john maynard keynes

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Book Review: The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes by Zachary D. Carter

Published by Anonymous (not verified) on Thu, 17/09/2020 - 9:18pm in

In The Price of Peace: Money, Democracy, and the Life of John Maynard KeynesZachary D. Carter offers a new intellectual biography tracing the life and legacy of the influential economist, which argues that in the years since Keynes’s death, Keynesian economics has been stripped of Keynesian thought. Weaving together a dazzling array of Keynes’s private letters, journalistic works and academic research, this accessible book may help to hasten Keynes’s revival, writes Stephen Paduano

The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes. Zachary D. Carter. Penguin Random House. 2020.

In the long run, economists will be like dentists, according to John Maynard Keynes. This was one of the loftier aspirations of the great economist’s 1930 essay, ‘Economic Possibilities for our Grandchildren’. Surveying the recent wonders of technological innovation and the ‘power of compound interest’, Keynes proposed that in 100 years the living standard would have improved eight-fold, the working week would have collapsed to just fifteen hours and the ‘love of money’ would be revealed as a ‘disgusting morbidity […] semicriminal, semipathological’. Under these conditions, economics would be akin to dentistry, he claimed, an apolitical field whose ‘humble, competent’ practitioners would do little more than set the odd problem straight. Needless to say, in order to arrive at this ‘destination of economic bliss’, one must listen to Keynes.

There is little denial that the world has lent Keynes its ear, and there is little debate that some of his economic policies have been broadly accepted. Generations of economists have organised themselves around and in response to his work. Central bankers and policymakers continue to turn to Keynes when recession looms. With US President Richard Nixon having declared that ‘We are all Keynesians now’, and US Vice President Dick Cheney allegedly agreeing that ‘Deficits don’t matter’, it would seem that even the most recalcitrant conservatives — Keynes’s lifelong opponents — have been converted.

But the bliss that Keynes envisioned has not yet arrived. Why?

In The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes, Zachary D. Carter argues that much to the detriment of the economics discipline and the world, Keynesian economics has been stripped of Keynesian thought.

The story of how this has happened is a riveting and maddening tale about textbook selection, tenure appointments, financial browbeating, presidential politics, elite conspiracies and more. All in all, it would take not only the death of Keynes but also the actions of McCarthyists in Washington, investment bankers in New York, craven university administrators across the United States and a proto-Koch Brothers furniture magnate named Harold Luhnow in Missouri to silence Keynes’s students and suppress his philosophy.

But to understand Keynes’s thoughts and vision, the philosophical essence that has been removed from his more formulaic work on macroeconomics, The Price of Peace begins with an enchanting biography of the man himself. It traces Keynes’s intellectual evolution, from his time as a proud imperialist studying at Eton and Cambridge to a peacenik, leftist visionary who debated with the likes of Bertrand Russell (a mentor of his at Cambridge) and Ludwig Wittgenstein (with whom he kept a correspondence about the philosophy of science even as the Austrian-born logician fought on the frontlines of World War One). It follows Keynes’s avant-garde adventures with the ‘Bloomsbury Set’ and his desire to be accepted by this irreverent friendship group of authors and artists, Virginia Woolf among them, who were often dismissive of Keynes’s lifework. To round out the portrait of a man often at odds with his times, the book also shines light on Keynes’s love affairs, his well-catalogued trysts with men, followed by a runaway romance with Lydia Lopokova, the celebrated Russian ballerina, whom he married in 1925 and with whom he was able to make sense of the emerging Soviet Union.

Weaving together a dazzling array of Keynes’s and his acquaintances’ private letters, journalistic works and academic research, Carter demonstrates how Keynes shaped the world that was born in the volatile beginning of the twentieth century, with his outsized contributions to the field of economics, US and UK domestic politics and the international monetary system. Endearingly, Carter goes on to show how the dramatic events of those years reshaped Keynes, making him and his ideas more ambitious, benevolent and radical at every turn.

Although Keynes wanted his discipline to become like dentistry, at its core his economics was a sweeping, far-reaching philosophy. ‘Not so much a school of economic thought as a spirit of radical optimism,’ Carter writes. Keynes hoped to make the world not only fairer and more prosperous, the standard domains of economists on the left, but also more peaceful and more beautiful. To do so, he argued that nations could and should spend their way to such a blissful future. ‘Were the Seven Wonders of the world built by Thrift?’ Keynes asked in A Treatise on Money. ‘I deem it doubtful.’

But then, on Easter Sunday 1946, Keynes died, and his vision, Carter recounts, died too.

The assault on Keynesianism began a year after his death, with the not-famous-enough saga of Elements of Economics. This was the first and most important textbook of Keynesian economics, published by Lorie Tarshis in 1947, which immediately became verboten during the Red Scare, the period of McCarthyist anxieties about Communist infiltration and subversion in the US that ran from the late 1940s through to the late 1950s. Soon Elements of Economics was renounced and discarded by universities throughout the US and replaced by a new (and approved) textbook: Economics by Paul Samuelson. Samuelson’s alternative offered a ‘neoclassical’ compromise between Keynes and his critics, swapping out Keynes’s emphasis on the irrational ‘animal spirits’ of the market with an ultra-rational, profit-maximising model. It would serve as an economics beginner’s manual for decades to come.

With Wall Street bankers and McCarthyist fearmongers chasing Keynesians out of politics and academia, a new generation of market fundamentalists was born. Behind this transnational assault on left economics and the aggressive propagation of more conservative ideas was an unlikely figure: the heir to a furniture fortune in the Midwest, Harold Luhnow, who helped to found the free-marketeer Mont Pelerin Society and financially supported the careers of Friedrich Hayek, Milton Friedman and Ludwig von Mises, among others.

But some good ideas are too good to be discarded. Low interest rates and fiscal stimulus in times of recession, as opposed to Hayek’s competing prescription of starving the market to allow the business cycle (and suffering) to go on unimpeded, happened to be irresistible after the Great Depression of 1929-39. And when such stimulus could take the policy form of ramped-up military expenditures as it did during World War Two, or upper-class tax cuts as it did under US President John F. Kennedy, even warmongers and plutocrats could cosy up to Keynes. Hence Nixon could say, only mildly sardonically, ‘We are all Keynesians now’, having put (unlawful) pressure on Federal Reserve Chairman Arthur Burns to slash the discount rate from 6% to 4.5% between 1970 and 1972 in an attempt to juice the economy and fix the 1972 Presidential election.

Likewise, US President Ronald Reagan would run record deficits, hitting $221 billion in 1986 (482), through a combination of tax cuts and increased military expenditures, not only in service to his political vision but also to revive the economy after the recession of the early 1980s. When the purportedly small-government, balanced-budget Republicans returned to office in 2001, they too revealed themselves to be adherents to a Frankensteinian philosophy of ‘Reactionary Keynesianism’, embracing deficit spending as they cut the top marginal tax rate from 39.6% to 35% and embarked on foreign wars.

‘Keynes’ pleasant daydream was turned into a nightmare of terror,’ warned Joan Robinson, a trusted academic colleague of Keynes at Cambridge and, to my mind, the undeclared heroine of the book. With the Republicans’ spending priorities and war habits, the ‘nightmare of terror’ was indeed becoming clear. But throughout The Price of Peace, what is portrayed as a greater disappointment is how Democrats perverted and abandoned Keynes all the same.

