Hunter, Graham (2017). 'The capability approach and modern monetary theory: perfect complements?' Paper presented at the annual conference of the HDCA, Cape Town 2017.


Proposal Theme: economic framework for social change
Key words: economic framework, human well-being, inequality, labour market, social inclusion, modern monetary theory

In “Collective Choice and Social Welfare” Amartya Sen argues that it is possible for societies to decide what most people consider important to be able to live a good life, to lead in Sen’s words “a life they have reason to value”. To do so they need to be able to use and improve their capabilities – what they are able to do and be. In the last decade much progress has been made in operationalising this capability approach, with many studies highlighting the current level of capabilities in many countries both developed and developing.  During the same period some economists reviewed the impact that the decision to remove the link between the US$ and gold would have on the macro economic framework. In what became known as Modern Monetary Theory they recognised that sovereign currency issuing governments are no longer financially constrained; they can create as much currency as is necessary to buy whatever is available for sale in that currency. Instead their constraint is the capability of the economy and in particular the capability of its citizens.  The Capability Approach and Modern Monetary Theory, therefore, both have as their objective the improvement of the capabilities of individuals and can be considered to be “perfect compliments”

Both the capability approach and modern monetary theory argue for creating employment opportunities for all citizens so that they are able to lead a life whereby, as Martha Nussbaum describes in her list of capabilities, they are able to live with and toward others and engage in forms of social interaction in which they are treated with self-respect, are not humiliated, and are treated as a dignified being. Two proposals which are designed to achieve this end and to reduce inequality are a universal basic income and a job guarantee. This paper evaluates each within both the capability approach framework and the modern monetary theory framework.

Part one of this paper gives a brief description of modern monetary theory and its key features. Part two evaluates a universal basic income, part three a job guarantee and part four concludes with a discussion of some of the implementation issues for each proposal.

Paper outline

Modern Monetary Theory
Modern monetary theory has developed over the last twenty years by William Mitchell, Randall Wray and others, who recognised that the abolition of a link between a currency and an item of specific value such as gold or silver, changes the options open to a sovereign currency issuing government. They are no longer financially constrained, they can issue as much currency as they wish and purchase anything that is for sale in that currency. Instead the constraint on a government arises from the need to avoid inflation. There is not an unlimited supply of the things a government might want to buy e.g. doctors, not everyone can be a doctor, and they take years to train. Similarly if a government wants to build more houses it can only do so if there are sufficient bricklayers. The capabilities of the population are thus the real constraint on what governments can buy.

The paper will outline four ways in which modern monetary theory challenges current economic thinking;
I.            governments are resource constrained, not financially constraine
II.            taxes do not fund government spending instead their role is to give the currency value and to allow the economy to be managed to achieve its social purpose
III.            government deficit s are endogenous and their level is not of concern per se
IV.            unemployment is a policy choice it is not essential  to controlling inflation

Universal Basic Income
The idea of a universal basic income has a long history dating back to Thomas Paine.  It provides every citizen with an unconditional sum of money in addition to any income received from any other source. Some such as Philippe Van Parijs argue that such an income, provided it is at a sufficient level, would allow citizens the freedom to do whatever they “might want to do.”

The Job Guarantee
The job guarantee would provide a job to anyone wishing to work for the minimum wage.  By operating at minimum wage rates the job guarantee does not put any inflationary pressure on wages and thus the wage rate risk to inflation is avoided. Any employer can obtain sufficient employees by paying just above the minimum wage or by offering better working conditions. A few countries such as India, Argentina and South Africa have experimented with such an approach.

A universal basic income would not necessarily enable citizens to play an active part in society in that it carries no obligation to contribute to society or to create or maintain public infrastructures. It relies on increases in purchasing power to solve the systemic crises associated with unemployment and underemployment and it gives the unemployed a role only as consumers.   Within the capability approach it does little to enhance the participants’ capabilities and modern monetary theory argues that since it is passive and not sufficiently productive, it is ultimately inflationary.

A job guarantee in contrast allows citizens to retain and enhance their capabilities during market downturns and stabilises prices by maintaining aggregate purchasing power and productive activity.  By eliminating forced unemployment, it eradicates systemic poverty, increases labours’ bargaining power, and provides a base level of socially accepted working conditions. Modern monetary theory argues that this buffer stock approach to employment is a preferable means of controlling inflation to that of the neoclassical approach which requires there to be a “non-accelerating inflation rate of unemployment “(NAIRU). 

Conclusion and Policy Proposals
The final section of the paper will review the experience of those countries which have introduced or propose introducing a job guarantee and those who have introduced or propose introducing some form of universal basic income. It will use these examples to suggest possible ways forward.

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