is different to a balance of payments constraint.

As long as there are real resources available for use in a LDC, the government can purchase them using its currency power.

Mass unemployment is a major reason for sustained poverty and there are millions of people unemployed across the LDCs. They are real resources which have no ‘market demand’ for their services. The government in each country could easily purchase these services with the local currency without placing pressure on labour costs in the country.

That should be the starting point for a development plan and one I emphasise when I give advice to governments in poorer nations who seek help with regional and community development strategies.

What would be the consequences of this full employment strategy?

The neo-liberals claim that if we try to eliminate poverty with public sector job creation programs, the newly employed workers will increase their food intake (good) and, given that many LDCs import food, this will blow the current account out as imports rise relative to exports and cause inflation.

Why the inflation? Well because the exchange rate apparently enters a death-spiral (depreciation), which soon enough transcends into a full-blown currency crisis. Phew!

Please read my blog from yesterday – Balance of payments constraints – for more discussion on this point.

The reality is that all open economies are susceptible to balance of payments fluctuations. What is usually not mentioned is that these fluctuations were terminal during the fixed exchange rate system for deficit countries because they meant the government had to permanently keep the domestic economy is a depressed state to keep the imports down so as not to run out of foreign reserves.

For a flexible exchange rate economy, the exchange rate does the adjustment. There is no balance of payments constraint facing a nation in this regard.

Is there evidence that fiscal deficits create catastrophic exchange rate depreciation in flexible exchange rate countries? None at all. There is no clear relationship in the research literature that has been established. If you are worried that rising net spending will push up imports then this worry would apply to any spending that underpins growth including private investment spending. The latter, in fact, will probably be more ‘import intensive’ because most LDCs import capital.

Indeed, well-targetted government spending can create domestic activity which replaces imports. For example, Job Guarantee workers could start making things that the nation would normally import including processed food products.

Moreover, a fully employed economy with a skill development structure embedded in the employment guarantee are likely to attract FDI in search of productive labour. So while the current account might move into deficit as the economy grows (which is good because it means the nation is giving less real resources away in return for real imports from abroad) the capital account would move into surplus. The overall net effect is not clear and a surplus is as likely as a deficit.

Finally, even if ultimately the higher growth is consistent with a lower exchange rate this is not something that we should worry about. Lower currency parities can stimulate local employment (via the terms of trade effect) and tend to damage the middle and higher classes more than the poorer groups because luxury imported goods (ski holidays, BMW cars) become more expensive.

These exchange rate movements will tend to be once off adjustments anyway to the higher growth path and need not be a source of on-going inflationary pressure.

Now, what about a nation that has to import all of its essentials to sustain life?

There is considerable research available which reports on how dependent nations are on food imports. The Worldwatch Institute in Washington does some great research in this regard.

Imports of grain, for example, have been rising significantly over the last several decades. The Worldwatch Food Trade and Self-Sufficiency report shows that in 2013:

… more than a third of the world’s nations — 77 in all — imported at least 25 percent of the major grains they needed. This compares to just 49 countries in 1961, an increase of 57 percent over half a century …

Even more worrying, 51 countries—about a quarter of the community of nations—imported more than half of their grain in 2013, and 13 imported all of the grain they needed.

In part, this trend is being exacerbated by IMF development programs, which push nations into an export-led strategy (with cash agricultural products) and destroy the previous sustainable subsistence agriculture.

World markets get flooded with produce, prices fall, the nations cannot service their debts to the IMF, who then pushes more debt and more draconian policies onto them.

I have also written in the past about the indecent way in which financial markets speculate on food commodities and manipulate commodity prices to their advantage. The losers are not just the counter parties to the financial products but the millions of impoverished citizens who cannot access essential food resources even if they are grown within their national borders.

Please read my blogs – Food speculation should be (mostly) banned and We should ban financial speculation on food prices – for more discussion on this point.

