J.K. Galbraith and the cult of economic growth

John Kenneth Galbraith’s The Affluent Society was one of the first non-textbooks on economics I ever read, when it was recommended to me as a schoolboy just starting out on an economics course prior to applying to university. It made a lasting impression on me. Galbraith was a brilliant and compelling writer of books for the layman, managing to entertain without trivialising, and to inform without overwhelming the intellect. He was very much a progressive Keynesian, with a deep concern for the poor and disadvantaged in society.

I am increasingly of the view that economists, politicians and the rest of society need to question rising GDP as a shibboleth of policymaking. I also remain aware that at the moment economic growth is needed to generate valuable employment providing the goods and services which many of us desire. Some of these are surely more necessary than others, and poorer countries need the rising income that comes with successful development more than the richest countries. Technological progress and structural change are also bound up with rising output. These factors are difficult to disentangle from one another, but we have not always had GDP as a central measure of economic progress, and perhaps it is time to incorporate alternative measures into our assessment of the latter, in ways which sustain it without wreaking unsustainable impacts on society and nature in which the economy is embedded. Here is the Open University’s Marcus Davison in a short extract from his chapter on financialisation in a wide-ranging book which is sharply critical of the nature of modern finance:

Questioning Modern Monetary Theory: Part 1

Following yesterday’s introduction, this is the first part of a new series which aims to explore, through some questions and answers, particular aspects of Modern Monetary Theory (MMT) which interest me. As I have already outlined some of MMT’s implications already, I will jump straight in.

What is the essence of money according to MMT? What are some alternatives?

According to Professor Michael Hudson in his J is for Junk Economics, “money’s main function is to denominate debts” and its “defining characteristic” is the willingness by governments to accept it as payment for taxes or fees. Money can be created by the government by running budget deficits which are spent into the economy, or it can be created by private banks which have been “granted…the money-creating privilege.” Furthermore, Hudson argues that “money is a legal creation, not a commodity like gold or silver” which is given “value by accepting it in payment of taxes and fees”.

Questioning Modern Monetary Theory: an introduction

I recently finished reading Stephanie Kelton’s The Deficit Myth which, judging by the number of reviews it has generated on amazon alone, has been a huge seller, at least for a popular economics book. Whether one agrees with her arguments or not, it was an enjoyable read.

The book makes accessible to a general audience the main ideas of Modern Monetary Theory (hereafter MMT), which has created much heat, and perhaps some light, across social media and the blogosphere. According to Michael Hudson, MMT sees money and credit as a public utility, and a creature of the state, which can potentially be used by governments to achieve all sorts of progressive goals, particularly full employment with moderate inflation, but also reduced inequality and poverty, a Green New Deal, improved public health, education and infrastructure, and so on. The mainstream focus on balancing the government budget, either over the economic cycle, or even, for some economists, at all times, is apparently shown to be misguided. Instead, the main economic constraint facing the government is inflation due to inadequate aggregate supply or a shortage of resources in the face of expanding aggregate demand, whether that is a shortage of labour or other factors of production.

Many MMTers argue that full employment can be achieved and sustained by a Job Guarantee (JG) scheme, so that all those otherwise unemployed who wish to work should be offered a public sector job at the minimum wage providing useful goods and services. In a recession with private sector employment falling, the JG scheme would automatically expand, employing the otherwise unemployed in the public sector. This would also cushion the economy from the usual recessionary fall in aggregate demand. As private sector employment recovers, the JG scheme would shrink, so that JG workers would transfer to higher wage jobs in the private sector.

Contrary to some popular criticisms, MMTers argue that their ideas are not an excuse for the government to print money and forget about budget deficits. If inflation rises above target, policymakers should raise taxes to reduce aggregate demand and shrink the deficit, reducing inflation that is believed to be mostly caused by a limited supply of real resources, as already mentioned. The JG scheme, since the jobs it provides pay the minimum wage, should help to stabilize inflation by anchoring wages across the whole economy to those set by the (public sector) scheme. To the extent that inflation can be caused by wages rising faster than productivity, with firms passing on such cost increases to output prices, the JG scheme can act as a sort of incomes policy by restraining wage inflation.

So MMT potentially offers all sorts of public policy goodies to the left, with apparently little cost economically.

This then is the introduction to a series of posts on MMT which aim to explore and critique (rather than criticise) some of its aspects. The series does not aim to be comprehensive. Instead, I will write about aspects which I find interesting, whether I think they are correct or otherwise. It will be set out as a series of questions and answers, which can be an appealing format, and one which focuses the mind on whatever topic is being suggested.

