Krugman’s Gadget Keynesianism

Published by Anonymous (not verified) on Tue, 22/05/2018 - 10:04pm in



Paul Krugman has often been criticized by people like yours truly for getting things pretty wrong on the economics of John Maynard Keynes. When Krugman has responded to the critique, by himself rather gratuitously portrayed as about “What Keynes Really Meant,” the overall conclusion is — “Krugman Doesn’t Care.” Responding to an earlier post of mine questioning his IS-LM-Keynesianism, Krugman […]

Suppose we were to create new national economic goals

Published by Anonymous (not verified) on Tue, 22/05/2018 - 4:25pm in



I have my first post on the new Progressive Economy Forum blog this morning. In it I argue for revision of our national economic goals, saying:

Suppose, though, we were to set more appropriate economic goals that might replace the almost irrelevant 2% inflation target? What might those goals be? And how might they be implemented?

I suggest there should be five targets, all of which are very obviously related. They are:

  1. To create full employment; whilst delivering
  2. rising median earnings from that employment; against a backdrop of
  3. falling income and wealth inequality; to be achieved in an economy where there is
  4. ecological sustainability; with the goal that all should share in a
  5. flourishing economy in which the wellbeing of all people matters.

I would propose that it is hard to argue against these targets – together, they appear to be the very definition of a successful economy.

The rest of my argument is available here.

IEA: high oil prices 'taking a toll' on demand

Published by Anonymous (not verified) on Tue, 22/05/2018 - 7:52am in



The inventory surplus has vanished, and more outages could push oil prices up even higher.


Published by Anonymous (not verified) on Tue, 22/05/2018 - 3:47am in



The FT posted this in an email this afternoon:


The peak is because the pound is fallen. These are wholly connected variables. Because so many FTSE 100 companies earn their profits in anything but sterling if the pound falls the value of their profits (in sterling) rises and so does the share price.

Not one of their brightest moments.

Book Review: Doughnut Economics: Seven Ways to Think like a 21st-Century Economist by Kate Raworth

Published by Anonymous (not verified) on Mon, 21/05/2018 - 8:39pm in

In Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist, Kate Raworth offers a new model for economics, based around the ‘doughnut’, which values human well-being and advocates for a ‘regenerative and distributive economy’. While the book holds multidisciplinary promise and Raworth draws upon appealing and evocative metaphors and examples to convey economic concepts in accessible terms, Maria Zhivitskaya remains unconvinced of the doughnut’s transformative potential.

If you are interested in this book review, you may like to listen to a podcast of Kate Raworth’s lecture ‘Doughnut Economics: Seven Ways to Think Like a 21-Century Economist’, recorded at LSE on 23 November 2017. 

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist. Kate Raworth. Penguin. 2017.

Find this book: amazon-logo

One day economic historians might examine Doughnut Economics as an artifact of thinking that emerged as a result of the 2008 financial crisis, deriving its credibility from the fact that economics failed to predict it. Kate Raworth pursued an undergraduate degree in economics in order to set herself on a career path in an organisation such as Oxfam or Greenpeace, ‘campaigning to end poverty and environmental destruction’. However, she found that those issues she cared deeply about were overlooked by the academic study of economics and so, years later, she wrote Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist to provide a ‘compass’ to help ‘policymakers, activists, business leaders and citizens alike to steer a wise course through the twenty-first century’. An ambitious aim.

The author positions this book as contrarian and revolutionary, and it dissects seven fundamental principles of economics that she feels need to be updated to make economics a useful discipline. Raworth explains that:

rethinking economics is not about finding the correct [school of thought] (because it doesn’t exist), it’s about choosing or creating one that best serves our purpose – reflecting the context we face, the values we hold, and the aims we have.

In her attempt to bring economics more up-to-date, as the subtitle of the book suggests, Raworth depicts humanity’s goals as a doughnut.

The doughnut has social foundation and human well-being in the middle, and is itself ‘the safe and just space for humanity’ and for a ‘regenerative and distributive economy’, surrounded on the outer edge by the ecological ceiling of ‘critical planetary degradation’. The overall target should be to remain within the doughnut to ensure that we neither fall into conditions of social inequality and suffer shortfalls, such as in water and food, nor allow growth to overshoot into threatening environmental collapse. In her words, this model ‘draws on diverse schools of thought, such as complexity, ecological, feminist, institutional and behavioural economics’. This multidisciplinary promise was the most appealing element of the book for me.

Image Credit: (Ferry Sitompul CC BY 2.0)

The book is neatly organised around the ‘seven ways to think like a twenty-first century economist’, which are listed on page 26. These principles are underlined by a broad assumption that economics as we know it doesn’t care about either humans or the environment, and therefore the first thing we should do is ‘change the goal’ from GDP growth to the doughnut. The second principle is ‘seeing the big picture’, where Raworth explains that the market is not self-contained, and that the economy is more embedded in society than some economists assume.

