Saturday, March 31, 2012

Mike Norman on the US Budget Deficit

Mike Norman gives an MMT perspective on the US debt and budget deficit. A great interview.

Video streaming by Ustream

My Posts on the Austrian Business Cycle Theory, updated

Below is an updated list of my various post criticising the Austrian Business Cycle Theory (ABCT):
“Austrian Business Cycle Theory: Its Failure to explain the Crisis of 2008,” October 18, 2010.

“Kirzner on Austrian Business Cycle Theory,” May 30, 2011.

“ABCT and Idle Resources,” June 6, 2011.

“Austrian Business Cycle Theory: Epicycles on Epicycles,” June 6, 2011.

“The Natural Rate of Interest: A Wicksellian Fable,” June 6, 2011.

“Austrian Business Cycle Theory (ABCT) and the Natural Rate of Interest,” June 18, 2011.

“Mises’s “Evenly Rotating Economy” (ERE) and ABCT,” June 20, 2011.

“Austrian Business Cycle Theory: The Various Versions and a Critique,” June 21, 2011.

“Mises’s “Originary Interest Rate” Theory,” June 21, 2011.

“The Differences Between Mises and Hayek on ABCT,” June 23, 2011.

“Hayek and the Myth of Neutral Money,” June 23, 2011.

“Milton Friedman on ABCT,” June 24, 2011.

“There was no US Recovery in 1921 under Austrian Trade Cycle Theory!,” June 25, 2011.

“Vaughn on Mises’s Trade Cycle Theory,” June 29, 2011.

“Hayek on the Flaws and Irrelevance of his Trade Cycle Theory,” June 29, 2011.

“Mises’s Versions of ABCT,” July 1, 2011.

“ABCT and Full Employment,” July 1, 2011.

“Hayek’s Trade Cycle Theory and its Appeal to Socialists,” July 1, 2011.

“Robert P. Murphy on the Sraffa-Hayek Debate,” July 19, 2011.

“Bibliography on the Sraffa-Hayek Debate,” July 20, 2011.

“Robert P. Murphy on the Pure Time Preference Theory of the Interest Rate,” July 13, 2011.

“Lachmann on Trade Cycle Models,” August 27, 2011.

“David Glasner on Hayek versus Sraffa,” September 10, 2011.

“Hayek and the Concept of Equilibrium,” September 20, 2011.

“Hayek and Equilibrium as a Starting Point for an Austrian Trade Cycle,” September 21, 2011.

“ABCT without a Unique Natural Rate of Interest?,” September 22, 2011.

“Did Hayek Advocate Public Works in a Depression?,” September 25, 2011.

“ABCT and the Flow of Credit,” October 6, 2011.

“Michael Emmett Brady on Hayek’s Concept of Uncertainty,” October 11, 2011.

“Austrians Predicted the Housing Bubble? – But so did Post Keynesians and Marxists,” December 14, 2011.

“Hayek’s Natural Rate on Capital Goods, Sraffa and ABCT,” December 27, 2011.

“Hayek’s Trade Cycle Theory, Equilibrium, Knowledge and Expectations,” January 4, 2012

“Equilibrium Amongst the Austrians,” January 28, 2012.

“Hülsmann on Mises’s Business Cycle Theory,” February 11, 2012.

“Bloggers Debate the Austrian Business Cycle Theory,” February 12, 2012.
I have added an updated list here of the Austrian books and articles where ABCT is given in its various versions:
(1) The version of Mises in The Theory of Money and Credit (trans. J. E. Batson; Mises Institute, Auburn, Ala. 2009 [1953]), pp. 349–366. (It is unclear to me if this appears in the original German edition, Theorie des Geldes und der Umlaufsmittel [Munich and Leipzig, 1912] or the 2nd German edition published in 1924.)

(2) Mises’s version in Monetary Stabilization and Cyclical Policy (1928) in Mises 2006 [1978], The Causes of the Economic Crisis and Other Essays Before and After the Great Depression (Ludwig von Mises Institute, Auburn, Ala.), p. 99ff.

(3) Hayek’s essay Monetary Theory and the Trade Cycle (1929) [English trans. 1933 by N. Kaldor and H.M. Croome] in Hayek 2008: 1–130).

(4) Hayek’s paper on intertemporal equilibrium:

F. A. Hayek, 1984 [1928]. “Intertemporal Price Equilibrium and Movement in the Value of Money,” in R. McCloughry (ed.), Money, Capital and Fluctuations. Early Essays, Routledge & Kegan Paul, London.

(5) Hayek’s first version of ABCT from his LSE lectures in Prices and Production (London, 1931).

(6) Hayek’s 2nd edition of Prices and Production in 1935.

(7) Hayek’s second version of ABCT in Profits, Interest and Investment (London, 1939).

(8) Hayek’s discussion in The Pure Theory of Capital (London, 1941).

(9) The version of Mises in Human Action: A Treatise on Economics (Auburn, Ala., 1998), pp. 568–583.

(10) Rothbard’s development of ABCT in Man, Economy, and State: A Treatise on Economic Principles (Ludwig von Mises Institute, Auburn, Ala., 2004 [1962]), pp. 994–1008; and in Economic Depressions: Their Cause and Cure (Ludwig von Mises Institute, Auburn, Ala. 2009 [1969]).

(11) M. Skousen’s interpretation in The Structure of Production (New York, 1990).

(12) Roger Garrison in Gerald P. O’Driscoll and Mario J. Rizzo’s The Economics of Time and Ignorance (2nd edn; Routledge, Oxford, UK., 1996), pp. 198–213.

(13) Roger Garrison’s Time and Money: The Macroeconomics of Capital Structure (London and New York, 2000). A summary can be found in Garrison (1997).

(14) the exposition in Jesus Huerta de Soto, Money, Bank Credit and Economic Cycles (trans. M. A. Stroup; Ludwig von Mises Institute, Auburn, Ala, 2006), pp. 265–508.

Garrison, R. W. 1997. “Austrian Theory of Business Cycles,” in D. Glasner and T. F. Cooley (eds), Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York. 23–27

Michael Hudson on Latvia

This is very insightful interview with Michael Hudson on Latvia, its bubble and crash. It is a few years old (from 2009), but still relevant.

Friday, March 30, 2012

Lithuania: Another Baltic Disaster

I’ve done a post on austerity in Latvia here. A good overview of what has happened in Lithuania can be found in this article:
Jeffrey Sommers, Arunas Juska, and Michael Hudson, “‘No People, No Problem’: The Baltic Tigers’ False Prophets of Austerity,” Counterpunch, December 6, 2011.
In short, the migration effect of austerity and internal devaluation has actually been worse in Lithuania than in Latvia!

Some 83,200 Lithuanians emigrated in 2010, the highest level of emigration since 1945. In 2008, the emigration rate was the highest in the EU countries (2.3 per 1,000), and forecasts predict a population decline of a further 10.9 per cent for 2008–2035.

This can only mean that the fall in official unemployment from 18.3% in summer 2010 to 13.9% in January 2012 must be more the result of the emigration of sectors of the labour force, than of domestic employment growth. Thus any employment “success” in Lithuania is sheer delusion.

As for real GDP, it contracted by 14.8% in 2009 – that is to say, Lithuania was hit by an actual depression in that year. Growth was a mild 1.4% in 2010, which was nothing to boast about.

In 2011, it was 5.9% (for figures, see here). The moderate growth rate for 2011 may well be the result of export-led growth, but the truth is that the price was appallingly high and utterly unnecessary.

Why? The reason is that any export-led growth that Lithuania – or indeed any of the Baltic nations – experienced in 2010–2011 could have been achieved by currency depreciation of their own independent currencies, which would have allowed a space for stimulating the domestic economy by Keynesian fiscal expansion.

Steve Keen on Neoclassical Economics and the Minsky Project

An interesting interview here with Steve Keen, covering quite a few issues: neoclassical theory, dynamic systems, disequilibrium models, debt and Minsky.

Monday, March 26, 2012

Some Discussion of Aggregates in the Blogosphere

There are some interesting posts on various blogs at the moment dealing with the Austrian attitude to aggregates:
(1) “Is There Macroeconomics?,” 3 March, 2012.

