Monday, February 13, 2012

The Dissenting Economic Blogosphere

There was an interesting article in The Economist recently about how blogging is allowing certain unorthodox economic theories to gain a more widespread audience. This is largely due to the failure for “conventional” economics to explain what is going on in the economy or offer solutions to the crisis. The article took a look at two theories in particular – neo-chartalism and Austrian economics. It’s a good introduction to those ideas and some of the blogs that promote them. I thought about this article again as I was reading the part in David Graeber’s Debt: The First 5,000 Years where he talks about Chartalism.

Marginal Revolutionaries (The Economist). Here’s a portion on neo-Chartalism:

To help spread the neo-chartalist gospel, Mr Mosler ran as an independent “Tea-Party Democrat” in the 2010 Senate race in Connecticut, his home state. His belief that America is “grossly overtaxed” is one that common-or-garden tea-partiers would happily endorse; his belief that fear of national insolvency is a mirage and that there is plenty of scope for borrowing more would have them reaching for their pitchforks—or at least their balanced-budget amendments. His campaign did not meet with electoral success.

Candidate Mosler’s boast was that he was “right on the money”. A country with its own central bank can generate an unlimited supply of money and guarantee demand for it by requiring it as payment for taxes. That gives the state scope to spend without worrying about going bust, Mr Mosler argues. It can always pay its bills, because it prints the stuff with which bills are paid.

The policy conclusions neo-chartalism draws from this owe a lot to Abba Lerner, John Maynard Keynes’s “militant prophet”. Lerner believed governments should judge their fiscal policy by its economic results—its impact on jobs and inflation—and ignore any red ink it might spill. Governments should seek high employment and stable prices, much as the Fed does today. But instead of relying on monetary policy to meet these objectives, they should use fiscal policy instead. If private spending is too strong, pushing up prices and threatening inflation, the government should raise taxes or cut its own spending. If, on the other hand, private spending is too weak, jeopardising jobs, the government should cut taxes or increase its own spending.

So far, so Keynesian. But most Keynesians, anxious to appear fiscally responsible, say that budget deficits in bad times should be offset by surpluses in good times, keeping the level of debt seemly. Lerner admitted this might not be possible. Private spending might be chronically weak. If so, the government should run chronic deficits, adding continuously to the national debt. Lerner did not see that as much of a problem, though he recognised that many others were “easily frightened by fairy tales of terrible consequences”.

One reason for this extraordinary tolerance towards red ink is straightforward macroeconomics. If firms, households and the rest of the non-government sector collectively refuse to spend all that they earn, they must lend the remainder to someone else. They cannot collectively lend more to each other than they borrow. So they must lend to the government instead. Private underspending creates both a need for fiscal stimulus and a simultaneous demand for the government liabilities a stimulus entails. Eventually, Lerner argued, the public would accumulate so much of this government paper that it would feel wealthy enough to spend again, sparing the government the need for further stimulus.

What if the public refused to spend, but also spurned government bonds, for fear perhaps of default? That cannot happen, according to the neo-chartalists, because the government can print the money these securities promise to pay. Such a response summons hyperinflationary nightmares of the Weimar Republic, or Zimbabwe. But neo-chartalists would argue that those regimes resorted to the printing press as a way to grab more resources than the private sector was willing to yield. The government and the private sector combined wanted to buy more than the economy could produce.

In Lerner’s scheme, printing money serves a different role. It gives the private sector something to hold, should it not wish to buy things. Printing money is not a way to increase the deficit. It is simply an alternative way to finance a deficit of given size, one big enough to keep employment up, but—crucially—small enough to keep prices flat.

In the neo-chartalist view of the world, fiscal policy comes to resemble monetary policy. When the Treasury spends, it adds to the supply of money in circulation. When it taxes, it withdraws money. So for neo-chartalism to work as intended, budget-makers must both tighten policy once demand has been restored and inflation threatens and also be credible in their commitment always to do so. Otherwise self-fulfilling expectations of inflation will take root, as they did in the 1970s. That period of stagflation demonstrated the need to leave macroeconomic stabilisation to forward-looking technocrats—central bankers—thought responsive to economic news and unresponsive to political demands. If you can imagine fiscal policymakers in Congress allowing the economy to be run in such a way, then you too can be a neo-chartalist.
Graeber himself is sympathetic to the chartalist view of money. It ties in with the argument he puts forward that money, coins and paper, has always been issued to create artificial markets, rather than money created to make existing markets based upon barter to function more efficiently. Thus money has always been a tool issued to create and regulate a market economy, rather than something with intrinsic value. So it is impossible to be in debt to anyone, since money is based on exchange value, and what sense does it make to go into debt to someone in order to do this? I’ll explore this idea more in the future. Here’s a portion on Austrian economics:

