An Overview of the Major Schools of Economics

The major approaches to economics can be divided into

(1) neoclassical theories and
(2) non-neoclassical or heterodox schools.

The neoclassical schools include Supply-side economics, Monetarism, New Classical economics, and New Keynesian economics.

The mainstream and orthodox approach to economics is the New Consensus Macroeconomics, which is a synthesis of the main neoclassical approaches. But the mainstream neoclassicals do not agree on all issues: at the higher level they can be found in different groups like the monetarists, New Classicals, and New Keynesians.

There are three major heterodox, or non-neoclassical traditions: Austrian economics, Post Keynesian economics, and Marxism (and Marxism has more in common with Classical economics/Classical political economy, an older economic theory).

These divisions can be seen in the chart below (please open it in a new tab or window to see a larger version).

On the development of the Keynesian schools, I have already written a post called “Neoclassical Synthesis Keynesianism, New Keynesianism and Post Keynesianism: A Review,” July 7, 2010.

After 1945, there were two Keynesian traditions:

(1) the neoclassical synthesis and
(2) the Cambridge Keynesians, who were the founders and progenitors of the Post Keynesian school.

Post Keynesian economics has no need for, and rejects, the IS-LM model of Hicks, the Phillips curve, and the empirically unsupported notion of the liquidity trap (Davidson 2002: 95). It is a more radical development of Keynesian theory, true to Keynes’ fundamental ideas (if not to all his more conservatively-minded policy recommendations), and has always rejected the foundational neoclassical axioms (namely, the gross substitution axiom, neutrality of money axiom, and the ergodic axiom).

The New Keynesians emerged after the collapse of neoclassical synthesis Keynesianism in the 1970s, but even modern New Keynesianism can be divided into conservative and liberal/progressive wings. Both Paul Krugman and Joseph Stiglitz are outstanding liberal New Keynesians. By contrast, George W. Bush took advice from the rather more neoliberal or economically conservative Republican New Keynesian N. Gregory Mankiw, who was chairman of Bush’s Council of Economic Advisors from 2003 to 2005. Despite the name “Keynesian”, there is a good deal of false and questionable neoclassical theory in New Keynesian economics, and in many ways it is inferior to the Post Keynesian tradition. Indeed, some of the worst writings of the conservative New Keynesians can actually be regarded as a travesty of Keynes’ thought. In its best, progressive forms, New Keynesian theory parallels Post Keynesian thinking.

The various types of libertarians are discussed in “The Types of Pro-Free Market Libertarians,” January 30, 2011.

Compared to the Austrians, the monetarists and New Classicals in fact support numerous state interventions, and their economics is derived from a revived neo-Walrasian general equilibrium theory. In fact, many Austrians are hostile to the mainstream monetarists and New Classicals, and there are very significant differences between their economic ideas.

As we can see, not all economists who support extreme or strong free markets are libertarians. I have not included monetarists as libertarians, but of course there is some overlap between the two sets. Although it is true that some supply-siders, monetarists, New Classicals, and Republicans think of themselves as “libertarians” in some way as well, many in fact do not. Modern conservatism or conservative economics comes in many forms, and by no means can it all be simply labelled as “libertarianism”.

Perhaps a better division of extreme or strong pro-free market ideologues would be as follows:

(1) Libertarians, including Austrians (Anarcho-capitalists, Misesians, Hayekians, moderate subjectivists, radical subjectivists) and non-Austrian libertarians (Randians, Robert Nozick’s libertarianism, David D. Friedman’s anarcho-capitalism, and non-Austrian neoclassical libertarians), and

(2) Mainstream neoclassical theorists, including Supply-siders, Monetarists, New Classicals, and conservative New Keynesians.

This can be shown in another chart below.

There is a blue line that divides the New Keynesians into conservatives on the left and liberals/progressives on the right. It is unfair to characterise the liberal/progressive New Keynesians as strong pro-free market ideologues, so they should be excluded from the other groups. The libertarians outside the black box (i.e., the Austrians and Randians) are non-neoclassicals but pro-free market. Those libertarians inside the black box are neoclassicals or influenced by neoclassical theory.

Now over the past 65 years (since about 1945) we have had two different economic systems based on two different macroeconomic theories:

(1) neoclassical synthesis Keynesianism and Cambridge Keynesianism/Post Keynesianism from 1945 to about 1979;
(2) revived neoclassical macrotheory from the late 1970s.

The revival of neo-Walrasian neoclassical theory was done mainly by (1) Milton Friedman and (2) the New Classicals at the University of Chicago in the 1970s, including John F. Muth, Robert Lucas, Thomas J. Sargent, Robert J. Barro, Neil Wallace, Robert M. Townsend, Robert E. Hall, Edward C. Prescott and Finn E. Kydland. In many ways, the New Classicals are the worst of all the revived neoclassical theories, because they have been one of the most powerful schools, with considerable influence.

While Neoclassical synthesis Keynesianism had its theoretical problems, derived from the mistaken attempt to wed it to fundamental neoclassical ideas, it provided a far better system than the one that we have seen since about 1979.

The new neoclassical orthodoxy that emerged in the 1980s can be called “neoliberalism,” the “Washington consensus,” or “globalization.”

Reaganomics and Thatcherism were blends of the various new neoclassical ideas. In particular, Reaganomics was a strange blend of monetarism and supply-side economics, with a type of military Keynesianism brought in via Reagan’s huge budget deficits. Thatcherism was a more doctrinaire neoliberal ideology influenced by Milton Friedman, with a tinge of Austrian rhetoric, via Friedrich von Hayek.

While forms of monetarism and supply-side economics rather quickly fell from favour amongst policy-makers (indeed I think that forms of monetarism or quasi-monetarism in fact failed rather spectacularly), the New Classical economics emerged as the dominant neoclassical theory, and, through its arguments with the New Keynesians, the resulting synthesis lead to the New Consensus Macroeconomics by the early 1990s. It is this modern consensus that has come under severe attack in the wake of the 2007–2009 global financial crisis and great recession.

It is clear that the New Consensus Macroeconomics has failed. The question is whether some of the more intelligent New Keynesians can escape from the death-grip of neoclassical economics and develop a better macroeconomic theory, purging it of its unnecessary, mad and bad neoclassical ideas. If that happens, my money is on Post Keynesian economics to be the new economic paradigm.

BIBLIOGRAPHY

Davidson, P. 2002. Financial Markets, Money, and the Real World, Edward Elgar, Cheltenham.

The Types of Pro-Free Market Libertarians

Pro-free market libertarians, or libertarians who support free markets, come in various kinds. I say “pro-market libertarians” because left-wing libertarians who support anarchism believe that the word “libertarian” has been unjustly appropriated by anarcho-capitalists and other capitalist libertarians.

Pro-free market libertarians can be divided in two main types: (1) Austrians and (2) non-Austrians. I provide a list of such libertarians below, on the basis of this division:

I. Austrians
(1) the Anarcho-capitalists, like Rothbard and Hoppe;

(2) The minimal state Austrians like Mises (with his praxeology);

(3) Austrian supporters of Hayek’s economics, with a minimal state;

(4) The “orthodox” Austrians who have a moderate subjectivist position (like Israel Kirzner and Roger Garrison);

(5) Austrian radical subjectivists like Ludwig Lachmann;

II. Non-Austrian libertarians

(6) Randians;

(7) followers of Robert Nozick’s libertarianism;

(8) followers of David D. Friedman’s anarcho-capitalism.

(9) other non-Austrian libertarians (e.g., Tom Palmer, Bryan Caplan and Tyler Cowen).

I have already discussed the Austrian school and its various subcategories in an earlier post (see “The Different Types of Austrian Economics,” December 5, 2010).

Non-Austrian libertarians also come in various forms. The Randians are followers of Ayn Rand’s Objectivism, an atheist, individualist, and laissez-faire ideology. I must confess that I have never thought much of Randian libertarianism, either in terms of its ethical ideas or its argument for laissez faire. Randians have a cultist feel to them, and this sentiment was famously shared by Murray Rothbard in his now classic play “Mozart was a Red,” which I highly recommend. In fact, I can’t resist quoting part of Justin Raimondo’s introduction to this:

“The Randian ideology was not so much an integrated philosophical system as a mythos, based as it was on Rand’s novels. Unfortunately, as she got older, she imagined herself to be a philosopher, and gave up fiction writing to become the leader of a movement. In her nonfiction tirades, Rand quotes mainly from her own works; this was due not only to her inflated self-estimate, but also to a colossal ignorance. She read almost nothing but detective novels, and her followers, usually considerably younger, were even worse. Although her philosophy of rational self-interest was an eccentric modern variation on a much older philosophical tradition, the only precedent she acknowledged was Aristotle.”
http://www.lewrockwell.com/rothbard/mozart.html

And this was from a fellow libertarian! As an aside at this point, I myself once had a Randian friend in university, and his support for Randian ideology came almost exclusively from reading Atlas Shrugged – so I cannot help but think there is something to Raimondo’s assessment of the Randians. But let’s move on.

Perhaps a more intellectually rigorous libertarianism can be found in David D. Friedman’s anarcho-capitalism, which is based on a consequentialist/utilitarian argument, in contrast to the natural rights/natural law approach of Murray Rothbard.

The various other non-Austrian libertarians seem to be adherents of neoclassical economics – or at least influenced by neoclassical economics to some extent, even when they claim an affiliation with Austrian economics, without completely accepting the ideas of that school. We can include Robert Nozick, Jan Narveson, David Gauthier, Bryan Caplan, and David D. Friedman in this group.