Following Franklin D. Roosevelt’s presidency, when Keynes’s influence made its debut and reached its high-water mark, and after US President Lyndon B. Johnson’s ‘Great Society’, when a valiant if diluted strain of Keynesianism re-entered the scene, Democrats have gradually become not only less ambitious, but also less sure of their intellectual legitimacy, Carter argues. This is not to say there is a shortage of collegiate elitism in the Democratic Party, but rather that the Party’s collegiate elites have abandoned what knowledge Keynes gave them and embraced a garden variety of conservative economic values: belt tightening, budget balancing, private-sector efficiency and, above all, artificial limits on the possibilities of economic policy.

Through to the present, Carter laments, the Democratic Party has had a habit of resisting the insights of philosophically ambitious and academically rigorous economists. Instead, party leaders often turn to those whom Paul Krugman, the Keynesian, Nobel-Prize-winning economist, calls VSPs — ‘Very Serious People’. The Democratic Party’s VSPs are the tough but fair business elites and pundits who just give the facts, which often come in the form of opinions about runaway inflation in the event of government spending, capital flight in the event of new taxes and other legislative excuses for why this or that just won’t work. When former Delaware Senator Ted Kaufman, a confidante of Joe Biden, recently batted down the idea of a sustained COVID-19 stimulus programme by saying, ‘When we get in, the pantry is going to be bare’, he was Very Serious indeed.

At times, Carter plunges the reader into a deep intellectual depression and gives the sense that Keynes was and will be another one of history’s Cassandras—always right but never believed. Why didn’t US Treasury official Harry Dexter White adopt Keynes’s supranational currency, ‘bancor’, at the 1944 Bretton Woods conference? Why didn’t Winston Churchill listen to Keynes before his ruinous decision to reinstate the gold standard in 1925? (For what it’s worth, Churchill would later quip, ‘Everybody said that I was the worst Chancellor of the Exchequer that ever was. And now I’m inclined to agree with them.’) And why oh why didn’t UK Prime Minister David Lloyd George just trust Keynes on dropping German war reparations in 1919, the impossible financial obligations that stoked the flames of German nationalism before World War Two? In the long run Keynes was dead; the arch-conservatives and capitalists killed him off, Carter writes. But in the short run his ideas, no matter how true and good they were, weren’t particularly alive either. What could bring Keynes back today?

Taking a page from Keynes’s ‘radical optimism’, Carter remains hopeful that Keynes, his economic insights and his philosophical ambitions may yet return to the left in the US. ‘In the long run’, Carter concludes, ‘almost anything is possible’. He is not wrong. In recent years, the growing and unflinching US left has shunned the Democratic Party’s VSPs and brought in post-Keynesian thinkers, living and dead, to make sense of the country’s (and the Party’s) problems. But it is early days for this movement, and it would be premature to rejoice in Keynes’s revival. For him to come back, he must be brought back. Fortunately, The Price of Peace, accessible for general readers, academics and VSPs alike, may help hasten Keynes’s return.

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.

Image Credit: Cropped photograph of Assistant Secretary, US Treasury, Harry Dexter White (left) and John Maynard Keynes (right), honorary advisor to the UK Treasury at the inaugural meeting of the International Monetary Fund’s Board of Governors in Savannah, Georgia, US, 8 March 1946 (IMF Public Domain).


Wynne Godley On Control Of International Trade

Published by Anonymous (not verified) on Tue, 18/08/2020 - 3:41am in

From Alan Shipman’s biography, Wynne Godley, A Biography, Chapter 9: Balance Of Payments, Deindustrialisation And Protection, page 151:

Of all Godley’s policy prescriptions, direct import controls were the one most roundly rejected by other economists, and least likely to be adopted by politicians with any chance of gaining power. The accusation of advocating a policy that was economically illogical, politically infeasible and inadmissible in international law hurt deeply, but never crushed his belief that import quotas should be seriously considered as an additional macroeconomic instrument. The depth of the wound emerged in an unusually personal statement to a 1978 conference on ‘Slow Growth in Britain’, convened by Oxford University’s Wilfred Beckerman in Bath. ‘I am disconcerted and distressed to find myself, together with the group of people with whom I work in Cambridge, in such an isolated position. For we seem to be the only group of professional economists who entertain the possibility that control of international trade may be the only way of recovering and maintaining the prosperity of this country; that free trade may be an enemy for the relatively weak’ (Godley 1979: 226).


Godley, W. (1979). Britain’s chronic recession—Can anything be done? In W. Beckerman (Ed.), Slow Growth in Britain. Oxford: Clarendon Press.

Keynes said that:

A study of the history of opinion is a necessary preliminary to the emancipation of the mind.

Although in the poor countries, ones colonised and which suffered because of imposition of laissez-faire, there have been a lot of opposition to free trade—and those voices aren’t heard through silencing internationally—in the advanced countries, it has been almost non-existent except from Cambridge Keynesians and maybe a few others. In recent times, we see some opposition, but not remotely like this even 40 years ago. It is important to know the history of thought to understand how hegemonic the ruling ideology has been.

For Wynne Godley, dissenting against free trade was one of the most important reasons for his dissent against the profession. In his short autobiography written in 2001 for A Biographical Dictionary Of Dissenting Economists, Godley said:

There are two aspects (in particular) of the work of the CEPG [Cambridge Economic Policy Group] which put its members into a category which may he termed ‘dissenting’. The first – a matter mainly of concern to the modelling fraternity and academic econometricians – was the unconventional view we took about how to construct and use an econometric model.

The second, and more egregious, respect in which we became a ‘dissident’ group was that, as a result of trying to think through the possible ways in which Britain’s net export demand might be improved, we entertained the possibility that international trade should be, in some sense, ‘managed’. There might, we argued, be no way in which the adverse trends could be reversed other than some form of control of imports. Our argument (see for instance Cripps, 1978; Cripps and Godley, 1978) was never one in favour of protectionism as normally understood – that is, the selective and unilateral protection of relatively failing industries under conditions of general stagnation. On the contrary, we were most careful to lay down conditions under which the management of trade would benefit not only our own country (without making its industry less efficient) but would also increase the level of trade and output in the rest of the world. The two basic principles were, first, that trade management should reduce import propensities without ever reducing imports themselves (in total) below what they otherwise would have been; and, second, that ‘protection’ should be as minimally selective as possible (for example, through the use of market mechanisms such as auction quotas) so that industrial inefficiency would not be sponsored.

I was surprised by the hostility with which our ideas about trade were received. It seemed to me at the time, and still seems to me, that the arguments actually used against us (at their most coherent by Maurice Scott et al., 1980) did not, in practice, rest on a well-articulated theoretical position but on very special assumptions about behavioural relationships and international political responses. (I have, to the best of my ability, answered these particular points in Christodoulakis and Godley, 1987.)

The ‘dissident’ argument in favour of managed trade is well summarized in Kaldor (1980), where he points out that the modern theory of international trade is based on the assumption that all production takes place according to the conditions described by the neoclassical production function, with constant returns to scale. Kaldor postulated instead, and he was surely right to do so, that the principle of circular and cumulative causation leads (through dynamically increasing returns) to a process, not of convergence, but of polarization between successful and unsuccessful economies in which success in competitive performance feeds on itself and losers become immiserated by trade.

Godley’s Major Writings

(1978), ‘Control of Imports as a Means to Full Employment: The UK’s Case’ (with T.F.
Cripps), Cambridge Journal of Economics, 2, September.

