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Basil Moore, R.I.P.

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Basil Moore passed away yesterday. 💐

Post-Keynesian economics greatly influenced Post-Keynesian monetary theory. Although his work was present in Cambridge Keynesians work, such as Joan Robinson, Nicholas Kaldor, Wynne Godley and Francis Cripps, they didn’t influence the thinking on monetary matters as much as Moore did with his great book Horizontalists And Verticalists — The Macroeconomics Of Credit Money.

He does recognise Kaldor’s work in that book:

The obvious lesson to be learned from the experience with the General Theory in the past fifty years is that .. revolutionizing the way the world thinks about economic problems” is an enormously difficult task. In spite of the mountains of Keynesian exegesis that has been produced, Nicholas Kaldor was the sole English-speaking economist of the first rank to have endorsed what is here termed the Horizontalist position (1970, 1981, 1982, 1983, 1985a, b). This book represents my attempt to enlist the support of other scholars in what has at times seemed a quixotic crusade by a member of the lunatic fringe against the prevailing orthodoxy.

I regret not having met him. My only interaction was to ask him via email, where I can buy his book Horizontalists And Verticalists because it cost $450 on Amazon at the time! He didn’t know but replied recommending his book Shaking the Invisible Hand: Complexity, Endogenous Money and Exogenous Interest Rates. But later I managed to get the book. He also said that

It was my attempt to introduce endogenous money into the Macro literature, but no one has heard of it since the mainstream never reviewed it. (They gave H&V to Phil Kagan, a leading Monetarist, who didn’t much like it, but at least it was reviewed.

Noechartalists will be surprised to know that Moore also endorsed Chartalism in his 1988 book:

[page 8] Soft or fiat money refers to unbacked paper or token coins. It maintains its value because it is legally tenderable (by fiat) in settlement of debts and taxes.

…

[page 18] Currency (fiat money) is the physical embodiment of the n,onetary unit of account (numeraire) defined by the sovereign government. It is a sure and perfectly liquid store of value in units of account. It is legal tender for the payment of taxes and for the discharge of private debt obligations enforceable in courts of law. In consequence it is generally accepted as a means of payment.

…

[page 294] Money of any kind allows the breaking of the barter quid pro quo that is imposed by lack of trust and for which money is not a substitute. Even though intrinsically worthless, money is acceptable to me provided that it is also acceptable to you and to everyone else. Trust in money now comes from government guarantee of its acceptability as legal tender. “Today all civilized money is beyond the possibility of dispute, chartalist” (JMK, 5, p. 4).

…

[page 372] Fiat money represents a bridge between the world of commodity money and credit money. In its liquidity characteristics it is virtually identical to commodity money, except that it is chartalist.

There were many places I disagreed with Moore. I don’t think he was a fan of the use of expansionary fiscal policy. I don’t know why he claimed that the Keynesian multiplier doesn’t exist. But as Geoff Harcourt says in the foreword to the book Complexity, Endogenous Money and Macroeconomic Theory — Essays in Honour Of Basil J. Moore:

But, important as these contributions have been, Basil has influenced many other topics, sometimes by his innovative thinking, sometimes by being the irritant that has led other oysters to create pearls of their own. Especially is this true of his highly individual approach to the true meaning of the Keynes–Kahn–Meade multiplier concept and also to the validity of Keynes’s concept of effective demand as presented in The General Theory. Basil has made us think anew about our understanding of the natures of saving and investment, their relationship to each other, to the concept of an under-employment rest state, and also of the relationship of the macroeconomic income and expenditure accounts, balance sheets and funds statements to the behavioral relationships originally developed by Keynes and his followers. To sometimes disagree with Basil’s arguments is not at all to detract from the great stimulus he has provided for fundamental rethinks of basic, central, core concepts and relationships.

Post-Keynesian Economics has lost a giant. R.I.P., Basil Moore.

Hangovers And Economic Ideology

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Post-Keynesians frequently highlight the Kaldor-Verdoorn Law which states that aggregate demand affects the supply side. This was even used by economists who prepared the economic plan for Bernie Sanders’ presidential campaign in the United States, as explained well by John Cassidy for The New Yorker. Although, the law is not generally known, economists roughly understand it as a theory of “hangovers”.

The Kaldor-Verdoorn Law is:

rate of growth of productivity = constant1 +  constant2  × rate of growth of production

where constant1 is the exogenous rate of growth of productivity.

