Who Will Accept It? Currency-Issuing Governments are Constrained by Resources, Not Money

“Lerner’s argument is impeccable but heaven help anyone who tries to put it across to the plain man at this stage of the evolution of our ideas.” (Keynes to Meade, April 1943)

“The need to balance the budget is superstition … a myth. It’s like a religious doctrine that is used to get people to believe a certain thing.” (Paul Samuelson)

Election time serves as a reminder of how difficult it is to break through the popular illusions clouding public debate. Try as we might – and this goes for anyone seeking to dispel prevailing neoliberal dogmas – the public perception, if it budges at all, appears to do so painfully slowly.

In attempting to break through, one challenge is to convey our core ideas as simply and succinctly as possible to people who have never encountered them before. When it comes to Modern Monetary Theory (MMT), I think a simple but central point to get across is that for currency-issuing governments the hard policy constraints relate to real resources, not money. We need to convey that money is not the constraint but in almost the same breath call for the focus to be on real resources when pondering questions of economic policy.

Thinking in this way helps to clear away the mental fog that can otherwise form when pondering economics.

For instance, at a time of substantial unemployment and underemployment, what sense could it make to restrict library opening hours if we have the librarians and the libraries? How would closing library doors earlier than usual achieve anything useful? We could only think it was a sensible choice if we falsely believed that money was the obstacle to the operation of public libraries. The currency-issuing national government can always ensure necessary funds are available to currency-using state and local governments in cases where libraries are provided at the state or local level.

If we have the trains, tracks and drivers, what good would be achieved by a cut in rail services? None, unless we thought that money was the obstacle to providing adequate public transport.

If we have teachers and schools; medical practitioners and hospitals; engineers, construction workers and raw materials, what would cutting back on education, health care or physical infrastructure achieve? Again, the answer is nothing, unless we thought money was the obstacle.

And ditto for a great many other activities.

In “economics circles” – whether in university departments or in the blogosphere, facebook or twitter – the opinion is sometimes expressed that the typical person would deem this change in focus from money to resources as being of no practical significance. I strongly disagree with that viewpoint. It is perhaps easy to forget what it was like trying to think about economics and the economy before becoming a specialist in the field.

When people think money is the constraint on the government’s economic policy, they can be very easily deceived into thinking that austerity makes sense.

For such people – and, at the moment, they are surely legion – a basic understanding of MMT is not just eye-opening but would give cause for a fundamental re-think on the economy and economic policy. It can alter a person’s economic perspective at the most basic level.

In terms of economic understanding, I would venture that most people would actually be better off if they had never encountered a single idea of mainstream economics. That is not to say that mainstream economics lacks insight, especially that part of it that has emerged out of a broadly Keynesian tradition. But in modern mainstream economics, as taught formally to undergraduates and informally to consumers of mass media, these insights are largely disguised amid a jumble of mystifying neoliberal notions. Chief among these are the flawed analogy of government as household and the supposed desirability of government being run “as a business”. The economy is held up erroneously as the determiner of the social rather than embedded in society. In short, there is acceptance of the myth that “there is no alternative”.

For those presently captive to neoliberal dogma, it would probably be more effective, when contemplating economic issues, simply to think (or ask) about the real processes and real resources involved in pursuing a particular policy and consider its feasibility in those concrete terms.

Once this simple but important distinction between money and real resources is understood, the way is clear to develop a more accurate understanding of money, its role and how it “works”.

The change in perspective is simple but at the same time requires something of an about-face. Much of what we thought we understood is “turned on its head”. It is an epiphany of sorts.

Once we “get” it, it seems simple and obvious, and we would never wish to go back.

There is nothing frightening on the other side. The change in perspective does not necessarily call into question any of our personal views on politics or policy questions, except when these views are predicated solely on a false notion that money, rather than resources, is what constrains a currency-issuing government.

Once a person has made this basic switch in perspective, I think an understanding of the basics of MMT and related macroeconomic perspectives will follow quite easily. These basics will seem intuitive rather than counterintuitive.

