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FT Letter To The Editor On Current Account Imbalances And War

FT has published a letter to the editor from some post-Keynesian economists arguing for regulating imbalances in the current account balance of payments, and that such imbalances make wars more likely.

One of the signatory of the letter is Dimitri Papadimitriou, who along with Wynne Godley had been warning about imbalances since the turn of the millennium.

From the letter:

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A new international economic policy initiative is therefore required to head off the threat of further wars.

A plan is needed to regulate current account imbalances, which draws on John Maynard Keynes’s project for an international clearing union.

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The current system of free trade has created a deflationary bias in the world economy. A further bias is introduced because the United States is now a large debtor of the world and till the crisis which started in 2007 it was acting as the driver of the world, a role which it still plays but is not as big as before. With such a deflationary bias, countries try to use beggar-thy-neighbour policies, as world output is limited. That creates tensions between countries and the desperation to raise output exacerbates the tensions. So a new international order: a system of regulated/planned trade.

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Ashwani Saith Discusses His Book Cambridge Economics In The Post-Keynesian Era: The Eclipse Of Heterodox Traditions

There’s a webinar for the Review Of Political Economy where Ashwani Saith discusses his new book on Cambridge economics, hosted by Louis-Philippe Rochon and with discussion from Francis Cripps, Marc Lavoie and Maria Cristina Marcuzzo.

The event was held on Feb 2, 2023.

[The title is the link to the video on YouTube]

Ashwani Saith’s New Book — Cambridge Economics In The Post-Keynesian Era: The Eclipse Of Heterodox Traditions

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Ashwani Saith’s new book is out. It’s the history of how Post-Keynesianism was dethroned at Cambridge through power and influence of neoliberalism.

Wynne Godley is on the cover!

From the book’s description of the cover:

COVER

St Michael’s victory over the devil.
Jacob Epstein, Coventry Cathedral

On 14–15 November 1940, “a bright moonlit cloudless night made navigation simple” for the Luftwaffe operation—fatefully code-named Moonlight Sonata—of the blanket bombing of Coventry in which “almost a third of the city was fattened” with its medieval cathedral reduced to rubble. (GCHQ 2021). Wynne Godley was married to Kitty Garman, daughter of Kathleen Garman and the famous sculptor Jacob Epstein, one of whose creations lives on the wall of the cathedral in Coventry evoking the unbroken spirit of the city, with Benjamin Britten composing his War Requiem for the consecration of the reconstructed cathedral in 1962. It depicts St Michael—representing the good—slaying the devil. Epstein used a model of his “impossibly handsome” son-in-law, Wynne, to sculpt the head of St Michael. Though Wynne and his research team, along with other celebrated heterodox lineages, lost out proverbially to “the devil” in the Cambridge war of economics, there has subsequently been a defiant phoenix-like revival of the reputation and work of the famous Godley-Cripps Cambridge Economic Policy Group of the 1970s, as well as of other renowned radical traditions nurtured since the 1920s in Cambridge, the crucible of heterodox economics. The allegorical symbolism of Sir Jacob Epstein’s sculpture resonates with the leitmotif of the book.

Here’s Marc Lavoie’s review:

Ashwani Saith’s book is monumental, enthralling, beautifully written with its occasional satirical tone, but as we are being warned, depressing. It explains how the Faculty of Economics of the University of Cambridge—the world centre of post-Keynesian economics—was gradually and entirely taken over by neoclassical economics and why the Department of Applied Economics, also at the heart of heterodox economics, eventually came to be dismantled. This was so far an untold story, except for a chapter on ‘Faculty wars’ in Saith’s previous book, the intellectual biography of Ajit Singh. The current book provides 14 chapters of a meticulous detective story, relying mostly on Cambridge archives, but also on testimonies, interviews, emails, and previous articles of participants to these events. The book makes clear that, besides possible strategical mistakes by the incumbent heterodox economists, there were inexorable and ineluctable outside forces that led to this dismal state of affairs, through the Americanization of the economics profession and through the changing political winds that blew out heterodox and left-wing economics nearly everywhere in the world. The last chapter shows that all is not lost, both in Cambridge and elsewhere in the world.

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REFERENCES

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GCHQ. (2021, April 19). The bombing of Coventry in WWII. Retrieved December 19, 2021, from https://www.gchq.gov.uk/information/the-bombing-of-coventry-in-wwii

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The book is 1217 pages long.

Word count of “Kaldor” and “Godley”: 428 and 512 respectively.

Mainstream Economics On A Better Globalisation

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The United States policies and maintains the “liberal international order”, a totally unfair game built on laissez-faire/anti-Keynesian ideas. That was advantageous for the United States because its corporations are highly competitive because of historical reasons and who don’t need protection at home. Of course the US has still been using protectionist measures, so there’s hypocrisy there too. But the general system is the removal of protection from countries whose producers need it. Free trade in general. Low tariffs, no import quotas and industrial policy is shooed away.

