My Posts on Say’s Law

My links on the history of Say’s law, its different versions, and the criticisms that can be made against it:

“The Myth of Say’s Law,” October 7, 2010.

“F. H. Hahn in a Candid Moment on Neo-Walrasian Equilibrium ,” January 29, 2011.

“Say’s Law Presupposes Aggregate Demand as a Meaningful Concept,” May 28, 2011.

“Say Repudiated Say’s Law,” December 1, 2011.

“Jean Baptiste Say on Failures of Aggregate Demand,” December 1, 2011.

“Jean-Baptiste Say and “Say’s Law,” September 14, 2012.

“The Origin of Say’s Law in Adam Smith and James Mill,” September 14, 2012.

“Bibliography on Say’s Law,” September 16, 2012.

“A Note on Prices and Say’s Law,” December 11, 2012.

“World GDP versus Total Value of Financial Asset Market Exchanges,” February 21, 2013.

“Say’s Law: An Overview and Bibliography,” April 13, 2013.

“Matias Vernengo on Say’s Law,” February 11, 2014.

“A Puzzle about Say’s Law,” June 29, 2014.

Monetarists Fail History, Time and Again

Certain supporters of monetarism are telling me in the comments on my last post that the central bank can indeed directly control the broad money supply.

Well, that was news to Milton Friedman as reported in a 2003 interview:

“... prepare to be amazed: Milton Friedman has changed his mind. ‘The use of quantity of money as a target has not been a success,’ concedes the grand old man of conservative economics. ‘I’m not sure I would as of today push it as hard as I once did.’”
Simon London, “Lunch with the FT – Milton Friedman,” Financial Times, 7 June 2003.

I imagine Friedman had in mind the quasi-monetarist experiments of Paul Volcker and Thatcher. Both attempted to control the growth rate of the money supply – and both failed and resulted in disaster.

In the case of Paul Volcker, he adopted a monetarist policy at the Federal Reserve in October, 1979. He gave up direct targeting of the federal funds rate and instead wanted to control the growth rate of M1 by directly targeting the growth rate of nonborrowed-reserves. According to the quantity theory, the central bank had the power to exogenously set the money supply and thus control inflation. But the result was a catastrophe. The Federal Reserve was utterly unable to achieve its reserve target or M1 target. In October 1982, Volcker abandoned monetarism and returned to a discretionary interest rate policy.

Thatcher’s monetarist experiment involved the Medium Term Financial Strategy (MTFS) from May 1979 to the mid-1980s. The MTFS stressed the monetarist idea that inflation is (supposedly) caused by excessive money supply growth, but the twist in Thatcher’s monetarist thinking (or really that of her advisers) was that the excess money supply growth in Britain was caused by government deficits through borrowing from the banking system.

The first flaw in this ideology was the notion of a straightforward direction of causation from money supply growth to the price level. In fact, money supply growth is, generally speaking, a consequence of real economic variables such as credit growth and the rising prices of factor inputs. Secondly, although there was some British government borrowing from the banking system, bond purchases in the UK tended to be made by the non-bank private sector (Stewart 1993: 49). Michael Stewart notes that the empirical evidence from the last years of the 1970s shows that 98% of government borrowing was from the non-bank private sector and not directly from the banking sector (Stewart 1993: 49–50).

Further proof of the incompetence of the strange form of British monetarism pursued under Thatcher was its focus on the broad money stock M3. The Medium Term Financial Strategy (MTFS) prescribed targets for the growth rates of M3, but, during the first three years of Thatcher’s rule, M3 grew by around 50% per annum, which was twice as much as the government’s targets (Stewart 1993: 50). A further perverse effect of the rise in UK interest rates was to cause the selling-off of long term financial assets and the shift of the money into interest-bearing bank deposits – which of course caused the growth rate of M3 to soar! (Stewart 1993: 50).

But, of course, it would be too much to expect fans of monetarism to learn some history, wouldn’t it.

BIBLIOGRAPHY
Stewart, Michael. 1993. Keynes in the 1990s: A Return to Economic Sanity. Penguin, Harmondsworth.