(1987), ‘A Dynamic Model for the Analysis of Trade Policy Options’ (with N. Christodoulakis), Journal of Policy Modelling, 9.

Other References

Cripps, T.F. (1978), ‘Causes of Growth and Recession in World Trade’, Cambridge Economic Policy Review, No. 4.

Kaldor, N. (1980), ‘The Foundations of Free Trade Theory and Recent Experiences’, in E. Malinvaud and Fitoussi, J.P. (eds), Unemployment in Western Countries, London: Macmillan.

Scott, M., Corden, W.M. and Little, I.M.D. (1980), The Case Against Import Controls (Thames Essay No. 24), London: Trade Policy Research Centre.

Joan Robinson On How Free Trade Is Destructive

Published by Anonymous (not verified) on Sun, 02/08/2020 - 1:38am in

Joan Robinson in her 1977 paper What Has Become Of Employment Policy on how free trade has been destructive and leads to divergence of fortunes of countries. Also in Collected Economic Papers, Vol V. Relevant text (with footnotes and quoted references in the same text) reproduced below, with my highlights:


Class war was not the only element of inherent vice in the free-market system to disturb the age of growth. There were also the problems generated by the unevenness of development amongst various capitalist nations and the economic and political relationships between industrial countries and primary producers, particularly those in the third world.

The pre-Keynesian theory of international trade required the balance of imports and exports for each country to be maintained by movements in relative price levels. After experiencing the attempt to return to the gold standard in 1925 (see Keynes, 1972), Keynes adopted the view that depreciating the exchange rate was much to be preferred to attempting to depress the price level. At the end of his life, feeling obliged to defend the Bretton Woods agreement against his better judgement (Kahn, 1976), he lapsed into arguing that, in the long run, market forces would tend to establish equilibrium in international trade (Keynes, 1946). He had forgotten his old crack, that in the long run we are all dead.

As it turned out, market forces generated disequilibrium. Differences in competitive power, whatever their origin, set up a spiral of divergence. A country such as West Germany, with growing exports, could maintain a high rate of investment and therefore of growing productivity, which enhanced its competitive power, and allowed real wages to rise so that workers were less demanding. In the United Kingdom, any increase in employment caused an increase in the deficit in the balance of payments so that every hopeful go had to be brought to an end with a despairing stop. Thus strong competitors grow stronger and the weak, weaker.

Because of the size and strength of the United States and its overseas economy, trade plays a small part in national income, but not a small part in the world market. The USA can move from deficit to surplus without much disturbance at home, but with a great deal of disturbance to the other trading nations. Moreover, it was able to take advantage of the dollar being the world currency to run an ever greater outflow on capital account with an ever growing deficit on income account, until President Nixon, with the dollar devaluation of 1971, suddenly tried to reverse the position with a stroke of the pen. All this laid great strains on the international monetary system.

Keynes worked out the structure of the General Theory mainly in terms of a closed economy. When it is extended to take in the operation of international economic relations, a missing link appears in the argument. The rate of interest was to be used to regulate home investment, and Keynes believed that a secular fall in interest rates was both necessary for this purpose and desirable in itself. Exchange rates were to offset differences in relative labour costs. Then nothing would be left to regulate short-term capital movements. Traditionally this was the function of relative interest rates. Britain, and other countries with chronically weak payments balances, could not indulge in cheap money however much home conditions required it, and had to follow the interest rates of other countries up whenever they happened to rise. This was one more turn in the spiral of weakness weakening itself.

Over and above the strains set up by the uneasy relationships amongst the industrial nations themselves, there were the strains involved in the relations of the industrial countries as a whole and the third world. The formation of prices in the free-market system is in two parts—cost-plus in manufacturing industry and supply and demand for primary products.† A rise in the level of production and consumption in industrial countries normally increases demand for all kinds of primary products. When prices of materials rise, while money wage rates are constant, real wages fall and so generate a demand for rising money wages, which adds to the original rise in costs. Thus favourable terms of trade reduce class conflict in the industrial countries and unfavourable terms exacerbate it.

Commodity prices responded sharply to the pressure of demand during the Korean war boom, but this was soon over and during the 1950s the terms of trade moved in favour of industrial countries. However, the long boom, swollen by the Vietnam war, financed by the USA on the principle of guns and butter, caused an acceleration in the rate of increase in commodity prices and finally sparked off the great inflation of 1973.

In an economic model, it is possible to analyse the consequences of any one change by keeping other things constant. In real life a lot of things happen at once. During the long boom, an excess of demand over growth of capacity led to shortages of one commodity after another. The demonetisation of the dollar in 1971 drove speculative funds into commodity markets. The Moslem oil producers, temporarily bound together by hostility to Israel, suddenly realised the extent of their monopoly power. Inflation at what now seems a mild and acceptable rate had been going on for years all over the capitalist world, setting up expectations that inflation would continue and undermining the conventional belief that a dollar is a dollar. Injected into this situation, the sudden rise in the costs of materials, especially oil, blew the inflation sky high.

This concatenation of circumstances has been described as a historical accident. But it is the inherent vice in the free-market system of international trade which creates the setting for such ‘accidents’, from which it has no means to defend itself except by destroying prosperity and depriving the primary product sellers of their favourable terms of trade.


The hopes which accompanied the Keynesian revolution, of reforming capitalism so as to ensure continuous prosperity with full employment, are now all but extinguished. The slide into crisis in the capitalist world has re-established the pre-Keynesian orthodoxy as the conventional wisdom in economic policy-making at both national and international levels. The inevitable consequence of this is a much higher general level of unemployment and recurrent crises, involving a massive waste of resources and considerable human misery.

Important changes in the world economy have taken place over the last two decades, which have ended the era of near-full employment and exposed the inadequacies of the conventional Keynesian analysis. One of the most important of these developments has been the relaxation of tariffs and exchange controls and the resulting large increase in international trade‡ and capital movements; this has increasingly exposed national economies to the ravages of uncontrolled capitalist competition, in the way that they were exposed before the 1930s.

While the USA remained the predominant world economic and political power, and effectively acted as the world central bank, some semblance of order in international economic relations was retained. The use of the dollar as a reserve currency and the eagerness of the USA to lend abroad allowed international liquidity to expand to meet the needs of the growing volume of trade and facilitated post-war reconstruction and structural adaptation in the capitalist world. But with the emergence of Japan and western European countries as strong competitors to the USA, and the deterioration of the USA’s balance of payments, unhindered capital movements became a major destabilising force. The IMF proved totally inadequate to its appointed task of protecting national economies from external shocks and assisting the correction of more permanent imbalances in payments. In fact, by establishing rules which threw the burden of adjustment mainly onto deficit countries, the IMF institutionalised an important element in the process of unequal development among capitalist countries.

Faced with growing international pressures, the governments of debtor countries have been obliged to adopt the deflationary policies acceptable to their creditors (including the IMF); policies which conflicted with the avowed aim of maintaining full employment and with the real-wage demands of the working class. Thus democratically elected governments of debtor countries, where the working class is well organised, have walked a knife edge between the international and internal disapproval of their economic policies. But the frequently imposed deflationary policies progressively weakened the competitive position of such economies, increasing their indebtedness and reducing the opportunities for advances in real wages. Unable to meet either internal or external demands, economic policy vacillated wildly; consequently growing economic crisis has been accompanied by increasing political instability and further destabilisation of the international economy.