(2) “Crude Austrians, Macroeconomics, and Complexity,” Facts & Other Stubborn Things, 25 March, 2012.

(3) Jonathan Finegold Catalán, “AAA = Aggregates Annoy (Crude) Austrians,” Economic Thought, 26 March, 2012.

(4) “‘Free Market’ Double Standards 4.0,” Unlearning Economics, March 23, 2012.
(see point 6).

(5) Gene Callahan, “Vulgar Austrians and Aggregates,” September 25, 2011.
(this post by Gene Callahan is somewhat older than the ones above, but I will post a link to it anyway).
I have always said that it is utterly absurd to watch Austrians deny the existence of aggregates. Often it is the sign of a truly infantile mind that thinks that, just because something has no concrete existence, then it must not exist.

But our universe contains a vast number of abstract things that have no concrete existence, say, like universals or numbers. For example, the number 5 has no concrete existence, but does anyone doubt that the number 5, and indeed numbers in general, are real, meaningful concepts? (of course, the advocates of the philosophical position called nominalism would dispute the idea that numbers are real, but the crude Austrians never seem even to have the wit or intelligence to frame the debate on aggregates in terms of nominalism versus realism. I take a “moderate realist” position, for the record). Do people doubt that the sum of 5, 6, 3, 4, 8, and 1 (itself a number) is not a real, meaningful concept?

Aggregates just have no concrete existence like a concrete particular, as, for example, the particular chair you are sitting on, as you read this post.

When we move to economics or finance, it is obvious how aggregates permeate everything.

A business can sell units of a good or even units of heterogeneous goods. But it can calculate value of the volume of its sales of goods as a monetary aggregate in any given period (say, the financial year or even a month or day). It is the same with the aggregated money value of purchased final goods and services throughout an economy in a given year, the aggregate that is used to express or calculate the value of aggregate demand.

Aggregate concepts are required by Say’s law: (1) the value of total factor payments considered as aggregate supply, and (2) aggregate demand as the aggregate of spending on output that has been earned from total factor payments. If aggregate concepts are invalid, then Say’s law is also invalid.

While I am pleased to see Jonathan Finegold Catalán proclaim that only crude Austrians deny the existence of aggregates, a more interesting question is whether he is willing to repudiate statements like this from the Austrian William L. Anderson:
“When Krugman uses ‘demand,’ he means ‘aggregate demand,’ which economically speaking is a nonsensical term. There is no such thing as “aggregate demand.’”

William L. Anderson, “Krugman: In the Long Run, We Screw Future Generations,” Krugman-in-Wonderland, June 25, 2010.

“The problem is that Krugman, as a Keynesian macro guy, cannot see anything but aggregates, which is not economics at all. There is no such thing as ‘aggregate demand’ and ‘aggregate supply,’ or at least something with such terms that can be represented in the crude ‘Keynesian Cross’ or an AD-AS graph.”

William L. Anderson, “The ‘Stimulus’ that Failed to ‘Fix’ the Economy ,” Krugman-in-Wonderland, December 21, 2011.

“For all of his ‘credentials,’ let us not forget that Krugman is a Keynesian who has no clue whatsoever what happens in a real economy. His world is the imaginary world of aggregates, GDP numbers, crude graphs, and no real people and certainly no real production.”

William L. Anderson, “Jeremy Warner Gets It Right on Krugman,” Krugman-in-Wonderland, March 21, 2010.
Anderson sets himself up as a serious Austrian critic of Paul Krugman, yet here he is caught making the most risible, stupid statements.

And this sort of stupidity is far more common amongst Austrians, especially internet Austrians, than the more “astute” Austrians think.

Sunday, March 25, 2012

Latvia’s Recovery: A Sick Neoliberal Joke

It might be noted that I dealt with Latvia in a post here on June 5, 2011. Latvia was an economic and social disaster then, from the austerity implemented from 2008 and 2009. How is Latvia doing now? In particular, is there any justification for certain crowing neoliberals who proclaim the great success of Latvian austerity and Baltic austerity in general?

There is an excellent paper here from the Center for Economic and Policy Research (Washington, D.C.) by Mark Weisbrot and Rebecca Ray on Latvia:
Mark Weisbrot and Rebecca Ray, “Latvia’s Internal Devaluation: A Success Story?” Center for Economic and Policy Research paper, December 2011 (Revised and updated).
Their findings give the lie to any claim of “success” for Latvian austerity and domestic wage and price deflation.

We already know by the standard figures that Latvia suffered a depression from 2008 to 2009. You should note that the word “depression” is bandied about by many people loosely to refer to any recession or economic downturn. On my blog, I use the word “depression” in its technical sense of a fall in the value of a nation’s real output (that is, real GDP or real GNP) of 10% or more.

Even after the financial crisis of 2008 and global downturn, most nations have avoided depression: most simply had moderate to severe recessions. Even the US did not have a technical depression, just a severe recession.

What about Latvia? We now know the truth. On p. 3 of their paper, Mark Weisbrot and Rebecca Ray report that “Latvia experienced the worst loss of output in the world”: its GDP contracted by 24%. They also present a graph showing serious downturns in a number of countries over the past 20 years. Latvia’s depression was the worst of any nation. Latvia’s depression was so severe that it was almost as bad as America’s real GDP collapse from 1929–1933 (a contraction of 28.9%).

From Q4 2009 Latvia had a weak recovery, as can be seen here:
Given the depth of the collapse, it is surprising how weak growth was for the first three quarters of the recovery. Real GDP growth was apparently still negative in 2010. While the annual GDP growth rate in 2011 was 5.5% (touted as some great achievement by the cheerleaders of neoliberalism), this had little real effect on unemployment (see below), and occurred, as we shall soon see, after the government terminated its fiscal austerity program.

The apologists for Latvia assert that export-led growth via “internal devaluation” (or domestic wage and price deflation) from 2009 has been the key to success. Weisbrot and Ray report that even this is a myth – something which even I did not know.

Weisbrot and Ray conclude that “there is almost no increase in net exports since the economy began to expand at the beginning of 2010” (p. 14). Instead, the weak recovery from 2010 was driven by the failure of the government to implement the further draconian fiscal contraction demanded by the IMF (p. 15): while the Latvian government did not cut further in 2010, its “fiscal policy was neutral for 2010” (p. 13). That is to say, unlike 2008–2009, the Latvian government did not take an axe to its economy in 2010: there was not serious contraction, nor any stimulus. This, combined with a positive inflation rate in 2010 that caused real interest rates to fall, led to a weak monetary expansion.

In any case, even if Latvia had experienced some small degree of export-led growth in 2010–2011, this could have been achieved by currency depreciation with fiscal stimulus.

And, above all, the weak recovery is explained simply by the fact that the government did gut its domestic economy on the scale of the 2008–2009 cuts.

So what about unemployment? Official unemployment soared to over 20% in early 2010 in Latvia, as you would expect given the depth of the GDP contraction.

Now recently there has been a fall in official unemployment down to 14.3%:
That might seem like a steep fall, but Weisbrot and Ray show clearly that the “official” unemployment statistic grossly underestimates unemployment, a state of affairs not uncommon in many nations.

Weisbrot and Ray state:
“The official unemployment rate does not measure the full cost of this recession and weak recovery to Latvia’s labor force. If we take into account those who are involuntarily working part-time (because they could not find full-time work, or other economic reasons) and those who have given up looking for work, we get peak unemployment/under-employment of 30.1 percent in 2010, declining to 21.1 percent in the third quarter of 2011.”
Mark Weisbrot and Rebecca Ray, “Latvia’s Internal Devaluation: A Success Story?” Center for Economic and Policy Research paper, December 2011 (Revised and updated). p. 8.
That is to say, once we adjust the official unemployment figures for those who have simply stopped looking for work or have taken part-time work (though they still want full-time employment) unemployment was, up until late 2011, a shocking 21.1%.

I can of course anticipate what apologists for austerity will say: “what about the drop from 30.1% in 2010 to 21.1% in late 2011, isn’t that impressive!,” they might say.

