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Philip Pilkington: The New Monetarism Part III – Critique of Economic Reason

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By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

During the Great Depression and the war years monetary policy in Britain had proved largely ineffective. In the meantime it was shown that government spending could cure economic depressions and return the economy to full or even super-full employment. After the war most political parties in Britain were thus interested in using fiscal policy to generate full employment rather than rely on the vagaries of monetary policy. (This, it should be said, is the polar opposite of our rather more desperate situation today).

Wily conservatives, however, recognised that such policies would mean the expansion of government – which they didn’t like at all. So they tried to resurrect monetary policy as the government’s tool of choice. In 1951 Chancellor of the Exchequer Lord Butler raised interest rates half a per cent (from 2% to 2.5%). In the ensuing years further increases were initiated. While the wartime Keynesian policies were firmly entrenched and highly popular, the Conservatives nevertheless pushed back against them. Their attempts to strengthen the role of monetary policy was the first move in a strategic game that was to play out throughout the rest of the 20th century and beyond.

However, as is typical throughout history, the monetary policies did not work as intended. Bank advances carried on regardless of the rate increases. What was not so typical was that much of educated public opinion was now sceptical of monetary policy, so the Conservatives found themselves somewhat cornered when trying to defend it. As is usual when monetary mysticism fails, its proponents claimed that it was simply not being implemented in the correct way. So the Conservative government launched the Radcliffe Commission in 1957 to investigate monetary policy and how it could be more effectively implemented.

The Radcliffe Commission was in no way radical. It was set up to defend monetary policy against its detractors and allow it to better function to counter the highly successful Keynesian spending and taxation policies of the war years. It was chaired by Lord Radcliffe, a man of conservative disposition who was no fan of Keynesian taxation policies. However, in its very greyness the Radcliffe Commission remained a great leap forward for truth and common sense. This was because the commission was chaired by mostly sensible public servants and lawyers. There were few economists involved that could sabotage the commission, engage in obscurantism and generally muddy the issues.

It is worth noting here that this is, in fact, what many economists spend a great deal of their working lives doing. This often surprises people who have not read policy and research papers issued by central banks and think tanks. Of course, not all economists do this. But there are usually more than a few sitting around cooking up this sort of intellectual sewage which they use to bung up policy channels, confuse the general public and give incompetent and corrupt politicians excuses for their ineptitude. The idea, so far as I can see, is to debunk what should be common sense policy measures through highly theoretical (and often woolly) arguments. The economists then claim that most people are not qualified to understand these arguments and that those who are qualified to understand them and still say that they are garbage are incompetent and should be ejected from the debate.

Anyway, there were few sewer-intellectuals on the Radcliffe Commission who could sabotage the investigation and so it proceeded as would any inquiry: through detailed investigation, considered testimony and clear-eyed scrutiny of the facts. The commission took two years, a thousand pages of oral testimony and 750 pages of memorandum from institutions and individuals. The findings were clear as day: monetary policy was for the most part a dysfunctional lever with which to steer the economy.

We are driven to the conclusion that the more conventional instruments have failed to keep the system in smooth balance, but that every now and again the mounting pressure of demand has in one way or another driven the government to take action. We envisage the use of monetary measures as not in ordinary times playing any other than a subordinate part in guiding the development of the economy.

The report of the Radcliffe Commission was pessimistic in the extreme with regards monetary policy. The commission found that the central bank had little control over the expansion of the money supply and that the velocity of money was extremely variable. Basically, what the commission found was that the banking system was largely passive in relation to the economy. Central banks did not ‘drive’ the economy at all and any policies they did implement, if they were in any way effective at all, would be wholly subordinate to real economic variables such as levels of private investment, consumer demand and government spending and taxation policies.

Needless to say many economists were livid. From their armchairs they poured forth their ‘learned’ obscurantist gobble-dee-gook, pedantically nit-picking and complaining of terminological inconsistencies. In truth, they found that the report threatened their roles as High Priests of the economy as it undermined much of what they taught. Lesser mortals had investigated the banking system and had turned up results that debunked most of their models – including the ISLM models of the Neo-Keynesian School – and the economists did not like this one bit. So they did what any marginalised academic would do in such a situation: they criticised the report in abstract and obtuse terms while sitting in their lamp-lit studies, ignored by both sensible policymakers and the general public.