These constants will be different for every nation and are to be found empirically.

Of course, productivity is not the only measure of the supply side, but that gives an idea about the general notion of super-hysteresis. 

So Post-Keynesians would argue that slowdown, crises and recessions will affect the supply side but fiscal and monetary policy can be used to quickly recover and that delays will affect the supply side.

It’s interesting to note how others see it.

Carmen Reinhart and Kenneth Rogoff do an empirical analysis and claim that the hangover effect is permanent.

John Cogan, Glenn Hubbard, John Taylor and Kevin Warsh claim this all wrong and that policy can be used to recover.

The two ideas contain a mix of ideology and scientific validity. As Joan Robinson says, “I believe that economic analysis, though it cannot help containing an element of propaganda, yet can be scientific as well.”

While Reinhart and Rogoff’s analysis about hangovers is half right, what they wish to say is that nothing can be achieved via policy to change it. Taylor and Co.’s analysis is correct that policy can be used to resolve the slowdown. They however reject the hangover effect or that there is a damage to the supply side because of a slowdown of aggregate demand. They are rejecting super-hysteresis. Also, by policy, what they mean is deregulation.

Link

INET Interview With Anwar Shaikh On His Work

Recently, Institute For New Economic Thinking (INET), interviewed Anwar Shaikh in their New York office. It’s like a short autobiography of his work and his life and a background to his book, Capitalism: Competition, Conflict, Crises. Shaikh starts off describing his personal background and what led to him ask the questions he asks. He then talks about his work, from the humbug production function to the theory of international trade to the responsibilities of the heterodox.

An interesting story is about his association with Joan Robinson while writing the paper on the production function. Shaikh tells us that he was at Columbia University at the time and the professors there told him, “Joan Robinson is not an economist”!

[the header of this article is the link to the INET page which has the video and a brief description]

Francis Cripps And Marc Lavoie’s Short Biography Of Wynne Godley

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There’s a new book, The Palgrave Companion To Cambridge Economics which features among other things biographies of Wynne Godley, Joan Robinson and Nicholas Kaldor and other notable Cambridge economists. Wynne Godley’s biography—Wynne Godley (1926-2010)—is by his closest collaborators – Francis Cripps and Marc Lavoie (pp. 929-953)

You can access the book on Springer, if you have subscription or preview it on Google Books.

Excerpt:

One interpretation of Godley’s theoretical work is that it is a quest for the Holy Grail of Keynesianism. Keynesians of all stripes had for a long time mentioned the need to integrate the real and the monetary sides of economics. Integration was all the talk, but for a long time, little seemed to be achieved … The main purpose of the Godley and Cripps’s 1983 book is to amalgamate the real and the financial sides, providing a theory of real output in a monetary economy …

Godley believed that Keynesian orthodoxy ‘did not properly incorporate money and other financial variables’ (ibid.: 15). Godley and Cripps and their colleagues ‘found quite early on that there was indeed something deficient in most macroeconomic models of the time’, including their own, ‘in that they tended to ignore constraints which adjustments of money and other financial assets impose on the economic system as a whole’ (ibid.: 16). Interestingly, Godley was aware of the work being carried out at about the same time by Tobin and his Yale colleagues, as well as by others such as Buiter, Christ, Ott and Ott, Turnovsky, and Blinder and Solow, who emphasized, as Godley and Cripps (ibid.: 18) did, that ‘money stocks and flows must satisfy accounting identities in individual budgets and in an economy as a whole’. Still, Godley thought that the analysis of the authors in this tradition was overly complicated, in particular because they assumed some given stock or growth rate of money, ‘leaving an endogenous rate of interest to reconcile’ this stock of money with the fiscal stance (Godley 1983: 137). Godley and Cripps (ibid.: 15) were also annoyed by several of the behavioural hypotheses found in the work of these more orthodox Keynesians, as they ‘could only give vague and complicated answers to simple questions like how money is created and what functions it fulfils’. The Cambridge authors thus wanted to start from scratch, with their own way of integrating the real and the financial sides, thus avoiding these ‘tormented replies’ (ibid.) …

Ultimately, Godley’s desire to present a definitive treatise based on consistent macroeconomic accounting gave rise, nearly 25 years later, to the Monetary Economics book (Godley and Lavoie 2007a) …

Why NAIRU is “zOMG HYPERINFLATION”

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Does employment and inflation have a relationship? Yes of course. Can a wage-price spiral happen? Yes it can. A lot of economists exploit this possibility to incorrectly argue for NAIRU.