Unfortunately, that drop was not caused by a massive surge in domestic employment. Again, Weisbrot and Ray show what happened:
“[sc. Official unemployment] … also does not include all the people who have left the country in search of employment since the crisis began. It is estimated that the net loss of population in 2009–2011 amounts to as many as 120,000 people, or 10 percent of the labor force. If not for this migration, the broader measure of unemployment could be as high as 29 percent in the third quarter of 2011, instead of 21.1 percent.”
Mark Weisbrot and Rebecca Ray, “Latvia’s Internal Devaluation: A Success Story?” Center for Economic and Policy Research paper, December 2011 (Revised and updated). p. 9.
Once we take account of the mass exodus of a significant part of the Latvian labour force (a situation that has also happened in Ireland), Latvian unemployment would have been something like an incredible, shocking 29% in late 2011. Once adjusted in this way again, it would perhaps be only slightly lower than this as of March 2012.

Any “success” in the area of a surge in domestic employment in Latvia is nothing but an utter delusion, another sick joke on the basis of (1) grossly unreliable official unemployment figures and (2) failure to net out the fall owing to emigration.

There is no Latvian employment success. This is a nation where 10% of the labour force has simply left the country.

That trend is accompanied by shocking demographic developments: falling birthrates, the Latvian countryside has been denuded of people, schools are closing, and some villages simply dying. While some of these trends are not uncommon in former Soviet countries (exposed not just to the terrible failure of communist command economies, but to neoliberal shock therapy from the 1990s), the scale of the disaster in Latvia has been made much worse by its austerity programs.

Social Costs
Weisbrot and Ray (p. 10) note the terrible increase in income inequality in Latvia, but I think a more eloquent piece of evidence from 2009 is this video below.

One wonders: who many excess deaths occurred just because of the cuts to the public health care system?

And all this so that they could have possibly the worst depression suffered by any nation in recent history, with a comparatively miserable recovery following, especially in terms of unemployment.

The “success” of Latvia, as I said in my title, is a sick joke. GDP growth since 2010 has been weak, an accidental product of the fall in real interest rates and the fact that the government retreated from further severe cuts in 2010. But even that recovery did very little for unemployment, which fell mostly because of emigration and the rise in discouraged workers.

One wonders how anyone can think that Latvia is a viable model for America, other European nations, or indeed any country at all.

Note on Estonia
At some point, I will do a similar post on Estonia. But I will be very surprised if many of the points made above do not also apply to Estonia.

First, it appears that Estonia relied on internal devaluation to a far lesser degree than the other Baltic nations. It also seems to be recovering comparatively better. Do I really need to point out what the lesson is?

Secondly, Estonia’s population is 1,340,194 (2010 est.). Its labour force is about 686,800 (2010 est.). I suspect that the fall in unemployment from 2010-2012 in Estonia is caused to some degree by the same factors as in Latvia: failing to take account of discouraged workers and to net out unemployed persons who have emigrated.

Emigration seems just as important in Estonia as in Latvia: in 2009, 3% of the Estonian labour force worked abroad, and around 14-19% in more recent years.

Saturday, March 24, 2012

Alfred Mitchell Innes on the Credit Theory of Money

Alfred Mitchell Innes (1864–1950) wrote the following article on the nature of money:
Mitchell Innes, A. 1914. “The Credit Theory of Money,” Banking Law Journal 31.2: 151–168.
This is one of two important articles he wrote (the other is Mitchell Innes 1913). Mitchell Innes was a British diplomat, expert on finance, and served in the British Embassy in Washington D.C. from 1908 to 1913. (As an aside, there seems to be some confusion about whether his surname was merely “Innes,” or whether he bore the hyphenated or non-hyphenated double-barrelled surname “Mitchell Innes.” In what follows, I assume the latter and call him “Mitchell Innes,” but I might be wrong on this.)

There is a useful set of essays in L. R. Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes (Cheltenham, UK, 2004) examining the legacy of Mitchell Innes’s work on monetary theory. The modern Post Keynesian or advocate of Modern Monetary Theory (MMT) does not have to agree with everything in Mitchell Innes’s papers or his, at times, strident presentation of his credit theory, in order to recognise that he made important contributions to the theory of money.

In this post, I will summarise Mitchell Innes’s original article, as follows:
(1) Mitchell Innes (1914: 159) attributed the origin of the credit theory of money to the Scottish economist Henry Dunning Macleod (1821–1902), a writer whose work on banking and credit is much underrated (see MacLeod 1902). Mitchell Innes saw his own work as a “more consistent and logical development of … [sc. Macleod’s] teaching.”

(2) Mitchell Innes noted that, in his day, people thought that gold and silver were “the only real money and that all other forms of money are mere substitutes” (Mitchell Innes 1914: 151), an erroneous view in his opinion.

Money is explained by the credit theory of money, which is that money is, in essence, credit:
“the Credit Theory is this: that a sale and purchase is the exchange of a commodity for a credit. From this main theory springs the sub-theory that the value of credit or money does not depend on the value of any metal or metals, but on the right which the creditor acquires to ‘payment,’ that is to say, to satisfaction for the credit, and on the obligation of the debtor to ‘pay’ his debt, and conversely on the right of the debtor to release himself from his debt by the tender of an equivalent debt owed by the creditor, and the obligation of the creditor to accept this tender in satisfaction of his credit.” (Mitchell Innes 1914: 152).
The credit nature of money can be seen, above all, in bank money (or fractional reserve demand deposits), a form of negotiable, transferable credit.

It is a credit that redeems a debt. Mitchell Innes (1914: 155) argued that payment is, in the end, the promise to “cancel our debt by an equivalent credit expressed in terms of our abstract, intangible [sc. monetary] standard.”

Even government money is a “‘promise to pay,’ just like a private bill or note” (Mitchell Innes 1914: 155). Mitchell Innes states:
“ …. the dollar is a measure of the value of all commodities, but is not itself a commodity, nor can it be embodied in any commodity. It is intangible, immaterial, abstract. It is a measure in terms of credit and debt. Under normal circumstances, it appears to have the power of maintaining its accuracy as a measure over long periods. Under other circumstances it loses this power with great rapidity. It is easily depreciated by excessive indebtedness, and once this depreciation has become confirmed, it seems exceedingly difficult and perhaps impossible for it to regain its previous position.” (Mitchell Innes 1914: 159).
Thus the monetary unit is an intangible and abstract thing (Mitchell Innes 1914: 155).

(3) I would contend that Mitchell Innes showed an awareness of the endogenous nature of the money supply in a developed capitalist nation:
“Every merchant who pays for a purchase with his bill, and every banker who issues his notes or authorises drafts to be drawn on him, issues money just as surely as does a government which issues drafts on the Treasury, or which puts its stamp on a piece of metal or a sheet of paper, and of all the false ideas current on the subject of money none is more harmful than- that which attributes to the government the special function of monopolising the issues of money. If banks could not issue money, they could not carry on their business, and when the government puts obstacles in the way of the issue of certain forms of money, one of the results is to force the public to accustom itself to other and perhaps less convenient forms.” (Mitchell Innes 1914: 152).
A related point here is how absurd the Austrian obsession with private sector, fractional reserve banking or public sector money creation is: capitalism has always, in its real world form, had endogenous money, with promissory notes or bills of exchange, as well as bank money, creating an elastic money stock.

(4) It is the confidence that the community has in government credit and the necessity of obtaining government money for payment of taxation that makes it of greater relative value than private bank money, promissory notes and bills of exchange:
“The dollar of government money in America is equal to that of bank money, because of the confidence which we have come to have in government credit, and it usually ranks in any given city slightly higher than does the money of a banker outside the city, not at all because it represents gold, but merely because the financial operations of the government are so extensive that government money is required everywhere for the discharge of taxes or other obligations to the government. Everybody who incurs a debt issues his own dollar, which may or may not be identical with the dollar of any one else’s money. It is a little difficult to realize this curious fact, because in practice the only dollars which circulate are government dollars and bank-dollars and, as both represent the highest and most convenient form of credit, their relative value is much the same, though not always identical” (Mitchell Innes 1914: 154).
Even government money is a credit in the sense that it can be used to cancel debt owed to the government.