Before we move on we should note just how revolutionary a move it was for these public servants – Conservative public servants, no less – to peer into the banking system with a powerful torch without any intellectual devils whispering in their ear. Today, with our central banks populated by scores of trained economists, we could barely imagine such a thing. But the Radcliffe Commission shows that it can be done. Thus, when certain US Congressmen call for an audit of the Fed we should go further – much further. We should be calling for a public inquiry by people other than trained economists into the structure of the banking system and the effectiveness of monetary policy. If the economists and the central banks complain, we should simply ask what it is that they’re trying to hide. And if they claim that mere mortals cannot understand such intricacies, we should subject them to public ridicule for being priest-like fools.

Myths of the Money Supply

So much for the monetarists and their fixed supply of money driving the economy! What the monetarists had actually found, when their empirical research was even valid (which it often was not), was that national income – that is, the economy at large – drove the money supply and that this was why any correlations they found existed. If national income increased banks would lend in order to accommodate the economic growth taking place. This observation, as already stated, is today known as the endogenous theory of money and is associated with Modern Monetary Theory (MMT) and other Post-Keynesian economists, such as Steve Keen.

Funnily enough Milton Friedman actually realised this to some extent. In a response to Kaldor he admitted that causation could run both ways. In 1969 he wrote:

The feedback effect of business on money, which undoubtedly also exists, may contribute to the positive conformity and may also introduce a measure of inverted conformity.

Personally, I cannot understand how Friedman continued to make the case for monetarism after publishing this statement. His whole theory, together with the policy stances recommended thereby, rested on the supposed fact that the growth of the money supply and the national income were strongly correlated and that the reason for this correlation was because increases in the money supply led to increases in the nominal national income (i.e. increases in money could either generate economic activity if there was excess capacity or inflation if the economy was at full capacity). The moment that Friedman admitted that the causality might run the other way and that national income (and inflation) might drive the expansion of the money supply his whole doctrine falls apart. The correlations he found could then be explained in precisely the opposite manner – which is exactly what the Radcliffe Commission found and which, today, is exactly what the endogenous money theorists argue.

I found myself wrestling with Friedman’s ghost on this point. Was he being cynical or simply incoherent? Was he an ideologue pure and simple who fudged his argument to sell his politics or was he a rather witless thinker who had a tenuous grasp of basic causal logic? I wasn’t the first to ask this – many, Kaldor included, have questioned whether Friedman and the monetarists were really serious about what they were saying and doing. This was annoying me for quite a few days because I didn’t know what I was to write in this piece. After talking to some friends and emailing some economists I have decided that I must be wholly honest and admit that I am still not quite sure if Friedman was being cynical or just a bit dim. Perhaps, being part of the same tissue, we cannot really separate the two. Perhaps those who hide their ideology beneath the auspices of science really do reason in a different way people who do not. I will leave that to the reader to decide on their own. Whatever cannot be said, it is certainly clear that in making the above statement and continuing to peddle his doctrines, Friedman and those he counselled were undertaking a extraordinary leap of faith.

QE… Really?

This is arguably where we are today. Quantitative easing is based on the same principles as the monetarist doctrine: increase the money supply and national income will increase with it because the correlations between these two measures can be explained through recourse to a simple, straight-forward channel of causation. And yet once again we have seen the failure of the doctrine – a failure which would have been obvious to Lord Radcliffe and his colleagues. QE has not done what it was supposed to. The banks are flooded with reserves and the money supply has increased drastically, yet national income has not followed suit.

Yet, at the same time, further rounds of QE are still spoken of in solemn tones by central bankers and the media (the markets, however, have been getting a bit sceptical recently…). What’s more, the old monetarist doctrines are still taught in economics departments across the world under the guise of the money multiplier.

What on earth is going on? Are central bankers and journalists being cynical or are they just misinformed? Again, I cannot pretend to answer that question; only to raise it. But the general public should be aware of these issues. It’s time to once again crack open the banking system and take a look inside.

People are sceptical of the system as it stands. They are sceptical of the strange operations that Bernanke, King and others are undertaking behind closed doors. Now is the time to allow policymakers and the educated public a look inside. Now is the time for a new Radcliffe Commission to investigate the effects of the QE programs. We can be sure that a bipartisan commission of non-economists who seek only the truth – and not confirmation of the biases with which they earn their crust – can tell us what all this monetary shamanism is actually about.