This post is a continuation of a recent post Simon Wren-Lewis, NAIRU And TINA in which I argued that NAIRU is not a useful concept and is counterproductive.

That wage-price spirals can happen isn’t a proof for NAIRU itself. NAIRU is defined as the unemployment rate U* below which prices start accelerating (or inflation starts to rise indefinitely). But the NAIRU hypothesis is a hypothesis of certainty. Economies are complex dynamical systems and just because wage-price spirals may have happened in the past doesn’t imply that it will always happen.

In the last mentioned how stock-flow consistent models, full employment can be achieved with no rising inflation, just higher inflation when parameters about wage-bargaining aren’t changing or if intervals between settlements shorten.

As I said in my previous post, NAIRU advocates think that a fraction of the workforce should be kept unemployed to keep inflation under control. By claiming that there exists a NAIRU or an unemployment rate below which prices necessarily start accelerating, they do a huge disservice to not just Economics but also to the welfare state. Any politician reading about NAIRU is likely to take away the incorrect notion that if unemployment is pushed too low, hyperinflation can happen. Hence the politician responsible for taking decisions is likely to postpone or abandon the pursuit for full employment.

So one can cogently believe all three of the following:

  • there is a relationship between employment and inflation
  • wage-price spiral can occur
  • NAIRU is wrong.

In other words, NAIRU proponents exploit the possibility to claiming a certainty. Wage-price spirals happened in the 70s and Joan Robinson even saw it coming. But wage-spiral is not NAIRU. Conflating the two is vile.

What are the solutions if a wage-price happens? There is a lot of literature for an “incomes policy” from economists such as Nicholas Kaldor. For the purposes of this post, it’s not necessary to go in that direction as it’s not needed in current times at least in the advanced economies.

Xi Jingping And Free Trade As A Not-So-Subtle Form Of Mercantilism

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Xi Jingping, the President of the People’s Republic of China spoke today at the World Economic Forum at Davos.

click the picture to see the video on YouTube. Transcript here

In his speech, he argues for globalization, although also points out the negatives. He says:

We must remain committed to developing global free trade and investment, promote trade and investment liberalization and facilitation through opening-up and say no to protectionism. Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air. No one will emerge as a winner in a trade war.

The timing of this speech is not surprising because it comes at a time when Donald Trump is going to become the President of the United States and is threatening to take action on China. Although economists and policy wonks have kept denying it, the Chinese government’s trade practices have been highly damaging to the United States’ economy. For China, “free trade” has been highly advantageous. By keeping its exchange rate at a highly devalued level, the government of China has made large gains for its economy at the expense of the rest of the world. But this “currency manipulation” is not the only unfair practice. Producers in China do what’s called predatory pricing in which prices of their products are kept low in the international markets to gain market share and harm competitors.

It’s an irony of our times that Donald Trump, a right-wing leader is insistent on taking action on China via protectionism, i.e., by setting large tariffs on Chinese exports to the US. It’s even more ironic that China is communist and is declaring free trade to be good.

China’s Mercantalism reminds us of a quote by Joan Robinson. In her 1977 essay What Are The Questions?, she says:

From a long-run point of view, export-led growth is the basis of success. A country that has a competitive advantage in industrial production can maintain a high level of home investment, without fear of being checked by a balance-of-payments crisis. Capital accumulation and technical improvements then progressively enhance its competitive advantage. Employment is high and real-wage rates rising so that “labor trouble” is kept at bay. Its financial position is strong. If it prefers an extra rise of home consumption to acquiring foreign assets, it can allow its exchange rate to appreciate and turn the terms of trade in its own favor. In all these respects, a country in a weak competitive position suffers the corresponding disadvantages.

When Ricardo set out the case against protection, he was supporting British economic interests. Free trade ruined Portuguese industry. Free trade for others is in the interests of the strongest competitor in world markets, and a sufficiently strong competitor has no need for protection at home. Free trade doctrine, in practice, is a more subtle form of Mercantilism. When Britain was the workshop of the world, universal free trade suited her interests. When (with the aid of protection) rival industries developed in Germany and the United States, she was still able to preserve free trade for her own exports in the Empire. The historical tradition of attachment to free trade doctrine is so strong in England that even now, in her weakness, the idea of protectionism is considered shocking.