(5) Mitchell Innes (1914: 161) in fact had the following insight that has made its way into Modern Monetary Theory (MMT):
“most … government money finds its way to the banks, and we pay our tax by a cheque on our banker, who hands over to the treasury the coins or notes or certificates in exchange for the cheque and debits our account. This, then – the redemption of government debt by taxation – is the basic law of coinage and of any issue of government ‘money’ in whatever form. It has lain forgotten for centuries, and instead of it we have developed the notion that somehow the metallic character of the coin is the really important thing whereas in fact it has no direct importance.”
(6) On pages 156–158, Mitchell Innes digresses and discusses the monetary reforms in Britain in the 1690s and how this was erroneously interpreted by Metallists.

(7) Mitchell Innes argues that
“… while the monetary unit may depreciate, it never seems to appreciate. A general rise of prices at times rapid and at times slow is the common feature of all financial history; and while a rapid rise may be followed by a fall, the fall seems to be nothing more than a return to a state of equilibrium. I doubt whether there are any instances a fall to a price lower than that which prevailed before the rise, and anything approaching a persistent fall in prices, denoting a continuous rise of the value of money, appears to be unknown. (Mitchell Innes 1914: 159).
He means by this that throughout history price inflation has generally been the rule. Perhaps that it is a somewhat exaggerated view: there have been aberrant periods like 1873–1896 where almost continuous price deflation occurred.

(8) Mitchell Innes engages in a lengthy (p. 165ff.) discussion of how price inflation is explained by his theory, but his ideas here seem of little merit to me, and I will not summarise them.

MacLeod, H. D. 1902. Theory and Practice of Banking (6th edn), Longmans, Green, Reader, & Dyer, London.

Mitchell Innes, A. 1913. “What is Money?,” Banking Law Journal 30.5: 377–408. (reprinted in L. R. Wray (ed.). 2004. Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 14–49).

Mitchell Innes, A. 1914. “The Credit Theory of Money,” Banking Law Journal 31.2: 151–168 (reprinted in L. R. Wray (ed.). 2004. Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 50–78).

Wray, L. R. (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham, UK. 79–98.

Thursday, March 22, 2012

Ireland Returns to Recession: The Failure of Austerity

It is now official: Ireland has slipped back into recession with a 0.2% fall in GDP in the last quarter of 2011. In Q3 2011, GDP contracted 1.1%, so we now have two consecutive periods of contraction: the official definition of a recession.

But it gets worse. In Q4 2011, Irish GNP (probably a better measure of real national output in Ireland’s case) slumped by a shocking 2.2%.

The reason is that exports have fallen, along with the Eurozone problems. Most of the growth Ireland has had since 2010 has been based on exports.

You can see the record of Ireland’s quarterly GDP here:
From 2008 to 2009, Ireland suffered a depression, both in terms of its GDP decline (10.1%) and its GNP contraction (14.1%) (a depression is technically a fall in the value of real output exceeding 10%). Of the 16 quarters from Q1 2008 (when the global recession hit), Ireland has had but 4 quarters of positive GDP growth. A miserable performance.

Meanwhile unemployment is at 14.2%, and has been stagnating between 14.2% and 14.4% ever since the middle of 2011.

Another development (seen in other nations like Estonia and Latvia that have gone down the path of severe austerity) is that people are leaving Ireland in droves, often the young and unemployed. From 2009 to 2011, some 86,000 emigrated. In 2012, some 75,000 are predicted to leave, figures higher than the last emigration surge owing to economic problems in the late 1980s. That trend can be seen in the video below, describing Irish emigration to Australia in 2011.

Lessons here are obvious: export-led growth is highly unreliable, and it is unlikely a nation will achieve robust, long-term growth by fiscal contraction and domestic wage and price deflation (especially when other nations pursue austerity), which, in any case, guts its domestic sectors.

So much for austerity, the policy prescription of fools and madmen.

Wednesday, March 21, 2012

Philip Grierson on the Origin of Money

The late Philip Grierson (1910–2006), historian and professor of numismatics at Cambridge University (from 1971), wrote an essay called The Origins of Money (London, 1977). The monograph is very short (only 33 pages of main text), but it has become something of a classic. Grierson, of course, to some extent relied on the findings of earlier literature, especially anthropologists like A. H. Quiggin (1949) and Dalton (1965), and economists with a knowledge of the anthropological literature like Einzig (1948 and 1949).

A summary of The Origins of Money is here:
(1) Grierson is careful to emphasise that the origin of coinage is not the origin of money (Grierson 1977: 7). Coinage in Western civilization makes its appearance in the third quarter of the 7th century BC in Asia Minor (that is, what is now Western Turkey), and then spread to Greece and other areas. The first coins were of electrum, an alloy of gold and silver. As Grierson says, “money lies behind coinage,” and coins often replaced “some earlier form of ‘primitive’ money” (Grierson 1977: 12).

(2) Grierson, from the writings of anthropologists like Quiggin (1949), is aware of the existence of “primitive” money, which includes “non-commercial money”, “social currency”, “social money” or “special-purpose money” (Grierson 1977: 15). “Primitive” money might include “general purpose money” (or what I would call commercial money) but there is a useful distinction between
(i) non-commercial money/social currency, and
(ii) general purpose money/commercial money.
Non-commercial money/ social currency is mainly used in social interactions, often formal social events such as marriage, wergild and bloodwealth payments, political relations (potlatch, moka), and fines and compensations (compensation for adultery, or for things lost), and may only be rarely used, if at all, for everyday purchases or commercial transactions.

(3) Grierson (1977: 16) contends that the property common to both non-commercial money/social currency and general purpose money/commercial money is the measure of value function. Grierson makes an important point: the task of the historian or scholar studying the origin of money is
“… is not essentially different from that of the student of other systems of measurement, though it is a much more complex one. Of the basic measures of length, area, volume, and weight, only those of length proved easy for our forebears to devise, since only for them did the human body, or simple human activities, like walking, running, and ploughing, provide satisfactory units. Units of value, like units of area, volume, and weight, could only be arrived at with great difficulty, in part because natural units are absent, in part because of the much greater diversity of commodities that had to be measured and the consequent difficulty of finding common standards in terms of which they could reasonably be compared.” (Grierson 1977: 18).
(4) Grierson notes how in the Homeric poems the Iliad and Odyssey, which to some extent reflect the social realities of late Dark Age (c. 1200–800 BC) and early Archaic period (800–480 BC) Greece, cattle or oxen are the unit of account (or measure of value). Goods are priced in terms of oxen, but oxen do not appear as a general or common physical medium of exchange (Grierson 1977: 16; for more recent work of the origin of money in Greece, see Peacock 2006 and 2011). The state of affairs where some thing functions as a standard of value but not a general, physical medium of exchange is in fact a not uncommon phenomenon in history (Grierson 1977: 17). The existence of non-commercial money/social currency very probably precedes commercial money in many societies.

(5) So where does the origin of non-commercial money as a measure of value come from? Grierson (1977: 19) proposes that the social custom of wergeld and wergeld-like customs are the answer. Wergeld (literally, “man-money”) is the paying of compensation for murder or other injuries and even theft of personal property. The object of wergild is to stop blood feuds and violence in revenge, and to provide an adequate measure of the things lost and compensation. The objects that arose as standards of value as non-commercial money in tribal wergild payments did not necessarily arise by barter spot trade of the most saleable commodity (Grierson 1977: 21; 28–29). Often in tribal societies objects of high social status or conferring “prestige” will function as non-commercial money, not simply common barter goods. Most interesting is the linguistic evidence from many societies which shows how the word for money arose etymologically from concepts related to wergild and debt. The English word “pay” comes via French payer from the Latin word pacare, meaning “to pacify,” “make peace with.” In certain societies, non-commercial money arose as a standard for measuring value related to wergild-like customs and possibly even things like bride-wealth, but did not develop into general purpose money/commercial money. Where commercial money arose from non-commercial money, Grierson makes the following argument:
“… where societies have developed the notion of money as a general measure of value, it will, I believe, most often be found that a system of legal compensation for personal injuries, at once inviting mutual comparison and affecting every member of the community, lay behind them.”(Grierson 1977: 29).
(6) I should emphasise how none of this really contradicts the chartalist or credit theories of money. What it means is that money often has a history before it becomes a creature of the state, but this history is quite frequently not what neoclassical and Austrian economists suppose it is, with their dogmatic universal barter spot trade origin of money theory (e.g., Menger 1892) and the cult of metallism.

Dalton, G. 1965. “Primitive Money,” American Anthropologist 67: 44–65.