But with those considerations aside, we have to acknowledge that if a nation has little that the world wants by way of its exports, and is food dependent on imports (and perhaps, other essential resources) then the capacity of the currency-issuing government to alleviate poverty is limited.

An understanding of MMT should bring that point home.

There are several major shifts in international thinking that have to occur to alleviate this reality.

First, where imported food (or other essentials) dependence exists then the well-being of the citizens in that nation cannot be solved within its own borders, especially if its export potential is limited.

Imposing austerity on these governments is no solution. The world has to take responsibility to ensure that it alleviates any real resource constraints that operate through the balance of payments.

Note, this is not a balance of payments constraint as it is normally considered. It is a real resource constraint arising from the unequal distribution of resources across geographic space and the somewhat arbitrary lines that have been drawn across that space to delineate sovereign states.

In this context, a new multilateral institution should be created to replace both the World Bank and the IMF, which is charged with the responsibility to ensure that these highly disadvantaged nations can access essential real resources such as food and not be priced out of international markets due to exchange rate fluctuations that arise from trade deficits.

I will write more about what that type of institution might look like in terms of governance, resourcing, and all the rest of it.

But in a progressive New World, there is no place for the current multi-lateral institutions such as the IMF and the World Bank.

Second, there has to be international agreements to outlaw speculation by investment banks on food and other essential commodities.

Third, a further progressive policy intervention, which, ideally, should be agreed to at the international level should be to declare illegal speculative financial flows that have no necessary relationship with improving the operation of the real economy. I will write more about that in due course.

In the absence of such international commitments, nations should consider imposing capital controls where they can be beneficial bulwarks against the destructive forces of speculative financial capitalism.

Please read my blog – Are capital controls the answer? – for more discussion on this point.

Fourth, in some situations a case can be made to impose import controls on equity grounds where the export base is thin and a nation is struggling to amass sufficient real resources to ‘feed and clothe’ its people.

While imports are clearly a benefit and exports are clearly cost there are still equity implications involved in the mix of imports that a nation might enjoy.

I heard once that South Africa had the largest per capita ownership of BMW cars, which is astounding, if true, given the mass poverty of the majority of its population.

Selective import controls, if they can be effectively designed, can ensure that a nation with a limited export base can import goods and services that target the provision of benefits via imports to the poor in the first instance.

Fifth, in some cases it will be in the global interest to restrict the capacity of a nation to export. For example, I’m thinking of those arguments where it is better to leave the coal in the ground than to mine it and worsen the environmental damage already existing.

In those cases, a single nation should not be punished for the pattern of geographic resource distribution and a global response is needed to make sure the damage to that nation’s export potential does not impair its ability to import and fight poverty.

Conclusion

I hope this blog has rounded off the recent discussion about balance of payments, external constraints etc.

I also hope it has clarified that a currency-issuing government can certainly use its capacities to improve the well-being of its citizens but in doing so, the nation may still remain poor, if its real resource space is limited.

A major restructuring of the multinational institutional framework, which includes scrapping the World Bank and its other neo-liberal sibling, the IMF is required to provide solutions to poverty in these cases.

The series so far

This is a further part of a series I am writing as background to my next book on globalisation and the capacities of the nation-state. More instalments will come as the research process unfolds.

The series so far:

1. Friday lay day – The Stability Pact didn’t mean much anyway, did it?

2. European Left face a Dystopia of their own making

3. The Eurozone Groupthink and Denial continues …

4. Mitterrand’s turn to austerity was an ideological choice not an inevitability

5. The origins of the ‘leftist’ failure to oppose austerity

6. The European Project is dead

7. The Italian left should hang their heads in shame

8. On the trail of inflation and the fears of the same ….

9. Globalisation and currency arrangements

10. The co-option of government by transnational organisations

11. The Modigliani controversy – the break with Keynesian thinking

12. The capacity of the state and the open economy – Part 1

13. Is exchange rate depreciation inflationary?

14. Balance of payments constraints

The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due later in 2016.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.

