Opportunity Costs, Marx, and Production Economics

Economies of scale

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Addressing Keen's Specific Critiques

In our previous post, we introduced MMT's multi-level framework for analysing international trade, distinguishing between real resource movements, financial flows, capacity utilisation, employment impacts, and sectoral balance implications. We established that MMT's statement 'exports are costs, imports are benefits' refers specifically to the real resource level of analysis. Now, let's examine how this framework addresses specific theoretical challenges raised by Steve Keen.

1. On Opportunity Cost and Full Employment

Keen correctly notes that opportunity costs only apply at full employment, but misunderstands how Modern Monetary Theory (MMT) incorporates this insight. MMT fully recognises that economies typically operate below capacity. In fact, this understanding is central to our policy framework.

The MMT position on trade is built on a two-tier analysis:

• First, we analyse real resource flows (exports transfer real resources abroad)

• Second, we analyse employment and capacity utilisation effects within specific institutional contexts

This sequencing is crucial. We begin with the accounting reality of resource transfers at the macroeconomic resource level, then incorporate employment considerations at the labour market level. This does not contradict our emphasis on achieving full employment through domestic policy - in fact, it complements it by clarifying that full employment should not depend on export-led strategies that can foster harmful global imbalances.

2. On Seller's Utility and Marx's Insights

Keen's invocation of Marx reinforces rather than undermines the MMT position. Marx recognised that commodities produced for exchange represent a distinction between use-value and exchange-value. MMT operates on precisely this distinction.

When we say, "exports are a cost," we are referring to the macroeconomic resource level - real resources produced domestically are no longer available for domestic use. This is entirely compatible with Marx's analysis, which states that firms produce for exchange value rather than use value. The "cost" applies at the macroeconomic level of real resource availability, not at the microeconomic level of producer utility.

Shifting from the macroeconomic resource perspective to the firm-level perspective, we can see why this distinction matters. While Mercedes-Benz indeed produces cars for sale (exchange value) rather than use, from the national perspective, these real resources are no longer available domestically once exported.

3. On Economies of Scale and Declining Marginal Costs

Keen's discussion of excess capacity and declining marginal costs is accurate but doesn't invalidate the MMT position. In fact, MMT scholars like Wray, Mitchell, and Mosler have extensively discussed capacity utilisation and industrial organisation in their work.

A more sophisticated MMT analysis acknowledges:

1. At the firm level, exports can indeed increase capacity utilisation

2. At the macroeconomic resource level, exports still represent a real resource outflow

3. At the employment level, the benefits of exports can be achieved through domestic demand policies without sacrificing real resources

These propositions aren't contradictory - they operate at different levels of analysis. Moving between the firm-level and the macroeconomic resource-level reveals complementary insights rather than contradictions. MMT prioritises domestic full employment policies precisely because we recognise that exporting to achieve full employment means sacrificing real resources that could instead benefit the domestic population.

Having addressed these theoretical critiques, our next post will examine how MMT's multi-level framework reconciles apparently contradictory perspectives by showing how they actually describe different aspects of the same trade reality.

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