Raworth acknowledges the vast influence economics as a discipline has had on the way we think: in particular, the notion of the ‘rational economics man’, which she suggests we need to replace with ‘social adaptable humans’. To demonstrate how unreasonable the ‘rational economic man’ assumption is, she quotes a Wikipedia page that lists 160 cognitive biases. Her argument goes that due to the sheer number of these, economics as a discipline is unhelpful. That seemed like a weak argument to me, not least because Daniel Kahneman, who discovered many of these, won the Nobel Prize in Economics. Using his discovery as a way to demonstrate the weakness of the discipline seems unfair.

The fourth principle is that we need to ‘get savvy with systems’, and appreciate that the real economy doesn’t comply with the supply-demand equilibrium but is instead embedded in dynamic complexity. The fifth and sixth are ‘design to distribute’ and ‘create to regenerate’, as Raworth claims that the assumption that growth reduces inequality and facilitates environmental improvements is false. Finally, the seventh recommendation is that we should be ‘agnostic about growth’:

today we have economies that need to grow, whether or not they make us thrive: what we need are economies that make us thrive, whether or not they grow.

Not surprisingly, three of the seven principles claim that growth doesn’t lead to redistribution of wealth or environmental regeneration and is overall not a helpful goal, which is why Raworth suggests we should rather be redistributive and regenerative by design.

Raworth’s attentive choice of words throughout the book is very attractive: for example, she quotes George Lakoff who summarises the US Conservatives’ use of ‘tax relief’ compared to the US left’s ‘tax justice’, concluding that this subtle reframing ‘helped to channel public outrage and mobilize widespread demand for change’. Her book, too, demands change. Raworth goes all the way back to Ancient Greece to draw on Aristotle’s distinction between the terms ‘economics’ – the ‘practice of household management’ – and ‘chrematistics’ – ‘the art of acquiring wealth’ – to criticise modern economics as being all about the latter. The book is also peppered with charming anecdotes: for example, did you know that the popular board game Monopoly is derived from the original ‘The Landlord’s Game’?

Raworth suggests that ‘economists need a metaphorical career change: from engineer to a gardener’, which is a quote ironically inspired by Friedrich Hayek, who originally meant it in a laissez-faire kind of way. Raworth beautifully explains that gardening actually entails the hands-on creation of conditions necessary for success. However, while her metaphors are flowery and appealing, they do not offer any real policy advice about how to tackle the complicated issues she highlights. Instead, the book is full of statements such as ‘building diversity and redundancy into economic structures enhances the economy’s resilience, making it far more effective in adapting to future shocks and pressures’; and ‘it is far smarter to create economies that are regenerative by design, restoring and renewing the local-to-global cycles of life on which human well-being depends’. Practical policy questions, such as tackling the complexities of integrated environmental and economic accounting, are outside the scope of her idealistic vision.

Overall, Doughnut Economics is excellent at describing economic concepts in accessible terms, and could be read as an add-on to an introductory economics textbook. Raworth’s in-depth summary of climate change is very well argued and would be useful for challenging climate change denial: in this sense, the book is more about sustainable development than economics.

Raworth criticises economists and politicians for debating ‘economic efficiency, productivity, and growth […] while hesitating to speak of justice, fairness, and rights’, without providing tangible policy recommendations. She calls for bringing ‘humanity back at the heart of economic thought’, and criticises the likes of Harvard and the London School of Economics for promoting ‘research in what are known as the “top” journals, but those journals simply maintain the status quo’. Her plea is to change that and teach history and philosophy in conjunction with economics, which is a useful suggestion that more universities could take on board, perhaps borrowing from LSE’s curriculum for Economic History studies and Oxford University’s Politics, Philosophy and Economics course that has been taught there for almost a century. So, despite the book’s gloomy view of the current state of the world, perhaps not all hope is lost.

Maria Zhivitskaya completed a PhD in Risk Management from the LSE Accounting Department in 2015, worked for Goldman Sachs afterwards, and currently works for Prudential plc. Read more by Maria Zhivitskaya.

Note: This review gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics. 

The BoTs are coming – and we should all take note

Published by Anonymous (not verified) on Mon, 21/05/2018 - 5:21pm in



John  Dizard wrote in the FT last week about a new and so far little noticed monetary phenomenon, the Italian mini-BoT. As he noted, the  new Italian coalition partners have agreed to fund their tax cuts and spending plans by issuing these new financial instruments.  As he noted:

These would be small (euro) denomination, non-interest-bearing Treasury bills in the form of bearer securities that would be secured by tax revenues. “BoT” is the abbreviation for an Italian treasury bill, and the small denomination makes them mini.