Review of Keynesian Economics on Endogenous Money

The latest issue of the Review of Keynesian Economics (ROKE 1.2 [2013]) has a number of articles on endogenous money and its history, as follows:

Riccardo Bellofiore, “Endogenous Money, Financial Keynesianism and Beyond,” ROKE 1.2 (2013): 153–170

Scott T. Fullwiler, “An Endogenous Money Perspective on the Post-Crisis Monetary Policy Debate,” ROKE 1.2 (2013): 171–194.

Virginie Monvoisin, “What’s the Use of Banks, Especially after the Crisis?,” ROKE 1.2 (2013): 195–209.

Louis-Philippe Rochon and Sergio Rossi, “Endogenous Money: the Evolutionary Versus Revolutionary Views,” ROKE 1.2 (2013): 210–229.

Malcolm Sawyer, “Endogenous Money, Circuits and Financialization,” ROKE 1.2 (2013): 230–241.

John Smithin, “Keynes’s Theories of Money and Banking in the Treatise and The General Theory,” ROKE 1.2 (2013): 242–256.

I find the article of Louis-Philippe Rochon and Sergio Rossi particularly interesting, as it discusses the history of endogenous money, and seems to be available for free download at the moment.

It presents a history of endogenous money in contrast to the evolutionary view of Chick (1986).

BIBLIOGRAPHY
Chick, Victoria. 1986. “The Evolution of the Banking System and the Theory of Saving, Investment and Interest,” Économies et Sociétés no. 3: 111–126.

Chick, Victoria. 1992. “The Evolution of the Banking System and the Theory of Saving, Investment and Interest,” in Philip Arestis and Sheila Dow (eds.), On Money, Method and Keynes: Selected Essays. Macmillan, Basingstoke. 193–205. [Reprint of Chick 1986.]

Who Said this About Austrian Economics?

Who said this?:

“For Austrian economists the third quarter of the … [sc. 20th century] was a bad time. To those who lived through them these were years in the wilderness. It is often thought that this eclipse of Austrian fortunes was brought about by the ‘Keynesian revolution’, but in fact this was only one of the misfortunes that befell Austrian economics in the 1930s, a decade of calamity. The promise of an Austrian theory of the trade cycle, which might also serve to explain the severity of the Great Depression, a feature of the early 1930s that provided the background for Hayek’s successful appearance on the London scene, soon proved deceptive. Three giants – Keynes, Knight and Sraffa – turned against the hapless Austrians who, in the middle of that black decade, thus had to do battle on three fronts. Naturally it proved a task beyond their strength.”

Was it some “evil” Keynesian?

The author held that the promise of the Austrian business cycle theory was “deceptive.” Also, that Austrians in the 1930s failed to meet the challenge of Keynes, Sraffa and Frank Knight.

Curiously, it was none other than Ludwig M. Lachmann, in The Market as an Economic Process (Oxford, 1986), p. ix of his preface.

I am in the process of reading this book, and it looks like interesting reading indeed, not just because of Lachmann’s view that there is no tendency to general equilibrium in market systems, but because, by the end of the book, Lachmann appears to be endorsing the Post Keynesian theory of markup pricing (or what he calls “fixprice” [Lachmann 1986: 132]) in certain markets:

“... in our world the flexprice type prevails in financial asset markets and those for raw materials, industrial and agricultural, while in modern industry, except in secondhand markets, the fixprice type predominates.” (Lachmann 1986: 132).

Lachmann is even willing to say that the concept of “market clearing prices” does not really apply to many markets where fixprices are set for other reasons (p. 134), and finds Austrian economics wanting for its failure to study markup prices or fixprices (Lachmann 1986: 130-131).

Further Reading

If you cannot get hold of Lachmann’s The Market as an Economic Process, one can read the following to get an overwiew:

Jonathan Finegold Catalán, “Notes to Lachmann’s ‘The Market as an Economic Process,’” Economic Thought, 21 April, 2012.
A set of reviews of the chapters by Jonathan Finegold Catalán.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition. Cambridge University Press, Cambridge and New York. pp. 157-160.
A short but useful overview of the book by Vaughn.