We should note that Austrian economics began as a theory that was not fundamentally hostile to government intervention (see “Friedrich von Wieser and Eugen von Philippovich von Philippsberg: Austrian Economists and Fabian Socialists,” October 21, 2010), but then took a wrong turn to the dead-end of Misesian and Rothbardian thought after World War II.

Of modern Austrians who managed to escape the grip of Mises and Rothbard, the most interesting (in my view) are the radical subjectivists like Ludwig Lachmann. The Austrian radical subjectivists share some ideas with Post Keynesians, and Austrian economics is still haunted by the “Lachmann problem” – the problem of how free markets result in plan/pattern co-ordination under subjective expectations and fundamental uncertainty.

The development of modern Austrian economics amongst the moderate subjectivists (such as Israel Kirzner, Roger Garrison, Gerald P. O’Driscoll and Mario J. Rizzo) is essentially the story of Austrians who have tried to solve the “Lachmann problem,” albeit unsuccessfully. In particular, O’Driscoll and Rizzo’s book The Economics of Time and Ignorance (Oxford, UK, 1985) is one that stands out in the Austrian literature.

F. H. Hahn in a Candid Moment on Neo-Walrasian Equilibrium

The neo-Walrasian economist Frank H. Hahn is a respected neoclassical economist. Unlike other neoclassicals, however, he has been rather more honest in admitting the limitations of neo-Walrasian general equilibrium theory.

John Maynard Keynes stressed that money has special properties. Money has a zero or very small elasticity of production, and money and financial assets have zero elasticity of substitution with producible commodities. Keynes and modern Post Keynesians thus reject the “gross substitution axiom,” an idea held by neoclassicals and probably by many Austrians as well.

As Paul Davidson has noted (Davidson 2010), Frank H. Hahn in 1977 came to a similar conclusion about money and financial assets:

“there are ... resting places for saving other than reproducible assets. In our model this is money. But land, as Keynes to his credit understood, would have just the same consequences and so would Old Masters. It is therefore not money which is required to do away with a Say’s Law-like proposition that the supply of labour is the demand for goods produced by labour. Any non-reproducible asset will do. When Say’s law is correctly formulated for an economy with non-reproducible goods it does not yield the conclusions to be found in textbooks. As I have already noted Keynes was fully aware of this and that is why he devoted so much space to the theory of choice amongst alternative stores of value” (Hahn 1977: 31).

Furthermore, Hahn also questioned the role that flexible money wages are supposed to play in clearing markets and reducing unemployment:

“One can certainly now see that the view that with ‘flexible’ money wages there would be no unemployment has no convincing argument to recommend it … Even in a pure tatonnement in traditional models convergence to an equilibrium cannot be generally proved. In a more satisfactory model matters are more doubtful still. Suppose money wages fall in a situation of short-run non-Walrasian unemployment equilibrium. The argument already discussed suggests that initially this will lead to a redistribution in favour of profit. The demand for labour, however, will only increase on the expectation of greater sales since substitution effects in the short run can be neglected. If recipients of profit regard the increase as transient (as they sensibly might) their demand for goods will not greatly increase. On the other hand, if wage-earners have few assets their demand will decrease. But that means that producers get a signal to reduce output. Wages continue to fall and prices begin to fall also. Real cash balances increase but expectations about future prices may give a positive rate of return to money. There may be many periods for which falling money wages go with falling employment. Where the system would end up in the ‘long run’ I do not know” (Hahn 1977: 37).

Hahn (1977: 39) also noted that in any economy “which is not a barter economy … any non-reproducible asset allows for a choice between employment inducing and nonemployment inducing demand.” Hahn was right, but Keynes knew this long before Hahn.

BIBLIOGRAPHY

Davidson, P. 2002. Financial Markets, Money, and the Real World, Edward Elgar, Cheltenham.

Davidson, P. 2010. “Keynes’ Revolutionary and ‘Serious’ Monetary Theory,” in R. W. Dimand, R. A. Mundell, and A. Vercelli (eds), Keynes’s General Theory after Seventy Years, Palgrave Macmillan, Basingstoke, England and New York. 241–267

Hahn, F. H. 1977. “Keynesian Economics and General Equilibrium Theory: Reflections on Some Current Debates,” in G. C. Harcourt (ed.), The Microeconomic Foundations of Macroeconomics, Macmillan, London. 25–40.

Rothbard Refutes Rothbard on the Effects of Deflation

I have recently seen an article by Philipp Bagus called “Deflation: When Austrians Become Interventionists” (Quarterly Journal of Austrian Economics 6.4 2003: 19–35). One does not have to agree with Bagus’ pro-deflation views to learn from this article.

Bagus points out a contradiction in Rothbard’s thinking on deflation, from the perspective of his own ethics and anti-fractional reserve banking theory.

But there is also another contradiction about the effects of deflation of which Rothbard is guilty. The essence of Rothbard’s views on this subject (at least in many of his writings) is that there is nothing “inherently bad about deflation” (Bagus 2003: 24).

Certainly in Man, Economy, and State (p. 766) there is a clear statement to this effect:

“Similarly, a decrease in the money stock involves no social loss. For money is used only for its purchasing power in exchange, and an increase in the money stock simply dilutes the purchasing power of each monetary unit. Conversely, a fall in the money stock increases the purchasing power of each unit” (Rothbard 2004 [1962]: 766).

Again in America’s Great Depression, Rothbard dismisses the idea of debt deflation, if prices are falling:

“It has often been maintained that a failing price level injures business firms because it aggravates the burden of fixed monetary debt. However, the creditors of a firm are just as much its owners as are the equity shareholders. The equity shareholders have less equity in the business to the extent of its debts. Bond holders (long-term creditors) are just different types of owners, very much as preferred and common stock holders exercise their ownership rights differently. Creditors save money and invest it in an enterprise, just as do stockholders. Therefore, no change in price level by itself helps or hampers a business; creditor-owners and debt-owners” (Rothbard 2000: 51, n. 16).

But then in The Mystery of Banking (originally published in 1983), Rothbard proposed a plan for a return to the gold standard (Rothbard 2008: 261–268), as follows:

“I propose that, in order to separate the government totally from money, its hoard of gold must be denationalized … What better way to denationalize gold than to take every aliquot dollar and redeem it concretely and directly in the form of gold? And since demand deposits are part of the money supply, why not also assure 100% reserve banking at the same time by disgorging the gold at Fort Knox to each individual and bank holder, directly redeeming each aliquot dollar of currency and demand deposits? In short, the new dollar price of gold (or the weight of the dollar), is to be defined so that there will be enough gold dollars to redeem every Federal Reserve note and demand deposit, one for one. And then, the Federal Reserve System is to liquidate itself by disgorging the actual gold in exchange for Federal Reserve notes, and by giving the banks enough gold to have 100% reserve of gold behind their demand deposits. After that point, each bank will have 100% reserve of gold, so that a law holding fractional reserve banking as fraud and enforcing 100% reserve would not entail any deflation or contraction of the money supply. The 100% provision may be enforced by the courts and/or by free banking and the glare of public opinion” (Rothbard 2008: 262–263).

Thus Rothbard wished to avoid a contraction of the money stock, and defended it on these grounds:

“we have the advantage of starting from Point Zero, of letting bygones be bygones, and of insuring against wracking deflation that would lead to a severe recession and numerous bankruptcies. For the logic of returning at $500 would require a deflation of the money supply down to the level of existing bank reserves. This would be a massive deflationary wringer indeed, and one wonders whether a policy, equally sound and free market oriented, which can avoid such a virtual if short-lived economic holocaust might not be a more sensible solution” (Rothbard 2008: 267).

If deflation of the money stock (admittedly the one imagined by Rothbard would be a very severe one) has no serious consequences for output and employment or no social loss (as in Rothbard 2004 [1962]: 766), then why would it lead to “severe recession and numerous bankruptcies,” as stated here? Rothbard has contradicted himself.

As Bagus (2003: 22–23) points out, Rothbard’s plan also seems to contradict his own stated ethics and opposition to fractional reserve banking:

“… Rothbard’s plan … is not only a prevention of justice but it entails an additional injustice, since he proposes to give to the banks gold that is the just property of other people. That is theft. It must be noted that the application of Rothbard’s theory of ethics must bring about deflation by ending all fiduciary media. Strangely enough, Rothbard does not apply his theory of ethics to his plan of monetary reform. In contrast he proposed a plan that contradicts his ethical theory and is—according to it—dead unjust” (Bagus 2003: 23).

Moreover, Bagus provides a review of the opinions of other Austrians on deflation, including Mises, Hans Sennholz, Jesús Huerta de Soto, Hayek, and George Reisman. He finds some negative views on deflation amongst some of these authors, and rightly notes Hayek’s volte face late in life on the issue of “secondary deflation.”

ADDENDUM

It is worth quoting Roger Garrison for another modern Austrian view on deflation.

See R. W. Garrison, “The Austrian School,” in B. Snowdon and H. R. Vane (eds), Modern Macroeconomics: Its Origins, Development and Current State, Edward Elgar, Cheltenham. 2005. p. 515:

“Deflation, like inflation, is a secondary issue in the Austrian literature. Growth-induced deflation, that is, the decline in some overall price index that accompanies increases in real output, is considered a non-problem. Here, the microeconomic forces that govern individual markets are fully in play.