“Fresh air! fresh air!” wrote Nietzsche, “Keep clear of the madhouses and hospitals of culture! Away from the sickening fumes of inner corruption and the hidden rot of disease!” Nietzsche’s refrain can and should be applied today to the madhouses and hospitals of banking!

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98 comments

  1. Lafayette

    I found myself wrestling with Friedman’s ghost on this point.

    Chris Sims put Friedman to bed a long time ago. Read on, here.

    And won a Nobel Prize for doing it.

    1. Lafayette

      The pertinent quotation from the above interview linked to Chris Sims.

      Over the course of about 10 years, things that I did and other people followed up on managed to sort out what the effects of monetary policy changes are and distinguish those from co-movements in money and prices and income that didn’t have anything to do with policy. There’s now pretty much a consensus on how monetary policy affects the economy, and on what the size of that effect is. The general conclusion is that it accounts for maybe somewhere between zero and 20 or 25 percent of the fluctuations we see, but if you try to trace out historically, you can’t blame any recession on monetary policy.

    2. nonclassical

      …not to mention Greg Palast, who was there at U of Chicago
      Friedman school of economics-rejected it early on…

    3. Nathanael

      If you think about it, the difference between “monetary policy” and “fiscal policy” is NOT a large difference Surely, as a follower of MMT, you know this, Mr. Pilkington.

      The difference is *entirely* about who the money is transferred to.

      The “monetarists” want to obscure this fact, because *they are working for rich people*. “Monetary policy” is a type of fiscal policy which involves given the money to already-rich people.

      Or, contrariwise, “fiscal policy” is a type of monetary policy which involves giving the money to poor people.

      The difference is pure DISTRIBUTIONAL. But people paid by the rich want to ignore distribution, because if you pay attention to distribution, you realize that it’s important to take money away from rich people and give it to poor people.

      I will go out on a limb and say that if the Federal Reserve lent money at 0% to *homeless people*, it would revive the economy very effectively. The reason why “quantitative easing” does not work is that it is just lending more money to rich people, who don’t need it.

      Likewise, if we engaged in “severe fiscal tightening” by taxing away *all the money billionaires have*, we would discover that *the economy is just fine*.

      The distinction between “fiscal” and “monetary” policy is misleading and bogus.

      It is true that the size of *a* money supply controls the level of economic activity, assuming that you aren’t hitting resource limits, but it is not the size of the “generic” money supply, it is the size of the money supply AVAILABLE TO THE POOR.

      The distinction between “fiscal” and “monetary” policy is used to disguise the economically relevant distinction, which is between policies which expand the money supply TO THE POOR and policies which contract the money supply TO THE POOR.

      I can go into more detail about this if you like. A more fully worked-out theory would replace “the poor” with “those who are most constrained in their spending by the amount of money they have”.

  2. F. Beard

    Wily conservatives, however, recognised that such policies would mean the expansion of government – which they didn’t like at all. Philip Pilkington

    Let’s be real. It’s government money that stimulates the economy, not expansion of government per se. That’s why GW Bush got away with his “stimulus checks”; they did NOT increase the size of government. Conservatives can thusly be flanked.

    But what possible justification can there be for simply giving money to the population? Answer: The banks are essentially a government backed counterfeiting cartel that has driven debtors into unjust debt and robbed non-debtors via price inflation. Everyone, therefore, deserves RESTITUTION. Again, this argument flanks conservatives because they supposedly believe in morality.

  3. YankeeFrank

    The word skeptical does not do justice to how the public sees the bankers these days. And perhaps I am too glib or simplistic, but Friedman based his whole reputation on monetarism. Of course he couldn’t admit the truth, not honestly anyway: he could admit only that the cause and effect were not always clear, but had to insist that in the main its the money that leads to national income growth, because that is what he’d been saying forever. As far as those who, these days, continue the charade, its again because the alternative throws them all out of a job, and brings back the hated true Keynesian fiscal stimulus as the only way to revive our ailing economy. The current generations hate the government, even apparently the democrats, and don’t want to admit the power that only it can wield.

