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Joan Robinson On How The Economic System Has A Deflationary Bias

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I was checking this video by John Eatwell on Joan Robinson, in which he says that Joan Robinson had figured that the international economic system has a deflationary bias. He refers to her 1965 writing The New Mercantilism but I didn’t find her explicitly saying this.

@34:33 in the video, but rewind to your liking for the context.

However in an article The International Currency Proposals published in The Economic Journal, Vol. 53, No. 210/211 (Jun. – Sep., 1943), pp. 161-175, she is quite explicit on this:

The basic rule of the gold-standard game, or of any system of multilateral international trade with stable exchange rates, is that a country which has a favourable balance of trade on income account must lend abroad on long term at a more or less commensurate rate; alternatively, a country whose citizens and Government are not prepared to lend abroad must not have a surplus on income account. Any slight and temporary failure of trade balances and rates of lending to keep in step can be provided for by movements to and fro of gold and short-term funds, but a large and continuous disequilibrium puts a strain upon the system which it cannot bear.

In the text-book account of the gold standard, gold movements of themselves set in train a mechanism to restore equilibrium. If the surplus of exports of a country exceeds its surplus of lending, gold flows to it from the rest of the world. Consequently, according to the text-book account, prices in that country rise, while they fall in the rest of the world. Exports from the surplus country to the rest of the world are therefore reduced, and its imports from the rest of the world are increased, until its surplus and the world’s deficit are wiped out. Outside the text-books matters do not go so smoothly. First, the country receiving gold is under no necessity to check the inflow, while those who lose gold are under an obligation, so long as they struggle to maintain the gold standard, to check the outflow, and they must set about doing so the more quickly the smaller their reserves. Thus the mechanism is not symmetrical, but has an inherent bias towards deflation, which is the more severe the smaller is the amount of gold possessed by deficit countries. Secondly, a loss of gold does not lead automatically and directly, as in the text-books, to the fall of prices which is required to stimulate exports from a deficit country and foster its home production at the expense of imports. The process of adjustment is much more painful. To check the outflow of gold the authorities in a deficit country must restrict credit and encourage a fall in activity and incomes. This, indeed, reduces imports, but it reduces imports not only from the surplus country, but from others as well, so that countries formerly balanced are thrown into disequilibrium and have to join in the process of deflation. And it reduces not only imports, but also consumption of home-produced goods. The total loss of income is a large multiple of the reduction of imports which it is designed to bring about. If unemployment and business losses continue long enough to bring about a sufficient relative fall in money wages, relative costs are reduced, and the text-book story is completed. But meanwhile the surplus country is also suffering from unemployment through its loss of export markets. There is pressure there also to lower wages; and much else, including the gold standard itself, may give way under the strain long before equilibrium has been restored.

Of course, the discussion is on the Bretton-Woods system but the system of floating exchanges hasn’t led to a system where imbalances are resolved by market mechanism, so the problem still remains.

Also deflationary bias doesn’t mean that the world is always in deflation but that there is a bias and that it prevents economic activity to be far less than what it could have been and that economies are crisis-prone.

Joan Robinson On International Trade In Times Of International Crisis

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Nick Johnson has some good quotes from Joan Robinson’s book Freedom & Necessity — An Introduction To The Study Of Society from 1970.

One for the current times, Chapter 9, The New Mercantilism, page 92:

The national egoism of modern capitalism is clearly seen in the sphere of international trade. The capitalist world (except in a major war) is a buyer’s market. Productive capacity exceeds demand. Exports yield profits and imports (apart from necessary raw materials) mean a loss of sales to competitors. Moreover internal investment is easier to foster, inflation easier to fend off and the foreign exchange easier to manage in a situation of a favourable balance of trade — that is, an excess of exports over imports. Thus every nation competes to achieve ‘export-led growth’, while each tries to defend itself from the exports of the others. The combination of national quasi-planning with international chaos (which the agreements on trade and finance made after the war have not succeeded in mastering) flares up from time to time in an international crisis.

Joan Robinson was one of the first economists to be against free trade.

In the book Aspects Of Development And Underdevelopment, 1979, Chapter 6, Dependent Industrialisation, page 102, she says:

The most pervasive and strongly held of all neoclassical doctrines is that of the universal benefits of free trade, but unfortunately the theory in terms of which it is expounded has no relevance to the question that it purports to discuss. The argument is conducted in terms of comparisons of static equilibrium positions in which each trading nation is enjoying full employment of all resources and balanced payments, the flow of exports, valued at world prices, being equal to the flow of imports. In such conditions, there is no motive for resorting to protection of home industry. Since full employment of given resources is assumed, there is no need for protection to increase home industry, and since timeless equilibrium is assumed there can never be a deficit in the balance of payments. Moreover, since all countries are treated as having the same level of development, there can be no question of ‘unequal exchange’.