Freedom and choice under social democracy: the role of collective provision

“A major deficiency in social democracy has been the failure to modernize the proposition that individual freedom derives from collective provision, and to link that proposition to an analysis of the economic role of the state in the process of accumulation and modernization. The relative economic success of France and Germany, and the relative failure of the United Kingdom in the 1970s and 1980s, stemmed in large part from the failure of the United Kingdom to develop institutions that could guide and mold the process of accumulation in a market economy. The British eschewed the structural approach to economic policy, relying on the market to direct accumulation into appropriate paths – a task that the market, as an essentially short-run institution, is peculiarly ill-equipped to perform.

The essence of such a structural approach to economic management is to guide choice in the most economically and socially efficient direction without inhibiting more than is necessary the stimulus of market competition. If interventionist strategies are successful, the range of economic opportunity is widened even though the range of actions open to the individual is restricted in the process. In other words, without collective provision and with entirely “free” choice, the total range of opportunities may be identical to the set of choices open to the individual. With collective provision, the total set of opportunities is expanded but the set of choices open to the individual is no longer identical with it. The argument for collective provision rests on the proposition that, for the majority of individuals (it would not be credible to argue that this is true for all individuals), the choice set is greater in the second case. This proposition embodies the essential dilemma of collective provision, for even if collective provision is successful in the above sense, some individuals will still see it to be in their own best interests to foreswear collective provision if they desire (and can thereby attain) access to more existing resources. Social democracy, by its very nature, nurtures the cuckoo of liberalism.”

John Eatwell and Murry Milgate (2011), The Fall and Rise of Keynesian Economics, Oxford University Press, p.349-50.

Kate Raworth on the importance of framing in economics

I have just finished Kate Raworth’s Doughnut Economics, which was for me a really good read, full of inspirational and clearly articulated ideas on the need to transform economic thinking for a world of sustainable human development. Here is a taster from her introduction, on the role that framing plays in shaping our thinking, in economics and beyond. If we want to persuade others, we need to set the frame of the argument, verbally and visually.

“Pre-analytic vision. Worldview. Paradigm. Frame. These are cousin concepts. What matters more than the one you choose to use is to realise that you have one in the first place, because then you have the power to question and change it. In economics, that’s an open invitation to look afresh at the mental models we employ in describing and understanding the economy. But it is no easy thing to do, as Keynes discovered. Coming up with his groundbreaking theory in the 1930s was, he admitted, ‘a struggle of escape from habitual modes of thought and expression…The difficulty lies not in the new ideas, but in the old ones which ramify, for those of us brought up as most of us have been, into every corner of our minds.’

The possibility of shaking off old mental models is enticing, but the quest for new ones comes with caveats. First, always remember that ‘the map is not the territory’, as the philosopher Alfred Korzybski put it: every model can only ever be a model, a necessary simplification of the world, and one that should never be mistaken for the real thing. Second, there can be no correct pre-analytic vision, true paradigm or perfect frame out there to be discovered. In the deft words of the statistician George Box, ‘All models are wrong, but some are useful.’ Rethinking economics is not about finding the correct one (because it doesn’t exist), it’s about choosing or creating one that best serves our purpose – reflecting the context we face, the values we hold, and the aims we have. As humanity’s context, values, and aims continually evolve, so too should the way that we envision the economy.

There may be no perfect frame waiting to be found but, argues the cognitive linguist George Lakoff, it is absolutely essential to have a compelling alternative frame if the old one is ever to be debunked. Simply rebutting the dominant frame will, ironically, only serve to reinforce it. And without an alternative to offer, there is little chance of entering, let alone winning, the battle of ideas.

Lakoff has for years drawn attention to the power of verbal framing in shaping political and economic debate. He points, by way of example, to the notion of ‘tax relief’ widely used by US conservatives: in just two words, it frames tax as an affliction, a burden to be lifted by a heroic rescuer. How should progressives respond? Certainly not by arguing ‘against tax relief’ because repeating that phrase merely strengthens the frame (who could be against relief, after all?). But, says Lakoff, progressives too often try to set out their own views on tax with lengthy explanations, precisely because no concise alternative frame has been developed. They desperately need an alternative two-word phrase to encapsulate their view and counter the other. In fact the frame of ‘tax justice’ – which instantly invokes community, fairness and accountability – has been fast gaining traction internationally as global scandals over tax havens and corporate tax avoidance have hit the headlines. Having a powerful way to frame the matter has no doubt helped to channel public outrage and mobilise widespread demand for change…