The world market system has run into a second, and much more general, impasse, caught between two interlocking conflicts—the demands of workers in the industrial countries for higher real wages and the demands of the third world for improved terms of trade.

So long as unemployment and slow growth continue, the relative prices of raw materials are kept down and this somewhat mitigates inflation in industrial countries. As soon as a revival begins, prices of raw materials and foodstuffs begin to go up and real wage demands become harder to resist; the authorities nervously pull back and the revival is checked. The orthodox economists, still repeating incantations about equilibrium, encourage the authorities to pursue these deflationary policies—the very same that Keynes in the thirties used to describe as sadistic.

It is ironic that after the great technical achievements brought by the age of growth, all we are offered is a return to large-scale unemployment and poverty in the midst of plenty, in an age of frustration. Kalecki was right to be sceptical; the modern economies have failed to develop the political and social institutions, at either domestic or international level, that are needed to make permanent full employment compatible with capitalism.

† See Robinson (1962); K. J. Coutts, W. A. H. Godley and W. D. Nordhaus, Industrial Pricing in the United Kingdom, Cambridge, CUP, forthcoming.

‡ Exports of OECD countries as a whole increased from 11% of GDP in 1954 to almost 17% of GDP in 1973.


Kahn, R. 1976. The historical origins of the IMF, in Keynes and International Monetary Relations, ed. H. P. Thirlwall, London, Macmillan

Keynes, J. M. 1946. The balance of payments of the United States, Economic Journal, vol. 56

Keynes, J. M. 1972. The economic consequences of Mr Winston Churchill, in Collected Writings of John Maynard Keynes, vol. 9, Essays in Persuasion, London, Macmillan

The Cambridge Keynesians And The “Bastard Keynesians”

Published by Anonymous (not verified) on Fri, 31/07/2020 - 1:13am in

Since the publications of Keynes’ GT, economists have been trying to overthrow the true interpretation of Keynes. To complicate the matter, Keynes himself committed a lot of errors in the book despite having a great colleague in Joan Robinson who truly was beyond the errors. Keynes also underestimated the power of vested interests:

… But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Marjorie Turner in Joan Robinson And The Americans explains Robinson’s views:

Robinson had no doubt about where the bastard Keynesian doctrine came from: it “evolved in the United States, invaded the economics faculties of the world, floating on the wings of the almighty dollar. (It established itself even amongst intellectuals in the so-called developing countries, who have reason enough to know better.)” She thought the worst part was that while “Keynes was diagnosing a defect inherent in capitalism … the bastard Keynesians turned the argument back into being a defense of laisser-faire, provided that just the one blemish of excessive saving was going to be removed.” Robinson condemned Samuelson’s alleged role in spreading bastard Keynesianism. The Samuelson textbook Economics in the 1970 edition committed this offense, she said, but by his 1976 edition, “Samuelson’s faith in macroeconomic policies (but not in the verities of microeconomics) had been badly shaken.” Regarding the alleged affection of the bastard Keynesians for laissez-faire and microeconomics as received, she admitted feeling “helpless.”

[Title borrowed from a paper of Marjorie Turner]

Joan Robinson On Michal Kalecki’s Claim To Priority

Published by Anonymous (not verified) on Sun, 24/05/2020 - 2:07am in

Keynesian policy is popular again. Many fiscal hawks are now arguing for stimulus, although they want to do it only temporarily. I came across this 1976 article Michal Kalecki: A Neglected Prophet by Joan Robinson where she argued once again for Michal Kalecki’s originality.


He told me that he had taken a year’s leave from the institute where he was working in Warsaw to write his own General Theory. (When his early Polish essays were published in English, it became clear that he had worked out the main points by 1933.) In Stockholm someone gave him Keynes’s book. He began to read it—it was the book that he had intended to write. He thought, perhaps further on there will be something different. No, it was his book all the way. He said: “I confess, I became ill. Three days I lay in bed. Then I thought—Keynes is better known than I am. These ideas will get across much quicker with him and then we can get on to the interesting question, which is of course the application of these theoretical ideas to policy-making. Then I got up.”
Kalecki did not make any public claim to his independent discovery of what became known as Keynes’s General Theory. I made it my business to blow his trumpet for him, but I was often met with skepticism. In the US, only Lawrence Klein recognized (in The Keynesian Revolution, 1947) that Kalecki’s system of analysis was as complete as Keynes’s and in some respects superior to it.

At the end of his life Michal told me that he felt he had done right not to make any claim to priority over Keynes. It would only have led to a tiresome kind of argument. Perhaps people have been skeptical of Kalecki’s contribution to the history of economic theory precisely because he did not demand recognition himself. Such dignified behavior is rare in this degenerate age. The only reference Kalecki ever made to the question is in the preface to a selection of essays, published, alas, posthumously. “The first part includes three papers published in 1933, 1934, and 1935 in Polish before Keynes’ General Theory appeared, and containing, I believe, its essentials.”3

3Michal Kalecki, Selected Essays on the Dynamics of the Capitalist Economy, 1933-1970 (Cambridge University Press, 1971), p. vii.

There are many other by Joan Robinson where she argued this, especially this.

Picture credit: Poland Today

A Post-COVID Vision: The Full and Sustainable Employment Act

By Brian Czech

If COVID-19 has taught us anything, it is that the Great God of GDP is a false god after all, impotent as Baal. The mighty American economy, with unprecedented GDP, has been knocked to its knees by one of the lowest conceivable life forms, a mere virus possessing not a single strand of DNA. Politicians who thought their legacies would be associated with “the greatest economy ever” now look like ridiculous priests of a sham religion.

GDP exceeding $21 trillion in 2019 ($87 trillion globally) has been powerless to cure the sickness, financial trauma, and fear experienced by millions of Americans and billions of souls worldwide. Adapting to the new reality of a COVID-infected world and the uncertain hope for a vaccine is depressing in the best of scenarios and devastating in the worst. Yet adapt we must, and that includes public policy as much as individual behavior.

Coronavirus briefing. We need a Full and Sustainable Employment Act.

Pushing for growth vs. protecting the public: COVID-19 as the latest episode. (Image: CC0, Credit: The White House)

The CDC, NIH, and WHO have provided recommendations for lowering the spread of the virus and helping infected patients survive. Politicians are attempting to balance such recommendations with the concern for a healthy economy. The problem is that virtually every major politician in the USA, as well as a majority of politicians in the world, think of economic health in terms of GDP growth. For that matter, so do the economists advising these politicians and appearing on mainstream media. Their “adaptation” to the COVID-caused recession is nothing more than a hapless attempt to get back to business as usual; that is, growing the GDP through fiscal and monetary “stimulus.” In other words, it’s no adaptation at all!

Common sense and a pair of eyes is enough to recognize that the need for social distancing—effective adaptation to COVID-19 at the individual level—translates into lower levels of economic activity and a lower velocity of money. Unfortunately, politicians are now handling public health as they handled environmental protection for decades, acting as if we can have our cake and eat it too. They seem to think that, with enough Plexiglas panels on factory floors and retail counters, we can stimulate the economy back into $21-trillion territory without suffering a pandemic death toll. We can expect claims of “there is no conflict between growing the economy and protecting public health,” echoing the decades-old mantra that “there is no conflict between growing the economy and protecting the environment.”