There’s a good Noam Chomsky video on What Is The WTO? (with transcripts on that page).

Post-Keynesians have argued how the system of free trade has a deflationary bias and causes polarisation in the fortunes of nations.

The solution is, as proposed by Nicholas Kaldor in his book Causes Of Growth And Stagnation In The World Economy, page 87:

… coordinated fiscal action including a set of consistent balance of payments targets and “full employment” budgets.

Anyway, China has gamed this too well to cause troubles to the United States. The US balance of payments and international investment position is on an unsustainable path now because of this. Slower growth for the US also implies slower growth for the world as a whole because the United States is a spender of the last resort (or more like the first resort). High imbalance also means that many countries can’t expand fiscal policy.

So there is a need to change the rules of globalisation, which is more than about free trade but free trade is an important part of it.

Dani Rodrik has two interesting recent articles on this. He is different from the establishment but unfortunately falls short. In his article US-China Rivalry: Geopolitics Is Ruining The Chance To Shape A Better Globalisation, he talks of how the US has taken measures which are more than just tariffs raised by Trump:

US President Joe Biden has added to these challenges by launching what Edward Luce of the Financial Times has called “a full-blown economic war on China”. Just before the party congress, the United States announced a vast array of new restrictions on the sale of advanced technologies to Chinese firms.

As Luce notes, Biden has gone much further than his predecessor Donald Trump, who targeted individual companies such as Huawei. The new measures are astounding in their ambition, aiming at nothing less than preventing China’s rise as a hi-tech power.

In Trump’s four years, economists led by Paul Krugman dismissed Trump’s actions on China but the current Biden administration for which Krugman—acts as a lackey—have gone way beyond.

It’s such a blot on the economics profession that almost nobody saw all this coming. The exception of course was Wynne Godley who was recommending import controls and policies to expand exports in the 2000s. The bigger solution of course is one in which trade is overall balanced. Wynne Godley mentions in his article The United States And Her Creditors — Can The Symbiosis Last? written in 2005:

A resolution of the strategic problems now facing the U.S. and world economies can probably be achieved only via an international agreement that would change the international pattern of aggregate demand, combined with a change in relative prices. Together, these measures would ensure that trade is generally balanced at full employment.

The other Dani Rodrik article How To Build A Better Order although interesting doesn’t go much far than proposing some changes. And Rodrik is a kind of dissenter from mainstream economics from within the establishment, so the profession doesn’t have a clue!

Mainstream Economics Vs. PKE On Manufacturing

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Post-Keynesian growth theory (based on the work of Nicholas Kaldor) highlights the importance of manufacturing.

Mainstream theory denies it.

That’s because once you start talking along those lines, the idea of free trade appears even more dubious than at first sight. Mainstream economists don’t want that to happen as they represent the interests of Western corporations which have an interest in finding more markets for their products and services, at the expense of local producers abroad.

A recent denial of the importance of manufacturing came from Adam Posen who uses what’s called woke language. It also highlights how the woke ideology/identity politics is simply class politics disguised as concerns for identity.

Here’s what Adam Posen said in a talk at the CATO Institute:

I’m sure I’m gonna piss off both left and right, so I apologize. The fetish for manufacturing is part of the general fetish for keeping white males with low education outside the cities in the powerful positions they are in in the U.S., and that is really what’s going on here, because when you look at the costs of manufacturing and Susan Houseman and her co-authors have done a lot not of manufacturing but of trade and job displacement and community. Susan Houseman and her co-authors have done a lot of work on this and I’m sure she’ll have a different view than I do but when I look at the so-called cost of the China shock or the cost of the decline of manufacturing, I always think ‘compared to what’?

This is ridiculous as it sort of implies that people of other races somehow don’t want a position in manufacturing, are okay with offshoring work abroad or are okay with closing down of factories due to competition from abroad.

In reality this kind of analysis is just cover for class politics favouring the upper class and the super-rich.

Compare Post-Keynesians:

Here’s a quote from Wynne Godley from 1995 from the article, A Critical Imbalance In U.S. Trade, The U.S. Balance Of Payments, International Indebtedness, And Economic Policy:

It is sometimes said that manufacturing has lost its importance and that countries in balance of payments difficulties should look to trade in services to put things right. However, while it is still true that manufacturing output has declined substantially as a share of GDP, the figures quoted above show that the share of manufacturing imports has risen substantially. The importance of manufacturing does not reside in the quantity of domestic output and employment it generates, still less in any intrinsic superiority that production of goods has over provision of services; it resides, rather, in the potential that manufactures have for expansion in international trade.

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Marc Lavoie And Matias Vernengo — Thinking About Inflation

There were two talks on inflation in recent times by Marc Lavoie and Matias Vernengo on September 16th at the Fields Institute For Research In Mathematical Sciences in Canada.