Deflation caused by a severe monetary contraction is another matter. Strong downward pressures on prices in general put undue burdens on market mechanisms. Unless, implausibly, all prices and wages adjust instantaneously to the lower money supply, output levels will fall. Monetary contraction could be the root cause of a downturn - as, for instance, it seems to have been in the 1936–7 episode in the USA. The Federal Reserve, failing to understand the significance of the excess reserves held by commercial banks, dramatically increased reserve requirements, causing the money supply to plummet as banks rebuilt their cushion of free reserves. But what caused the money supply to fall at the end of the 1920s boom? The monetarists attribute the monetary contraction to the inherent ineptness of the central bank or to the central bank’s (ill-conceived) attempt to end the speculative orgy in the stock market, an orgy that itself goes unexplained. In the context of Austrian business cycle theory, the collapse in the money supply is a complicating factor rather than the root cause of the downturn. In 1929, when the economy was in the final throes of a credit-induced boom, the Federal Reserve, uncertain about just what to do and hampered by internal conflict, allowed the money supply to collapse. The negative monetary growth during the period 1929 to 1933 helps to account for the unprecedented depth of the depression. But like Keynes’s focus on the loss of business confidence, the monetarists’ focus on the collapse of the money supply diverts attention from the underlying maladjustments in the economy that preceded – and necessitated – the downturn”.

The crucial factors ignored by Austrians in regard to the 1929–1933 collapse are the unstable nature of poorly regulated financial markets, the deflation of an asset bubble fuelled by excessive debt, and debt deflationary collapse. US monetary policy was no doubt hampered by the gold standard – or perhaps, more accurately, “gold standard thinking” from which policy-makers had difficulties extracting themselves.


BIBLIOGRAPHY

Bagus, P. 2003. “Deflation: When Austrians Become Interventionists,” Quarterly Journal of Austrian Economics 6.4: 19–35.

Garrison, R. W. 2005. “The Austrian School,” in B. Snowdon and H. R. Vane (eds), Modern Macroeconomics: Its Origins, Development and Current State, Edward Elgar, Cheltenham. 474–516.

Mises, L. 1996. Human Action: A Treatise on Economics (4th rev. edn), Fox and Wilkes, San Francisco.

Rothbard, M. N. 2000 [1963]. America’s Great Depression (5th edn), Ludwig von Mises Institute, Auburn, Ala.

Rothbard, M. N. 2004 [1962]. Man, Economy, and State: A Treatise on Economic Principles, Ludwig von Mises Institute, Auburn, Ala.

Rothbard, M. N. 2008. The Mystery of Banking (2nd edn), Ludwig von Mises Institute, Auburn, Ala.

Mises on the Ricardian Law of Association: The Flaws of Praxeology

I have already written a post criticising Misesian praxeology (“Mises’ Praxeology: A Critique,” October 1, 2010), but have recently been challenged to present specific examples of the unsound arguments in Mises’ praxeology which involve false stated or hidden assumptions (see “Apodictic Certainty of Praxeology”).

Mises’ discussion of the “Ricardian law of association” (or free trade by comparative advantage) is a perfect example of this, and is given in Mises’ Human Action: A Treatise on Economics (4th edn, 1996), pp. 159–164 (for discussion, see Murphy and Gabriel 2008: 65–66; Vaughn 1994: 78).

First, it is perfectly clear that even Mises admits some role for empirical evidence in praxeology. In fact, the alleged “apodictic certainty” for his praxeology claimed by some modern Austrians vanishes when we look carefully at a candid passage of Mises himself:

“Every theorem of praxeology is deduced by logical reasoning from the category of action. It partakes of the apodictic certainty provided by logical reasoning that starts from an a priori category. Into the chain of praxeological reasoning the praxeologist introduces certain assumptions concerning the conditions of the environment in which an action takes place. Then he tries to find out how these special conditions affect the result to which his reasoning must lead. The question whether or not the real conditions of the external world correspond to these assumptions is to be answered by experience. But if the answer is in the affirmative, all the conclusions drawn by logically correct praxeological reasoning strictly describe what is going on in reality” (Mises 1978 [1962]: 44).

An assumption about “real conditions of the external world” is a synthetic proposition. If the “question whether or not the real conditions of the external world correspond to these assumptions is to be answered by experience,” then we need empirical evidence.

And we can add to Mises’ last sentence: if the answer is in the negative, then the conclusions drawn even by valid praxeological reasoning do not describe what is going on in reality. They describe a non-existent, fantasy world.

Mises’ praxeological case for free trade is such an example. Mises’ argument is itself heavily dependent on Ricardo:

“Ricardo expounded the law of association in order to demonstrate what the consequences of the division of labor are when an individual or a group, more efficient in every regard, cooperates with an individual or a group less efficient in every regard. He investigated the effects of trade between two areas, unequally endowed by nature, under the assumption that the products, but not the workers and the accumulated factors of future production (capital goods), can freely move from each area into the other” (Mises 1996: 159).

“Ricardo, however, starts from the assumption that there is mobility of capital and labor only within each country, and not between the various countries …. Now, Ricardo’s assumptions by and large held good for his age. Later, in the course of the nineteenth century, conditions changed. The immobility of capital and labor gave way; international transfer of capital and labor became more and more common. Then came a reaction. Today capital and labor are again restricted in their mobility. Reality again corresponds to the Ricardian assumptions (Mises 1996: 164).

Mises correctly notes that there were certain assumptions made by Ricardo for his principle of comparative advantage to work. Mises was writing the original edition of Human Action before 1949, long before the era of globalization and liberalized capital markets that began from the 1970s.

The period from 1945 to 1973 was indeed a world where capital controls restricted foreign investment to some extent and labour mobility was more restricted than in the 19th century. Mises even concedes that by the late 19th century the conditions assumed by Ricardo did not necessarily hold.

What Mises completely misses is that, because of hidden assumptions in the argument for comparative advantage, it is highly doubtful whether his argument for comparative advantage works even for 1945–1973 period. Before we examine the hidden assumptions, however, it is useful to look at the stated assumptions.

Even neoclassical arguments for free trade rely on David Ricardo’s principle of comparative advantage, though of course modern neoclassical theory uses the more sophisticated Heckscher–Ohlin model as its defence of free trade. But this model has been increasingly challenged by modern critics (e.g., Gomory and Baumol 2000), and there are rival theories in mainstream economics like New Trade Theory (NTT), to which Paul Krugman has made contributions (for some other critical work on free trade, see Prasch 1996; Gomory and Baumol 2000; Reinert 2007; Fletcher 2008; Baiman 2010).

It should be noted that Ricardo wrote the book Principles of Political Economy and Taxation in 1817. This was at a time before the full effects of the industrial revolution were clear, a point which we will return to below.

Ricardo’s principle of comparative advantage requires two conditions to work properly, as follows:

(1) Domestic factors of production like capital goods and skilled labour are not internationally mobile, and instead will be re-employed in the sector/sectors in which the country’s comparative advantage lies;

(2) Workers are fungible, and will be re-trained easily and moved to the new sectors where comparative advantage lies (Prasch 1996: 39–40).

As is admitted even by Mises, by the late 19th century assumption (1) was questionable.

Today it is also the case that both capital goods themselves and investment money for production are very mobile, so that (1) is also not true. Proposition (2) is also questionable in many cases (Prasch 1996: 40–41).

Once capital becomes extremely mobile internationally, we no longer have comparative advantage, but absolute advantage. It is not at all clear that free trade under “absolute advantage” is beneficial to all nations. In Ricardo’s day, internationally mobile capital was not that significant. David Ricardo observed that the immobility of capital in his day prevented capital from seeking absolute advantage. He described it as

“the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the … [ease] with which it invariably passes from one province to another in the same country” (Ricardo, On the Principles of Political Economy and Taxation, 7.18).

In Ricardo’s day, capital mobility did not happen on a large scale because capital and technology were more difficult to transfer. But it never occurred to Ricardo that, in a world of mobile capital and easily transferable technology, capital would seek absolute advantage in a destructive way to its home country.

The neoclassical and Misesian argument for free trade is dependent on the capital of one country remaining in that country and being put to work in some other productive domestic industry, where comparative advantage lies. This is not what happens today, where capital from Western countries seeks absolute advantage in the developing countries. Movement of capital to a place where it has absolute advantage simply causes de-industrialization in Western countries, as capital moves to nations with the lowest unit labour costs, and higher wage countries experience falling wages and high unemployment (Holt 2007: 103). Moreover, the large-scale movement of service industries overseas (often called “outsourcing”) is just as damaging.

With the collapse of manufacturing and other production, nations suffer higher unemployment and higher trade deficits. Capital does not simply move from one domestic sector to another where comparative advantage lies, because of international capital mobility and the drive for lower wages and higher profits. Thus the changes in domestic investment that would happen under the assumptions of Ricardo do not happen.

But, even if all the assumptions stated above are true, there are still devastating hidden assumptions underlying the whole argument of Ricardo and Mises. These hidden assumptions are precisely the type of synthetic propositions I have referred to in my earlier post on praxeology.

The hidden assumptions are as follows:

(1) it does not matter what you produce (e.g., you could produce pottery), as long as you do it in a way that gives you comparative advantage;

(2) technology is unchanging and uniform; and

(3) there are no returns to scale (Galbraith 2008: 68; Chang 2003: 292).

These hidden assumptions are utterly absurd. First, it does matter what you produce. Reliance on primary commodity exports whose prices are subject to volatility is not a successful strategy for economic development in most countries; in fact, such countries reliant on primary commodities and service industries are usually poor developing nations.