He added:

Conventional BoTs are electronic book-entry securities but the mini-BoTs would be printed, reportedly using the state lottery’s ticket presses, and the designs have been selected.

The essential question is, then, whether these are an alternative form of currency, or not. As Dizard noted,  no one would be obliged to accept them in payment, and as a matter of fact they would almost certainly trade at a discount to their par value, precisely because they do not carry interest. But, the whole point of these Treasury bills is that they are, in effect, a discounted upfront settlement of tax liabilities owing,  and for precisely that reason the Italian government will accept them in payment of tax when it becomes due.  They do, then, share all the characteristics of money even though the new coalition government says that it is not creating a parallel currency to the euro.

They instead say that the BoTs simply represent upfront payments of tax. As such they claim they do not represent an increase in the Italian national debt,  although since I would argue that any government-issued promissory note that is only cancelled upon payment of tax is, by definition, a government debt, I think that stretches credibility the the limit.  Candidly, they are also, and for precisely the same reason,  money in all but name.

But,  worryingly, many of the constraints on the use of cash in the Italian economy will not apply to these notes.  In particular,  whilst it is illegal to make settlement of any debt of more than €3,000 in cash in Italy, this rule will not apply to these bonds.  And precisely because they are printed they might be bonds, but they will for all practical purposes behave like printed money, and that means that they are bearer bonds in all but name.  Everyone involved in tackling illicit financial flows knows the risk that these bonds create.  The shadow economy should have a field day with these.

But, perhaps their most important feature is macroeconomic.  It is well known that the Italian banking system has been quite unable to deal with the demand for growth in the Italian economy precisely because it still has so many 'zombie'  non-performing loans that restrict meaningful new lending.  Under the rules of the Eurozone there is nothing Italy can do about this.  But with its own 'shadow'  currency Italy may be in a different position, even if a very dangerous one with regard to the creation of illicit activity.  The prospect of new investment may be created.  That could change Italian financial fortunes.  If it does that is dangerous to those who oppose populism.  But it is also deeply dangerous to those who believe in the importance of European financial stability which is, for better or worse, and for richer or poorer, based on the euro present. If BoTs become commonplace that primacy will cease to exist and Europe will have a multicurrency system that would be fundamentally dangerous to tax revenues, financial stability and ultimately to political coherence.

I have always been opposed to the euro:  I thought it a disaster in the making before it was introduced, and nothing about it has ever made me change my mind.  However, dual currencies are even more dangerous. If the ECB  has any sense at all (and I leave that for others to debate)  then it should not just be slapping down on these BoTs,  but it should instead be actively considering how it can replicate the freedom that they provide to governments who wish to undertake fiscal policy at a time when that this is essential for the growth of their economies when monetary policy has ceased to have any relevance at all. This is  the real economic crisis in Europe: if BoTs bring it to a head  that may be no bad thing. But I worry for Italian stability in the meantime.

Only a new currency could set Scotland free

Published by Anonymous (not verified) on Mon, 21/05/2018 - 4:33pm in

The Scottish Growth Commission of the SNP is, I am told, reporting this coming Friday.

One of the key issues for the Commission will be the central one of which currency Scotland should use if it were to be independent. I hear rumour that it will not be the euro. Equally, I hear rumour that it will be the pound, before transitioning to a Scottish currency. But, I stress, rumours can be wrong.

My own position on this is clear, and is reflected in my White Paper on Scottish Taxation after independence written for Common Weal last year. In the summary of that paper I said:

If Scotland is to have a sound tax system then it must be based on economic reality. It is widely believed that tax is necessary to pay for government provided services. It has, however, recently been realised that this is not the case. This is because all government services can in principle be paid for either by a central bank creating new money or by quantitative easing (‘QE’) operations (which amount to much the same thing).

This understanding is critical to the design of a Scottish tax system. What it demands is that Scotland must have its own currency from the day it becomes independent. This is because of another critical consequence of the understanding of tax and money, which is that a country with its own central bank and currency cannot go bankrupt.

What should also be clear is that a Scottish currency is also essential for the creation of an effective tax policy for an independent Scotland. This is because if a country has its own currency then there is technically no limit to what a government can achieve. There are, however, two practical constraints. The first is that the government does not try to create more economic activity than the economy can deliver. And the second is that they must tax sufficiently to cancel enough of the money that the government has created through its spending to ensure that its inflation targets are met.

The implications of this understanding are profound. First, a policy based on this understanding does not require that the Scottish Government balance its budgets. Secondly, this understanding means that the Scottish Government does not need to think itself beholden to bond markets or their interest rate whims. Third, in this scenario tax entirely ceases to be a mechanism that raises money to pay for government spending. Tax is, instead, a means of reclaiming the money that the government has spent into the economy as a result of that spending.