Of course one of the best is the 1937 article Beggar-My-Neighbour Remedies For Unemployment.

Michał Kalecki, From 1932, On Coordinated Fiscal Expansion

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I came across this 1932 article by Michal Kalecki, Inflation And War, in which he talked of a coordinated fiscal expansion (although he was not optimistic that politicians might do it)!

He says:

What indeed could change the situation is fiscal inflation on large scale, for instance, by the government obtaining large credits from the central bank and spending them on massive public works of one sort or another. In this case the money no doubt would be spent and this would result in increased employment (combined with an overall reduction in wage rates). However, even such an intervention could be effective only if it were undertaken in a closed economy, e.g. in the capitalist system as a whole, embracing the whole world, where there is one exchange only and no tariff barriers. If fiscal inflation is carried out on a broader scale in one country alone it must cause disturbances in the rate of exchange. A rise in local output requires increased supplies of foreign raw materials and imports as well. At the same time, together with employment domestic prices rise which restricts exports. Consequently, the balance of payments deteriorates, an outflow of gold and foreign exchange follows, and the exchange rate falls.

In general, these processes will end earlier because in expectation of their development foreign capital will withdraw and local capitalists will purchase foreign exchange thus accelerating devaluation. This, in turn, will distort the fiscal inflation process because of rise in prices of foreign raw materials will add to a general price rise until the symptoms of hyperinflation, already known from our experience, appear. Therefore, a necessary condition for fiscal inflation to be effective is an international agreement of the capitalist powers, which is, of course, totally utopian. Thus, imperialism, which is an unavoidable phase in the development of capitalism, makes the ‘inflationary’ way of mitigating the crisis unavailable.

The article in available in his Collected Works, Volume VI, pages 175-179 and was originally written in Polish.

One reason that propaganda often works better on the educated than on the uneducated is that educated people read more, so they receive more propaganda. Another is that they have jobs in management, media, and academia and therefore work in some capacity as agents of the propaganda system—and they believe what the system expects them to believe. By and large, they’re part of the privileged elite, and share the interests and perceptions of those in power.

– Noam Chomsky, Propaganda, American-style

Ingrid Harvold Kvangraven On The Dependency Research Program

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Ingrid Harvold Kvangraven has a new paper Beyond The Stereotype: Restating The Relevance Of The Dependency Research Programme in the journal Development And Change in which argues for the high importance of “dependency theory” which she wants to call a research programme.

There’s a good Twitter thread by her summarising the paper.

The central idea of the theoretical framework is that:

core countries benefit from the global system at the expense of periphery countries, which face structural barriers that make it difficult, if not impossible, for them to develop in the same way that the core countries did.

And from the summary at the end:

… defining dependency theory as a research programme provides an alternative way of categorizing dependency scholarship that captures the breadth of the scholarship as well as its strengths. This research programme — characterized by 1) theorization on the persistence of uneven development; with a focus on 2) the specific constraints peripheral countries face; and 3) structures of production; with 4) a global historical approach to these issues — provides a foundation from which to fruitfully explore important questions related to development and global inequality.

Although, the paper doesn’t mention the name of Nicholas Kaldor, I look at such issues using his work, and agree quite a bit with the dependency research programme.

Identity Politics As A Neoliberal Alternative To A Left

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The George Floyd protests are now international. Initially, the Democratic Party tried to discredit and delegitimise the protests as instigated by the Russian government, but the protests became so strong that they had to feign support for it. What explains?

This tweet by Glenn Greenwald is an exceptional explanation to what is happening:

💯🎯

Title borrowed (and slightly modified) from Adolph Reed Jr.

Thomas Piketty On The Winners Of Globalisation

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Thomas Piketty gets dismissed a lot: from the right-wing since they either think there’s much inequality or that it’s unimportant. From the left, he gets ridiculed for not being a Marxist or even Post-Keynesian/Keynesian enough. Whatever the criticisms, there are some things which he says which are useful and highly important in the current political climate. My view is that he is a bit late to it but some of his analysis adds more light.

Snapshot from a promotional video for Seuil.