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    29 Responses to Ultimately, real resource availability constrains prosperity

    1. Podargus says:

      The fifth point is certainly pertinent for Australia. Particularly Queensland and New South Wales which are the gargantuan coal exporters.
      But try telling that to the Boosters in the respective state governments,one Tory Lite and one Tory . Not only are they congenitally incapable of seeing past extractive industries to a sensible future they also get a lot of income from royalty payments.
      This is a clear case where a responsible federal government,who control the currency and export permits, would shut down the mines and more than compensate the states for the loss of revenue.

      Oops,did I say “responsible federal government”? I’d better go and wash my mouth out with a strong caustic solution to restore my cynicism.

    2. Ikonoclast says:

      A significant conceptual problem for people swayed by monetarism and neoliberalism is their unknowing reification of money. “Reification” is also referred to as the fallacy of misplaced concreteness. Bill refers to the fallacy of composition with good effect in some of his expositions of MMT and macroeconomics against specious neocon economics. The “good effect” occurs when he explains the full nature of the fallacy and its refutation along with examples which make it all clear. In turn, I think it could be very useful to explain the fallacy of misplaced concreteness and give examples with respect to concepts like money, surpluses, deficits, and fiscal space and comparing them to real resources. The contrast of the nominal to the real in economics will be made clearer overall. The fallacy name is a conceptual peg to hang the concept on. It helps people remember.

      I think people like it when you explain to them how a fallacy works and you give examples. Giving the fallacy a clear name then helps fix it in their mind . You have clarified a puzzle for them and made the solution clear. People love puzzle solutions. Once they have the fallacy, its (il)logic and its general refutation all clear in their mind, people then become very good at “jumping on” on the fallacious reasoning of others and exposing it. In this way, you can create myriads of useful helpers for your point of view. When set loose they are able “algorithmic refuters” who argue a point on behalf of a valid system of knowledge against fallacious logic.

    3. Neil Wilson says:

      “For example, the USD will often be in use in a LDC”

      Unless I’m mistaken the acronym LDC pops up at this point without explanation of what it stands for. Something about developing countries I presume.

    4. Neil Wilson says:

      Again I think it is instructive to look at this from the ‘inward’ direction.

      If you have resource rich countries – particularly those with massive capacity for agricultural output – then they will struggle to maintain those resources at maximum output without markets external to the country. There simply can’t be enough internal demand to hoover up all the corn for example.

      You can take this view with pretty much any renewable resource (if you have lots of flowing water you could have a surplus of hydro electricity).

      There are many nations on the planet in this excess situation, and in a world where food production is unequally distributed we really don’t want food production capacity underutilise. So globally food production, etc. needs those external markets.

      So new markets that are opened to them are very valuable.

      Which leads onto the policy for developing countries. Access to their market so that export led countries can increase their turnover is valuable. And so the correct policy for a developing country is to franchise that access to those countries with a sufficiently integrated financial system that they can discount the developing country’s currency.

      Obviously suppliers come in asking for ‘hard currency’, but you play them off against each other and refuse access unless they take payment in the local currency – which has value by virtue of it being required for taxation in the country. In a competitive world you will likely find somebody for which the access to the new markets is sufficiently valuable to set up the trade.

      The idea goes for all nations obtaining imports – realising that sales demand is the most valuable commodity they have in the international market. Businesses need customers more than anything else.

      Only where there is a complete stall and ‘no deal’ on the table do you need an IMF like arbitrator to make the market. This is very similar to the way central banks step in when the banks get spooked and refuse to do interbank lending.

      If developing countries realise that taxation circulation of their currency creates intrinsic value in that currency and therefore the sales demand of the country becomes valuable externally they can likely drive a harder bargain in the international market.

    5. Daniel D says:

      LDC refers to, I think, the term;

      Least Developed Countries

    6. Andy says:

      Beautifully written Bill

    7. bill says:

      Dear All

      LDC means less developed countries.

      best wishes
      bill

    8. Phil says:

      “If you are worried that rising net spending will push up imports then this worry would apply to any spending that underpins growth including private investment spending. The latter, in fact, will probably be more ‘import intensive’ because most LDCs import capital.”