Moreover, as Galbraith as noted:

“Comparative advantage operates on the assumption of unchanged technology and constant returns to scale. There are no economies of scale, no learning curve, no improvements in productivity as output increases. The only requirement is that conditions of production differ, so that one good—in terms of the other—is relatively more expensive in one country and relatively less so in the other. The only efficiency gained from trade stems from the reorganization of production and the reallocation of factors—labor, capital, land—to their best uses in the new, larger, common market … But the argument does not generalize to the real world. Given three countries and three commodities, it is not obvious that each country will always be the relatively most efficient producer of exactly one good. And then what? Does the country that has no comparative advantage produce nothing? Does it refuse to trade? If its “comparative advantage” lies in exporting labour and closing up shop, is this acceptable? The textbooks do not say. The actual world has some 220 countries and thousands of distinct commodities. In this world—the one where we actually live—the calculation of comparative advantage is intractable, and the doctrine says nothing about who should specialize in what, still less that specialization will exactly reproduce full employment in each place ... Further, comparative advantage is based on the concept of constant returns: the idea that you can double or tripe the output of any good simply by doubling or tripling the inputs. But this is not generally the case. For manufactured products, increasing returns, learning, and technical change are the rule, not the exception: the cost of production falls with experience. With increasing returns, the lowest cost will be incurred by the country that starts the earliest and moves fastest on any particular product line … For most other commodities, where land or ecology places limits on the expansion of capacity, the opposite condition—diminishing returns—is the rule. In this situation, there can be no guarantee that an advantage of relative cost will persist once specialization and the resulting expansion of production take place” (Galbraith 2008: 68).

In the real world, production in high-value-added sectors like manufacturing leads to innovation, advancement of technology, increasing returns to scale, synergies, and strong economic growth. That is why manufacturing drives industrialization and makes nations rich. The basis of a modern first world economy is manufacturing and high-value added industries. Writing in 1817, Ricardo did not understand the full implications of the industrial revolution for economic development.

As is shown brilliantly by Erik S. Reinert in How Rich Countries Got Rich, and Why Poor Countries Stay Poor (Carroll & Graf, New York, 2007, p. 301ff.), a developing nation can follow rules of comparative advantage to the letter, and still remain mired in poverty and stagnation, with low-valued-added production and decreasing returns to scale.

A catastrophic example of the effects of comparative advantage was seen in Mongolia’s economy in the 1990s. Mongolia, under advice from the World Bank, implemented free trade, which caused its manufacturing sector to collapse, and it shifted to raising livestock (where its comparative advantage lay, according to classical trade theory). The result was a halving of per capita GDP and ecological disaster, as increasing livestock production led to diminishing returns, overgrazing, and desertification (Reinert 2004: 157–214).

Such free trade by comparative advantage is not a successful path to economic development.

In a world where a developing nation specialises in primary commodities, often according to the dictates of comparative advantage, it is normally cheaper to buy manufactured goods from overseas. But, under such circumstances, a Third World country will not industrialize. It will be permanently mired in poverty, commodity exports or service industries (the typical type of third world economy). There are sound reasons for violating free trade theory and creating your own high-value added industries, where the home market has sufficient demand for the products of those industries, through targeted infant industry protectionism or modern import substitution industrialization (Chang 2002, 2003, 2007; see also “Industrial Policy: A Brief Comment,” June 21, 2010)

The alleged economic advantages of free trade claimed by Misesian praxeology and by Ricardo are simply false, because of the false hidden premises in the argument.

BIBLIOGRAPHY

Baiman, R. 2010. “The Infeasibility of Free Trade in Classical Theory: Ricardo’s Comparative Advantage Parable has no Solution,” Review of Political Economy 22.3: 419–437.

Chang, H.-J. 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective, Anthem Press, London.

Chang, H.-J. 2003. Rethinking Development Economics, Anthem Press, London.

Chang, H.-J. 2007. Bad Samaritans: Rich Nations, Poor Policies, and the Threat to the Developing World, Random House Business, London.

Fletcher, I. 2008. “Fatal Flaws in the Theory of Comparative Advantage,” American Economic Alert (November 6)
http://www.americaneconomicalert.org/view_art.asp?Prod_ID=3076

Galbraith, J. K. 2008. The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should too, Free Press, New York.

Gomory, R. E. and Baumol, W. J. 2000. Global Trade and Conflicting National Interests, MIT Press, Cambridge, Mass.

Holt, R. P. F. 2007. “Post Keynesian Economics?,” in M. Forstater, G. Mongiovi, and S. Pressman (eds), Post Keynesian Macroeconomics: Essays in Honour of Ingrid Rima, Routledge, London. 89–107.

Korzeniewicz, R. P. 2001. “Comparative Advantage and Unequal Exchange,” in P. Anthony O’Hara (ed.), Encyclopedia of Political Economy. Volume 1. A–K, Routledge, London and New York. 127–131.

Mises, L. 1978 [1962]. The Ultimate Foundation of Economic Science: An Essay on Method (2nd edn, Sheed Andrews & McMeel, Kansas City.

Mises, L. 1996. Human Action: A Treatise on Economics (4th rev. edn), Fox and Wilkes, San Francisco.

Murphy, R. P. and A. Gabriel, 2008. Study Guide to Human Action: A Guide Tutorial of Ludwig von Mises’s Classic Work, Ludwig von Mises Institute, Auburn, Ala.

Prasch, R. E. 1996. “Reassessing the Theory of Comparative Advantage,” Review of Political Economy 8.1: 37–56.

Prestowitz, C. 2004. “Free Trade and Outsourcing Are Not the Same,” Financial Times (25 April).

Prestowitz, C. V. 2005. “China as No. 1,” American Prospect, February 21
http://www.prospect.org/cs/articles?article=china_as_no_1

Prestowitz, C. V. 2010. The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How we Must Compete in the Post-Dollar Era, Free Press, New York and London.

Reinert, E. S. “Diminishing Returns and Economic Sustainability; The Dilemma of Resource-based Economies under a Free Trade Regime,”
http://www.othercanon.org/uploads/SUM%20paper%20diminishing%20returns.doc#32;paper%20diminishing%20returns.doc

Reinert, E. S. 2004. “Globalization in the Periphery as a Morgenthau Plan: The Underdevelopment of Mongolia in the 1990s,” in E. S. Reinert (ed.), Globalization, Economic Development, and Inequality: An Alternative Perspective, Edward Elgar Pub., Cheltenham. 157–214.

Reinert, E. S. 2007. How Rich Countries got Rich, and Why Poor Countries Stay Poor, Carroll and Graf, New York.

Roberts, P. C. 2004. “Clarifications on the Case for Free Trade” Mises Daily (January 10) http://mises.org/daily/1420

Roberts, P. C. 2007. “Commentary & Analysis: Economists In Denial; Blind To Offshoring's Adverse Impact,” Manufacturing & Technology News 14.3 (February 6)
http://www.manufacturingnews.com/news/07/0206/art2.html

Roberts, P. C. 2009. “The Problem of Free Trade,” Counterpunch 16.2 (January 16–31).

Ruffin, R. 2002. “David Ricardo’s Discovery of Comparative Advantage,” History of Political Economy 34.4: 727–748.

Schumer, C. and Roberts, P. C. 2004. “Second Thoughts on Free Trade,” New York Times (6 January).

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge.

Hayek on Secondary Deflation

Austrians frequently assert that deflation is not to be feared, and even that deflation has no undesirable consequences. One of the more absurd statements from their literature is by Murray Rothbard. This can be found in Man, Economy, and State (p. 766):

“Goods are useful and scarce, and any increment in goods is a social benefit. But money is useful not directly, but only in exchanges. And we have just seen that as the stock of money in society changes, the objective exchange-value of money changes inversely (though not necessarily proportionally) until the money relation is again in equilibrium. When there is less money, the exchange-value of the monetary unit rises; when there is more money, the exchange-value of the monetary unit falls. We conclude that there is no such thing as ‘too little’ or ‘too much’ money, that, whatever the social money stock, the benefits of money are always utilized to the maximum extent. An increase in the supply of money confers no social benefit whatever; it simply benefits some at the expense of others, as will be detailed further below. Similarly, a decrease in the money stock involves no social loss. For money is used only for its purchasing power in exchange, and an increase in the money stock simply dilutes the purchasing power of each monetary unit. Conversely, a fall in the money stock increases the purchasing power of each unit” (Rothbard 2004 [1962]: 766).

Rothbard clearly never heard of debt deflation or Irving Fisher’s debt deflation theory of depressions, or if he did never properly understood the process, and one cannot take seriously his view that “a decrease in the money stock involves no social loss.”

Hayek, to his credit, had a different view of the role of deflation in 1929–1933, at least later in life:

“There is no doubt, and in this I agree with Milton Friedman, that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation! So, once again, a badly programmed monetary policy prolonged the depression” (Pizano 2009: 13).

Hayek, then, argued that a secondary deflation had negative effects on the US economy after 1929 and admitted that his earlier views had been wrong:

“Although I do not regard deflation as the original cause of a decline in business activity, such a reaction has unquestionably the tendency to induce a process of deflation – to cause what more than 40 years ago I called a ‘secondary deflation’ – the effect of which may be worse, and in the 1930s certainly was worse, than what the original cause of the reaction made necessary, and which has no steering function to perform. I must confess that forty years ago I argued differently. I have since altered my opinion – not about the theoretical explanation of the events, but about the practical possibility of removing the obstacles to the functioning of the system in a particular way” (Hayek 1978: 206).