BIBLIOGRAPHY

Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford.

The History of Modern Monetary Theory

My last post got a bit hijacked by my attempt to write a digression on the origin of Modern Monetary Theory (MMT), which has also been called Chartalism, neo-Chartalism, the Kansas City approach, and soft currency economics. It strikes me that the subject deserves a post in its own right, so I will attempt one here (bear in mind there is some repetition).

Chartalism in the historical sense should be distinguished from Modern Monetary Theory. Chartalism was a theory of money developed by Georg Friedrich Knapp (1905; English translation 1924), which he called the “state theory of money.” This was taken up by Keynes in his Treatise on Money (1930). It appears to me that economists in the late 20th century associated with Post Keynesianism revived Chartalism as a theory, with the work of Alfred Mitchell-Innes (1913 and 1914) on credit money, including Charles A. E. Goodhart (although, strictly speaking, Goodhart does not regard himself as a Post Keynesian; see Goodhart 2005: 817).

Chartalism has been one source of MMT, and an early proponent L. Randall Wray appears to have used the term to describe the macrotheory he was developing. Randall Wray states:

“... somehow [sc. Chartalism] ... got the name Modern Money Theory. We think the first time those exact words were used might have been in a comment to Bill’s blog in 2007; if anyone can find that comment or a previous use, please send it along. It also looks like Bill used the term “modern monetary theory” in an academic paper in 2008.”
L. Randall Wray, “MMP Blog #30: What is Modern Money Theory?,” January 1, 2012.

The broader sources of Modern Monetary Theory are as follows:

(1) G. Frederick Knapp’s work (1905; 1973 [1924]);
(2) Mitchell Innes’s work (1913; 1914).
(3) Keynes;
(4) Abba Lerner’s functional finance model (1943; see also Lerner 1944; 1947; 1951);
(5) Post Keynesianism (with influence from both Keynes and Michał Kalecki), and
(6) Hyman Minsky’s work (e.g., the employer of last resort idea and the financial instability hypothesis).

Economists who stand out as inventors of Modern Monetary Theory include L. Randall Wray (1998), William F. “Bill” Mitchell, and Warren Mosler.

L. Randall Wray explains the origin of MMT:

“[sc. the origin of MMT] ... goes back to PKT (Post Keynesian Thought) in the early 1990s—the first internet discussion group I ever heard of. It started off with all the stars of heterodox economics—Paul Davidson, Herb Gintis, Michael Perelman, Ed Nell; even Hyman Minsky contributed a post or two. And then there was ... Bill Mitchell ... He had little tolerance for Keynes but otherwise I found myself agreeing with him more often than with anyone else. On Kalecki, on Marx, on fiscal policy, and especially against the Austrians that were slowly but surely killing PKT.

And one other guy stood out—a hedge fund manager named Warren Mosler who was continually pushing two things. First there was something he called soft currency economics. It sounded to me like good old Keynesian economics from the Treatise on Money, which followed Knapp’s state theory of money. ....

What Warren also added was a much deeper understanding of bank reserves and treasury bonds. I came at this from the PK endogenous money, horizontal reserves view of Basil Moore. There’s nothing seriously wrong with that, but it never understood why a sovereign government would sell bonds. Warren explained bond sales as a reserve drain, and lightbulbs went off. Exactly right: government sells bonds to hit the overnight interest rate target. I think it was Mat Forstater who brought the final piece of the puzzle: Lerner’s functional finance approach.”

Wray, L. R. 2011. “MMT: A Doubly Retrospective Analysis,” December 11.

By 1995, Warren Mosler called his theory “soft currency economics.” I quote Warren Mosler:

“The origin of MMT is ‘Soft Currency Economics’ .... I had never read or even heard of Lerner, Knapp, [Innes], Chartalism, and only knew Keynes by reading his quotes published by others. I ‘created’ what became know as ‘MMT’ entirely independently of prior economic thought. It came from my direct experience in actual monetary operations ... .”
http://mmtwiki.org/wiki/History_of_MMT

Mosler, as I understand it, has a connection with Paul Davidson (see also this interview for Mosler’s passing remarks about Charles Goodhart and the LSE). One of Mosler’s early publications was published in the Journal of Post Keynesian Economics (Mosler 1997-1998: 167-182).