I am pleased to say that leading independence campaigner Robin McAlpine adopts a similar position in his recent book, ‘How to make a country’.

Scotland could be half-hearted and go for a gradual transition, but if it does three things follow on.

First, it will not be economically independent.

Second, it will have to balance its books, which will be desperate for a new nation needing to invest for its future.

Third, the new social settlement that a Scottish tax system should deliver will not be capable of delivery.

And perhaps as bad, who knows how long the transition will last?

The Commission has to go for an independent currency. Anything less sells the people of  Scotland short and would reveal a lack of understanding of tax and money that would be deeply worrying in a party that will seek power as the government of a new country.

Courage is required. It will pay handsome rewards. Scotland would be free.

People having bad luck when trying to think

Published by Anonymous (not verified) on Mon, 21/05/2018 - 2:47am in



A couple of years ago Andrew Lilico wrote an article in The Telegraph arguing that good economists almost always are — mirabile dictu — right: Lord Turner wrote two reports creating important government policies based on his claim that people are often irrational — his pension review of 2005 and his report on the financial crisis in 2009. Indeed, in his famous Turner […]

We need a dose of that

Published by Anonymous (not verified) on Sun, 20/05/2018 - 7:20pm in



I admit I did the weekly shop during a wedding yesterday - and very quiet it was as a result. For this reason alone they could repeat the gig weekly, please. But then I heard I'd missed a bit of a sermon. So I took a look. And I liked this:

If you don't believe me, just stop and imagine. Think and imagine a world where love is the way.

Imagine our homes and families where love is the way. Imagine neighbourhoods and communities where love is the way.

Imagine governments and nations where love is the way. Imagine business and commerce where this love is the way.

Imagine this tired old world where love is the way. When love is the way - unselfish, sacrificial, redemptive.

When love is the way, then no child will go to bed hungry in this world ever again.

When love is the way, we will let justice roll down like a mighty stream and righteousness like an ever-flowing brook.

When love is the way, poverty will become history. When love is the way, the earth will be a sanctuary.

When love is the way, we will lay down our swords and shields, down by the riverside, to study war no more.

When love is the way, there's plenty good room - plenty good room - for all of God's children.

That's not radical. It's simply saying what Jesus seemed to be preaching. It's what Christianity should be. But isn't. As G K Chesterton said 'The Christian ideal has not been tried and found wanting. It has been found difficult; and left untried'.

But I liked the fact that this was said at a royal wedding. And it reminded me of another great line sung by another great black man, Louis Armstrong, who sang:

The colors of the rainbow so pretty in the sky
Are also on the faces of people going by
I see friends shaking hands saying how do you do
They're really saying I love you

I often think that last sentiment's true. We need a dose of that.

Police Clear Vagrants Off Windsor’s Streets for the Tourists at the Royal Wedding Today

Published by Anonymous (not verified) on Sat, 19/05/2018 - 7:02pm in

Here’s another injustice, this time nothing to do with Israel. Also this week Mike put up a post about how the Tory council at Windsor had got around the ban on their plans to clear the beggars off the streets of their borough. The plans had been shelved due to massive public outrage. But Tories are Tories, and so they’ve come up with a plan to get round it: they had the cops come round to seize their possessions, meaning their sleeping bags, and put them in storage, so they couldn’t sleep on the streets. This was supposed to be ‘helping’ them.

I can remember a political commentator stating that we now live in an age of ‘inverted totalitarianism’. In the past, the dictator or the authorities in a totalitarian state told people what to do, and the penalty for not complying was brutally clear. Now the authorities also dictate to you, but do it with mealy-mouthed words about helping you.

You can see the same process at work in the sanctions system and work capability tests. Oh no, we’re not leaving people to starve to death, or commit suicide out of despair. We’re incentivising those that can to find work.
Look, so far we’ve helped all these people find jobs. This was followed by statistics, that actually showed you had a better chance of finding work if you didn’t go on their wretched workfare programme.

And the same lying verbiage used to give a veneer of humanity to the Tories’ murderous welfare reforms has been adopted to clear the beggars off the streets. And this is especially hypocritical today, because many of the well-wishers come down to cheer on the royal couple at the wedding today were camping out on the streets. Which is illegal, but no-one was moving them on.

Here’s Chunky Mark making his comments about this, and the Tories wider policy about supporting high house prices for the benefit of rich vulture capitalists in tax exile in Bahamas. He argues that it’s all about pushing down at the people at the bottom of society. They need homelessness and deaths, like the 78 homeless people, who died last year, to keep house prices high in accordance with the law of supply and demand.