In saying that he agreed with Milton Friedman, however, Hayek presumably would have accepted a monetarist solution of stabilizing the money supply by open market operations and other interventions, but not a Keynesian solution of fiscal policy.

Despite the acknowledgement that some monetary intervention was necessary in situations like 1929–1933, Hayek still failed to see that mere monetary stabilization will not stop debt deflationary collapse.

Merely preventing a contraction of the money supply by itself will not prevent price deflation when it is caused by a severe contraction of aggregate demand, through deleveraging, shocks to business confidence, net negative changes in debt, and a slump in consumption and investment. To prevent such crashes, fiscal policy and more radical interventions to fix broken financial systems are necessary.

If monetary policy were really all that is needed to prevent price deflation, then why did Japan’s ZIRP in the 1990s not prevent the descent into price deflation in 1999? And why did price deflation persist in Japan for years after the beginning of quantitative easing in 2001?

UPDATE

I have a new post here related to this one on Rothbard’s view of deflation:

http://socialdemocracy21stcentury.blogspot.com/2011/01/rothbard-refutes-rothbard-on-effects-of.html


BIBLIOGRAPHY

Hayek, F. A. 1975. A Discussion with Friedrich A Von Hayek, American Enterprise Inst., Washington.

Hayek, F. A. 1978. New Studies in Philosophy, Politics, Economics and the History of Ideas, Routledge & Kegan Paul, London.

Pizano, D. 2009. Conversations with Great Economists, Jorge Pinto Books Inc., New York.

Rothbard, M. N. 2004 [1962]. Man, Economy, and State: A Treatise on Economic Principles, Ludwig von Mises Institute, Auburn, Ala.

Keynesianism in America in the 1940s and 1950s

I have recently seen a most peculiar Austrian argument to the effect that Keynesianism was not used after 1945 in the US, and that America pursued “austerity” measures in that era.

This bizarre claim is easily disposed of. First, the era of classic Keynesianism in the US ran from 1945 to about 1979. Neoclassical synthesis Keynesianism quickly came to dominate the US economics profession in the late 1930s and early 1940s. From the Post Keynesian perspective, however, the neoclassical Keynesians (like Paul Samuelson and Robert M. Solow) set themselves up for later theoretical problems by wedding their Keynesianism to a Neo-Walrasian neoclassical equilibrium model (see “Neoclassical Synthesis Keynesianism, New Keynesianism and Post Keynesianism: A Review”). But in these post-war years a more radical kind of Keynesianism was also developed by John Kenneth Galbraith, the American Institutionalist, and his supporters.

After WWII, the US presidency was held by the Democrat Harry S. Truman (1945–1953) and the Republican Dwight D. Eisenhower (1953–1961). Both presidents were certainly concerned with budget deficits and the threat of inflation, but both also presided over an economy that had been transformed by the New Deal. Once social security and other welfare measures had been introduced by Roosevelt and then extended by Truman, the US had a Keynesian system of automatic stabilizers which provided countercyclical fiscal policy in times of recession. It is important to stress that the US economy had an automatic fiscal mechanism that operated to counter recessions. The fact that both Truman and Eisenhower were concerned with balanced budgets was largely irrelevant given the automatic tendency for countercyclical fiscal policy to occur.

So was Keynesianism used in the US after 1945? The necessary data on the US budget in these years can be found here (as totals including both on-budget and off-budget amounts):

http://www.presidency.ucsb.edu/data/budget.php

We must remember that before 1977 the US fiscal year ran from July 1 to June 30 the next year.

The first post-WWII recession was that of February to October 1945, which was the result of the end of the war and the beginning of the conversion of the wartime US economy to a peacetime economy. The US recession of 1945 was not a normal recession in any sense of the term, and the surge in domestic demand for consumer goods which had pent up during the war lead to high private consumption and economic growth after 1945, especially after the 1945 tax cut of $6 billion passed in November. The post-war growth to 1948 was an entirely predictable development consistent with Keynesian economics.

Austrians appear to believe that the recovery that quickly began in 1945 in some way contradicts Keynesianism. Usually, they point to the fear that some Keynesians like Paul Samuelson (Samuelson 1944 and 1944a) had that the depression would return after the war.

Of course, what they don’t say is that opinion amongst Keynesians was divided, and Keynes himself predicted what would happen. In 1943, Keynes was giving a lecture at the Federal Reserve and was asked by Abba Lerner about the possible economic problems of the post-war period. Keynes’ reply is significant:

“Keynes harshly rejected the risk of post-war stagnation, holding that because of Social security there would be a large reduction in private saving and so that would be no problem” (Colander and Landreth 1996: 202).

That Samuelson and others thought the economy would slide back into a depression after 1945 shows nothing more than that they were wrong, and Keynes was right.

The second post-WWII recession extended from November 1948 to October 1949. As can be seen in the US federal budget data, Truman’s budget surplus of 4.6% of GDP in fiscal year 1948 fell to 0.2% in fiscal year 1949, as spending went from $29.8 billion in 1948 to $38.8 billion in 1949, as automatic stabilizers kicked in. In fiscal year 1950 (July 1, 1949 to June 30 1950), the budget went into an actual deficit of 1.1% of GDP (which was also partly the result of the beginning of the Korean war in June 1950). Moreover, Congress had pushed through a tax cut in 1948, which boosted spending in 1949. What we have here is classic Keynesian countercyclical fiscal policy.

The next recession ran from 1953 to 1954, and was caused by the end of the Korean war, inventory liquidation, and lower consumer demand (Sorkin 1997: 567). The recovery was again aided by automatic stabilizers and tax cuts in 1954.

The fourth recession lasted from 1957 to 1958, and was caused by inventory liquidation, shifts in investment and consumption, and a fall in exports in 1957 (Sorkin 1997: 567). While Eisenhower continue to favour a balanced budget and saw inflation as a more important threat than unemployment (Gosling 2008: 74), US fiscal policy was again Keynesian. To deal with the recession of 1957–1958, Congress passed a stimulus package in 1958, which Eisenhower supported (Benavie 1998: 42). The US budget remained in deficit in 1958 and 1959, the result of automatic stabilizers and discretionary spending for the stimulus.

But Eisenhower and his administration accepted higher unemployment as a check on inflation, and were criticised by liberal Keynesians like Paul Samuelson and John Kenneth Galbraith for lost growth, a real GDP less than potential GDP, and unnecessarily high unemployment (Gosling 2008: 75–76).

In fact, American economic policy-makers in the post-WWII period were essentially divided into conservative Keynesians and liberal Keynesians. The economic policy-makers in the Eisenhower administration were conservative Keynesians, but after John F. Kennedy became president liberal Keynesians became more influential.

The conversion of America’s policy-makers to neoclassical synthesis Keynesianism was famously described in a Time issue of December 31, 1965 in the cover article “The Economy: We Are All Keynesians Now.” Here the introduction of Keynesianism in the 1940s and 1950s is correctly described:

“In World War II, Washington planners used Keynesian ideas to formulate their policies of deficit spending. Congress adopted the Keynesian course in 1946, when it passed the Employment Act, establishing Government responsibility to achieve ‘maximum employment, production and purchasing power.’ The act also created the Council of Economic Advisers, which for the first time brought professional economic thinking into close and constant touch with the President. Surprisingly it was Dwight Eisenhower’s not-notably-Keynesian economists who most effectively demonstrated the efficacy of Keynes’s antirecession prescriptions; to fight the slumps of 1953–54 and 1957–58, they turned to prodigious spending and huge deficits” (“The Economy: We Are All Keynesians Now,” Time, December 31, 1965).

A. L. Sorkin also sums up the nature of the recessions and countercyclical nature of fiscal policy in the period down to 1961:

“[sc. Post-war] recessions can be characterized as ‘inventory recessions,’ that is, the business-cycle contractions were the result of excessive inventory accumulation and subsequent liquidation. Tax cuts, particularly those that occurred in 1948 and 1953–54, helped to stabilize personal income and consumption spending, tending to moderate these recessions. The automatic stabilizers and accompanying federal budget deficits helped move the economy toward the recovery phase of the cycle” (Sorkin 1997: 569).

There is no doubt at all that post-WWII US policy was Keynesian.

A final point is also worth noting. The business cycle after WWII down to 1990 was rather different from the pre-1933 business cycle. Recessions in this period were not caused by the familiar 19th-century and pre-1933 pattern of bursting asset bubbles, financial crises, bank runs and debt deflation.

As Sorkin argues, downturns were mostly “inventory recessions,” a phenomenon that people in the 1950s and 1960s themselves understood (see Life, 14 April 1961).

The absence of huge and damaging asset bubbles, financial crises, and bank runs after 1945 is undoubtedly related to the superior system of financial regulation and deposit insurance that existed in this era that minimised bubbles and reckless lending.

When that effective system was transformed into one that was fundamentally dysfunctional after 1980 and, in particular, in the 1990s, with the advent of New Classical economics, monetarism, and revived neoclassical macro-theory, we saw the return of huge asset bubbles, financial crises and debt deflation as significant causes of the business cycle.


BIBLIOGRAPHY

Benavie, A. 1998. Deficit Hysteria: A Common Sense Look at America’s Rush to Balance the Budget, Praeger, Westport, Conn. and London.