[boldening: mine]

In her article she was talking about how free trade is a subtle form of mercantilism. What she was imagining was a nation typically not seen as mercantilist but pro-free-trade but that the latter is a subtle form of the former. In the present case, China is seen more as Mercantlist (although the establishment economists deny it) and it’s promoting free trade now. So these two ideologies have a lot in common. Jinping’s speech makes this obvious. Free trade is now a not-so-subtle form of mercantilism.

“In The Long Run”

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But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.

–  John Maynard Keynes, A Tract on Monetary Reform (1923), Ch. 3, p. 80.

As you might know, the Indian government cancelled the legal tender nature of majority of bank notes in circulation, earlier this month and asked Indians to deposit them at banks or exchange them for new. The aim according to the government was to curb counterfeiting and what’s called black money here. This is damaging as a large amount of transaction is in bank notes and the implementation has been a failure. People have been standing in queues for the whole day and some even reach banks at 2 am to get a good position in the queue. For many, standing in queues means that the day’s labour is lost. For others, there are delays in wage payments since their employers have problems getting hold of new bank notes. More than 50 people have died. Even 11 bank managers have died due to stress and work overload.

Despite this we keep hearing from the government and the ruling political party’s defenders that the benefits will be long term.

The previous Indian Prime Minister (who was the nation’s leader during mid 2004-mid 2014), Manmohan Singh gave a scathing speech in the Indian Parliament yesterday in which he quotes Keynes on the long run. Manmohan Singh was a student at Cambridge and his heroes are Nicholas Kaldor and Joan Robinson and presumably John Maynard Keynes as well. In this era where politicians are promoting neoliberal ideas, it’s good to see the master being quoted in a Parliament.

The seven-minute video is linked below.

manmohan-singh-quoting-keynes

click the picture to see the video on YouTube. 

This question about the long-term reminds me of super-hysteresis which was referred by Marc Lavoie recently in an article for INET. It’s closely related to the Kaldor-Verdoorn law in which demand affects supply.  The damage done to the demand side because of slowdown in production caused by the Indian government’s poor implementation of its decision to replace majority of bank notes by value affects the supply side as well. Almost nobody who talks about the long-term benefits talks about this issue.

Free Trade And Balanced Budgets

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Wikileaks has released “The Podesta Emails” which show Hillary Rodham Clinton’s political positions best explained by an NYT article:

[Clinton] embraced unfettered international trade and praised a budget-balancing plan that would have required cuts to Social Security, according to documents posted online Friday by WikiLeaks.

The tone and language of the excerpts clash with the fiery liberal approach she used later in her bitter primary battle with Senator Bernie Sanders of Vermont and could have undermined her candidacy had it become public.

Neoliberalism, the “New Consensus” and pre-Keynesian economics stand exactly for this idea: free trade and balanced-budgets. John Maynard Keynes’ true followers starting with Joan Robinson stood exactly in dissent against the idea of free trade and balanced budgets. Keynes himself understood the trouble with free trade, as can be seen by reading his chapter on Mercantilism in the General Theory, but didn’t emphasize it enough. Unlike what others see, Joan Robinson stood for her opposition to free trade more than anything else.

According to the New Consensus of economics, fiscal policy is impotent and hence budget should be balanced. Free trade will lead to convergence of fortunes of nations according to this view. Instead what we see is polarization. In my previous post, I quoted a top advisor who conceded how economists had been wrong about fiscal policy. But the damage seems to have done. Progressive and Keynesian ideas have a long battle ahead.

Needless to say Donald Trump is not the alternative. So there’s a lot of fight ahead for economists in years ahead to overthrow the new consensus. Macroeconomics makes a difference in people’s life, and it’s a battle worth fighting.

Remarkable Admission On Fiscal Policy

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There’s a paper by Jason Furman who is the Chairman of the Council of Economic Advisers which concedes how wrong economists were on fiscal policy. The link is a file hosted at the White House’s website! The paper starts off with a remarkable admission on fiscal policy (h/t and words borrowed from Jo Michell)

A decade ago, the prevalent view about fiscal policy among academic economists could be summarized in four admittedly stylized principles:

  1. Discretionary fiscal policy is dominated by monetary policy as a stabilization tool because of lags in the application, impact, and removal of discretionary fiscal stimulus.
  2. Even if policymakers get the timing right, discretionary fiscal stimulus would be somewhere between completely ineffective (the Ricardian view) or somewhat ineffective with bad side effects (higher interest rates and crowding-out of private investment).
  3. Moreover, fiscal stabilization needs to be undertaken with trepidation, if at all, because the biggest fiscal policy priority should be the long-run fiscal balance.
  4. Policymakers foolish enough to ignore (1) through (3) should at least make sure that any fiscal stimulus is very short-run, including pulling demand forward, to support the economy before monetary policy stimulus fully kicks in while minimizing harmful side effects and long-run fiscal harm.