In his book Capital And Ideology, he talks of how the dynamics of winners against losers of globalisation creates interesting politics. For example in pages 812-817:

Will the Democratic Party Become the Party of the Winners of Globalization?

…

Nevertheless, other factors cast doubt on the long-term viability of a transformation of the Democratic Party into the party of the winners of globalization in all its dimensions: educational as well as patrimonial. First, the presidential debates of 2016 showed the degree to which cultural and ideological differences remain between the Brahmin and merchant elites. Whereas the intellectual elite stressed values of level-headed rationality and cultural openness, which Barack Obama and Hillary Clinton sought to project, business elites favored deal-making ability, cunning, and virility, of which Donald Trump presented himself as the embodiment.16 In other words, the system of multiple elites has not yet breathed its last because at bottom it rests on two different and complementary meritocratic ideologies. Second, the 2016 presidential election showed the risk that any political party runs if it becomes too blatantly identified as the party of the winners of globalization. It then becomes the target of anti-elitist ideologies of all kinds: in the United States in 2016, this allowed Donald Trump to deploy what one might call the nativist merchant ideology against the Democrats. I will come back to this.

Last but not least, I do not believe that this evolution of the Democratic Party is viable in the long run because it does not reflect the egalitarian values of an important part of the Democratic electorate and of the United States as a whole …

  1. Note that the recourse to overtly anti-intellectual and anti-Brahmin leaders like Donald Trump is not limited to the US Republican Party: the European right has gone in a similar direction as shown by the choice of a Silvio Berlusconi in Italy or a Nicolas Sarkozy in France.

and on the EU referendum/Brexit, page 861, Chapter Sixteen, Social Nativism: The Postcolonial Identitarian Trap:

… in all three countries [United Kingdom, United States, and France], the “classist” party systems of the period 1950–1980 gradually gave way in the period 1990–2020 to systems of multiple elites, in which a party of the highly educated (the “Brahmin left”) and a party of the wealthy and highly paid (the “merchant right”) alternated in power. The very end of the period was marked by increasing conflict over the organization of globalization and the European project, pitting the relatively well-off classes, on the whole favorable to continuation of the status quo, against the disadvantaged classes, which are increasingly opposed to the status quo and whose legitimate feelings of abandonment have been cleverly exploited by parties espousing a variety of nationalist and anti-immigrant ideologies.

Link

Jeremy Corbyn On His And Tony Benn’s Positions On The EU And Brexit

Jeremy Corbyn appeard in a recent episode of the podcast Benn Society and at around 13:31 in the audio, he is asked about his and Tony Benn’s position on Brexit since both were opposed to the EU.

Of course, as expected his answer was messed up as he never took a clear position but you can listen to what happened directly from him and how it cost Labout the election.

Image credit: Jeremy Corbyn on Twitter

Neochartalists’ Rhetoric Against Raising Taxes

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Neochartalists (“MMTers”) have a strange political positions. Although many of their proposals can be left-leaning, some of their proposals are highly right-wing. So Warren Mosler argues for removal of most taxes for example.

In a recent “webinar”, Monetary Finance In The Age Of Corona Virus: MMT And The Green New Deal, Stephanie Kelton is seen making similar rhetoric.

click to see the video on YouTube

The irony is that she has been an advisor to Bernie Sanders, the politician who has proposed large increases on taxes on the rich and has even said that billionaires shouldn’t exist (i.e., nobody should have a net worth above $1 bn).

Roughly, her argument is that the super-rich’s expenditure as a proportion of income and wealth is less than the poor and if the US economy has full employment and the US Congress wants to do additional spending it will have to raise taxes to offset the demand rise due to the additional expenditure. But matching $-for-$ doesn’t help, as billionaires only a small fraction of their income and wealth.

But this is a ridiculous argument. Taxes can be calibrated so the government expenditure rise can be matched $-for-$ with a fall in the super-rich’s expenditure. So if the US government wants to spend $1 additionally, it can calculate how much billionaires need to be taxed so that their expenditure falls by $1.