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16 thoughts on “Who Will Accept It? Currency-Issuing Governments are Constrained by Resources, Not Money

  1. I had a charity ring me up the other day, asking for money. I said ‘why don’t you ring up the national Govt. – they create the stuff’. She then launched into Govt. can only spend what they collect in taxes or borrow. I said ‘they got that because Govt. spent it into the economy in the first place’. Long silence on the phone. Then ‘omg – have never thought about it like that’. So then I mentioned some of your points above, and got her to write down the billy blog url and debriefing 101 (sorry Pete, couldn’t remember the equivalent on your site – ‘posts to read first’ (now I’ve got it and will use it next time). Every time I get a phone call like that or someone knocks on the door I do that just for fun, and give them a little donation if I have something on hand.

  2. That’s awesome, jr. Everyday interactions can get the word out, step by step. Billy Blog debriefing 101 is a perfect recommendation. You were wise to recommend going straight to source.

  3. Hi Pete.

    For those presently captive to neoliberal dogma, it would probably be more effective, when contemplating economic issues, simply to think (or ask) about the real processes and real resources involved in pursuing a particular policy and consider its feasibility in those concrete terms.

    I share your feelings, but I’m not sure the problem is that people are captive to the neoliberal dogma. Who are those captives?

    For one, because among the avowedly anti-neoliberal a great many have no interest whatsoever on “real processes and real resources”. I remember a very insightful comment you made a few weeks ago about neoclassicals removing time considerations from the economy, so as to remove value considerations. Many so-called anti-neoliberals went one step further: to remove economic considerations from the economy.

    A couple of years ago, Ismael Hossein-Zadeh published “Keynes is Dead; Long Live Marx!” in Counterpunch. You might find it interesting:
    http://www.counterpunch.org/2014/08/26/keynes-is-dead-long-live-marx/

    A little quibble with your opening quote. Tony Aspromourgos (“Keynes, Lerner, and the Question of Public Debt”) has attempted to settle definitively this debate about what Keynes really meant on debt and his confrontation with Lerner. While I don’t think Aspromourgos succeeded, his article presents a lot of fascinating facts (including that quotation):
    https://varoufakis.files.wordpress.com/2014/01/ta-on-debt-paper-1.pdf

    Although Aspromourgos doesn’t mention her by name, the Confidence Fairy seems to be in the background, at least in Keynes’ mind.

  4. Thanks, Magpie. I have actually visited those links before but enjoyed revisiting each of them.

    I liked the anecdotes in Tony A’s paper of seminars and scholarly get-togethers in the 1930s and 1940s. It is a fascinating period in the history of economic thought. I laughed at the account of Paul Sweezy ending a meeting with a drunken right-wing rant only to veer sharply to the left not long afterwards. 🙂

    —–

    As for the confidence fairy and the supposed possibility (perhaps implicitly countenanced by Keynes?) of contractionary expansionism, I wonder if this is another example of the confusion that can result if we fail to remain cognizant of time or sequential aspects of economic processes.

    Consider …

    The government announces an increase in expenditure of X.

    Which businesses are going to lose all confidence and cut back investment and production?

    Presumably none of the businesses who find themselves in receipt of new government orders partially making up the amount X. There is little uncertainty where their next dollar is coming from.

    Presumably not the suppliers of the businesses attempting to meet the new placement of orders. And so on along the supply chain.

    Presumably not the businesses selling consumables to the workers who receive additional wages from government as another portion of X.

    When the sequence of events set in place by the expenditure of X is kept in mind, the notion of a collapse in business and consumer confidence such as to defeat (or more than defeat) the impact of X on aggregate demand seems farfetched, to say the least.

    —–

    With our bolshie caps on, we might further observe that if private corporations nonetheless did lose confidence with the announcement of expenditure X – I highly doubt it, but for the sake of argument, let’s consider it – we would have it within our powers simply to nationalize those industries. Simply put, we don’t need them.

    Of course, this could only happen as a result of massive grassroots pressure being exerted from below, which dovetails into one point of the Counterpunch article, which is that policy, under capitalism, is class policy.

    Right now there is little doubt which class is the main beneficiary of class policy.

    In some respects, though, I am not overly persuaded by the Counterpunch author’s position. I agree, absolutely, that the New Deal policies only came about through mass pressure being exerted from below. But I don’t really agree that the relevance of Keynesian policy can be dismissed on the basis that economic circumstances were more conducive to such policies than now because there was more to do (postwar reconstruction). I think it would be wrong to say that we have run out of things to do.