Chartalism clearly was an important influence on other Modern Monetary Theory economists, but MMT, as it now exists, goes well beyond the original theories of Knapp or Mitchell-Innes.

The leading proponents of MMT hold that it is now an independent macroeconomic theory (by contrast, the Cambridge Post Keynesian Mark Hayes regards MMT as a sub-branch of Post Keynesianism). At the very least, Post Keynesianism can be regarded as the important macro-theory that stands behind MMT as one of its intellectual fathers, so to speak.

Perhaps it is even possible to think of MMT economists as a new generation of Post Keynesians—that is, as a younger generation that has developed Post Keynesian theory in new ways.

Appendix
I will end this post with a list of advocates and supporters of MMT (mainly academics):

Warren Mosler
Randall Wray
Bill Mitchell
Pavlina Tcherneva
Stephanie A. Kelton (formerly Stephanie Bell)
Mat Forstater
Ed Nell
Scott Fullwiler
Mike Norman

BIBLIOGRAPHY

Bell, S. 2000. “Do Taxes and Bonds Finance Government Spending?,” Journal of Economic Issues 34.3: 603-620.

Goodhart, C. A. E. 2005. “What is the Essence of Money?” (Reviewing: Geoffrey Ingham, The Nature of Money, Polity, Cambridge, 2004), Cambridge Journal of Economics 29: 817–825.

Keynes, J. M. 1930. A Treatise on Money, Macmillan, London.

Knapp, G. F. 1905. Staatliche Theorie des Geldes, Duncker & Humblot, Leipzig.

Knapp, G. F. 1918. Staatliche Theorie des Geldes (2nd edn.), Duncker & Humblot, Munich and Leipzig.

Knapp, G. F. 1921. Staatliche Theorie des Geldes (3rd edn.), Duncker & Humblot, Munich and Leipzig.

Knapp, G. F. 1973 [1924]. The State Theory of Money (trans. H. M. Lucas and J. Bonar), Augustus M. Kelley, Clifton, NY.

Lerner, A. P. 1943. “Functional Finance and the Federal Debt,” Social Research 10: 38–51.

Lerner, A. P. 1944. The Economics of Control, New York, Macmillan.

Lerner, A. P. 1947. “Money as a Creature of the State,” American Economic Review 37.2: 312–317.

Lerner, A. P. 1951. The Economics of Employment, New York, McGraw Hill.

Mitchell, Bill, 2011. “MMT is Biased Towards Anti-Crony,” December 28.
http://bilbo.economicoutlook.net/blog/?p=17528#more-17528

Mitchell, W. and J. Muysken. 2008. Full Employment Abandoned: Shifting Sands and Policy Failures, Edward Elgar, Cheltenham.

Mitchell-Innes, A. 1913. “What is Money?,” Banking Law Journal 30.5 (May): 377–408.

Mitchell-Innes, A. 1914. “The Credit Theory of Money,” Banking Law Journal 31.2 (January–December): 151-168.

Mosler, W. 1995. “Soft Currency Economics,”
http://www.mosler.org/docs/docs/soft0004.htm

Mosler, W. 1997-1998. “Full Employment and Price Stability,” Journal of Post Keynesian Economics 20.2: 167-182.

Mosler, W. 2010. The Seven Deadly Innocent Frauds of Economic Policy, Valance Co., St Croix, U.S.V.I.
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

Wray, L. R. 1998. Understanding Modern Money: The Key to Full Employment and Price Stability, Edward Elgar, Cheltenham.

Wray, L. R. 2011. “MMT: A Doubly Retrospective Analysis,” December 11.
http://neweconomicperspectives.blogspot.com/2011/12/mmt-doubly-retrospective-analysis.html