Einzig, Paul. 1948. “New Light on the Origin of Money,” Nature 162.4130 (25 December): 983–985.

Einzig, Paul. 1949. Primitive Money: In Its Ethnological, Historical, and Economic Aspects, Eyre & Spottiswoode, London.

Grierson, P. 1977. The Origins of Money, Athlone Press and University of London, London.

Menger, C. 1892. “On the Origin of Money,” Economic Journal 2: 238–255.

Peacock, M. S. 2006. “The Origins of Money in Ancient Greece: The Political Economy of Coinage and Exchange,” Cambridge Journal of Economics 30: 637–650.

Peacock, M. S. 2011. “The Political Economy of Homeric Society and the Origins of Money,” Contributions to Political Economy 30: 47–65.

Quiggin, A. H. 1949. A Survey of Primitive Money: The Beginnings of Currency, Methuen, London.

Saturday, March 17, 2012

Keynes’s Early Life, 1909–1914

I have written up part 3 of notes and trivia on Keynes’s early life. Part 2 is here. My reading material has been D. E. Moggridge’s Maynard Keynes: An Economist’s Biography (London, 1992), and Robert Skidelsky’s John Maynard Keynes: Hopes Betrayed 1883–1920 (vol. 1; London, 1983).

My biographical details of interest and trivia:
(1) In 1908, Keynes was offered one of two lectureships in economics (the other went to Walter Layton), with a salary of £100 a year (Skidelsky 1983: 185). He began lecturing at Cambridge on “money, credit and prices” on 19 January 1909 (Skidelsky 1983: 211). At first, this was mainly a way of returning to Cambridge and escaping from the drudgery of his India Office job, but Keynes was eager to “display his professional competence” in economics (Skidelsky 1983: 207). Keynes’s workload had reached 100 hours of lecturing in his third year at Cambridge, or 4 hours a week over the 3 terms (Skidelsky 1983: 211).

(2) After Alfred North Whitehead (1861–1947) (who was also the doctoral supervisor of Bertrand Russell) was favourable to the revised version of his dissertation on probability, on 16 March 1909, Keynes was elected to a prize fellowship at King’s College, Cambridge, which he held for the rest of his life (Skidelsky 1983: 204; Moggridge 1992: 185).

(3) Keynes founded an economic society at Cambridge called the Political Economy Club, which included dons, postgraduates and undergraduates, whose first meeting was on 22 October 1909 (Moggridge 1992: 189; Skidelsky 1983: 212). Some of the students who were admitted to this club were to become important economists, and included the following:
Dennis Robertson
Hubert Henderson (who came up to Cambridge in 1909)
Fredrick Lavington
Dudley Ward
Hugh Dalton.
(4) Keynes showed an interest in monetary economics from 1909, being influenced by the oral tradition of Marshall at Cambridge (Moggridge 1992: 198). He had read Eugen von Böhm-Bawerk’s Recent Literature on Interest (trans. W. A. Scott and S. Feilbogen; New York and London, 1903) around 1905–1906, so was not unaware of Austrian economics (Moggridge 1992: 198).

(5) When Indian students were the subject of a racist slur at Cambridge, Keynes condemned this and defended them and their abilities in May 1909 (Skidelsky 1983: 213–214). I can’t help but contrast Keynes’s liberalism with Hayek’s slur against his Indian students at the LSE.

(6) From 1910 Keynes was already showing an interest in the psychology of investors and the question of expectations under conditions of uncertainty (Skidelsky 1983: 208) – a very important theme for his later work.

(7) In October 1911, Keynes was appointed as editor of the Economic Journal, probably the most respected economics periodical in Britain. He began the task of editing it in late December 1911, and was editor until 1945 (Moggridge 1992: 208). Keynes was 28. In those days, refereeing of articles was not so common a practice, and Keynes appears to have made many decisions on acceptance and rejection of articles himself (Moggridge 1992: 209).

(8) Around 1911 Keynes seems to have had some contact with the Fabian socialists at Cambridge, and his father wrote a curious sentence in his diary entry for 6 September 1911:
“Maynard avows himself a Socialist and is in favour of confiscation of wealth” (quoted in Moggridge 1992: 190).
Despite this, Keynes’s other political activities and loyalties appear to be quite Liberal in these years: he joined the Eighty Club (a progressive liberal society), was the secretary of the Cambridge University Free Trade Committee, and supported the Liberal party in elections (Moggridge 1992: 190).

I suspect one shouldn’t read too much into Neville Keynes’s diary entry. Progressive taxation may be all that Neville Keynes had in mind when he said that Maynard was “in favour of confiscation of wealth” (for some evidence confirming this, see Skidelsky 1983: 241) – for the simple truth is that many 19th century Liberals found progressive taxation unacceptably radical, even a form of “socialism.” Whatever other policy positions were entailed by Keynes declaring “himself a Socialist,” I wonder whether Maynard’s support for Fabianism was much more than a flirtation or phase. The evidence is overwhelming that Keynes identified himself as a Liberal for most of his life by actions as well as words. His Fabian flirtation is also strangely at variance with his political beliefs before 1914 as sketched by Skidelsky (1983: 209).

(9) John Maynard Keynes entered the Bloomsbury Group (which existed from c. 1904 until around the 1940s) from about 1909 (Skidelsky 1983: 242–243) or around 1911 (Moggridge 1992: 217–218). Skidelsky (1983: 243) dates the beginning of the Bloomsbury Group to March 1905.

Leonard Woolf remembered the “Old Bloomsbury” as composed of the following people:
Vanessa and Clive Bell
Virginia and Leonard Woolf
Adrian and Karin Stephen
Lytton Strachey
Maynard Keynes
Duncan Grant
E. M. Forster
Saxon Sydney-Turner
Roger Fry
Desmond and Molly MacCarthy
Julian, Quentin and Angelica Bell
David Garnett.
This group provided Keynes with the focus for his social and intellectual life while in London (Moggridge 1992: 218). Keynes was to become a financial patron of Bloomsbury from the First World War onwards (Skidelsky 1983: 250). From 1911, Keynes tended to spend the middle of each week in London, a practice he continued until 1937 (Skidelsky 1983: 250), which increased his contact with the Bloomsbury group.

(10) In March 1910, Keynes read about half of Adam Smith, early in his holiday with Duncan Grant through Greece and Asia Minor, praising it as a “wonderful book” (Skidelsky 1983: 254). He visited Troy on his trip and returned via Berlin, arriving in Britain on 8 May 1910.

(11) In the summer of 1910 Keynes worked on logic and the justification of induction (Skidelsky 1983: 254–255).

(12) Keynes began publishing technical articles on economics in 1908. The following is a list of his publications from 1908–1914:
J. M. Keynes, 1908. “Rents, Prices, and Wages,” Economic Journal 18.71 (Sep.): 472–473.

J. M. Keynes, 1909. “Recent Economic Events in India,” Economic Journal 19.73 (Mar.): 51-67.

J. M. Keynes, 1914. “Currency in 1912,” Economic Journal 24.93 (Mar.): 152–157.

J. M. Keynes, 1914. “War and the Financial System, August, 1914,” Economic Journal 24.95 (Sep.): 460–486.

J. M. Keynes, 1914. “The Trade of India in 1913–14,” Economic Journal 24.96 (Dec.): 639–642.

J. M. Keynes, 1914. “The Prospects of Money, November, 1914,” Economic Journal 24.96 (Dec.): 610–634.
Keynes wrote a number of book reviews, but these stand out as of interest:
J. M. Keynes, 1911. “The Purchasing Power of Money: Its Determination and Relation to Credit, Interest, and Crisis. by Irving Fisher, Harry G. Brown” (review), Economic Journal 21.83 (Sep.): 393–398.

J. M. Keynes, 1912. “Theory of Political Economy. by W. Stanley Jevons” (review), Economic Journal 22.85 (Mar.): 78–80.

J. M. Keynes, 1912. “The Economic Principles of Confucius and his School. by Chen Huan-Chang” (review), Economic Journal 22.88 (Dec.): 584–588.