    Having said this, it does seem difficult to imagine communities agitating for meaningful systemic – or even policy – change so long as they are under the illusion that there is nothing that can be done, other than to sell off public assets, give themselves pay cuts and impose austerity on the false grounds that “the government has run out of money”.

    —–

    Coming back to Lerner and Keynes, the limitations of Keynesian policy and functional finance are largely why the JG is so central to MMT. With a JG, employment would be maintained irrespective of the level of aggregate demand. Demand-side inflationary pressure in the broader economy could be dampened without causing unemployment due to a migration of temporarily displaced workers to JG employment.

    I would point out that Kalecki’s argument concerning the unlikelihood of maintaining full employment under capitalism is a qualified argument. He suggests that full employment could not be maintained “without changes to the fundamental institutions of capitalism”.

    Quite possibly Kalecki had in mind the sphere of production when referring to the need for fundamental institutional change, but personally I think the rejection of gold standard/Bretton Woods/Eurozone type monetary systems in favor of a flex-rate fiat currency may in itself be a fundamental institutional reform and that, if we began to make use of its potential, it could facilitate a concerted push for further fundamental institutional reform and systemic change. (I’ve discussed this before. I know you have reservations with my argument. I won’t labor the point here.)

    Even taking my optimistic position, though, we are back to the problem that no capitalist government will employ currency sovereignty for the benefit of the whole community in the absence of grassroots pressure.

    And this also brings us back to false consciousness and the belief that there is no alternative to the neoliberal agenda.

    This is partly why I think the “government has run out of money” myth is such a crippling one for society.

  5. As for the confidence fairy and the supposed possibility (perhaps implicitly countenanced by Keynes?) of contractionary expansionism, I wonder if this is another example of the confusion that can result if we fail to remain cognizant of time or sequential aspects of economic processes.

    It probably does fail.

    You see, that calculation, rational (but partial) as it is, does not address the problem as Keynes must have seen it. For him Animal Spirits was not rational: capitalism is unstable, alright — even Keynes had to recognize it. Does that mean we need to replace capitalism? No — would have been his answer — because capitalism is not unstable because of anything inherent to it.

    It’s people who are not up to capitalism’s requirements. Animal Spirits was Keynes’ ideologically safe explanation for recessions.

    And it was an explanation that owed a lot to Keynes. If you think about it, chapter 12 of the “General Theory” feels very introspective, doesn’t it? It’s all about what “we”, the “average business man” think, feel, fear (frankly, to me — and maybe I’m being unfair and certainly politically incorrect — the Confidence Fairy looks a lot like Keynes in drag).

    But there are more reasons, if those don’t persuade you. He did not invent government intervention. His claim to immortality was, as a very big shot Keynesian put it some years ago, to have “cracked the code of recessions”. Would he be willing to give that up?

    Moreover, Animal Spirits was meant to be instrumental in his fight to the death for capitalism and all that’s good and pure against Marxism and its satanic hordes.

    He may have thought — correctly, in my opinion — that dispensing with the Confidence Fairy would have threatened his beloved Animal Spirits. That could have been a bridge too far.

    At any event, this is what Aspromourgos wrote:

    “It is evident enough from Keynes’s various explicit comments on functional finance, detailed in the previous section, that the prevalence of false consciousness is one reason for his caution concerning simple policy application of Lerner’s idea. Although Keynes does not make explicit in any of those remarks how this might obstruct successful application (other than by dissuading policymakers from implementation), one may infer from his economic theory how adverse private sector expectations in response to a functional finance policy could reduce private spending via negative impacts on the marginal efficiency of capital or upward pressure on interest rates. The mere ‘fear of a Labour Government or a New Deal’ can cause the former, Keynes (1936, 162) tells us.”

    =========

    I am very skeptical about the whole neoliberalism thing. I don’t think preaching to economists or governments will make any difference. Endorsements by big shot economists, columnists, bureaucrats may open some doors, career-wise, to young, up-and-coming people with mover-and-shaker ambitions, trying desperately to emulate The Lord.

    I see no reason why that should excite us bolshies.