Will we be fooled again by the win-win rhetoric? I don’t think so—at least not nearly so many of us—because this time the threat of the growth obsession is a direct, imminent matter of life or death. As employees are prematurely pressured to return to work “for the economy,” knowing fully well that doing so increases their odds of contracting the deadly virus, surely they will rethink what “the economy” is really for and who is behind the push to “stimulate” it.

There will be a significant percentage of individuals who decide more or less happily never to return to the jobs that dominated their life pre-COVID. Many will wrestle with trade-offs, such as extra gardening and more childcare, and certainly less luxury goods and entertainment. Some will have saved enough—and were cautious enough to avoid debt traps—such that they may find the new lifestyle to be empowering and even more joyful than the old 9-to-5 grind. They won’t be contributing much to GDP, but they’ll be healthier and happier, and will hardly be a burden on the nation’s infrastructure and budget.

Unfortunately, many others will be desperate to return to work or find a new job. They may have little means of subsistence—no lawn for a victory garden—and some will be threatened with homelessness when they can’t pay the rent. Even they, however, will see through the lie that “there is no conflict between growing the economy and protecting the public from COVID-19.” They are victims of an unfair capitalist system who must go to work “for the economy” and risk their health in the process.

The experience of individuals far and wide, then, will be conducive to a sea-change in attitudes toward the economy, GDP growth, and the government’s role in defending its own taxpaying citizens.

A New Economic Policy for 21st Century America

A new policy vision for the post-COVID economy entails replacing the current policy. So, what exactly is the current policy? What is it that steers us constantly, relentlessly back onto the GDP growth path? Let’s take a short trip down institutional memory lane…

Harry Truman and the Full and Sustainable Employment Act

President Harry Truman signed the Employment Act in 1946; a first step in the formal pursuit of GDP growth. (Image: CC0, Credit: Abbie Rowe)

As a response to the Great Depression, Franklin Delano Roosevelt gave Americans the New Deal. Most of the work programs were cultural successes and employed significant numbers of young men. Yet the Depression wasn’t “solved” until World War II, with the mobilization of the civilian labor force and technological progress spinning out of war-time laboratories. Most Americans know this basic story of the Great Depression, New Deal, and World War II, but few seem aware of the Employment Act of 1946. We must be fully aware of it to move toward a new economic policy for the 21st century.

The Employment Act was a Keynesian adaptation to the experience of the Great Depression; that is, it was largely a result of John Maynard Keynes’ General Theory of Employment, Interest, and Money. Prior to Keynes, economists clung stubbornly to their ideal of laissez faire (let do; non-interference) as the proper governmental approach to economic affairs. General Theory was the paradigm-shifting book that persuaded Western governments to take active fiscal and monetary measures for ensuring adequate demand for goods and full employment of the labor force.

In crafting the Employment Act, the 78th Congress was especially concerned about the social and cultural ravages of unemployment. It was less concerned with any explicit notion of economic growth. For one thing, national income accounting was in its infancy. Also, Congress was still reluctant to get the federal government very involved in economic affairs, especially with heightened concerns over the sway of communist ideology. That said, the Employment Act did establish the Council of Economic Advisors, which turned out to be a highly influential pro-growth institution for decades to come.

The American economy ran fairly smoothly and grew very rapidly for the next couple of decades, but by the 1970s, American political leadership was beside itself with the problem of stagflation, that is, recession (“stagnation”) concurrent with inflation. Economists thought you could have only one or the other for any significant period of time and that they were, in fact, countervailing forces. Unlike World War II, though, the Vietnam War wasn’t sufficient to kick the real economy into high gear. Efforts to stimulate investment and consumer spending by loosening the money supply only led to inflation. Thus, stagflation.

The bedeviling bouts of stagflation finally led Richard M. Nixon to announce, “We are all Keynesians now,” recognizing that conservative diehards were some of the last to accept any government involvement in macroeconomic policy. Nixon had established the Bureau of Economic Analysis in 1972 for state-of-the-art accounting and GDP calculation. The 95th Congress, led by Hubert Humphrey and Augustus Hawkins, worked to update the Employment Act, which was finally amended as the Full Employment and Balanced Growth Act (FEBGA) and signed by President Carter in 1978. As of then, the US government was fully and formally committed to GDP growth as central economic policy.

It was easy for supporters of FEBGA to argue mathematically that, all else equal, more jobs could be had with greater GDP. It was also easy for Big Money to hide behind pro-growth policy for purposes of accumulating more capital and increasing CEO salaries, without any concern for creating more jobs. Not surprisingly, FEBGA ended up a thick mix of fiscal and monetary policy that serves the capitalist as well as the labor force.

FEBGA is often referred to with the shorthand “Employment Act,” saving a number of syllables and reminding us of its original (1946) focus. I favor the full 1978 title, even if only via acronym, as a reminder that GDP growth is not just some wistful political notion or rhetorical tool but rather a formal, central policy of the USA pursued with fiscal, monetary, and deregulatory means, as well as diplomacy and terms of trade in international affairs.

Now, more than a half century later and in the midst of an economy-crushing pandemic, it’s time to rewrite FEBGA. We need a Full and Sustainable Employment Act, with the very name change communicating that growth is no longer sustainable.[1] The Full and Sustainable Employment Act will mark the transition from economic growth to a steady state economy, politically and every bit as formally as FEGBA called for growth.

Pro-growth politicians (or perhaps Big Money) came up with the brilliant metaphor, “A rising tide lifts all boats.” While at least one source attributes the phrase to President John F. Kennedy, it seems like the stuff of Madison Avenue. And, when limits to growth aren’t acknowledged, the logic illustrated by the metaphor is unassailable. All else equal (“ceteris paribus” in econ-speak), a growing GDP means more jobs. Of course the devil is in the phrase “all else equal,” because little is equal on the tilted chess board of a capitalist economy. Instead of more jobs, a growing GDP too often means more expensive technology and billionaire CEOs, who are just as effective at blasting ships out of the water as making way for more boats.

Either way, the metaphor of the rising tide sinks like a presidential approval rating when limits to growth are recognized, as they increasingly are and should especially be in the context of COVID-19. There is only so much water; the tide can’t rise forever. There is a limit to the number of boats at sea, too, and even a limit to boat-building material on shore. It’s high time for the “rising tide” metaphor to ebb all the way back into the rustic recesses of faded political minds.

It so happens that the acronym of Full and Sustainable Employment Act—FSEA—is useful for nailing the coffin shut on the “rising tide” metaphor. Combining “F” (for Full) and “SEA” invokes the image of a full sea. Why not take advantage of such a linguistic coincidence and make the message a little clearer yet? It is not unprecedented for Congress to wax metaphorical with the short title of a paradigm-shifting statute; they might as well call this one the “Full Seas Act.”

ships and the Full Sustainable Employment Act

“A rising tide lifts all boats” was a fine metaphor for the 20th century, but in the 21st century the seas are full. (Image: CC0, Credit: Good Free Photos)

What might the Full Seas Act actually look like? How will it conduce a steady state economy? What happens to the pro-growth arrangements established by FEBGA? The best way to envision these developments is to consider a proposed Section 2.[2]

Full Seas Act—Findings and Declaration

In a typical act of Congress, Section 1 provides a short title (“Full Seas Act” in this case). Section 2 is in many ways the most important section of a path-breaking statute because it establishes the key findings and declarations of Congress. It comprises a sort of preamble and emanates the spirit of the law. It justifies the details laid out in subsequent sections, and future policy development at the agency level will be informed by its content as well.