      This is a key point. Although there are constraints on countries that have little access to real resources and this constraint typically shows up as a BoP constraint, that really says little about public versus private spending. The arguments that are implicitly deployed in that sphere are efficiency arguments that are based on dubious propositions in microeconomic theory.

      MMT and Post-Keynesian theory generally allows us to clearly delineate when an argument is based on sound macroeconomic thinking and when it is based on ideology — even if that ideology is backed up by marginalist microeconomics (which is itself an ideology, but that is a different day’s discussion).

    9. James Schipper says:

      Exporters usually don’t pay taxes in the country to which they export. Still, they should be willing to accept payment in the currency of the country to which they are exporting as long as some other foreigners have an interest in importing something from that country or buying something in that country. What makes the currency of a country valuable abroad is the willingness of foreigners to import from that country or to buy or invest in that country. If no foreigner at all wants to import anything from Botswana, to buy anything in Botswana or to invest in Botswana, then Botswana’s currency will have no value abroad.

      Regards. James

    10. Neil Wilson says:

      “Although there are constraints on countries that have little access to real resources and this constraint typically shows up as a BoP constrain”

      The point of the piece is that it doesn’t, or shouldn’t.

      The ‘BOP constraint’ is a myth because in a floating rate currency there is no such thing. The trade balance is offset by the capital balance to the penny – and neither can exist unless the other does *at the same time*. The whole thing is entirely an artefact of the way you choose to look at things – drawing a line around a country’s borders and drawing up the accounts to that line regardless of what is happening on the ground.

      So there is no financial constraint as such. Anybody trying to get rid of an LDC currency beyond what the system will stand will simply run out of liquidity and be unable to settle, and the knock on effect would be a reducing in import demand. A sensible policy in an LDC would make sure that the exporters to the LDC felt that loss of demand early so that they do something about it. It’s the exporters that want the demand. Let them do the work to make the trade happen.

      A lot of this is to do with smart policy design based upon an understanding of the persistent search for demand in the world. Of course the powerful countries will try and enslave the LDC. But a smart and well advised government would not fall for it.

    11. Phil says:

      No, Neil, a BoP constraint is when economic growth is constrained by the BoP. Bill explained this in his Thirlwall/Kaldor post. This is the meaning of the term in the literature. When a country displays the properties Bill is outlining in the above they are subject, on Kaldor and Thirlwall’s definition (which is widely accepted), as being subject to BoP constraint.

      The difference between MMT and Thirlwall? Thirlwall thinks that BoP constraint is an immutable law that applies across time and space; MMT thinks that it often does not exist, as in the case of many advanced economies, but may still be an important framing for resource-poor countries.

    12. J Christensen says:

      This series has been very helpful Professor Mitchell; I have them bookmarked for reference when trying to help others disentangle themselves from the web of neoliberal deception.

      There is something akin to Stockholm syndrome that develops in the minds of those have been drinking neoliberal cool aid for a long time. Some people get MMT instantly; however, a substantial number have an instant visceral opposition to anything that conflicts with the teachings of their neoliberal captors; even when, and I’m leaning toward saying especially when, they are among those most disadvantaged by policies so derived. I suspect it is because of all the effort it takes to turn the work of fiction they have read from purportedly credible sources, into the accepted reality, in the vain attempt to figure out how to improve their own situation. It’s tough for others to admit to having been duped; especially those who have taken on serious debt getting an orthodox education.

      Among non economists experiencing their initial MMT epiphany, there is a tendency to let the mind run wild with possibilities as to what MMT can accomplish.
      I have learned to begin a conversation about MMT with something like ” Why does It seem reasonable that so many people should be suffering, poverty, unemployment or underemployment in nations rich in real resources”. This begins the conversation about the disconnect between the world of money and the world of available real resources, which can only be developed, and accessed by all, within a system that is working with the goal of meeting the needs of the common good. That tempers MMT’s good message with the realities of real resource constraints from the start.