  6. I think it’s the general public that needs to be convinced that there are alternatives, and the general public that would need to build grassroots pressure for change.

    But I am assuming, here, that the general public would actually embrace a social alternative if it were believed possible. This may be a mistaken assumption on my part. It may be that the current situation is more or less satisfactory to the majority. So far, many keep voting for more of the same, or worse.

    Even so, I do believe that the electorate has been kept in the dark concerning the implications of currency sovereignty. The conversation jrbarch relates above includes a response that I suspect would be quite typical: “omg – have never thought about it like that”.

    My feeling is that if we can encourage a better public understanding of the policy space available to a currency-issuing government, at least then people are empowered to make informed choices.

    I can understand others questioning the value of this project considering how little all this “MMTing” appears to have affected public perceptions.

    —–

    A simple form of adaptive expectations (not rational in the neoclassical sense) would be sufficient for confidence to be maintained after an increase in government spending of X. If production depends on expected demand (or realized profitability), and recent demand or realized profitability are used to guide expectations, there will be little likelihood of a collapse in confidence.

    Even if a “fear of a Labour Government or New Deal” were sufficient to reduce the MEC and hit private spending to such an extent that it more than offset X, which I doubt, the next question would be: does this matter? This would only be a problem for somebody (such as Keynes) who is (was) ideologically predisposed to capitalism. Currency sovereignty enables an expansion of not-for-profit activity to the extent we are prepared to undertake it. If capitalists don’t wish to play ball, they don’t have to. In that case, no profits for them.

    In all likelihood, though, capitalists will play ball. They will kick and scream and warn of all manner of calamity if they don’t get their way, but the moment a Labour Government or New Deal comes in, they take what they can get or lose market share to those who do.

    For instance, in recent weeks, all sorts of nonsense has been claimed about the dire consequences that would be sure to follow if Britain left the EU. Much of the same nonsense was claimed in the past when debating whether Britain should adopt the euro. Lexit the Movie highlights some of the parallels. The threats should have no credibility with anybody. But they can appear to be credible to those who believe myths such as the lie that a currency-issuing government can run out of money.

    —–

    My view is that the role of uncertainty and “animal spirits” is somewhat overblown in Keynes and Post Keynesian economics. Not just Marxists but also economists following the surplus approach or influenced by Kalecki seem largely to share this assessment.

  7. J.D. Alt has a new video out this morning on MMT for the general public. It’s on the way; nice and simple using graphics and voice, but a bit flat. If he had a few of those young millenials bringing some life and animation, a touch of humour, music to it – it would be really good!

    The Millenials’ Money

  8. Pete,

    You made a lot of good points, Pete. Let me, however, concentrate on my first comment, which — judging by your reply — I think may have been less than clear.

    I think it was Dean Baker (in “The Conservative Nanny State”) who once described the “neoliberal” view of economic policy in more or less these terms: the state, like a nanny, needs to hold capitalists’ hands, lest something upsets them.

    That’s an apt description, I think. Would you agree?

    ———-

    Let’s do a bit of liturgy of the Catholic mass.

    A reading from the Book of Maynard (chapter 12):

    “This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent; it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.”

    The Word of the Lord. (Thanks be to God.)

    You write:

    “With our bolshie caps on, we might further observe that if private corporations nonetheless did lose confidence with the announcement of expenditure X – I highly doubt it, but for the sake of argument, let’s consider it – we would have it within our powers simply to nationalize those industries. Simply put, we don’t need them.”

    Like yourself, I have no problem with that. But neither of us is a capitalist.

    I can however imagine that a capitalist would read that as an existential threat. You are threatening the baby. That goes a long way into “upsetting the delicate balance of [the average business man’s] spontaneous optimism”.

    And you know very well that it’s not a matter of just “they will kick and scream and warn of all manner of calamity if they don’t get their way. The baby can do a lot more than that.

    ———-

    The question, then, boils down to whether that is just an empty threat or whether we can back it up with a Kaleckian mass mobilization (strong enough to overcome political and maybe even military/police support for the baby).

    So, are we — in 2016 — in position to issue effective threats?