J. M. Keynes, 1913. “Gold, Prices, and Wages. by J. A. Hobson,” Economic Journal 23.91 (Sep.): 393–398.

J. M. Keynes, 1913. “The Standard of Value. by David Barbour” (review), Economic Journal 23.91 (Sep.): 390–393.

J. M. Keynes, 1914. “What is Money? by A. Mitchell Innes” (review), Economic Journal 24.95 (Sep.): 419–421.
(this is in fact a positive review of Innes 1913, and Keynes [p. 421] actually says that Innes’s “historical conclusions ... have, I think, much foundation.” For more on Keynes’s endorsement of Innes’s credit theory of money and Chartalism, see here).

J. M. Keynes, 1914. “Theorie des Geldes und der Umlaufsmittel. by Ludwig von Mises; Geld und Kapital. by Friedrich Bendixen” (review), Economic Journal 24.95 (Sep.): 417–419.
[for more analysis of this article, see my post here.]
(13) Keynes’s reputation as a monetary reformer was almost entirely the result of his book Indian Currency and Finance (Macmillan and Co, London, 1913), a work which defended India’s gold exchange standard, in which there was a partial domestic paper currency in India convertible into gold for capital account transactions. Keynes defended this system as allowing a greater elasticity of money supply (Skidelsky 1983: 275).

But an additional point which, I think, escapes Keynes’s biographers is that Keynes appears to have endorsed Mitchell Innes’s credit theory of money and Georg Friedrich Knapp’s Chartalism, as I have pointed out in another post. That puts Keynes into the world of heterodox monetary thinkers well before the 1920s.

(14) Keynes was appointed to the Girdler’s Lectureship in Economics at Cambridge in December 1910 (Skidelsky 1983: 264).

(15) Keynes met Ludwig Wittgenstein in October 1912 at Cambridge and helped to have him elected to the Apostles (Skidelsky 1983: 266).

(16) Keynes served on the Royal Commission on Indian Finance and Currency in 1913 (Skidelsky 1983: 277). He contributed to the discussion on whether India should have its own central bank, and helped write a proposal for such a bank.

(17) Keynes started to purchase stocks and shares in a significant way from 1910, including speculative activity. In July 1914, Keynes had an overdraft of 1,000 pounds for speculative purposes (more detail in Skidelsky 1983: 286–288).

John Maynard Keynes – Timeline.

John Maynard Keynes, Wikipedia.


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

Keynes, W. Milo (ed.). 1975. Essays on John Maynard Keynes, Cambridge University Press, London.

Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography, Routledge, London.

Skidelsky, R. J. A. 1983. John Maynard Keynes: Hopes Betrayed 1883–1920 (vol. 1), Macmillan, London.

Michael Shermer on the Evolution of Fairness

Michael Shermer is the founder of the US-based Skeptics Society, and editor of the Skeptic, a magazine I have always enjoyed, being skeptically-minded on a good many things myself.

This is a short excerpt from a talk where Shermer discusses the evolution of our sense of fairness (curiously, Shermer describes himself as a libertarian).

Some comments:
(1) I have to say I find it unconvincing that all relations and exchanges must be analyzed in economic terms. Reciprocal gift exchange, for example, goes well beyond some crude economic transaction: it involves a wealth of social interactions and obligations. Economic transactions for thousands of years in many societies were deeply embedded in social life. But this is perhaps a minor criticism.

(2) Our species is about 200,000 years ago, and agriculture only emerged about 10,000 years ago. For most of our history (probably over 88% of it), we were nomadic hunter gatherers. Modern human psychology (which is partly and significantly caused by the evolved structure of the human brain) remains fundamentally the product of that evolution.

It is likely that the sense of “fairness” or even “entitlement” leading to the existence of common property (the ancient equivalent of public goods) or sharing the wealth (e.g., egalitarian food sharing practices amongst hunter gatherers) appears to be evolved in us as an advantage for survival. Hunter gatherer societies obviously had a degree of social coercion to enforce egalitarianism as well (to solve the free rider problem and to deal with the appearance of selfish impulses deemed unfair).

The desire to “spread the wealth” is not some alien, wicked propensity caused by “evil” governments: it is in our psychology, the psychology of egalitarian, food-sharing hunter gatherers.

This has consequences: most of the social and economic positions held by virtually all forms of libertarianism would appear to me to be unnatural (if one can use that word) to most people, and go against the deeply ingrained, evolutionary and psychological traits that many humans have. The belief that the rich cannot be made to give up some of their wealth to provide for humans unable to find work on the market or any private charity would, I contend, find few supporters. Yet it is a requirement of natural-rights based libertarianism that there is nothing immoral about allowing the deaths of humans unable to find work on the market or unable to obtain private, voluntary charity. The mass “conversion” of people to libertarian or Austrian philosophy (and the elimination of all taxes, public goods, government provided social security) is about as likely as the disappearance of the widespread human fear of snakes, which also seems to have an evolutionary and psychological basis.

(3) I do not wish to ignore the role of culture, or suggest some vulgar genetic determinism (which I personally find distasteful) here, of course. Human psychology is the complex interaction of genes and environment. There are exceptions to general genetically-influenced psychological traits. Culture can have a very significant role in shaping behaviour, attitudes and preferences.

Nor do aspects of our psychology justify in the moral sense egalitarian behaviour or political/social systems. For proper justification, an objective ethical theory is required. Intelligent people have felt themselves able to defend a reasonable degree of egalitarianism via independent ethical theories, such as some form of consequentialism, Rawls’ ethics, Kantian ethics, etc.
I have discussed this subject in a longer post here:
“Hunter Gatherer Ethics?,” February 23, 2011.

Steve Keen on Advanced Political Economy 2

These are the second lecture of Steve Keen’s course on Advanced Political Economy, which he teaches at the University of Western Sydney.

More information here. Again, the sound is not the best. Turn the volume up!

Friday, March 16, 2012

Hayek Grasps Endogenous Money

There is an interesting passage from Hayek’s Prices and Production:
“There can be no doubt that besides the regular types of the circulating medium, such as coin, bank notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, ceteris paribus, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.

In particular, it is necessary to take account of certain forms of credit not connected with banks which help, as is commonly said, to economise money, or to do the work for which, if they did not exist, money in the narrower sense of the word would be required. The criterion by which we may distinguish these circulating credits from other forms of credit which do not act as substitutes for money is that they give to somebody the means of purchasing goods without at the same time diminishing the money spending power of somebody else. This is most obviously the case when the creditor receives a bill of exchange which he may pass on in payment for other goods. It applies also to a number of other forms of commercial credit, as, for example, when book credit is simultaneously introduced in a number of successive stages of production in the place of cash payments, and so on. The characteristic peculiarity of these forms of credit is that they spring up without being subject to any central control, but once they have come into existence their convertibility into other forms of money must be possible if a collapse of credit is to be avoided.” (Hayek 2008: 289–290).
That is an insightful passage: it describes the endogenous money supply that capitalist systems have had for centuries.

A major aspect of the elastic, endogenous money supply historically was, and still is to some extent, the negotiable debt instruments we call (1) promissory notes and (2) bills of exchange.

Both are freely and voluntarily created by private agents – there is no fraud involved. Free agents on the market create money at will by both these debt instruments. If modern Western capitalism has any “natural” or normal characteristics, it is the endogenous money supply.

The Rothbardian, anti-fractional reserve banking Austrians are guilty of two-fold intellectual incompetence, as follows:
(1) fractional reserve banking (FRB) is not fraudulent. FRB is an exchange of present for future goods, and is a mutuum contract, not a bailment. FRB does not involve two parties owning the same property because fractional reserve accounts (which we normally call demand deposits, checking accounts, transactions accounts, etc.) are nothing but debt instruments (just like promissory notes and bills of exchange): you transferred legal ownership of the money when you signed the contract and your FR account is actually just a record of the debt owed to you by the bank, re-payable on demand.

(2) even if FRB was banned, capitalism would still have an elastic, endogenous money supply via promissory notes and bills of exchanges. In order to stop the elasticity of money production by negotiable debt instruments, Rothbardian Austrians would have to violate private freedom and ban promissory notes and bills of exchanges. By its own self-proclaimed standards, the Rothbardian system is nothing but a tyrannical ideology violating liberty and free contract.


Hayek, F. A. 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala.