    13. Kevin Harding says:

      It always pays to return to first principles.Bill is right it is always about the real resources.
      Money is an IOU for stuff ,goods and services.This is why imports increase a nation’s real wealth
      and exports decrease the nation’s wealth as a whole of course there are distributional effects.
      Those who profit from exports expand their claim on real resources.
      Put in this way we do see the real resource problems which would arise from currency depreciation.
      the non sovereign private sector will have less access to foreign resources ,will lose real wealth.
      This is the quandary facing Southern Europe € using households and why they cling to a failed
      currency .
      Of course it may prove to be a one time loss of real wealth ,and allow for recovery but by real
      taking it back to real resources I currency derpretiation is a worry.

    14. Jeff says:

      Bill, another great post. Thank you. I wish I could convince more of our people to read it.

      “I have written about this before but the message still seems to get lost.”

      The message isn’t getting through to our bureaucrats because they don’t to hear it. All us commoners can do is try to bash them over the heads repeatedly and/or vote them out of office.

      As I listen to our presidential debates, I’ve sadly come to the realization they have everything backwards–our neoliberal politicians insist all real resources are infinite (e.g. oil, clean water, clean air) except “skilled” labor (thus our immigration policies) yet currency is somehow scarce.

      So we cannot adequately fight climate change, pollution, food shortages, unemployment etc. because our funds are limited. The neoliberals will have us all believe our national debt is the real crisis that will result in the destruction of humankind. But what is currency, if not just a virtual means of resource allocation for an entire society? Our monetary system could fail, although it won’t, and life would go on. However we have just one planet earth to sustain.

      No, the real issue is that our elite ruling class would lose control if money were not widely perceived to be scarce. They figured out centuries ago that wealth equals power in a capitalist economy. They have to maintain the illusion that federal funds remain scarce, spreading fear of oppressive taxation and/or economic doom, in order to sustain their excessive wealth and ruling status.

      The truth is starting to come out in this year’s campaign although there is still too much emphasis on taxation. We’ll find out in November what impact it has had.

    15. Gregory Long says:

      One way a job guarantee could help some nations faced with real resource constraints of food, for example land-locked desert nations, is to use the job-guarantee workers to help develop vertical-farms and water-desalination centers. Vertical farms are high-rise greenhouses that enable agriculture in places where the soil, weather, etc., will not allow for it. Because of the level of skill required, the farms and desalination centers would need to start with the construction and training of workers and would take at least a little time before they could turn to production.

      Regarding the large per-capita number of BMWs in South Africa, this is not necessarily a sign of concentration of wealth if most of the BMWs are, say, 30+ years old.

    16. Steve says:

      “Reification” is also referred to as the fallacy of misplaced concreteness.

      I agree with the definition of reification, however, Wisdom being the integration and alignment of bothness as in (at least two) opposite factors as in the concrete and the conceptual is the only discipline that resists reification. And the way that is accomplished is just to keep on integrating and aligning until the twoness actually becomes a threeness-oneness, that is a third and different condition, theory and/or systemic state that is a unified whole.
      Wisdom and its pinnacle concepts is thus what theorists should seek. No religion here, this is entirely natural philosophy.

    17. Jason H says:

      I thought I posted this but hadn’t.

      Bill you are on fire with this series for your book I’m loving it.

      One of my first thoughts from the post was about trade in food. I’ve read that the USA burns wheat and other crops to support prices when there is over supply. The EU and USA subsidies on food are sickening when realised in the context of humans going without nutrition, particularly if they could grow those crops locally.

      My 2nd stand-out was how much the world is stuck in a fixed exchange rate and gold standard world. It’s like nothing changed. Rather than worry how is that possible I think all of us MMT proponents need to break that link with any trained economists we meet.