Today, the tide of expert opinion is shifting the other way from this “Old View,” to almost the opposite view on all four points. This shift is partly the result of the prolonged aftermath of the global financial crisis and the increased realization that equilibrium interest rates have been declining for decades. It is also partly due to a better understanding of economic policy from the experience of the last eight years, including new empirical research on the impact of fiscal policy as well as observations of the reaction of sovereign debt markets to the large increases in debt as a share of GDP in the wake of the global financial crisis. In the first part of my remarks, I will discuss the theory and evidence underlying this “New View” of fiscal policy (with, admittedly, the core of this theory being an “Old Old View” that dates back to John Maynard Keynes and the liquidity trap).

Compare that to the Post-Keynesian view, which according to Wynne Godley and Marc Lavoie in their book Monetary Economics written before the crisis (from chapter 1, Introduction):

The alternative paradigm, which has come to be called ‘post-Keynesian’ or ‘structuralist’, derives originally from those economists who were more or less closely associated personally with Keynes such as Joan Robinson, Richard Kahn, Nicholas Kaldor, and James Meade, as well as Michal Kalecki who derived most of his ideas independently.

… According to post-Keynesian ideas, there is no natural tendency for economies to generate full employment, and for this and other reasons growth and stability require the active participation of governments in the form of fiscal, monetary and incomes policy.

Paul Krugman Is More Orthodox Than Joseph Stiglitz

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… There is also the problem of the relative levels of different types of earned income. Here we have the famous marginal productivity theory. In perfect competition an employer is supposed to take on such a number of men that the money value of the marginal product to him, taking account of the price of his output and the cost of his plant, is equal to the money wage he has to pay. Then the real wage of each type of labor is believed to measure its marginal product to society. The salary of a professor of economics measures his contribution to society and the wage of a garbage collector measures his contribution. Of course, this is a very comforting doctrine for professors of economics, but I fear that once more the argument is circular. There is not any measure of marginal products except the wages themselves. In short, we have not got a theory of distribution.

We have nothing to say on the subject which above all others occupies the minds of the people whom economics is supposed to enlighten.

[italics in original]

– Joan Robinson, The Second Crisis Of Economic Theory, 1972. Link

There’s an article at Evonomics by Joseph Stiglitz, which is an excerpt from a chapter from a book. Stiglitz has denounced the marginal productivity theory. He says:

The trickle-down notion— along with its theoretical justification, marginal productivity theory— needs urgent rethinking. That theory attempts both to explain inequality— why it occurs— and to justify it— why it would be beneficial for the economy as a whole. This essay looks critically at both claims. It argues in favour of alternative explanations of inequality, with particular reference to the theory of rent-seeking and to the influence of institutional and political factors, which have shaped labour markets and patterns of remuneration. And it shows that, far from being either necessary or good for economic growth, excessive inequality tends to lead to weaker economic performance. In light of this, it argues for a range of policies that would increase both equity and economic well-being.

… Neoclassical economists developed the marginal productivity theory, which argued that compensation more broadly reflected different individuals’ contributions to society.

It reminds me of the debate between Paul Krugman and Thomas Palley some time ago. Paul Krugman completely denied all this. In his blog post at his blog for The New York Times, Krugman said in April 2014:

But doesn’t that show that conventional economics is indeed capable of accommodating big concerns about inequality? You fairly often find heterodox economists insisting that to accept the idea that capital and labor are paid their marginal products, even as a working hypothesis to be modified when you address things like executive pay, is to accept that high inequality is morally justified. But that’s obviously not the case: there are plenty of economists who are willing to use marginal-product models (as gadgets, not as fundamental truth) who don’t at all accept the sanctity of the market distribution of income.

So you have two mainstream economists: Paul Krugman defending orthodoxy and Joseph Stiglitz denouncing the marginal productivity theory.