Thursday, March 15, 2012

Steve Keen on Advanced Political Economy 1

These videos are the first lecture of Steve Keen’s course on Advanced Political Economy, which he teaches at the University of Western Sydney.

More information here. The sound is not the best. Turn the volume up!

Links for Economics

I have assembled a list of links here of online newspapers, magazines, blogs and staff pages relevant for economics.

I. Online Newspapers, Journals, Magazines

Wall Street Journal


Financial Times

BBC News Business

Dollars and Sense, Real World Economics

II. Mainstream Blogs
New Keynesian
Paul Krugman Blog

Facts and Other Stubborn Things, Daniel Kuehn

Greg Mankiw’s Blog

Economics One, A Blog by John B. Taylor

Brad DeLong, Grasping Reality with the Invisible Hand

Market Monetarist

Scott Sumner

Macro and Other Market Musings, David Beckworth

Stephen Williamson: New Monetarist Economics

MacroMania, David Andolfatto, David Glasner

New Classical
John H. Cochrane, The Grumpy Economist

Dani Rodrik’s Weblog

Matthew Yglesias

Hjeconomics: The Blog, Henrik Jensen

III. Post Keynesian and Heterodox Keynesian
Post Keynesian Economics Study Group

Naked Keynesianism

Debt Deflation, Steve Keen

Mark Hayes, Robinson College, Cambridge

Dr. Thomas Palley, PhD. in Economics (Yale University)

Marc Lavoie, Professor in the Department of Economics at the University of Ottawa

Dr. J. Barkley Rosser, Jr., Professor of Economics, James Madison University

Philip Arestis

Robert Pollin, Professor of economics at the University of Massachusetts-Amherst

Professor Malcolm Sawyer, Leeds University Business School

Professor Sheila Dow, University of Stirling, Ann Pettifor blog

Michael Hudson

Richard P.F. Holt’s Web Site

Ric Holt, “What is Post Keynesian Economics?”

Barkley Rosser’s Home Page

Mark Hayes’s Staff Page

Malcolm Sawyer’s Web Page

Modern Monetary Theory (MMT)/Neochartalism
New Economic Perspectives

L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City

Billy Blog, Bill Mitchell

Warren Mosler, The Center of the Universe

Centre of Full Employment and Equity (CofFEE)

Mike Norman Economics Blog

Modern Money Mechanics

Other Heterodox Resources
Prime, Policy Research in Macroeconomics

New Economics Foundation

Unlearningeconomics Blog

Real-World Economics Review Blog

Econospeak Blog

James Galbraith

Robert Skidelsky’s Official Website

The Other Canon

Tony Lawson, Staff Page, University of Cambridge

Thoughts on Economics, Robert Vienneau

Post-Keynesian Observations

Lars P. Syll’s Blog, Docendo discimus

Levy Economics Institute of Bard College

Multiplier Effect, Levy Economics Institute Blog

New Deal 2.0

Unsettling Economics, Michael Perelman

The Progressive Economics Forum

John Quiggin

Ambrose Evans-Pritchard Columns, The Telegraph

IV. Libertarian and Austrian
ThinkMarkets, A blog of the NYU Colloquium on Market Institutions and Economic Processes

Radicalsubjectivist Blog

Free Advice, The Personal Blog of Robert P. Murphy

Coordination Problem

Economic, Jonathan Finegold Catalán

Krugman in Wonderland, William L. Anderson

Ludwig von Mises Institute

Mises Economic Blog

Taking Hayek Serioulsly, Greg Ransom

Roger W. Garrison, Professor of Economics, Auburn University

The Free Man Online

The Independent Institute

Foundation for Economic Education (FEE)

Library of Economics and Liberty


The Daily

George Selgin

Selected Works of Mario Rizzo

Guido Hülsmann

Free Association, Sheldon Richman, Australia’s leading libertarian and centre-right blog

The Cobden Centre Blog

Quarterly Journal of Austrian Economics

Stefan Karlsson Blog

Ideas Matter

Charles Rowley’s Blog

Other Libertarian/Free Market Resources
Cato Institute

Crash Landing, blog of Gene Callahan

Wednesday, March 14, 2012

Nassim Nicholas Taleb is No Progressive on Economics

Nassim Nicholas Taleb is the author of The Black Swan (2007) and Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (2001), works about unpredictable events. The latter book also invoked the writings of George L. S. Shackle, and both of his books caused something of a stir.

But here we can see how far this man is from any progressive economic agenda. His assertions that America needs to eliminate deficits, and has been risking hyperinflation are, quite frankly, just utter rubbish. He even says he is afraid of hyperinflation (8.25), putting him in company with some of the most laughable Austrian ideologues.

Tuesday, March 13, 2012

Sunday, March 11, 2012

Keynes on Mises’s Theory of Money and Credit

The Austrian critics of Keynes are quick to condemn him for alleged “dismissal” of Mises’s Theorie des Geldes und der Umlaufsmittel (Theory of Money and Credit), the original German edition of which was published in 1912.

Don Boudreaux makes the following charges:
“When Mises’s German-language book first appeared in 1912, Keynes reviewed it in the prestigious Economic Journal, dismissing it as being unoriginal. Seems pretty damning, until we learn that Keynes himself, in his 1930 book Treatise on Money, confessed that ‘in German, I can only clearly understand what I already know – so that new ideas are apt to be veiled from me by the difficulties of the language.’

Keynes’s influential dismissal of Mises’s work was based not on anything as lofty as informed disagreement; it was based instead on incomprehension.”

Don Boudreaux, “Keynes on Mises — and on Himself,” Cafe Hayek, November 7, 2009.
While it is true that Keynes included the charge of unoriginality, here is in fact what Keynes really said about Mises’s Theorie des Geldes und der Umlaufsmittel (it is in fact reasonably positive):
“DR. VON MISES’ treatise is the work of an acute and cultivated mind. But it is critical rather than constructive, dialectical and not original. The author avoids all the usual pitfalls, but he avoids them by pointing them out and turning back rather than by surmounting them. Dr. Mises strikes an outside reader as being the very highly educated pupil of a school, once of great eminence, but now losing its vitality. There is no ‘lift’ in his book; but, on the other hand, an easy or tired acquiescence in the veils which obscure the light rather than a rending away of them. One closes the book, therefore, with a feeling of disappointment that an author so intelligent, so candid, and so widely read should, after all, help one so little to a clear and constructive understanding of the fundamentals of his subject. When this much has been said, the book is not to be denied considerable merits. Its lucid common sense has the quality, to be found so much more often in Austrian than in German authors, of the best French writing. The field covered is wide. .... there is a great deal on every one of these topics very well worth reading. Perhaps the third book is, on the whole, the best. The treatment throughout is primarily theoretical, and quite without striving after actualite. The book is ‘enlightened’ in the highest degree possible.” (Keynes 1914: 417).
Keynes did not engage in some savage attack on the book, nor did he dismiss it at all: he showed a balanced appreciation of it, even saying it had “considerable merits.”

As to the charge that Keynes was not able to understand Mises’s book, here is Keynes’s actual comments on the content of the work:
“The first book deals with the meaning, place, and function of money; the second with the value of money, the problem of measuring it, and the social consequences of variations in it; and the third with the relation of bank-money, of notes, and of discount policy to the theory of money. With the exception of the section on the value of money, where Dr. von Mises is too easily satisfied with mere criticism of imperfect theories, there is a great deal on every one of these topics very well worth reading. Perhaps the third book is, on the whole, the best.” (Keynes 1914: 417).
Again, not only did Keynes not “dismiss” the work or its content, but also described the content, and even appreciated and agreed with some chapters.

There is also the question of this statement of Keynes published in 1930 in A Treatise on Money:
“I should have made more references to the work of these writers if their books, which have only come into my hands as these pages are being passed through the press, had appeared when my own thought was at an earlier stage of development, and if my knowledge of the German language was not so poor (in German I can only clearly understand what I know already!—so that new ideas are apt to be veiled from me by the difficulties of language).” (Keynes 1958 [1930]: 199, n. 2).
Yet what Keynes already knew in German was not insignificant: Keynes had two German governesses in the 1890s, who, according to Skidelsky (1983: 55), gave him a “good grounding in German,” even if he admitted later that his knowledge was hardly fluent. I suspect there is some degree of self-deprecation in the remark above too, a quite British trait.