      We no longer have those bizarre concepts of requiring shiny yellow metal for humans to produce value. I often imagine a very large asteroid of gold landing on earth as a way to blow the gold backed needs of money apart. (Pardon the pun). Why would a new billion dollar Internet business require a billion dollars of gold to be mined?It doesn’t make sense to me and I hope to the masses when framed like that.

    18. Neil Wilson says:

      “No, Neil, a BoP constraint is when economic growth is constrained by the BoP.”

      But it’s not constrained by the payments. It’s constrained by the availability of real resources for sale in the currency. There are no payments to balance. It’s always balanced by definition in a floating rate system.

      That’s the problem. The term in the ‘literature’ is assuming a mapping that doesn’t exist in reality. Then they wander off talking about hard currency and other such nonsense. Which leads to borrowing in foreign currency and other silly ideas.

      As usual words matter.

      Once you switch your viewpoint around, then you can start looking at ways of getting things made available in your currency by pointing out the tax driven demand for it, and by offering favoured access to those export nations prepared to discount the currency on that basis.

    19. Steve Hummel says:

      Distributive Gifting is the integrated, virtuous and freeing paradigm and policy that can largely if not entirely replace the economically fragmenting and unnecessarily punitive vice known as taxation.

    20. Ikonoclast says:

      Steve,

      I think what Bill, MMT and functional finance are saying, in essence, is that fiat money is a nominal quantity and it is not to be confused with real quantities. This is what it boils down to philosophically and empirically. It seems simple but it has profound implications if carried through properly.

      I subscribe to the correspondence theory of truth and along with that complex systems thinking and process philosophy. In that framework, it can be seen that it is important for formal systems and models to be accurate and to correspond with real systems in enough respects to make the formal systems useful for manipulating real systems. That is, formal systems must say something true with respect to real systems and formal systems should have a practical use. Otherwise, they should be discarded. (There are exceptions like abstract art or nonsense verse but we are talking about economics here.)

      But humans with their capacity to develop complex and elegant formal systems begin to take the internal relations of their formal systems to be more “fundamentally real” than the real systems all about us. This is the fundamental mistake made by essentialism, rationalism and theology. The only way to correct this is to use the methods of empiricism and pragmatics. We must always go back to the real system and see what the real system is telling us (empiricism). We must always evaluate the outcomes of our formal systems and see if they are doing anything useful for us (pragmatics).

      Bill is saying that what happens in the real system is what counts. What is happening in real production? What is happening in real consumption? What is happening in real distribution? What is happening in real people’s lives? What is happening with unemployment and so on? Formal systems, like the money system and finance system, should be “jigged” to get the best real outcomes. This is just as a jig is “jigged” to make true (properly squared) window frames for example. In woodworking and metalworking, a jig is a custom-made tool used to control the location and/or motion of another tool or the location or motion of materials being worked on. When you make something using jigs and other tools, you do not place the jigs according to a theory for placing jigs in relation to each other. You place the jigs according to a theory of jig placement which is relative to the manufactured item-to-be’s specifications and requirements.

      As Bill says, the macroeconomic settings must be set relative to the real economic outcomes we are attempting to create. Having a budget surplus as a goal is as foolish as having it as a goal that all jigs must aligned at right angles to each other. As soon as you want to make something that has angles other than 90 degrees in its construction, the rule becomes an obstacle not a help.

    21. larry says:

      Ikonoclast, I would suggest you alter your truth theory allegiance to the Revision Theory of Truth by Gupta and Belnap along with its association with Tarski’s convention T. It is more sophisticated than the standard correspondence theory and avoids problems associated with it. I realize I am being perhaps rather too succinct but a longer exposition would take us far from Bill’s topic.

    22. Steve says:

      The economic system is utterly embedded in the temporal universe which is entropic. Thus how can the economic system itself…have a vector toward and be anything but entropic as well?