The Austrian school’s thinking centres on the way “malinvestment” orchestrated by central banks distorts the business cycle. By keeping interest rates artificially low, central banks trick entrepreneurs into believing that society is more abstemious than it really is. The entrepreneurs then embark on ambitious, long-gestation investment projects, only to discover that the men and materials they require are otherwise engaged in the production of more immediate gratifications. Once this realisation dawns, the entrepreneurs abandon their follies, firing their workers. If wages are flexible and workers mobile, this bust need not be too bad. But misguided attempts by the government or the Fed to prevent unemployment will delay the necessary reshuffling of labour from industries too tied up in the future to those catering to the needs of the present.

Scholars such as Lawrence White of George Mason University see in this the grounds for replacing central banks with “free banking” in which private institutions take deposits and issue their own banknotes without government permission or protection. To make these liabilities credible, free banks would probably have to make them redeemable into something else, such as gold. As a consequence, banks will hesitate before expanding too quickly, lest their gold reserves come under threat. This, Mr White argues, would impose a natural check on overexpansions of credit.

To put it in simple terms, the Neo-chartalists believe that money has no intrinsic value, rather it is simply a tool used for governments to regulate the economy. If there is inflation or deflation, or unused resources, the government should step in via printing money and taxation to inject money into the economy or take it out. It’s the effects on real people we should be worried about.

The Austrians, by contrast, believe that any attempt by government to regulate the economy is bad. They believe that the market is a perfectly functioning mechanism for allocating goods and services, and the only thing that causes it to malfunction is government interference, whatever that means. I find this view odd, because markets themselves are creations of government. It’s a bit like saying the game Monopoly would work perfectly if it weren’t for all the rules. I call it market fundamentalism – the belief that the market is infallible and all-knowing. Two points about this – it seems that looking at the history of markets, governments never just take over, they always step in when markets fail – the Great Depression is an excellent case in point. The other is that, in my view, markets are not perfectly-balancing scientific instruments, but rather casinos built on hope, greed and fear. To trust your entire society to them is to tear your society apart. Matt Yglesias penned an article for Slate explaining Austrian economics which put forward some valid crticisms:

“Austrian economics,” in this sense, goes beyond standard-issue free market thinking in a number of ways. Most notably, it seeks to build a strong ethical case for strict libertarianism without admitting that this would lead to any practical problems whatsoever. Therefore, along with rejecting the legitimacy of any intervention to protect the poor or regulate anything (a position much more extreme than even the Hayek of Road to Serfdom), Austrians reject the idea that there is anything at all the government can do to stabilize macroeconomic fluctuations. This, to be clear, is different from the mainstream Republican view that the stimulus bill enacted by Congress in 2009 and signed into law by President Obama was wasteful or ineffective. Austrians also believe that cutting taxes to boost economic activity doesn’t work either. And they disagree with Milton Friedman that appropriate monetary stimulus by the Federal Reserve could have prevented the Great Depression. Indeed, they disagree with even the least controversial of all stabilization measures, the ordinary tweaking of short-term interest rates that all modern central banks use to try to prevent either inflation or deflation. In the view of the Austrians, practically every economic policy pursued by the federal government and Federal Reserve is a mistake that distorts markets. Rather than curing recessions, claim Austrians, stimulative policies cause them by producing unsustainable bubbles.

The way this works, according to the Austrians, is that artificially low interest rates spur “malinvestment” in unworkable enterprises that inevitably crash when the stimulus is withdrawn. This is an emotionally appealing idea, positing that the suffering of a bust is a kind of cosmic payback for the boom. But it doesn’t make much logical sense. For one thing, as George Mason University economist Bryan Caplan, who’s ideologically sympathetic to the Austrians, points out, it’s hard to understand why businesspeople would be so easily duped in this way. If Ron Paul and Ludwig von Mises know that cheap money can’t last forever, why don’t private investors? Why wouldn’t firms avoid making the supposedly dumb investments? Ironically, the Austrians have replicated an error from the crudest forms of postwar Keynesianism—the failure to consider the role of expectations feedback in macroeconomic policy.