    I guess what I’m saying is don’t give credit where its not due. And don’t assume that there is anything approaching intellectual integrity amongst our current batch of high priests in the economics realm. The system is rotten to the core, and the core is the ideological underpinnings of which we are speaking here. The powers that be CANNOT have us relearn once and for all, or even for a generation, what the New Deal and WWII taught us. They become powerless to stop government from reasserting its primacy instead of being handmaiden to business — and just look at the shining towers, shiny suits and clean-lined suites of corporate power the current corporate reign has given “us”. Those ensconced in the comfort and luxury of the current corporate opulence have one interest only: to keep there cozy suites, perks, prestige and unearned salaries and bonuses. Everything else is secondary, including a potentially starving, dying populace, mass immiseration and poverty, and billions going hungry under the current commodities “booms”. It IS the best of all possible worlds, even as its ideological edifice crumbles with every newly uncovered massive fraud and economic “principle” that goes bust.

    It unfortunately appears that it will take a crash of monumental proportions (apparently ’08 wasn’t big enough) to finally empty out the shining corporate towers of useless laborers and restore sanity to an insane system.

    1. Lafayette

      As far as those who, these days, continue the charade, its again because the alternative throws them all out of a job, and brings back the hated true Keynesian fiscal stimulus as the only way to revive our ailing economy.

      Keynes first expounded the idea of Stimulus Spending (and the circumstance in which it would work and not work) in the early 1930s (in a book). This work convinced Roosevelt that his “austerity budget” was not going to work. He thus refuted the Conservatives of his time.

      Still, for all the Stimulus Spending that he did with his alphabet-soup government agencies, he never really lowered significantly unemployment rates. Until one other thing happened.

      The US embarked upon a massive Stimulus Spending program called WW2. My point is that stimulus spending, for it to work thus bringing down unemployment, must be clearly significant.

      The immorality of the Troglodyte Right today in America is that they know full well the above is true and correct. But, this is the US in 2012 and we are playing political hardball. Gridlock is just not another word.

      Stonewalling is an electoral tactic that incarcerates countless American households in poverty. For only one selfish purpose. To favor their candidate’s installation in the Oval Office.

      It is difficult to imagine such a betrayal of American values, when one party will stop at nothing, literally nothing, to put its hands on the levers of power to maintain the status quo. Of what?

      Of Income Disparity, which has been plaguing the United States since its inception. The same existed in pre-WW2 Europe. But, smarter heads decided post-war that Social Justice was necessary. European leaders then set about not only to reconstruct Europe from its ashes, but also to bring about Social Democracies that function to the benefit not of a select minority but for all citizens.

      We won WW2? Really? We won what? Income Disparity for the next sixty years. See the Gini Coefficient here that shows, with rare exception, the US having the highest permanent Income Disparity of any developed nation on earth since WW2.

      1. Joe

        “But, this is the US in 2012 and we are playing political hardball. Gridlock is just not another word.”

        Very true. But, why is this obviously simple tactic working now? ‘That there’s nothing new under the sun’ is a bit trite, but stone-walling as a political tactic really is age-old. I guess what I’m saying, is that this tactic requires certain conditions to be really successful, for example, the general level of fraud, duplicity, etc. which we see today. This isn’t going to be a simple problem with an easy solution– everyone should be aware of that by now.

        1. Nathanael

          Stonewalling works because the people on the “other side” who need to break through the stone wall are either:
          (1) unwilling to engage in the necessary strong-arm tactics which are the standard tactical counter to stonewalling;
          or
          (2) do not have the resources to do so.

          (1) applies to well-meaning idiots in Congress, (2) applies to Occupy.

      2. Ricky

        Whether it took WWII to end the depression isn’t really debatable. I suggest reading:
        http://presimetrics.com/?p=634

        I think the reason that the “debate” persists is that of an ideological shield used by conservatives. Government intervention can’t be allowed to help the economy therefore, it must have been the war that drove growth.