      The money system, being most basically an agreement/abstraction, does not have to necessarily abide by the supposed temporal laws of thermo-dynamics. That is it can be used to create both entropic (unbalanced) and non-entropic (equilibrium) purposes.

      For instance, if the rate of flow of total costs exceeds the rate of flow of individual incomes in the normal and completely unfettered process/condition of the system and is the reality (an entropically cost inflationary and individual income deflationary condition) then the money system being digital in nature and also not being subject to entropy can balance it by costlessly gifting the individual and the business community in economically equilibrating ways. It can also be used not only to equilibrate the system, but to reverse its entropic nature/flow in favor of more individually freeing and systemic free flowing ways while maintaining profit making systems…and actually having price deflation within a profit making system.

      Now lending by the Banks or distributing money by the government can somewhat mitigate the entropic nature of the economy, but as such private or governmental distributions either incur an additional flow of costs (lending) or go into the economy proper before they reach the individual as wages (governmental programs for infrastructure etc.) they necessarily maintain and re-initiate its naturally entropic condition.

      Only direct Gifting to the individual and reciprocal Gifting by businesses to the consumer which is in turn Gifted back to merchants can actually resolve the entropically cost inflationary and individual income deflationary reality/condition of the economic system.

    23. Ikonoclast says:

      Steve,

      “The economic system is utterly embedded in the temporal universe which is entropic. Thus how can the economic system itself…have a vector toward and be anything but entropic as well?”

      That is rather easy to answer. Taking the biosphere as a system, new energy comes from the sun. Thus the biosphere can increase in complexity locally (in the biosphere) while entropy increases in the universe as a whole. There is another aspect too which is quite scary. That is the “earth battery” theory which states our economy is running down biological and fossil fuel complexity on earth at a rate greater than insolation (incident solar energy) can provide energy to rebuild these forms of complexity. This is a very disturbing conclusion and probably correct IMO. The loss of fossil fuel is not concerning. We can replace it with solar power and should do so anyway to stop anthropogenic global warming (AGW). The loss of biological complexity on a large scale is very disturbing and it could destabilise global ecology. Also, AGW inputs have gone so far we are likely in for massive climate and ecological destabilization anyway.

    24. Ikonoclast says:

      Larry,

      I will look at the Revision Theory of Truth. It sounds like a logical extension of the Correspondence Theory and a theory that one would arrive at in fully developing Correspondence Theory anyway. But in case I am being too dismissive, I will check it out thanks.

      I see (and have seen for some time) the Correspondence Theory of Truth as relating to the interactions of Formal Systems and Real Systems (for human truth checking purposes) so it becomes for me part of systems theory or systems philosophy. As such, I implicitly and explicitly see information traveling both ways many times between Real Systems and Formal Systems. Correspondence “truths” do in that way get revised and improved. This entails both empiricist and pragmatist views philosophically speaking. Anyway, I am a process philosopher (an amateur one). Thus, I naturally see “truth” as a process in all senses. One sense is that “truth” is a relation which relates an aspect of one system to another aspect of the same system or an aspect of another system. A “truth” relates aspects reliably and predictably to at least a required degree of probability. A “truth” in this sense is a process of reliable relation in space-time. Clearly I adhere to process metaphysics and not to substance metaphysics. “Process has primacy over things. Substance is subordinate to process: Things are simply constellations of process.” – Nicholas Rescher.

      Finally and almost paradoxically I see Formal Systems as Real Systems too. Formal Systems are contained in Real Systems and finally are only Real Systems too. There is something something special about Formal Systems which seems to make them qualitatively different from other Real Systems. (What makes a brain or a mind different from a rock?) I am working on that conundrum as an amateur philosopher. My early guesses are that the issue revolves around factors regarding matter-energy and information transfers between systems through their interfaces. Formal Systems, as a sub-group of Real Systems, show high information content and information processing / transformation capacity relative to their matter-energy content. This makes them qualitatively different.