More broadly, the Austrian story of investment booms and busts doesn’t actually explain recessions and unemployment. Spending patterns shift all the time without sparking a recession. People stop buying BlackBerrys and they buy iPhones instead. Or people stop buying boot-cut jeans and buy skinny jeans instead. Across sectors, maybe people go see fewer movies and with the money they save they eat out at nicer restaurants. A business that curtails its investment spending should have extra money to pay out as dividends. Or if they want to horde the cash, it sits in a bank for someone else to lend out.
He concludes:

The developed countries that have done best in the recession—places like Israel and Sweden—are the ones that have pursued the least “Austrian” courses of action, while the European Central Bank’s insistence on pursuing a somewhat Austrian-style course in Spain and Italy is creating a deepening crisis.
What Is “Austrian Economics”? And why is Ron Paul obsessed with it? (Slate)

Austrian economics seem to have come to the fore through the backing of libertarian billionaires, who talk a good game about government interference distorting markets, but really see government interference as curtailing their profits, like preventing monopolies, frauds, and enforcing worker protections. As government “interference” is eliminated, the wealthy are allowed pretty-much free reign. As The Economist article points out, some very deep pockets have funded the resurgence of Austrian Economics, and I don’t think it’s for reasons of principle. Institutes like the Ludwig Von Mises institute and George Mason University seem to have endless resources and “experts” to flog their propaganda to the masses, always couched in feel-good ideas about “freedom”. They also have paid off sympathetic politicians flogging their ideas as a way to career climb and polish the apple.

Austrians seem to see the nineteenth century as a lost golden age that we can return to. In their view, it wasn’t an undeveloped frontier, unexploited resources or the inventions of the industrial revolution that made the expanding economy, it was the lack of government interference and centralized money. They conveniently neglect the fact that most people sent their children off to work, died early, lived in abject poverty, worked sixteen hour days with no benefits, lived in polluted environments and substandard housing, labored in sweatshops, and were regularly beaten or shot for forming unions. They also neglect that under the gold standard and private money there were constant speculative bubbles, crashes, bank runs, panics, unemployment, and other ecoomic maladies. I suspect Ron Paul supporters have no grasp of history, otherwise they would not be so eager to return to 1853. I think that they all think they will be the ones wearing a monocle and top hat through their hard work and superior skills, rather than shoveling coal onto a train car for twelve hours. Maybe they should read some Dickens to get an idea of the end goal of Austrian economics.

By contrast, the chartalist view is a threat – it removes the mystical view of money, and puts it under democratic control as a tool to be used by the people to create socially desirable outcomes. We can print money ourselves without having to go into debt to bankers and pay back that debt with interest (to come from where?).

Suspiciously absent from any of these articles is another economic school – Marxism. Yet like those other heterodox schools, Marxism gives us another view of the economy to look at. And, just like the others, the word gets around conventional economic propaganda theory by blogging. Since The Economist didn’t see fit to mention this blog, I will: (What About Marx)

I think Marxism offers something the previous theories don’t. In my view, a central problem of the economy isn’t too much or too little interference, or too much debt or money printing. Indeed, there has never been more “money” floating around than there is today, and yet living standards continue to decline. I think the central problem is that ordinary workers have less and less of it, while paying more for everything. That is, workers keep very little of the value they produce, and capital is free to seek the cheapest labor anywhere in the world, with a small overclass reaping the profits. The dominance of financial capital over industrial capital, the tendency towards monopoly, the impoverishment of workers, the alienating nature of modern work, centralized control of the means of production into fewer and fewer hands, and the imperative to seek ever-higher profits and growth – all of these were predicted by Marxism. Yet no mention in The Economist or Slate? Hmmmm. And we haven’t even talked about steady-state economic theories as promoted by Herman Daily. Here is his blog: (CASSE Blog)

Gonzalo Lira once pointed out that economic schools are more like religious cults than ways to view the world. I think all of these theories (even the Austrians) bring something to the table in terms of understanding our world. If only we could bring ourselves to take Bruce Lee’s advice concerning martial arts – take what is useful, make it your own, reject the rest.

Check them all out. Verify against your experience. Think for yourself. Make up your own mind.

Have a nice day.

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