On the other hand, readers should keep in mind that Section 2 is never designed to address all the details of the challenge at hand, much less all the problems of the world. The crux of the Full Seas Act is a formal transition from economic growth to the steady state economy (most likely via degrowth). Therefore, Section 2 will not include references to specific policy tools such as minimum wages, energy caps, banking reforms, etc. Sections 3 and beyond just as surely will, however.

Without further ado, then, the initial public offering of the Full Seas Act, Section 2, more or less consistent with the canons of statutory construction:


SEC. 2.

(a) FINDINGS. The Congress finds that—

(1) Economic growth, as measured with gross domestic product (GDP), requires a growing human population, increasing per capita consumption, or both.

(2) Consistent with the natural sciences, including basic principles of physics and biology, there are limits to economic growth within and among nations.

(3) There is a fundamental conflict between economic growth and environmental protection, including the maintenance of: clean air and water; productive soils; biological diversity; stocks of natural resources including water, timber, fisheries, minerals, and fossil fuels, and; funds of ecosystem services including nutrient cycling, pollination, waste absorption, and carbon sequestration.

(4) A well-maintained, non-degraded environment is the foundation of a productive economy. Therefore, and because of the fundamental conflict between economic growth and environmental protection, there is also a fundamental conflict between economic growth and the long-term maintenance of the economy including jobs, income, and wellbeing.

(5) A well-maintained economy is vital to national defense. Therefore, and because of the fundamental conflict between economic growth and the long-term maintenance of the economy, there is a fundamental conflict between economic growth and national security.

(6) There is abundant environmental and economic evidence that long-term limits to growth have been and are being reached and exceeded in the Nation, other nations, and globally.

(7) There is abundant evidence that perennial fiscal and monetary efforts to stimulate GDP growth are increasingly causing environmental, economic, and social harm while resulting in fewer benefits, with the harm gradually exceeding the benefits.

(b) DECLARATION. The Congress declares that—

(1) It is heretofore the policy of the Nation to undertake a gradual but certain transition from the goal and pursuit of economic growth to the goal and pursuit of a sustainable steady state economy, with stabilized or mildly fluctuating population and per capita consumption as generally indicated, all else being equal, by a mildly fluctuating GDP.

(2) The transition to a steady state economy must be undertaken with every intent and effort to achieve and maintain the full employment of the labor force consistent with environmental protection and other aspects of economic sustainability including a balanced federal budget and the effective control of inflation.

(3) The President, President’s Cabinet, Council of Economic Advisors, Federal Reserve, and federal agency directors will immediately cease and desist from developing strategies and initiatives to grow or stimulate the economy. Existing policies, programs, and projects designed explicitly to grow or stimulate the economy shall not be extended beyond fiscal year 2021 or beyond the designated sunset date, whichever comes later.

(4) The Congressional Research Service, collaborating with the Office of Management and Budget and Council of Economic Advisers, will review and summarize the federal agency mission statements, goals, objectives, policies, programs, and practices designed for GDP growth, producing a Report on Federal Growth Incentives no later than 30 April 2022.

(5) A Commission on Economic Sustainability (“the Commission”) is hereby established to include the Administrator of the Environmental Protection Agency and the Secretaries of Agriculture, Energy, and Commerce, chaired by the Secretary of the Interior, to estimate and monitor environmentally sustainable levels of population and socially optimal levels of GDP. The Commission will produce a Report on Sustainable Population and Optimal GDP no later than 31 August 2022.

(6) The Commission Chair, with counsel of the Chairman of the Council of Economic Advisors, Secretary of Commerce, Federal Reserve Chair, and Secretary of the Treasury, drawing on the Report on Federal Growth Incentives and the Report on Sustainable Population and Optimal GDP, and pursuant to the framework provided in subsequent sections herein, will develop and deliver to the President, no later than 31 August 2023, a 25-year Steady-State Transition Plan detailing and scheduling the adjustments, modifications, additions, and deletions necessary to establish a system of government operations most conducive to a steady state economy at an estimated optimal level of GDP.

(7) The President, Cabinet secretaries, and federal agency directors shall not overlook the existence, neglect the enforcement, or underfund the performance of the Clean Air Act, Clean Water Act, Endangered Species Act, National Environmental Policy Act, or any other of the Nation’s environmental laws or regulations on grounds that said laws or regulations may interfere with the workings of the economy or slow the rate of GDP growth.


Stay Tuned for the Rest of the Full Seas Act

For policy wonks and steady-state advocates, exciting times lie ahead as Sections 3 and beyond of the Full Seas Act will feature long-awaited steady-state policy instruments. The starting point should be the top ten policies favored by Herman Daly. Chapter 11 of Supply Shock is largely for purposes of informing the Full Seas Act. And, at the risk of unintentionally omitting dozens of helpful individuals, now is the time to revisit specific proposals of scholars such as Peter Victor, Tim Jackson, Dan O’Neill, and Phil Lawn as well as the rich mix of overlapping ideas emanating from the European degrowth movement.

“Steady statesmanship” an essential aspect of the Full Seas Act. (Image: CC0, Credit: U.S. Department of State)

Speaking of the latter, the Full Seas Act could hardly be effective in a world pursuing GDP growth with only rare exceptions such as Bhutan and New Zealand. Ramped up levels of international trade will be difficult to reconcile with the steady state economy of a huge nation-state. Therefore, the Full Seas Act must address the need for steady statesmanship in international diplomacy.

We should take a page from the playbook of the 93rd Congress, which passed the Endangered Species Act of 1973. Congress used Section 8 largely to implement American obligations pursuant to the Convention on International Trade in Endangered Species of Wild Fauna and Flora, or “CITES,” one of the most sweeping international conservation agreements to date.

Our approach in the Full Seas Act needs to be more proactive, because in this case there is no convention ready and waiting to be implemented. We should devote one section, then, to fleshing out and pursuing the development of a Convention on Economic Sustainability, most likely with a United Nations secretariat. This convention will be assembled for purposes of addressing global limits to growth and the need for “contraction and convergence,” or the acceptance of degrowth in wealthy countries while nations with ubiquitous poverty are assisted to the extent that they have diplomatically established their own sustainable steady-state goals.

Steady statesmanship may be even more difficult than the domestic policy reforms required for an American steady state economy. Yet the harsh realities of COVID make such statesmanship feasible as well. In any event, does it matter how difficult it is, in deciding whether to pursue it? After all, what is the alternative? As we like to say at CASSE, peace is a steady state economy.

And so is health.

[1] See Chapter 11, “A Call for Steady Statesmen,” in Czech, B., Supply Shock: Economic Growth at the Crossroads and the Steady State Solution (2013, New Society Publishers) for the initial proposal of the Full and Sustainable Employment Act along with numerous policy tools and institutions to be considered in drafting the legislation.
[2]The Section 2 proposed herein does not include amending specifications. The bill presented to Congress will specify which clauses of FEBGA are to be amended, and how. Basically, however, the intent is to replace Section 2 of FEBGA with the proposed Section 2 herein.

Brian Czech

Brian Czech is the Executive Director of the Center for the Advancement of the Steady State Economy.

The post A Post-COVID Vision: The Full and Sustainable Employment Act appeared first on Center for the Advancement of the Steady State Economy.