Visual frames, it gradually dawned on me, matter just as much as verbal ones. That realisation drove me to look back at the images that had dominated my own economic education and I saw for the first time just how powerfully they summed up and reinforced the mindset I had been taught. At the heart of mainstream economic thinking is a handful of diagrams that have wordlessly but powerfully framed the way we are taught to understand the economic world – and they are all out of date, blinkered, or downright wrong. They may lie hidden from view but they deeply frame the way we think about economics in the classroom, in government, in the boardroom, in the media, and in the street. If we want to write a new economic story, we must draw new pictures that leave the old ones lying in the pages of last century’s textbooks.”

Kate Raworth (2018), Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist, Penguin Random House, p.22-4.

Money and Power: the diversity of capitalisms

This is the third and final post inspired by Vince Cable’s new book Money and Power, following discussions on the making of history and the keys to successful development. Today I take as my point of departure a quote from the concluding chapter to the book (p.345-6):

“It is tempting to look for a big picture and in particular a pattern of success or failure. If there is a big picture, it is probably around the attraction of hybrids. Planned socialist economies have moved towards markets, pragmatically and gradually or in a ‘big bang’. State capitalism has become a distinct and seemingly successful model not just in China but in many emerging economies such as Korea’s. Capitalist economies have tried to blend competitive markets and a strong state with welfare and public goods: the German model from Bismarck to post-Erhard Christian Democracy, Roosevelt’s American liberalism (while it lasted) and Nordic social democracy. Lee’s Singapore is perhaps an extreme example of how a powerful and effective state can coexist with an open market economy, and succeed (though there are some obvious failures like the attempts at reformed communism in Eastern Europe). Despite attempts to shift the balance, as in the Thatcher and Reagan years, such hybrids seem to have proved more durable, politically and economically, than purer models.”

Michael Pettis on China’s latest economic prospects and the difficulty of reform

For some years now I have found Professor Michael Pettis’ analysis of the Chinese economy and its relationship to the rest of the world to be original and compelling. Here is a short interview with him on China’s growth prospects for this year, and the difficulty for policymakers in rebalancing the economy away from investment and towards household consumption. He has long argued that a substantial redistribution of income and wealth from businesses and the state towards ordinary households is vital to this end, for the good of China and the world. He also argues that this still remains largely undone.

The hidden agenda of austerity

“Besides their supposed beneficial effects on inflation and the balance of payments, austerity programmes are commended for other reasons, too, and these may be the real basis for their popularity in business circles. For example, high unemployment and the increased likelihood of lay-offs certainly helps business maintain labour discipline. When sales are strong and labour is badly needed to maintain high levels of production, strikes and slowdowns are costly; labour is in a strong position. But when sales are slow, and inventories are high, so that production is not urgent, labour has no ground to stand on. In general, austerity forces people to think more about profit and loss, and less about environmental and social issues. In boom times, popular democracy will force business to curb pollution, restrict the dumping of dangerous wastes, improve unsafe working conditions, and the like, but in hard times no one wants to risk driving business over the edge and making things even worse.

In short, austerity has helped to banish the spectre of the 1960s – no more unbridled challenges to corporate authority, or angry demands for regulation and social accountability, perhaps most important, no more mass refusals of talented youth to start the scramble up the corporate ladder, preferring instead to ‘turn on, tune in and drop out’. In times of austerity the college-minded look to business school; everyone is glad of a job – if they are lucky enough to get one!…

Austerity promotes control; it strengthens authority and weakens labour. Expansion undermines authority; by creating prosperity it provides the weak and the powerless, the underdogs, with the resources to stand up to the system. Austerity supports the center, weakens the periphery, creates dependency and intensifies competition. It promotes innovation and cost-cutting, weeding out the weak and rewarding the strong, who therefore favour it. Austerity removes the state and popular forces from the marketplace; expansion both requires and promotes control over business by labour and popular sentiment.