    Back in 1943 Kalecki himself seemed less than optimistic about that:

    “This state of affairs is perhaps symptomatic of the future economic regime of capitalist democracies. In the slump, either under the pressure of the masses, or even without it, public investment financed by borrowing will be undertaken to prevent large-scale unemployment. But if attempts are made to apply this method in order to maintain the high level of employment reached in the subsequent boom, strong opposition by business leaders is likely to be encountered. As has already been argued, lasting full employment is not at all to their liking. The workers would ‘get out of hand’ and the ‘captains of industry’ would be anxious to ‘teach them a lesson’. Moreover, the price increase in the upswing is to the disadvantage of small and big rentiers, and makes them ‘boom-tired’.”

    But there is something more. One day we may yet be in position to credibly threaten capitalists with nationalisation (at least, I hope to live to see that day). If we ever are in such position, why should we be content with having capitalists’ more of less forced cooperation on full employment, when we can have full employment without capitalists?

    ———-

    Another quotation from my treasure trove:

    “Well, this is where we differ. You guys see no need for unemployment. I do. I think it serves an incredibly important psychological component to any healthy economy. I’ve feared for my job and been unemployed. Those moments shaped who I am and what I’ve become. They were invaluable in retrospect. If I’d been able to apply for a JG job I might not be half the man I am today. Maybe it’s just personal entrepreneurial experience speaking here, but I know what it means to hunt and kill for ones [sic] dinner.”

    The guy who wrote that (which I shall not name to avoid resurrecting that fight) may not have read either Kalecki or Keynes. But he sure was channeling the latter.

    To paraphrase Kalecki: this passage is perhaps symptomatic of the structural economic regime of capitalist democracies.

    PS:

    I’m aware that

    “My view is that the role of uncertainty and ‘animal spirits’ is somewhat [?] overblown in Keynes and Post Keynesian economics. Not just Marxists but also economists following the surplus approach or influenced by Kalecki seem largely to share this assessment.”

    The question is, when push comes to shove, will those economists who largely share that assessment side with Our Lord, or with their ideas?

  9. Good comment, Magpie.

    As you note, I was too gentle in suggesting that the confidence fairy is “somewhat” overblown. What I meant to convey was that, yes, there is uncertainty and it is a factor in the decisions of private-sector agents, but once we take account of systemic features of capitalism, time and sequence of action, I think it is clear that government expenditure will tend to have a stimulatory effect on private-sector behavior, even when it raises the ire of the capitalists.

    Capitalists can hate an increase in government spending of X all they want. But, to reiterate what I wrote previously, if part of that X is an order for a specific product, which potential supplier of that product is not going to compete for the contract? Not to do so means missing out on profit and risking a loss of market share. And, similarly, which suppliers of the business winning the government contract will refuse the extra business? Who will refuse the trade of the customers being paid wages in the public sector as part of X? These demand effects begin in specific places but ripple through the economy.

    For contractionary expansionism to be a reality, it is not just that private spending would have to fall in response to X, but that its fall would have to more than offset X and result in a lower overall level of spending.

    Now, some might be disturbed by any softening of private spending, even if total spending rose, based on an ideological preference for private enterprise. But below full utilization of resources, these concerns also seem unwarranted. I think that private spending will tend to be encouraged by X, not discouraged, irrespective of capitalists’ personal feelings, “animal spirits” and belief in confidence fairies. Once we understand how state money “works”, it seems clear that government net spending entices (crowds in) private-sector activity. A flow of X in government spending (unmet by taxes) enters the economy. It is up for grabs. Businesses compete for it.

    —–

    I think more significant than uncertainty per se is that some demand is autonomous. Autonomous decisions to spend, when acted upon, create income, with the income inducing further endogenous spending and income.

    Strictly speaking, all spending requires an actual decision to spend by the recipient of the income. However, in recognition that much of this spending is more or less automatic for social and systemic reasons — though Keynes himself appealed to supposed communal psychological propensities — it can make sense to identify a large part of spending as endogenous, induced by income.

    It is really the capacity for autonomous spending — the possibility of deciding to spend independently of income — that makes the level of demand and production indeterminate. But this level can be influenced through appropriate collective action because of the (more or less) automatic nature of induced expenditure. If demand is insufficient to maintain strong employment levels, the government can autonomously spend an additional X. Unless the confidence fairy can somehow more than reverse the effect on total demand of X, overall demand will rise.