Both authors highlight the shortcomings of orthodox explanations of the recent spike in inflation: the monetarist argument about expansion of the balance sheet of central banks, wage-price spiral, rise in demand etc. They also critique the argument about firms raising their markups and becoming more greedy, which many on the left seem to be putting forward. In their opinion—which I also agree with—it is mainly because of supply chains.

[The title is the link to the video]

Thomas Palley On Nord Stream Pipeline Attack Whodunnit

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As John Mearsheimer says—and which I believe is right—the United States bears the primary responsibility for the crisis in Ukraine.

Thomas Palley has written some good articles on this and in his latest, he address the issue of whodunnit on the attack on the Nord Stream pipeline. The article is titled Sabotaging Germany, Blaming Russia: Another View Of The Nord Stream Pipeline Attack.

Unfortunately discussion of US imperialism is now forbidden and even Post-Keynesians smear Palley. An example in this discussion.

Here’s Tony Blinken, US Secretary of State saying how this is a good opportunity!

Here’s Jeffrey Sachs saying he thinks that it’s the United States which did it and talks about how saying this is now taboo.

This crisis has shown how anti-imperialism is a rare thing in the West. It’s sad but perhaps scholars need to update their theories and reevaluate the role of the left in the West as providers of a left cover for imperialism.

RIP, Lance Taylor

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Lance Taylor has passed away.

Among other things, he promoted stock-flow consistent modeling. He had a book Reconstructing Macroeconomics.

I hold dear the review of Lance Taylor of Wynne Godley’s work, titled: A Foxy Hedgehog: Wynne Godley And Macroeconomic Modelling.

The article starts:

The fox knows many things, but the hedgehog knows one big thing (Archilochus, seventh century BCE).

Lance Taylor clearly understood the importance of accounting. In the paper A Simple Model Of Three Economies With Two Currencies, Wynne Godley and Marc Lavoie quote him:

As pointed out by Taylor (2004, p. 206), ‘the best way to attack a problem in economics is to make sure the accounting is right’.

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Bibliography

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Taylor, L. 2004. Exchange rate interderminacy in portfolio balance, Mundell–Fleming and
uncovered interest rate parity models, Cambridge Journal of Economics, vol. 28, no. 2, 205–27

…

Here’s the link to that Lance Taylor paper.

Thomas Palley On The Intellectual No-Fly Zone

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Thomas Palley has a new blog post Flirting With Armageddon: The US And Ukraine discussing how the US government is escalating the situation in Ukraine and that warns that it may end badly. An important part of his post is ponting out the existence of an edict of silence.

First, the liberal blob has promulgated an edict of silence against those who challenge its explanation of the war and the case for US participation. The edict applies to conservatives who argue “it’s not our war”, and to independent critics who argue the war has been “made in the USA” via a thirty-year slow-motion attack on Russia conducted through eastward expansion of NATO and regime change subversion in the republics of the former Soviet Union.

Matt Taibbi has used the phrase intellectual no-fly zone to describe this.

Anyone who criticises will be brought down. Supposed left-wing politicians such as Bernie Sanders and the “Squad” vote for more funds for the military industrial complex. The left in the West has always been soft on imperialism and with this the process seems complete. Even supposedly left-wing governments of Sweden and Norway have joined NATO.

There’s a serious problem with the left in the West.

Matt Taibbi quotes Noam Chomsky:

… I reached out to Chomsky this weekend and asked him what in particular it is about the Ukraine conflict that’s brought out such an aggressive response.

“Putting aside the dangers, which are all too real,” he says, the unusually intense response is “part of something much worse: the general atmosphere of irrationality engendered by the whole Ukraine affair. It ranges from the nutcases like Fukuyama assuring us that there’s no threat of nuclear war if we escalate (and the official policy that is not much different), to the ‘left’ shouting slogans about how we have to defend Ukraine and punish Russia no matter what, and any voice that breaks unanimity has to be stilled, maybe crushed.”

A Rare Admission Of How Monetary Policy Works

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A recent FT Alphaville post by Ajay Rajadhyaksha, global chair of research at Barclays has this admission on how monetary policy works:

Central bankers don’t like admitting it, but a primary goal of rate hikes is to cause enough job losses to ensure that wage growth slows down.

Several Post-Keynesians have of course said this but here I quote Nicholas Kaldor who wrote in 1980 in the article Monetarism And UK Monetary Policy:

… This does not mean that a ‘monetarist’ economic policy such as that of the present government is futile. But its real effect depends on the shrinkage of effective demand brought about through high interest rates, an overvalued exchange rate and deflationary fiscal measures (mainly expenditure cuts), and the consequent diminution in the bargaining strength of labour due to unemployment. Control over the ‘money supply’, which has in any case been ineffective on the government’s own criteria, is no more than a convenient smoke-screen providing an ideological justification for such antisocial measures.