CUNY, Corona, and Communism

Published by Anonymous (not verified) on Sun, 10/05/2020 - 12:41am in

The coronavirus has hit CUNY, where I teach, hard: more than 20 deaths of students, faculty, and staff, and counting. Yet the impact of the virus on CUNY has received almost no press coverage at all.

At the same time, the media continues to focus its higher education coverage, during the coronavirus, where it always has: on elite schools.

The combination of these elements—the unremarked devastation at CUNY, the outsized attention to wealthy colleges and universities—led me to write this piece for The New Yorker online:

It seems likely that no other college or university in the United States has suffered as many deaths as CUNY. Yet, aside from an op-ed by Yarbrough in the Daily News, there has been little coverage of this story. Once known proudly as “the poor man’s Harvard,” CUNY has become a cemetery of uncertain dimensions, its deaths as unremarked as the graves in a potter’s field.

The coronavirus has revealed to many the geography of class in America, showing that where we live and work shapes whether we live or die. Might it offer a similar lesson about where we learn?…

During the Depression, the New York municipal-college system opened two flagship campuses: Brooklyn College and Queens College. These schools built the middle class, took in refugees from Nazi Germany, remade higher education, and transformed American arts and letters. In 1942, Brooklyn College gave Hannah Arendt her first teaching job in the United States; an adjunct, she lectured on the Dreyfus affair, which would figure prominently in “The Origins of Totalitarianism.” In the decades that followed, CUNY built more campuses. Until 1976, it was free to all students; the government footed the bill.

What prompted this public investment in higher education was neither sentimentality about the poor nor a noblesse oblige of good works. It was a vision of culture and social wealth, derived from the activism of the working classes and defended by a member of Britain’s House of Lords. “Why should we not set aside,” John Maynard Keynes wondered in 1942, “fifty million pounds a year for the next twenty years to add in every substantial city of the realm the dignity of an ancient university.” Against those who disavowed such ambitions on the grounds of expense, Keynes said, “Anything we can actually do we can afford.” And “once done, it is there.”

Public spending, for public universities, is a bequest of permanence from one generation to the next. It is a promise to the future that it will enjoy the learning of the present and the literature of the past. It is what we need, more than ever, today. Sending students, professors, and workers back to campus, amid a pandemic, simply because colleges and universities need the cash, is a statement of bankruptcy more profound than any balance sheet could ever tally.

You can read the whole piece here.

Since it came out on Thursday, I’ve learned of three additional deaths at CUNY, all students in their last year at Lehman College: Daniel DeHoyos, Zavier Richburg, and Lenin Portillo. The Lehman College Senate has voted that they all be awarded posthumous degrees. That brings the total number of deaths at CUNY that I know of to 26.

Speaking of the activism of the working classes, I also wrote for The Nation an essay on the communist, which doubles as a review of Vivian Gornick’s classic The Romance of American Communism, which has recently been reissued, and Jodi Dean’s excellent work of political theory, Comrade.

The communist stands at the crossroads of two ideas: one ancient, one modern. The ancient idea is that human beings are political animals. Our disposition is so public, our orientation so outward, we cannot be thought of apart from the polity. Even when we try to hide our vices, as a character in Plato’s Republic notes, we still require the assistance of “secret societies and political clubs.” That’s how present we are to other people and they to us.

The modern idea—that of work—posits a different value. Here Weber may be a better guide than Marx. For the communist, work means fidelity to a task, a stick-to-itiveness that requires clarity of purpose, persistence in the face of opposition or challenge, and a refusal of all distraction. It is more than an instrumental application of bodily power upon the material world or the rational alignment of means and ends (activities so ignoble, Aristotle thought, as to nearly disqualify the laborer from politics). It is a vocation, a revelation of self.

The communist brings to the public life of the ancients the methodism of modern work. In all things be political, says the communist, and in all political things be productive. Anything less is vanity. Like the ancients, the communist looks outward, but her insistence on doing only those actions that yield results is an emanation from within. Effectiveness is a statement of her integrity. The great sin of intellectuals, Lenin observed, is that they “undertake everything under the sun without finishing anything.” That failing is symptomatic of their character—their “slovenliness” and “carelessness,” their inability to remain true to whatever cause or concern they have professed. The communist does better. She gets the job done.

You can read the rest here.

Okay, back to reading Smith and Keynes, and on Smith and Keynes, for an essay I’m working on now. (And still waiting for another essay I’ve done on Weber to come out.) And reading and preparing for my last class (on Nietzsche and Virginia Woolf) this coming week.

Hope everyone is healthy and safe.

Which Keynesianism?

Published by Matthew Davidson on Mon, 27/11/2017 - 11:41am in

I posted this enormous torrent of blather on Blackboard the other day. It's mostly a restatement of stuff I've said before, but I'll repost it here for the purposes of copying and pasting in the likely case I have to restate it yet again elsewhere.

Because I've been studying economics for the last few years, rather than sticking to the curriculum and dutifully cultivating my employability, I feel obliged to chip in with a cautionary note: Almost all of the academic economists, and their policy prescriptions, which are characterised as Keynesian have nothing to do with the work of Keynes.

The post-war economic order established at Bretton Woods is conventionally understood as being Keynesian, but in fact Keynes was railroaded by the US representative Harry Dexter White, who insisted upon the system of fixed exchange rates pegged to the US dollar, with global dependency on holding US dollar reserves being greatly to America's benefit; the US gained the benefit of cheap foreign imports sold to acquire those reserves. Neither was Keynes responsible for the "Bretton Woods institutions", the World Bank and the IMF. His plan for regulating and settling international financial flows was considerably more humane than the usurious loans and standover tactics these institutions became notorious for.

Even "progressive" and "liberal" economists like Paul Krugman and Joe Stiglitz are members of the school of "New Keynesianism", a product of what Paul Samuelson called the "Neoclassical Synthesis"; taking some of the superficial trappings of Keynes' work and melding it with the earlier "neoclassical" school of economics, which Keynes actually intended to entirely overturn. Neoclassical models of the economy ignore the role of money and banking, believing that all economic transactions are ultimately barter transactions, and that money is therefore said to be "neutral", and banking is just redistribution of loanable funds, ultimately of no macroeconomic effect. Keynes wrote of this "Real-Exchange economics" (in an article unfortunately unavailable via SCU):

Now the conditions required for the "neutrality" of money, in the sense in which it is assumed in […] Marshall's Principles of Economics, are, I suspect, precisely the same as those which will insure that crises do not occur. If this is true, the Real-Exchange Economics, on which most of us have been brought up and with the conclusions of which our minds are deeply impregnated, […] is a singularly blunt weapon for dealing with the problem of Booms and Depressions. For it has assumed away the very matter under investigation.