Keynes clearly had enough German to read (or at least plan to read) an astonishing 3,000-4,000 pages of the German literature* for his work on probability theory (Moggridge 1992: 172; Skidelsky 1983: 178). Around 1907, Keynes had his father send him books in German relevant to probability, and he himself said in a candid private letter to his father that his reading speed for English, French and German bore a ratio of 1:2:3 (letter of Keynes to John Neville Keynes, 22 March 1907; cited in Moggridge 1992: 172; Skidelsky 1983: 178). In August 1911, Keynes told Lytton Strachey that he was “reading endless and appalling books in German” (letter cited in Skidelsky 1983: 259) – undoubtedly German books on probability, logic or induction.

Keynes was, then, far from fluent in German. But a man who may have read something like 3,000 pages of German was hardly incompetent in German either. Even a cursory look at Keynes’s bibliography and notes of A Treatise on Probability (1st edn.; London, 1921) shows a vast range of German works cited.

There is no evidence that Keynes was so incompetent in German that he could not tackle Mises’s Theorie des Geldes und der Umlaufsmittel, nor that he could not understand that work reasonably well.

* The original German edition of Mises’s Theorie des Geldes und der Umlaufsmittel (1912) had 476 pages of text. That should not have been so difficult for a man who had poured through 3,000-4,000 pages of German writings on mathematics and probability.


Keynes, J. M. 1914. “Theorie des Geldes und der Umlaufsmittel. by Ludwig von Mises; Geld und Kapital. by Friedrich Bendixen” (review), Economic Journal 24.95 (Sep.): 417–419.

Keynes, J. M. 1921. A Treatise on Probability (1st edn.), Macmillan, London.

Keynes, J. M. 1958 [1930]. A Treatise on Money (vol. 1), Macmillan, London.

Mises, L. von. 1912. Theorie des Geldes und der Umlaufsmittel, Duncker & Humblot, Munich and Leipzig.

Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography, Routledge, London.

Skidelsky, R. J. A. 1983. John Maynard Keynes: Hopes Betrayed 1883–1920 (vol. 1), Macmillan, London.

Keynes on Metallism versus Chartalism in 1914

There is a most interesting book review, now almost forgotten, written by John Maynard Keynes and published in 1914, in which Keynes reviews both the original German edition of Ludwig von Mises’s Theorie des Geldes und der Umlaufsmittel (Theory of Money and Credit; Munich and Leipzig, 1912), and Geld und Kapital (Money and Capital; Leipzig, 1912) by the German Chartalist Friedrich Bendixen (see Keynes 1914a).

The Chartalist theory of money derived from Georg Friedrich Knapp’s Staatliche Theorie des Geldes (The State Theory of Money; original German edition 1905; English translation 1924), which has been one of the important sources of recent Chartalism or Modern Monetary Theory.

Although Keynes was not hostile to Mises, nevertheless it is clear from his view of Bendixen’s book that Keynes already repudiated the Metallist position on money and was receptive to Knapp’s Chartalism. Keynes says:
“[sc. Bendixen says that the] … old ‘metallist’ view of money is superstitious, and Dr. Bendixen trounces it with the vigour of a convert. Money is the creation of the State; it is not true to say that gold is international currency, for international contracts are never made in terms of gold, but always in terms of some national monetary unit; there is no essential or important distinction between notes and metallic money; money is the measure of value, but to regard it as having value itself is a relic of the view that the value of money is regulated by the value of the substance of which it is made, and is like confusing a theatre ticket with the performance. With the exception of the last, the only true interpretation of which is purely dialectical, these ideas are undoubtedly of the right complexion. It is probably true that the old ‘metallist’ view and the theories of regulation of note issue based on it do greatly stand in the way of currency reform, whether we are thinking of economy and elasticity or of a change in the standard; and a gospel which can be made the basis of a crusade on these lines is likely to be very useful to the world, whatever its crudities or terminology.” (Keynes 1914a: 418).
Keynes (1914b) also published in 1914 a positive review of Mitchell Innes’s 1913 essay “What is Money?” Keynes (1914b: 421) even said explicitly in this latter review that he thought that Innes’s “historical conclusions ... have, I think, much foundation.”

So Keynes the monetary reformer was already moving to the Chartalist and credit theories of money by 1914, only a few years after he had begun lecturing in economics at Cambridge university in January 1909 (for Keynes’s education and emergence as an economist, see my post here).


Bendixen, Friedrich. 1912. Geld und Kapital, Duncker & Humblot, Leipzig.

Keynes, J. M. 1914a. “Theorie des Geldes und der Umlaufsmittel. by Ludwig von Mises; Geld und Kapital. by Friedrich Bendixen” (review), Economic Journal 24.95 (Sep.): 417–419.

Keynes, J. M. 1914b. “What is Money? by A. Mitchell Innes” (review), Economic Journal 24.95 (Sep.): 419–421.

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

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

Mises, L. von. 1912. Theorie des Geldes und der Umlaufsmittel, Duncker & Humblot, Munich and Leipzig.

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

New Look “New Economic Perspectives” Blog

New Economic Perspectives has been redesigned and moved to a new address:
New Economic Perspectives,
This has always been an excellent site for MMT, and looks even better now.

I have just looked at L. Randall Wray’s heroic series on MMT for Austrians:
L. Randall Wray, “Blog 39: MMT for Austrians: Disagreements Among Reasonable People,” March 4, 2012.

L. Randall Wray, “Blog #39 Disagreements among Reasonable People: Response to MMT for Austrians #3,” March 7, 2012.

L. Randall Wray, “MMT for Austrians 3: How Do YOU Propose We Deal with the Elderly, Disabled and their Depts?,” March 7, 2012.
Worth a read!

Saturday, March 10, 2012

Taking Keynes’s Name in Vain

That title refers to what is now an almost notorious 2011 article by Vince Cable, the UK Secretary of State for Business, Innovation and Skills, which defends the Tory-Liberal Democrat coalition regime of austerity in Britain:
Vince Cable, “Keynes Would be on Our Side,” New Statesman, 12 January 2011.
There are already good responses from David Blanchflower and Robert Skidelsky and partly from Bill Mitchell.

I suppose part of the problem is that Keynes moved through various stages in his economic thinking, from being essentially a typical liberal before 1914 in favour of free trade, to a quasi-monetarist, to the Keynes of the General Theory in favour of stabilisation of investment and fiscal activism. Which Keynes are people claiming?

For me it would be the Keynes who praised the work of Abba Lerner (1943; 1944; and 1951), the man who really did develop the modern Keynesian policy of active fiscal management of an economy.

After some initial dismissal of some of Lerner’s ideas (perhaps even hostility) at a lecture at the Federal Reserve in 1943, Keynes withdrew this opposition. This is related by David Colander:
“Keynes retracted his characterization of Lerner’s ideas as ‘humbug.’ According to Lerner, ‘in reading … [The Economics of Control] later, at leisure, … [Keynes] found the logic less escapable and the resistances more obvious’ … Keynes admitted to being at least a closet Lernerian in a letter to Lerner (September 1944) congratulating him on The Economics of Control. Keynes wrote:
‘I have marked with particular satisfaction and profit three pairs of chapters-chap. 20 and 21, chap. 24 and 25 [where Lerner had discussed functional finance], chap. 28 and 29. Here is the kernel of yourself. It is very original and grand stuff. I shall have to try when I get back to hold a seminar for the heads of the Treasury on Functional Finance. It will be very hard going-probably impossible. I shall have to temper its austerity where I can. I think I shall ask them to let me hold a seminar of their sons instead, agreeing beforehand that, if I can convince the boys, they will take it from me that it is so!’
It was not only in this letter that Keynes retracted his initial remarks about Functional Finance. In 1945, when Keynes again visited the United States, he repeated his praise of Lerner at another Federal Reserve Seminar. In this meeting Keynes spoke in glowing terms of Lerner’s contribution and ‘without any provocation, he held forth a panegyric on Functional Finance’” (Colander 1984: 1574).

Colander, D. 1984. “Was Keynes a Keynesian or a Lernerian?” Journal of Economic Literature 22.4: 1572–1575.

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. 1951. The Economics of Employment, New York, McGraw Hill.