    —–

    You raised an interesting point in your second comment above, in relation to my observation about time and sequence:

    You see, that calculation, rational (but partial) as it is, does not address the problem as Keynes must have seen it. For him Animal Spirits was not rational: capitalism is unstable, alright — even Keynes had to recognize it. Does that mean we need to replace capitalism? No — would have been his answer — because capitalism is not unstable because of anything inherent to it.

    I’m not sure Keynes would have denied the inherent instability of capitalism, but you make an interesting point that his own “confidence fairy” logic would seem to imply that the source of instability is actually human psychology (animal spirits), not the capitalist system itself.

    For the sake of argument, let’s momentarily accept that instability is not inherent to capitalism. Even so, if the community’s psychology is such that we are prone to unstable behavior under capitalism, then perhaps capitalism and humanity are not a good match; i.e., perhaps capitalism is not a good system for humans. We should be seeking a different system that is not so susceptible in its outcomes to those wild animal spirits.

    —–

    I am sympathetic to what I suspect is your point about neoliberalism. Defenders of capitalism can place the blame on neoliberalism as if capitalism itself is not the problem.

    My own view is that whether our goal is (i) merely to overcome neoliberalism or (ii) to end capitalism in its entirety, fiat money offers a way forward. The reason for this is that both (i) and (ii) involve acting independently of the profit motive – just in varying degrees. A currency issuer is not subject to profit imperatives. Viewed in this way, ending capitalism entirely would involve doing away completely with for-profit activity. Ending neoliberalism, in contrast, would involve tighter regulation of for-profit activity and a willingness to fill in any gap in activity caused by fluctuations in for-profit activity. It would also involve a narrowing of the for-profit sphere of economic activity to a degree that was democratically determined.

    Even if (ii) – an end to capitalism – came about through sudden revolution rather than a gradual process of reform, it seems to me that the capacity of the currency (or perhaps labor certificate) issuer to spend on productive activities not aimed at private profit would still play a key role.

  10. Pete

    Thanks for your observations. Very clear and reasonable, as usual. And apologies for not replying earlier: this week was really terrible for me.

    Let me say this first, so we can move on. I have little problem with your argument. Government spending can indeed stimulate private spending. Your argument is rational and reasonable.

    My problem is the same problem Kalecki had not with creating employment as a result of stimulatory measures, but with the maintenance of full-employment:
    “We have considered the political reasons for the opposition to the policy of creating employment by government spending. But even if this opposition were overcome—as it may well be under the pressure of the masses—the maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders. Indeed, under a regime of permanent full employment, the ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.”

    ———-

    You wrote:
    “For contractionary expansionism to be a reality, it is not just that private spending would have to fall in response to X, but that its fall would have to more than offset X and result in a lower overall level of spending.”
    I am not sure I get your meaning. I believe for contractionary expansionism to work, if one follows Keynes’ writings (as opposed to the idea one has of Keynesian economics), which were developed by Austerians, a government’s demonstration of fiscally sound austerity may objectively reduce aggregate demand, but it would have a even larger subjective effect: it would buoy the “average business man’s” Animal Spirits.

    But I suggest we leave this matter for another opportunity.

    Besides, there’s a totally different argument to support your position: if Animal Spirits/Confidence Fairy were as real as the more fanatical Keynesians believe, then economic policy would be impossible. After all, its effects are as fundamentally uncertain for policy-makers as they supposedly are for the “average business man”. As M’Lord said: “we just don’t know”. That applies as much to Keynesian economists as to everyone else.

    We have a paradox, then: economists favouring activist fiscal policy can’t predict the effect those policies will have.

    The only way to solve that paradox is to conclude that fundamental uncertainty is false. Another of M’Lord’s half-baked “ideas”.

    ———-

    “For the sake of argument, let’s momentarily accept that instability is not inherent to capitalism. Even so, if the community’s psychology is such that we are prone to unstable behavior under capitalism, then perhaps capitalism and humanity are not a good match; i.e., perhaps capitalism is not a good system for humans. We should be seeking a different system that is not so susceptible in its outcomes to those wild animal spirits.”

    That is, indeed, a possible conclusion. The conclusion a rational person would reach, I’d add.