Joan Robinson On Public Sector Deficits And Debt

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Some good quotes by Joan Robinson on deficits and debt:

In Introduction To The Theory Of Employment, Chapter 5, Change In Thriftiness, in the section A Budget Deficit, 1937:

A special kind of reduction in thriftiness is represented by a budget deficit. If the state is paying out more money in salaries to civil servant, commissions to contractors and so forth, than it is receiving in taxation, and is borrowing the difference by issuing Treasury bills or otherwise raising loans from the public, then it is in just the same position as an individual who is spending on current consumption more than his income, by means of drawing on past accumulated wealth or getting into debt. In short the state is dis-saving. The result is to increase incomes and expenditure all round. Suppose that the state keeps its outlay constant and remits taxation. Then out of the increased net income of taxpayers part will be spent, and this extra spending will raise the incomes of those on whose output the expenditure is made. Out of this extra income, again, a part will be spent; and so on. Just as in the case of investment, the extra expenditure will lead to such an increase in incomes that the public are saving more than they otherwise would have done at just the same rate the government is borrowing.

The idea that a budget deficit is good for trade is often found to be shocking, but it is a fact which has become obvious to the governments of the world since the great depression began in 1929. The argument used to be common, particularly in England, that a budget deficit upsets the confidence of entrepreneurs, and so does more indirect harm to employment than direct good. But this is a case where “thinking makes it so”, and it is found nowadays that a deficit accompanies by the right kind of propaganda can have a very beneficial effect.

The mere fact that a deficit is good for trade is not a sufficient argument for having a deficit, since other methods of improving trade may be preferable. It can, however, be regarded as a merciful dispensation that budgets have a tendency to come unstuck when trade is very bad. Taxes fail to yield as much as was expected, while expenses in connection with unemployment go up, and the government is forced to borrow to meet its current outgoings. This has the effect if preventing the decline in employment from going so far as it would if the budget were kept balanced.

In The Problem Of Full Employment, Chapter 9, Some Fallacies, 1943:

1. “THE TREASURY VIEW”
During the great slump it was the official view that Government investment cannot increase employment. The argument ran: there is a certain amount of saving going on at any time, and if more savings are invested by the Government, less will be available for private enterprise. This overlooks the fact that if there is more investment there will be a higher level of activity and of incomes and consequently more saving. The argument is so childish that it would not deceive anyone who had not a strong wish to believe it. Nevertheless, it was for many years the basis of Government policy, and was set out in a famous White Paper in 1929.

2. “ECONOMY”
The National Government which was formed in 1931 went in for a great economy campaign. Local authorities were compelled to cease work on building schemes, roads, fen drainage, and so forth. An emergency budget was introduced, increasing taxation, cutting unemployment allowances and reducing the pay of public servants, such as teachers and the armed forces. Private citizens felt it was patriotic to spend less. Some Cambridge Colleges gave up their traditional feasts as a recognition of the crisis. All this helped to increase unemployment and make the economic situation of the country still more depressed. Nowadays there is considerably more understanding of how things work and it is unlikely that such a completely idiotic policy will be tried again.

3. THE BURDEN OF THE NATIONAL DEBT
The National Debt is often brought forward as an argument against public spending to create employment. There is a good deal of confusion between the National Debt and the debt of an individual. An individual who is in debt has to pay interest to someone else, and will be obliged to return the sum borrowed to the lender. A nation which is in debt has to pay interest to its own citizens (a foreign debt is a different story and is much more like a private debt). That is to say, the Government has to raise taxes from Peter and Paul and pay interest to Paul and Peter. Taking the country as a whole, there is no burden of the debt. Moreover, the debt need never be repaid. As one lot of bonds fall due to be redeemed a fresh lot can be sold to the public. If the debt is finally repaid, it is repaid out of the wealth of the citizens of the country, and this, like interest payments, is merely a swap round among the members of the community.

At the same time there are genuine objections to a large National Debt. It means that there is a large volume of rentier income (the interest on Government bonds), so that the active part of the population has to allot a large share of the proceeds of production to the mere owners of wealth. This objection is all the stronger if the holders of the National Debt are mainly the richer part of the community, while taxes to pay their interest are raised from the population as a whole. This drawback can be kept within bounds, first, by keeping interest rates low, and second, by arranging the tax system so that the same class which gets the interest has to pay the extra taxes. But however well the national finances are managed, some objection must remain.

This does not mean that fear of increasing the National Debt is a sound objection to having a full employment policy. The drawback of having a swollen rentier class is trivial compared to the loss of wealth and of happiness, and of life itself, which is entailed by unemployment.

If, however, we are to have a full employment policy in any case, the problem must be viewed in a different light. Government outlay covered by taxation on the rich is to be preferred to borrowing. A full employment policy conducted according to the rules of Sound Finance is far more radical than a policy of deficits, and Government loan expenditure can only be justified as a concession to the status quo.