Perhaps equally important, austerity favours finance over production. Austerity raises the earnings of finance at the expense of production capital; at the same time it weakens the position of the latter, by simultaneously shrinking their markets and raising their costs…

[I]t would seem that a policy of Expansion is clearly superior, and so it is from the point of view of the public. But this is not at all how it appears to business. For Expansion improves the bargaining position of labour, and not just over wages. After a long period of full employment, labour is likely to bargain to increase job safety, reduce pollution, re-design jobs to make them less repetitive, and generally improve the quality of life. What labour gains in these respects, restricting management powers, businesses of all kinds lose. Consumers and citizens may likewise be emboldened to demand regulation of dangerous or unsavoury business practices. Hence Austerity, by weakening labour, promotes the interests of both kinds of capital, whereas Expansion, by strengthening labour does both kinds of capital a disservice. From the point of view of business, austerity is indispensable in maintaining the freedom of business to do what it pleases with its assets.”

Edward J. Nell (1996), Making Sense of a Changing Economy, Routledge, p.120-2.

James Crotty on Keynes’ vision for the good society

James Crotty is an eminent American economist who, according to his biography, has attempted in much of his work to “integrate the complementary analytical strengths of the Marxian and Keynesian traditions.” He could thus be classed as a “left Keynesian” or at least very much in the heterodox economics camp. His most recent book, Keynes Against Capitalism, makes the controversial claim that Keynes himself ultimately made the case for a package of policies which would shift society towards a kind of “Liberal Socialism”. This is contrary to the views of many others who recognized that Keynes wanted to save capitalism from its most disagreeable aspects and outcomes, namely mass unemployment and inequality, while preserving its essential capitalist character. Nevertheless, here is Crotty’s summary, drawing on his interpretation of Keynes, of the case against “free-market” economics and the kind of economy that it legitimises, in favour of institutions and policies which promote the “good society” and greater social justice in particular:

“In standard economic theory, we formally or informally assume we are representing a marketplace in which non co-operating, isolated individuals and firms come together to buy and sell goods and services. The distribution of wealth among agents is exogenous, unexplained within the confines of the theory. Price signals in the market guide the allocation of economic resources and the distribution of income among economic agents. Much of the history of economic thought has been devoted to demonstrating that an idealized model of a free-market economy generates outcomes that optimize a social welfare function.

The vision of society embedded in standard mainstream models of market economies is thus one in which individuals have no connection with one another except through what Marx referred to as a “cash nexus.” Everyone looks out only for themselves, while the market system determines economic and social outcomes. It is reasonable to assume that the “winners” in such an economy – those with the greatest wealth – would have a disproportionate influence on the character of the society in which it was embedded and would be capable of transmitting this power intergenerationally. The economy-society nexus would thus tend to be dominated by the character of the “free-market” capitalist economy. Of course, most governments and other non-market institutions in real world capitalist economies interfere in market activities in many ways, but they generally do not do so in ways that knowingly threaten the economic, political and ideological dominance of the capitalist system. Countries committed to strong forms of social democracy are an exception to the rule…

[T]he assumption set required to generate Pareto-optimal general equilibrium describes an absurdly unrealistic economy that could not possibly exist in the real world. What, then, was the purpose of devoting so much professional economic talent to the creation of such a theory? Keynes believed the answer to this question was largely ideological: orthodox theory supported the domination of capitalism and capitalists over society.

“That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social forces behind authority.”

There is an alternative way to structure the relation between the economy and society: let society dominate the society-economy nexus. Start from assumptions about what kind of society the citizens of a country would like to have, as determined through effective democratic processes, and then ask what kinds of economic institutions and policies would be consistent with and supportive of the reproduction of the values and priorities of the “good society” or of “economic and social justice.”

James Crotty (2019), Keynes Against Capitalism, Routledge, p.366-7.

Capitalism, socialism and innovation – the role of soft budget constraints

Since I was a student, industrial policy and its key historical role in promoting prosperity under capitalism have been among my main interests in economics. An article by Max Jerneck in the December issue of the journal Industrial and Corporate Change explores the role of so-called soft and hard budget constraints (SBCs and HBCs), how they differ under capitalism and socialism, how they promote or hinder innovation, and their role in successful industrial policy.

Jerneck refers to the work of Janos Kornai, who developed the ideas of SBCs and HBCs in relation to different economic systems and policies. The budget constraint is part of the external environment faced by firms. Under SBCs, which for Kornai are typical under socialism, the state will support producing firms however they perform, which hinders innovation, as firms lack the incentive to improve products, processes and efficiency in response to market pressures. Organisations “can avoid making internal adjustments to changing conditions” which is “an expression of market power”. External financial support is sustained, leading to general expectations among all firms that this is the norm. This goes beyond the occasional bailouts and rescues that occur under capitalism. Under socialism, “the survival and growth of an organisation is not decided by market forces but by bureaucratic coordination and bargaining”.