This is the answer to Queen Elizabeth's question on how economists failed to see the Global Financial Crisis (GFC) coming; if the financial sector is macroeconomically neutral, as the neoclassicals claim, there cannot be any financial crises. However, outside the neoclassical tradition, the normal functioning of the economy, and the pathologies leading to crises, are well understood:

  • The Chartalists determined that all money is credit, ultimately issued by the state. Michael Hudson recently did some exhaustive historical work on this, which David Graeber popularised in his book Debt: the First 500 Years.
  • Wynne Godley showed how currency-issuing states must spend more than they tax if the private sector is to have the money necessary to spend and save.
  • Irving Fisher identified the role of debt deflation in turning a rush to liquidate debt into an ongoing crisis where outstanding debts become impossible to repay.
  • Hyman Minsky's financial instability hypothesis extended Fisher's work to describe how financial crises arise from the normal workings of a capitalist economy.
  • Keynes implicitly regarded the money economy as a tool for allocating real resources in pursuit of public policy objectives, a principle explicitly formulated by Abba Lerner as "functional finance". This is in opposition to the neoclassical intuition that a household is like an individual, a firm is like a household, and a government is like a firm; therefore a government must follow the principles of "sound finance" and "live within its means".
  • All of the above are incorporated in the teachings of "Post-Keynesian" economics, which Keynes' biographer Robert Skidelsky considers closest to Keynes' own thinking. The sub-field of Modern Monetary Theory (MMT) synthesises all of these into a single coherent framework for analysing the economies of countries which issue their own currency.

By the end of World War II, functional finance was so well established as to be almost universally understood to be common sense. The 1945 White Paper on Full Employment in Australia, prepared for John Curtin by H. C. "Nugget" Coombs, and based on the principles in Keynes' General Theory of Employment, Interest, and Money, declared:

It is true that war-time full employment has been accompanied by efforts and sacrifices and a curtailment of individual liberties which only the supreme emergency of war could justify; but it has shown up the wastes of unemployment in pre-war years, and it has taught us valuable lessons which we can apply to the problems of peace-time, when full employment must be achieved in ways consistent with a free society.

In peace-time the responsibility of Commonwealth and State Governments is to provide the general framework of a full employment economy, within which the operations of individuals and businesses can be carried on.

Improved nutrition, rural amenities and social services, more houses, factories and other capital equipment and higher standards of living generally are objectives on which we can all agree. Governments can promote the achievement of these objectives to the limit set by available resources.

(Emphasis mine.) As expressed by MMT, currency-issuing governments are not fiscally constrained. The only limits on public policy are real resource limits. During the last UK election campaign, Theresa May was vehemently insisting "there is no magic money tree". But in fact there is: it's called the Bank of England (we have the Reserve Bank of Australia), and Her Majesty's Treasury has an unlimited line of credit there. Whenever the government wants to spend, the Bank of England just credits the accounts of commercial banks. I was delighted when while campaigning May was confronted by a furious protester wanting to know "Where's the magic doctor tree? Where's the magic teacher tree?" The policy limits we should be worried about are real resources (including people), not money.

Nevertheless, mainstream economists and politicians believe, in some vague way, that (as Stephanie Kelton puts it) "money grows on rich people". So it's not surprising to read already on the discussion boards here that Keynesianism is all very desirable, but how will the federal government pay for it? This is a meaningless question. The government will pay for it like it pays for anything: by spending the money into existence. That's where all money comes from, net of private sector credit creation. Logically, it can't come from anywhere else. If the government were to try to achieve fiscal (or, conflating governments and firms again, "budget") surpluses over the long term by taxing more than they spend, as neoclassicals, including New Keynesians, recommend, they would merely be draining savings from the private sector for no good reason. State-issued money is an IOU, a tax credit. When the credit is redeemed it ceases to exist. The government doesn't have to tax in order to spend. It has to spend in order to tax. Think about it: where else would the first dollar ever taxed come from?

Now you might be thinking, hang on: what about the most fiscally responsible government we've ever had (Howard/Costello) and their record run of "budget" surpluses? The economy was going gangbusters! Okay, here's the fiscal balance for that period:

As with every currency-issuing sovereign state in history, deficits are the rule, not the exception. Here's what happened to private sector debt over the same period:

(Data from the Bank of International Settlements and OECD.) As soon as the government started taxing more than it spent, private sector debt took off, and subsequent fiscal deficits were insufficient to reverse the damage. Notably, at the same time household debt overtook corporate debt, as credit was used to sustain consumer demand, not to mention standards of living, rather than for investment in productive capacity. Australia "Nimbled it, and moved on", and to hell with the consequences.

Australia recently passed two milestones of note: total private sector debt (the blue line above) exceeded 200% of GDP — at roughly the level that Japan's private debt was at in the early 90s when its real estate bubble burst — and bank equity in residential real estate passed 50%. That's 50% of the total residential real estate stock, not just houses built in the last x years. Minsky describes the path to financial collapse as progressing through the stages of "hedge finance", then "speculative finance", and finally "Ponzi finance". When you see phenomena like interest-only mortgages — where the principal is never repaid, on the assumption that housing prices only ever go up, and the debt will be settled whenever you sell the property, presumably pocketing a tidy and lightly-taxed capital gain at the same time — you know which stage you're in.

So why does nobody in mainstream politics or economics know anything about this? To put it succinctly, because neoliberalism. On the left, the "balancing the books" rhetoric serves a useful purpose: it gives you a disingenuous pretext to do what you want to do anyway that is compatible with the dominant paradigm. As Randy Wray said at a recent MMT conference:

"[Progressives] link the good policies they want to 'we'll tax the rich to pay for it'. So when you point out we don't need to tax the rich to pay for it, they're just crestfallen because they want to tax the rich. So I say 'Of course we should tax the rich. Why? They're too rich.' You don't need any other argument than that."

Taxes drive demand for the currency. If you know you have to pay taxes, you will work to get the money to pay for it. It's a coercive way for the government to mobilise labour to achieve its policy objectives, but assuming policy is arrived at democratically, it's relatively fair and vastly preferable to the autocratic alternative of having a gun put to your head. Taxes are also a fiscal instrument that can be used to discourage certain kinds of behaviour, and harmful social phenomena (like income inequality).

In the neoliberal era, that's why Australia has a retrospective tax on education called HECS-HELP, which in turn is why SCU has no school of history, or philosophy, or in fact any of the traditional academic disciplines. Students know that their education will be retrospectively taxed, so they can't afford to choose disciplines unlikely to offset that tax with increased earnings. There are twice as many universities as there were in 1988, but the new ones are glorified vocational colleges with next to no permanent academic staff. Australian post-Keynesian economist Steve Keen, who correctly predicted — and more importantly, explained — the GFC, subsequently lost his job at the University of Western Sydney when they closed down their economics department. Who needs academic economics when you have business studies courses, after all? He ended up at Kingston University in London, another young neoliberal institution, where last year he was given an ultimatum to spend more hours teaching or take a significant pay cut. He's ended up having to put his hat out for donations from the public in order to continue his work as a public intellectual.

Why would public policy function like this? Why would policy makers want a population uneducated about how the world actually works, and instead merely trained in how to work in it? Why is the conventional wisdom so full of assertions that are demonstrably untrue, and profoundly damaging to society? Paul Samuelson, author of the macroeconomics textbook that gave generations of undergraduates a completely misleading interpretation of Keynes' work explained this in an interview:

I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say "uh, oh what you have done" and James Buchanan argues in those terms. I have to say that I see merit in that view.

So basically, belief in myths must be maintained among the general population wherever doing so provides support for the elite political preference for small government, i.e. for control over the economy to be exercised by private finance rather than public fiscal policy. This is what neoliberalism fundamentally is, an Orwellian fiction imposed on a deliberately dumbed-down populous, with access to the truth as much the reserve of a select educated elite as ever. "Long-run civilised life" has been restored, thanks to neoliberalism's making of the 21st century by its un-making of the 20th.

I could go on forever (evidently) but others explain all this better than I:

If you have read this far, I admire your tenacity.