Colander, D. C. and H. Landreth (eds), 1996. The Coming of Keynesianism to America: Conversations with the Founders of Keynesian Economics, E. Elgar, Cheltenham.

Gosling, J. J. 2008. Economics, Politics, and American Public Policy, M.E. Sharpe, Armonk, N.Y.

Samuelson, P. A. 1944. “Unemployment Ahead: (I.) A Warning to the Washington Expert,” New Republic, September 11, 297-299.

Samuelson, P. A. 1944a. “Unemployment Ahead: (II.) The Coming Economic Crisis,” New Republic, September 18, 333-335.

Sorkin, A. L. 1997. “Recessions after World War II,” in D. Glasner and T. F. Cooley (eds), Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York. 566–569.

Weatherford, M. S. and L. M. McDonnell, 1985. “Macroeconomic Policy Making Beyond the Electoral Constraint,” in G. C. Edwards, S. A. Shull, N. C. Thomas (eds), The Presidency and Public Policy Making, University of Pittsburgh Press, Pittsburgh, Pa. 95–113.

US GNP Estimates in the Recession of the 1890s

In the 1890s, the US and other countries suffered either a depression or a severe recession (for the US downturn, see Steeples and Whitten 1998). The US GNP contraction began in January 1893 and continued until June 1894, and a further contraction started after December 1895 until June 1897 (for the official data, one can consult D. Glasner and T. F. Cooley, Business Cycles and Depressions: An Encyclopedia, New York, 1997; this is an incredibly useful book!).

The downturn was made worse in the US by a financial crisis and banking panic in 1893, in which there was also a suspension of payments from August to September (Rockoff 1996: 671). Furthermore, the money stock declined by 4% between 1892 and 1893 (Rockoff 1996: 671), and many banks and businesses failed.

An important point is that 1890s America had no central bank, government spending was a very small percentage of GDP (it fluctuated between 2.55% and 3.62% in the 1890s), and governments tended to pursue austerity in times of recession. In fact, US federal government spending fell from 1893 to 1896 and fell from $465.1 million in 1893 to $443.1 million by 1896, which was obviously contractionary fiscal policy.

The 1890s was a period of comparatively strong laissez faire, certainly by the standards of neoclassical economics. It can even be invoked as an approximation of the type of free market system imagined by Austrians.

As an aside, I would note how utterly absurd it is for Austrians to invoke 1920–1921 as an (alleged) vindication of their theories, when in that period America had a central bank. By any definition, 1920–1921 was even less of a laissez faire system than 1890s America, so it should be less relevant than the 1890s.

If 1920–1921 can be invoked as relevant to how a pure Austrian system might work, then, with even greater reason, the 1890s can be as well. But, of course, given there was no period in recent history when the fantasy Austrian world of no fractional reserve banking, no fiduciary media, no regulation, and no government has ever existed, there is no direct empirical evidence whatsoever that such a system would work or be stable.

All we can do is look to real world capitalism in the 19th century for indirect evidence: given there was no central bank, a gold standard, and minimal regulation in 1890s America, this must give at least an approximation of what an Austrian system would look like.

The trouble with any US GNP figures for the 1800s is that the official Department of Commerce series only began in 1929 (Maddison 1995: 137), and we can only ever have rough estimates for GNP, not reliable data. The reliability of any estimates for the 19th century depends on the sources and methodology used, and there is still dispute about the figures (Maddison 1995: 135–137).

The standard estimates for pre-1914 real US GNP are based on the work of Simon S. Kuznets (1938, 1941, 1946, 1961), whose work was developed by Gallman (1966) and Kendrick (1961). The resulting data is normally called the Kuznets-Kendrick series.

As is well known, the standard data shows far more volatile output in the 19th century than after 1945, but that was challenged by Christina Romer (see Romer 1986, 1986a, 1988, and 1989).

Romer, in turn, was challenged by the estimates of Balke and Gordon, who found that real GNP was on average as volatile as seen in the Kuznets-Kendrick series (Balke and Gordon 1989: 40, 86; Zarnowitz 1992: 362, n. 5).

It is obvious that US GNP estimates for the 19th century are controversial, and that this issue is far from settled.

Now what are the actual estimates of the contraction in GNP in the 1890s?

The Kuznets-Kendrick series shows a real GNP fall of 4% from 1892 to 1893 and another 6% decline from 1893 to 1894, with a further fall of 2.5% from 1895 to 1896. By this data, the 1890s was hit by a full-blown depression (that is, where output fell by 10% or more).

By contrast, Romer’s estimates show a 1.69% contraction in GNP from 1892 to 1894, but no further contraction in the 1890s (Romer 1989: 22, Table 2).

According to Balke and Gordon, real GNP contracted by 2.96% from 1892 to 1894, and, after a recovery in 1895, by 2.27% from 1895 to 1896 (Balke and Gordon 1989: 84, Table 10). Balke and Gordon, then, show a quite severe recession, but not a depression.

Most recently, the New Keynesians G. A. Akerlof and R. J. Shiller have contributed to his debate by arguing the 1890s was so bad partly because of the shock to business expectations (Akerlof and Shiller: 59–64), a view that is essentially consistent with a Post Keynesian theory of fluctuating subjective expectations having serious effects on investment, liquidity preference, spending and aggregate demand.

But there is a real paradox here. Romer’s lower figures for GNP seem blatantly contradicted by the astonishingly high unemployment that began in 1893 and that continued until 1898 (Wicker 2000: 81; Akerlof and Shiller 2009: 60). Perhaps that provides support to Balke and Gordon’s findings, which contradict Romer’s.

We can review the two estimates for unemployment in the 1890s below. First, we can take the revised figures in Romer (1986: 31):

Year Unemployment rate
1892 3.72%
1893 8.09%
1894 12.33%
1895 11.11%
1896 11.965
1897 12.43%
1898 11.62%
1899 8.66%
1900 5.00%

Even using Romer’s figures, the US economy did not return to full employment for nearly a decade after 1893.

The other widely used estimate of unemployment in the 1890s is the work of Stanley Lebergott, and his estimates of unemployment are much higher than Romer’s, so, even if his estimates are invoked as more accurate than Romer’s, they would only make matters worse.

Some argue that Romer’s estimates are questionable (Lebergott 1992), or at least for the period from 1900–1929 (Weir 1986), as the idea that movements in the labour force were pro-cyclical before 1945 can be challenged: if aggregate participation rates were anti-cyclical, then Lebergott’s estimates for 1900–1929 may be better (Weir 1986: 364; Weir 1992, however, does agree that Lebergott’s figures for 1890–1899 are too volatile). Here are Lebergott’s estimates of the unemployment rate:

Year Unemployment rate
1890 4.0
1891 5.4
1892 3.0
1893 11.7
1894 18.4
1895 13.7
1896 14.5
1897 14.5
1898 12.4
1899 6.5
1900 5.0

On either measure of unemployment, the US in the 1890s was mired in suboptimal growth, shockingly high unemployment, and real GNP that did not reach potential GNP.

The experience of the 1890s demonstrates how false is the neoclassical idea that free markets tend to return quickly to full employment equilibrium. What is frequently forgotten is that an economy mired in high involuntary unemployment, even if it has growth, is in an underemployment disequilibrium. The US from 1893 to 1899 was clearly such an economy.

This is important empirical support for the Post Keynesian view that free markets do not have a tendency to full employment equilibrium in the short term. If one considers the return to low unemployment by 1900 after eight years an example of “long-term” tendency to full employment equilibrium, I can only say: such apologists for free markets have already lost the debate.

What use is a system that, after a shock, takes eight years of underemployment disequilibrium, high unemployment and all the resulting social misery caused by this to return to full employment?

Neoclassical laissez faire in the 19th century was a system inferior to a well-run Keynesian economy, on the grounds both of economic efficiency and morality.

APPENDIX 1: GNP ESTIMATES

The real GNP estimates of Balke and Gordon (1989: 84) are as follows:

Year Real GNP*
1888 $170.7
1889 $181.3
1890 $183.9
1891 $189.9
1892 $198.8
1893 $198.7
1894 $192.9
1895 $215.5
1896 $210.6
1897 $227.8
1898 $233.2
1899 $260.3
1900 $265.4
1901 $297.9
1902 $303.0
* GNP figures are in billions of 1982 dollars.

The estimates of Romer (1989: 22) for real GNP are as follows:

Year Real GNP*
1889 $175.030
1890 $182.964
1891 $191.757
1892 $204.279
1893 $202.616
1894 $200.819
1895 $215.668
1896 $221.438
1897 $233.655
1898 $241.459
1899 $254.728
1900 $264.540
1901 $284.908
* GNP figures are in billions of 1982 dollars.


BIBLIOGRAPHY

Akerlof, G. A. and R. J. Shiller. 2009. Animal Spirits: How Human Psychology drives the Economy, and Why it Matters for Global Capitalism, Princeton University Press, Princeton.

Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.

Gallman, R. E. 1966. “Gross National Product in the United States, 1834–1909,” in Output, Employment, and Productivity in the United States after 1800 (Studies in Income and Wealth, vol. 30), Columbia University Press, New York.

Glasner, D. and T. F. Cooley (eds). 1997. Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York.

Kendrick, J. W. 1960. “Comment,” in Trends in the American Economy in the Nineteenth Century (Studies in Income and Wealth, vol. 24), Princeton University Press, Princeton, N.J.

Kendrick, J. W. 1961. Productivity Trends in the United States, Princeton University Press, Princeton.