    I, however, dare say it’s not the conclusion the “educated bourgeoisie” — on whose side Keynes placed himself — would reach.

    Comparing Keynes and Hayek’s many affinities, Robert Skidelsky write that both men were Whigs: “Both came to believe that Western civilization was precarious, which they found hard to square with their jointly held conviction that it was an evolutionary success story” (“Hayek versus Keynes: The Road to Reconciliation”)

    http://www.skidelskyr.com/site/article/hayek-versus-keynes-the-road-to-reconciliation/

    What is the “Whig” thing Skidelsky mentioned?

    Whig (old-fashioned adjective for liberal) history consisted on the view that capitalist society (as best exemplified by 19th century Victorian Britain) was the culmination of human development.

    (You can easily find similar notions in other fields: there was an alleged progression from lower religious forms — animism, shamanism — passing through polytheism until we reach the most perfect and truest religion: Christian monotheism. Another example: all life evolved to reach the peak of evolution in Homo sapiens as exemplified in the upper classes of Western Europe/North America and particularly in England).

    Capitalism was perfect or as perfect as it is achievable. If humans are imperfect then the solution cannot be to adopt a lesser form of human organization more congenial to the masses’ imperfection, but to (1) breed better humans, (2) dispose/control barely human population, and (3) put the best humans in charge: that was the programme of Eugenics and elitism.

    (A propos, you should read Matt Taibbi’s “In Response to Trump, Another Dangerous Movement Appears”
    http://www.rollingstone.com/politics/news/in-response-to-trump-another-dangerous-movement-appears-20160630)

    Keynes was both, but he wasn’t alone. The Fabian “socialists” were as elitist and convinced of Eugenics as him, if not more. Tories, like Winston Churchill, were if anything, even more radical. In fact, even Marxists of bourgeois background (like the mathematician J.B.S. Haldane) were also Eugencists (although, to be fair, Haldane was much less extreme than the Webbs and Churchill).

    It was just mere coincidence that the upper classes of Western Europe/North America and particularly England were also the judges and living examples of perfection.

    In dealing with less “evolved” races outside of Europe, for instance, that ideology was given a name: “the white man’s burden”. We had that in Australia. The Stolen Generations were the latest example: the way to force improvement into the Aborigines was to put their children under the supervision of whites and away from their families and communities.

  11. Pete,

    After some time to clarify my own mind, this is how I would summarize my argument. It should go without saying, but I’ll say it just the same: if you feel I am missing the plot or that I am outright wrong on something, I’ll thank you your correction.

    (1) Public deficit spending does increase output, employment, income and profits.

    (2) “Expansionary austerity” (fiscally “responsible: policy during recessions) does not.

    I think it important to clarify those two things upfront.

    (3) How do we know (1) and (2)? Because

    (i) There is a reasonably good theoretical explanation for (1): the multiplier. (In fact, it’s not that difficult to understand. A simple way to understand it: the problem is that stuff produced and put for sale is not selling and languishing in inventory shelves; as a consequence, refill orders are not issued, workers are left without work and capitalists cut production or go broke. The solution is obvious: to find new customers. Either (a) already cashed up nationals or foreigners, (b) the government, through military or civilian purchases, or (c) consumption subsidies for us, the rabble).

    (ii) Experience shows both (1) and (2). There is, in other word, empirical evidence in support of (1) and (2).

    (4) However, there is no theoretical, a priori, argument for (2). I may be mistaken, but it does not seem possible to prove (2) logically, because the Animal Spirits thing which supports “expansionary austerity” is explicitly defined as being beyond rationality.

    (5) Therefore, the problem arises because in Keynes’ writings he gave paramount importance to the very politically convenient Animal Spirits: it was his explanation for recessions. Additionally, many (but not all) post Keynesians place great value on Keynes’ “fundamental uncertainty” closely associated to Animal Spirits. The downside of Animal Spirits is that it easily mutate into the malignant Confidence Fairy.

    (6) That is the situation in the short run, as I see it. In the long run, however, even taking (1) into account, capitalists prefer a lower employment rate, so there’s no guarantee full employment can be maintained.

    Is there a partial solution to that conundrum? I think there is and it should be obvious: ditch Keynes, Animal Spirits, and fundamental uncertainty. (Even Paul Krugman once suggested as much, but he may well change his mind at any moment).