      I believe there is also something critical happening with respect to dimensions (space-time or 3D space plus time if you like). This could be summed up by saying “Merely physical real systems have space-time dimensions. Formal Real Systems both have space-time dimensions and model space-time dimensions of many other systems external to them.” This is the crucial way, in my opinion, that physical processes (not things) can “regard” other physical processes and not just interact at the basic physical-chemical level with them. This is how “mind” regards other systems, operates on other systems algorithmically and heuristically and appears qualitatively different. Of course this does not explain affective or feeling consciousness.

      I don’t think consciousness is ontologically special. It requires no special explanation. It is not more inexplicable than any other fundamental process. All fundamental processes in the universe are inexplicable. This is not to say that we must immediately go to mythical or religious explanations. Such explanations do not explain they explain away. Consciousness is a brute fact just as quantum indeterminacy is a brute fact. At some level in chasing the regress of causes and explanations we must come up against brute facts which are inexplicable. This is the way of it unless one accepts revelation (a circular proof doctrine) or gnosis which is unverifiable by a second party.

      Anyway, I hope that this not too long as it will serve to outline my position on epistemology and ontology. Most have abandoned this thread and will never read its tail again anyway so I feel a little safe in going off topic.

    25. larry says:

      Ikonoclast, not too long at all. I agree with you regarding the inexplicable. After all, the ultimate speed of light in vacuum is ultimately inexplicable. Why light “behaves” this way, we don’t know.

      As for the mind, it is a deep question whether the “mind” operates entirely by means of algorithms (partial recursive functions). If it doesn’t, then it is not the sort of computational device that we can build. And it is then another question whether a bigger or faster computer of the sort we know how to design will render such a device artificially intelligent. To say that such a device will be intelligent “in another way” is to say almost nothing at all.

      The relationship you see between formal and real systems is of interest but I see the “mind” intervene between the information flow going between your formal and real systems. After all, a formal system is a conceptual construct and something has to “hold” it or it disappears into the ether, as it were. Of course, it needn’t be the mind that “holds” this construct; it could be a document lying around for another “mind” to grasp it. A mind of some kind is needed for any action based on it to take place. Your real system is just out there, like consciousness. While these are brute facts, I would like to know what makes them what they are. And if I could, why they are.

    26. larry says:

      Ikonoclast, I was pleasantly surprised to see you quote Rescher. He taught me epistemological logic. Although not because of this, I, too, agree that process takes precedence over things.

    27. Steve Hummel says:

      Iconoclast,
      Yes, I wouldn’t disagree with you that we need to switch toward solar/electrical as our primary source of energy, but you only make my point about the economy being entropic and that it requires an outside non-entropic system/tool/policy. And that the way to alter that vector is a non-entropic force, namely the monetary system to not just statically equilibrate it but in line with the insights of Steve Keen (whom I have run these monetary policy recommendations by for several years by the way) about the economy being in a continual state of disequilibrium, ….that is policies that create a higher, more individually freeing and systemically free flowing price deflationary DISEQUILIBRIUM….but which still fits seamlessly within profit making systems.

    28. Ikonoclast says:

      Larry,

      There are some arguments now that the brain (among many other things) is an indeterminism engine. That is to say it harnesses quantum indeterminacy to “choose” outcomes in some cases. Thus “free will” might actually be indeterminate “will”.

      There is also a theory (and I can’t find the reference now) that the macro world is not entirely deterministic precisely because quantum random events can break though and influence the macro world. The example given is the random breakdown of a radioactive particle which enters a person’s body and causes a dangerous cancer mutation. The person’s life trajectory and those of many around him are changed by the random event.

      But it is all very speculative of course.

    29. larry says:

      Ikonoclast, of course. And the computing devices we know how to design are deterministic, indeed, partial recursive. That leaves open the question of whether such a device could ever become a “brain”. There is no impossibility proof for this conjecture. And I doubt there will be one in the foreseeable future. Thus, speculation abounds, sometimes dressed up as a “known known”.

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