Kuznets, S. S. 1938. Commodity Flow and Capital Formation, National Bureau of Economic Research, New York.

Kuznets, S. S. 1941. National Income and Its Composition, 1919–1938 (2 vols), National Bureau of Economic Research, New York.

Kuznets, S. S. 1946. National Product since 1869, National Bureau of Economic Research, New York.

Kuznets, S. S. 1961. Capital in the American Economy: Its Formation and Financing, Princeton University Press, Princeton, N.J.

Maddison, A. 1995. Monitoring the World Economy, 1820–1992, Development Centre of the Organisation for Economic Co-operation and Development, Paris.

Maddison, A. 2001. The World Economy: A Millennial Perspective, Development Centre of the Organisation for Economic Co-operation and Development, Paris.

Maddison, A. 2003. The World Economy: Historical Statistics, Development Centre of the Organisation for Economic Co-operation and Development, Paris.

Maddison, A. 2007. Contours of the World Economy, 1–2030 AD: Essays in Macro-economic History, Oxford University Press, Oxford and New York.

Rockoff, H. 1996. “Banking and Finance, 1789–1914,” in S. L. Engerman and R. E. Gallman (eds), Cambridge Economic History of the United States. Vol. 1, Colonial Era, Cambridge University Press, Cambridge. 643–684.

Romer, C. D. 1986. “Is the Stabilization of the Postwar Economy a Figment of the Data?,” American Economic Review 76: 314–334.

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It’s 2011 and Still No Hyperinflation

When the US and UK began quantitative easing (QE) in 2009, remember the hysterical predictions of hyperinflation?

By 4 November 2009, the US monetary base had increased by 142% over the previous two years to about 2 trillion dollars. These unprecedented and large open market operations conducted by the Fed stirred up the usual suspects, including a number of hapless Austrians and others, who were screaming that hyperinflation was on the way. A good example of such dire predictions can be found here:

Marc Faber with Peter Schiff – Hyperinflation in the United States a 100% Certainty, Glenn Beck, 28th May, 2009.

Other pro-free market bloggers boldly proclaimed that the UK or the US was the new Zimbabwe, with equally ridiculous and contemptibly stupid rhetoric.

Now we are in the first month of 2011, and there is no sign of any hyperinflation. In the UK and US, 2010 was a year of disinflation, not accelerating inflation.

Moreover, despite the initial QE in 2009, there was massive disinflation or outright deflation in the US or UK in that year. Various Austrian and other free marketeer predictions of hyperinflation were, and still are, wrong. Why?

The simple fact is that inflation of the base money supply by x% does not necessarily cause price inflation of x% (and to believe so relies on the flawed quantity theory of money which I have criticised elsewhere on this blog). Nor does a large increase in base money necessarily mean a large increase in the CPI, particularly in an economy with high unemployment and low growth. Predictions of hyperinflation in the current economic conditions are absurd. There is no reason why all the base money created by QE will be injected into the economy by banks when business confidence is low, credit demand is limited, and banks themselves are wary of lending.

The key to all this is the Post Keynesian insight that the broad money stock is essentially endogenous (for the classic study, see Moore 1988), a view which is also held by the monetary circuit theorists, was supported by Wicksell and Schumpeter (Howells 2006: 53), and can be traced back to the 19th-century Banking school (Wray 1998: 32–33).

Before we discuss endogenous money, however, we need to distinguish properly between (1) the base money supply and (2) broad money stock.

I have done this in the section below, and take the US as an example:

(1) High-powered money (= monetary base, base money, M0)
Base money is currency in circulation and bank reserves (both required and excess reserves).

This means that the monetary base includes all cash and coins, even vault cash at banks, as well as deposits that banks hold at the Fed (which are reserves). Reserves come in two forms: (1) required reserves and (2) excess reserves. The latter are balances held at the Fed in excess of required (or minimum) reserves. It was excess reserves that soared after quantitative easing began in 2009, when in March the Federal Reserve announced it would purchase $300 billion of US government debt over 6 months. Banks sold bonds and then mortgage backed securities (MBOs) to the Fed.

Now no one denies that the central bank has the power to increase the base money supply by open market operations, and to control the interest rate.

But we need to look carefully at what is meant by the expression “printing money.” This expression has two meanings:

(1) expansion of the central bank’s balance sheet and the base money supply (M0), and
(2) central bank financing of government deficits (= monetizing deficits).

In sense (1), one can refer to the Fed’s QE as “printing money.” But the money created is reserves, and the process involved is actually better described as an asset swap: the banks swap their bonds for reserves. Furthermore, since required reserves and excess reserves are merely held at the Fed, they are not injected into the economy, nor are they used to buy goods or services. Money in the form of reserves merely held at the Fed is not inherently inflationary, despite the nonsense from many economic commentators over the last few years. Reserves must be turned into private debt and spent into the economy to enter the broad money stock before becoming inflationary.

(2) Broad money (M1, M2, M3)
Broad money is different from base money, and can be measured by M1, M2, or the now discontinued measure M3.
M1 is the most liquid form of money. M1 includes:

(1) currency in circulation outside bank vaults (and also excluding bank reserves),
(2) checking/transactions accounts (or demand deposits) and other checkable accounts, and
(3) travelers checks.

M1 excludes vault cash and bank reserves at the central bank. All M1 money can be spent quickly or relatively quickly, and is not locked up in time deposits. The key is that M1 does not include bank reserves. This is very important. Reserves, a major part of the monetary base, are not included in M1, or in any other measure of broad money. This is why, when base money supply soared in 2009, M1 did not increase by the same amount. Thus, when Austrians complain that QE caused massive inflation of the money supply, they refer to the monetary base, not to the broad money stock M1. But, as we have seen, inflation of M0 does not necessarily increase M1, unless the money is injected into it via private debt.

The two other measures of broad money are M2 and M3, and they include increasingly less liquid forms of money, such as time deposits, money market deposits, and savings deposits. Thus M2 is as follows:

M1 supply + money held in money market funds + savings accounts + small certificates of deposit (CDs).

M3 is simply M2 plus large CDs. The M3 measure was discontinued by the Federal Reserve in 2006, although Shadowstats.com maintains a useful estimate of M3.

One of the most important facts about M3 is that from 2009 to 2010, M3 actually contracted (see Ambrose Evans-Pritchard, “US money supply plunges at 1930s pace as Obama eyes fresh stimulus,” http://www.telegraph.co.uk, 26 May 2010), which can be seen on Shadowstats.com:

http://www.shadowstats.com/charts/monetary-base-money-supply

Although both M1 and M2 have increased since 2008, the percentage increase has been nothing like the 140% increase in base money.

In April 2008, M1 was about $1.4 trillion, and is now about $1.8 trillion. This is an increase of 28.57% since 2008. In November 2007, M2 was $7.41 trillion and has gone up to about $8.8 trillion in November 2010, which is an increase of 18.75%.

Moreover, if one looks at the historical growth rates of M1 and M2 over the past 50 years, one can easily observe that the percentage increases over the past few years are not unprecedented at all (see the longer term historical monetary charts at Shadowstats.com). Despite base money surging by 140%, M1 and M2 have not exploded. Nor has inflation.

What should be particularly damning for the hyperinflation hystericists is the recent contraction of M3, the broadest measure of money.

We must remember that, just as the creation of debt creates broad money, the repayment of debt destroys broad money (Wray 1990: 73). We therefore have an endogenous system that creates and destroys money, and expands and contracts the broad money stock.

In the current environment of private deleveraging, debt is being paid down, and there are powerful forces at play destroying broad money, which are probably reflected in the contraction of M3 (although higher capital asset ratios are also a reason). We can also note that, in the latter part of 2009 and early in 2010, M2 remained flat and even declined slightly at times, which may well have been caused by money destruction through private deleveraging.

Now we can review the facts above. If it is to cause inflation, QE-created money has to be injected into the economy by debt and then spent into an economy to inflate the prices of commodities. But private credit/debt is precisely what collapsed in the UK and US in late 2008 and 2009: we are in a debt deflationary environment with deleveraging, where the private-debt-derived part of aggregate demand has fallen or even gone negative, just as the Post Keynesian economist Steve Keen has shown in numerous posts on his Debtdeflation blog (Steve Keen, “What Bernanke doesn’t understand about deflation,” Debtdeflation.com, August 29, 2010).

When we say that the broad money stock is endogenous, it means that changes in M1 are essentially caused by internal factors like the amount of private debt issued by the banks and private demand for such debt (for the debate between accommodationists and structuralists on endogenous money, see Fontana 2003: 291–292 and Piegay 2003). Thus the broad money supply is determined by demand for bank credit, and the latter is itself caused by other economic variables, such as expectations, business confidence, the state of the economy, and other factors. This is in stark contrast to the neoclassical and monetarist view that the broad money supply is purely exogenous: that is to say, that the money supply is determined and controlled by central banks outside of the private sector. The myth that the broad money stock or its growth rate is under the direct control of the central bank was demonstrated as false during the disastrous experiment with monetarism in the early 1980s in the UK and US, particularly in Paul Volker’s failed monetarist experiment from 1979–1982. Volker tried to control the growth rate of M1, through targeting non-borrowed reserves, but this was a miserable failure, with the Fed badly missing its M1 targets (Wray 2003: 92). In October 1982, Volcker abandoned monetarism and returned to a discretionary interest rate policy, through the Federal funds rate (which had always been the main policy instrument before 1979). The Fed tried to target M2 growth rates for the rest of 1980s, but this was also a failure, and the monetarist fiction that the Fed controls broad money was officially abandoned in 1993.