    This partial solution has a cost (apart from losing Keynes as patron saint and figurehead): Keynesians need to answer what causes recessions. It has a limitation, too: it does not solve the problem of maintenance of full employment.

    ———-

    By the way, I suppose you never read my “The Horror of the Confidence Fairy” series. For what it might be worth, you might find it amusing, even if it’s not amazing.

    Cheers.

  12. Actually, I visit your blog fairly often, Magpie. Thanks for bringing my attention to the series. I think you must be right that I hadn’t read all of it before, as some parts seemed new to me. The series makes for a very enjoyable read. (For other readers who may be interested, the series starts here.)

    A couple of minor things. First, I noticed in one part you interpreted Matias Vernengo’s position as being an intermediate one, between “confidence fairy” enthusiasts and detractors. Actually, my impression is that the position of Matias (and most economists employing the surplus approach) would be much stronger than just intermediate. Their models suggest that: (i) even with perfect foresight, there would be no automatic tendency toward full employment; but that (ii) the level of output as well as capacity will be positively influenced, including in the long run, by the growth rate of non-capacity generating autonomous expenditures. A large part of what makes this possible is rejecting Marginalism. Because they do this, they don’t need to appeal either to “imperfections” or “uncertainty” to arrive at their results. FWIW, I agree with them on these positions. That is not to deny that, in reality, there are of course imperfections and uncertainty. But, within the surplus approach, uncertainty is not the fundamental cause of unemployment, and uncertainty will not prevent a persistent growth of autonomous demand from having a positive impact on growth.

    Second (and this point is very minor), I notice you categorized me as “Post Keynesian” at one stage, though I had the honor of being called “Marxist/Post Keynesian” at another stage. 🙂 I’m not really sure what label I would apply to myself. My main influences, in no particular order, are Marx, Kalecki, the TSSI, MMT, and Kaleckian and Sraffian theories of demand-led growth. Like Post Keynesians, I think effective demand is important, including in the long run. But unlike them, I want to integrate key aspects of Marx (including his theory of value, as interpreted by the TSSI) with MMT. Whether and to what degree I will have to shed some of these eclectic influences (as being incompatible) is something I am still grappling with. Even so, I find all the aforementioned influences interesting in their own right, even if possibly incompatible in some respects.

  13. “First, I noticed in one part you interpreted Matias Vernengo’s position as being an intermediate one, between ‘confidence fairy’ enthusiasts and detractors.”

    Not exactly: what I think I said is that he seems to accept Animal Spirits as the (or one of the) cause(s) of recessions.

    He may not have realised that if Animal Spirits can cause recessions, then it’s really hard to argue that the Confidence Fairy cannot derail recoveries: the same mythical creature with different names.

    Or maybe I just misunderstood something. I am getting old, after all. 🙂

    “Second (and this point is very minor), I notice you categorized me as ‘Post Keynesian’ at one stage, though I had the honor of being called ‘Marxist/Post Keynesian’ at another stage.”

    Sorry, Pete. No offense meant. 🙂

    At any rate, whatever label you apply to yourself or one applies to you, you’re one of the few good guys! 🙂

  14. Check these two posts out. They serve as a reductio ad absurdum to the notion of fundamental uncertainty/expectations as causes of recession carried to its logical conclusion:

    (1) http://blog.dilbert.com/post/150220069346
    (2) http://blog.dilbert.com/post/102544426246/the-avatar

    From (1):

    One of the the most important things I learned while getting my degree in economics is that economies are driven by psychology. If people expect tomorrow to be better than today, they make investments. If they think things are in decline, they wait it out, and that lack of investment makes things decline further. Psychology rules. Almost everything else is just scenery.

    From (2):

    I think the economy will struggle for some time to come, but I’m calling this the bottom. The first sign of the turnaround is a turnaround in attitudes, especially in such things as consumer confidence. Thanks to the Avatar (or aviator if you prefer) that turnaround starts now.

    Thanks, man.

    ———-

    The thing is so absurd, in fact, that I use that example with reluctance.

    One must take at face value (as I am taking at face value) what that guy writes and assume he is not being sarcastic.

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