In short, central banks do not directly control the broad money stock or its growth rate. Instead, the central bank controls the interest rate and supplies reserves, while broad money is created by the banks, which often obtain reserves afterwards (Howells 2006: 52).

Post Keynesian economists like Nicholas Kaldor, Basil J. Moore and Thomas I. Palley have defended and developed the endogenous money theory. In brief, the conventional textbook account of our monetary system relies on the money multiplier, a view that is false, as shown here by Bill Mitchell (Bill Mitchell, “Money multiplier and other myths,” April 21st, 2009).

With new private debt issued by banks constrained by falling demand, the idea that all the excess reserves created by quantitative easing would enter the economy and inflate M1 to a large extent, causing massive inflation, was ridiculous, even in 2009. With the net annual change in private debt falling in the US, internal deflationary forces are gripping the economy. Those deflationary forces have been reduced by deficit spending and Keynesian stimulus, which certainly prevented a global depression. But the stimulus packages in the UK and the US have been insufficient to stimulate the economy back into full employment. The US case is particularly dire: the most accurate government measure of unemployment in the US is U-6, and that stands at 17%. John Williams of Shadowstats.com thinks that even U-6 is not wholly reliable and produces his own estimate, which is now running at a shocking 22%. There is also a significant amount of excess capacity (idle capital) in the US and UK, so that if demand was to surge, what would happen is that capacity utilization rates would rise, rather than disastrous inflation.

Moreover, many Western economies have dysfunctional banks and excessive private debt. What is needed now is a thorough auditing of the financial institutions of the US, the UK and other Western countries. Non-performing loans and bad assets must be written off or restructured. Effective financial regulation needs to be re-introduced. Then radical Keynesian stimulus needs to be conducted to bring down unemployment.

In the absence of such policies, the most likely scenario for the West will be debt deflation and low growth for many years, possibly like Japan’s lost decade in the 1990s. Japan itself tried quantitative easing from 2001–2006, with the monetary base in Japan rising by 70%. The Bank of Japan increased the base money from about 65 trillion yen in 2001 to 110 trillion yen by 2006. But no hyperinflation ever resulted: in fact, deflation continued for some years after 2001 in Japan.

In fact, Japan offers the West some stark lessons. Japan suffered from a property bubble in the late 1980s and early 1990s (after ill-advised financial deregulation), and that bubble burst. Japan then endured the lost decade from 1992–2003. Though the causes of it are hotly debated, it seems clear that debt deflation, a zombie banking system infected by non-performing loans and bad assets, and an overvalued currency crippled the economy. The economy was on life support, and was saved by intermittent use of Keynesian stimulus, which, when done properly (as in the case of 1995 stimulus package), worked well (for the myth that Keynesianism did not work in Japan in the 1990s, see Posen 1998: 29–54 and R. Katz, “The Truth About Japanese Stimulus, Fiscal pump-priming can work to revive the economy,” January 16, 2009).

But the real lesson from Japan is that debt deflation and a zombie banking system must be fixed before an economy can function properly, and Japan did not really address the problem of bad bank assets until after 2002 with the Takenaka Plan.

One other important point should be stressed: Japan is an export-led growth economy. The yen was clearly overvalued for much of the 1990s (see Lok Sang Ho, “The Moral of Japan’s Lost Decade,” February 24, 2009). The low interest rate policy pursued by the Bank of Japan and its later turn to QE helped to cause depreciation of the yen through the carry trade, which allowed export competitiveness to be restored by the early 2000s. This was no doubt a factor in economic recovery that ended the lost decade. But QE in Japan did not stimulate domestic aggregate demand to a significant extent, nor did the broad money stock rise proportionally or significantly, just because the base money was inflated by QE. Instead, deflation continued until 2006.

It is possible that with austerity the US or UK might even slip into deflation again, although the demand for primary commodities from China and other developing nations which are factor inputs for the West will probably keep inflation mild to moderate.

Another factor ignored by those who predicted hyperinflation is that such a phenomenon generally requires a severe loss of confidence in a currency as a store of value, and this can be quite independent of the changes in the money supply (for an excellent account of hyperinflation and the Weimar episode, see Rob Parenteau, “The Hyperinflation Hyperventalists,” New Economic Perspectives Blog, March 22, 2010; and the Richebächer Letter, Number 417, June 2009, p. 4ff.). Often terrible crises are required to cause hyperinflation, such as ruinous wars, supply shocks, blockades or sanctions, civil war or internal collapse. In Weimar Germany, the classic instance of hyperinflation, there was

(1) a supply shock caused by WWI and the loss of productive capacity and output, made worse by the occupation of the Ruhr Valley in 1923;
(2) huge war reparations and budget deficits (in 1919, for example, the German budget deficit was perhaps as high as 50% of GDP); and
(3) exchange rate collapse.

It is obvious that these factors do not apply to the US or the UK. There have been no savage supply shocks affecting production in America or Britain; instead, there is significant unused capacity in these countries. Although there has been significant depreciation of the pound sterling and the US dollar, that is simply not the same thing as a collapse of the currency. Nor are budget deficits in either country anything like Weimar Germany: in fiscal year 2010, the US budget deficit was 9.1% of GDP and is projected to fall to 7% of GDP in fiscal year 2011. In the UK, the budget deficit for 2010 was about 12% of GDP. Neither the US nor the UK is being invaded, and the wars in Iraq and Afghanistan are confined to those countries. In short, the factors that applied to Weimar Germany do not apply to the US or the UK.

In November 2010, the Fed announced a second round of quantitative easing (QE2), in which it would buy up to $900 billion of US Treasuries by quarter 3 of 2011. What are we to make of this? The first round of QE failed to stimulate aggregate demand and end high US involuntary unemployment, and I expect the second round will as well.

But the zero interest rate policy (ZIRP) in the US, of which QE is a part, will probably encourage more speculation in equities and commodities, and the US dollar carry trade. However, it is US dollars in the money markets which will be mainly used in these speculative and carry trade activities. Most of the new excess reserves created by QE2 will probably remain at the Fed, just as most of the base money created in QE1 has stayed at the Fed. We must remember that base money went from $800 billion in 2008 to about 2 trillion in early 2010, and has hovered around $2 trillion ever since. The $1.2 trillion created in QE1 has not entered the economy, but has been held by the banks as excess reserves.

A worst case scenario that is a possibility is that the US zero interest rate policy could fuel speculation in energy and commodities (particularly ones that are important factor inputs), which, combined with demand from emerging economies, might cause double digit inflation.

But, even with QE2, the idea that hyperinflation is on the way remains absurd: it is nonsense from people who are, moreover, clueless about how the modern monetary system actually functions.

FURTHER READING

Steve Keen, “The Roving Cavaliers of Credit,” Debtdeflation.com, January 31, 2009.
This is a classic essay from Steve Keen on endogenous money in the context of 2008 financial crisis.

Bill Mitchell, “Quantitative Easing 101,” March 13th, 2009.
Bill Mitchell analyses quantitative easing, refuting some myths about it and showing its limitations.

Bill Mitchell, “Zimbabwe for Hyperventilators 101,” July 29th, 2009.
Another excellent post from Bill Mitchell on hyperinflation in Zimbabwe.

Bill Mitchell, “Building bank reserves will not expand credit,” December 13th, 2009.
Without appropriate demand for debt from the private sector, increasing bank reserves does not cause equal, or even significant, expansion of credit.

NOTE: US DOLLAR COLLAPSE?
Another prediction that was widely heard last July (2010) was that the US dollar would collapse in 6 months. The date for this “prediction” is rapidly approaching, and I expect it will be as embarrassingly wrong as the prediction that hyperinflation was 100% certain. A look at the trade-weighted US dollar index shows that the dollar’s value is in fact higher than the nadir it reached in 2008. Some are now expecting a US dollar rally in 2011.

BIBLIOGRAPHY

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Fontana, G. 2003. “Post Keynesian Approaches to Endogenous Money: A Time Framework Explanation,” Review of Political Economy 15.3: 291–314.

Howells, P. 2006. “The Endogeneity of Money: Empirical Evidence,” in P. Arestis and M. Sawyer (eds), A Handbook of Alternative Monetary Economics, Edward Elgar, Cheltenham, UK and Northampton, Mass. 52–68.

Kaldor, N. 1982. The Scourge of Monetarism, Oxford University Press, Oxford and New York.

Moore, B. J. 1988. Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Press, Cambridge and New York.

Palley, T. I., 2002, “Endogenous Money: What It is and Why It Matters,” Metroeconomica 53: 152–180.

Piegay, P. 2003. “Post Keynesian Controversies on Endogenous Money: An Alternative Interpretation,” in L.-P. Rochon and S. Rossi (eds), Modern Theories of Money: The Nature and Role of Money in Capitalist Economies, Edward Elgar Publishing, Cheltenham, UK and Northampton, Mass. 246–264.

Posen, A. S. 1998. Restoring Japan’s Economic Growth, Institute for International Economics, Washington, D.C.

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Targetti, F, and A.P. Thirlwall (eds), 1989. The Essential Kaldor, Duckworth, London.

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Wray, L. R. 2003, “Monetary Policy: An Institutionalist Analysis,” in Marc R. Tool and Paul Dale Bush (eds), Institutional Analysis and Economic Policy, Kluwer Academic Publishers, Norwell, Mass. 85–114.