          1. LeonovaBalletRusse

            Ricky, please square the catastrophic outcome, in 2008-2012, of the information given within your link–which led to the catastrophic outcome of 2008-2012–with the information given in the book shown below, relating “another” catastrophic outcome (especially for then-solvent America), related in:

            “THE BUBBLE THAT BROKE THE WORLD” by Garet Garrett (Boston, Little, Brown, and Company, 1932) — http://mises.org/books/bubbleworld.pdf

            Follow the money and the DNA from era to era: STILL “Old wine in new bottles.” THIS is the NUT that must be cracked; and Skidelsky points the way in an apparently “everyday” piece at a “news” site. A realistic “Skidelsky-Das Euro Finesse,” followed by a Keen Strategic Debt Jubilee, evolving into Michael Hudson’s “Justice for All” New Real Economy, is a feasible route to GROUNDED Economic Justice with Sufficient Transparency in “trusted” exchanges for legitimate trade, from local through international levels, in which System NO MONOPOLIES/DUOPOLIES by “vertical integration,” M&A’s, or other means are permitted, and in which System “asset stripping” is a felony.

      3. F. Beard

        The immorality of the Troglodyte Right today in America is that they know full well the above is true and correct. Lafayette

        Won’t Obama feel like a fool if Mittens wins and advocates what Obama should advocate, a universal bailout of the population? And how are the Democrats going to oppose that without seeming like total jerks?

        So if Mittens wins we may see the end of the Democratic Party’s power for decades.

        1. Gizzard

          I dont know if Obama would feel like a fool or not but Romneys chances with such a proposal would be just above zero as long as Boehner and McConnell have any say. If you think the Tea Party has any real pull in the rethug party, and I do, a universal bailout would be approved just before we approved surrendering to Iran.

          1. Nathanael

            Willard Romney, Inc., is probably congenitally incapable of proposing the “bailout of the population”.

            It is absolutely true that if a thuggish would-be dictator got the Republican nomination and won, that person could implement such a popular bailout and use it to cement his support (Franco-style). Such a person could and would ignore Congress.

            We have not seen such a person (luckily, I think). I would really like us to get someone with the guts and ambition of FDR before the right-wingers find someone with the guts and ambition of Franco.

    2. LeonovaBalletRusse

      YF, why hang it on Shill Friedman alone? Let’s track the Conspiracy from Leo Strauss unto the present day.

      Even Mandelbrot, Mandelbrot! was ignored, just so the Conspirators could march on in Deep State destruction of America’s SUCCESSFUL Middle Class and its flourishing manufacturing and uncorrupted corporate base–which was ruined through thuggish hostile takeovers by the Junk “Private Equity” Fifth Column, among other “Destroyers of Worlds” (see John Coleman on You Tube anent this obscene War Against America [his “Committee of Three Hundred” lecture); see Sir James Goldsmith’s interview in 1994 on Charlie Rose–featured at Solari Report Blog of Catherine Austin Fitts –
      http://www.solari.com/blog/sir-james-goldsmiths-1994-warning/ –).

      Let the Culdees of Ireland have a say, and see what happens.

      1. LeonovaBalletRusse

        re Deep State, see:
        http://aangirfan.blogspot.com/2012/06/alan-turing-and-deep-state.html

        See also:

        http://www.bloomberg.com/news/2012-07-15/romney-s-bain-yielded-private-gains-socialized-losses.html

        http://confoundedinterest.wordpress.com/2012/07/06/libor-fixing-and-the-fed-funds-target/ — proving it’s all about Dark Pie-in-Sky: insider cartel profits from manipulation and derivatives rackets for Deep State

        http://topdocumentaryfilms.com/power-principle/

        Bring RICO, Interpol, and ask: Where does BIS stand on the issue of the Deep State?

        1. LeonovaBalletRusse

          And what’s with that BIS “Entertainment Talent Scout/Booking Agent sector of BIS, providing big bucks to somebody’s niece/daughter/etc.? Is this propaganda arm proper to The Central Bank of Central Banks? Is it just featherbedding for .01% progeny, and/or a way to grant favors, some quid pro quo?

        1. LeonovaBalletRusse

          Sorry, FractAlkemist link doesn’t work. Can’t see the error in my print. Help.

    3. rotter

      Phil Pil always tries to avoiding muddying his “pure scientific” interest in the sham science of economics, but no one can understand freidman or hayek or any austrian school/chicago school/monetarist wing nut without getting in neck deep into the “sewage” of thier ideology. You only have to have one conversation with an arch conservative to realize that everything they think do or say, is an effort to cram all of reality into their ideological frame. Every single boring anecdote of daily life is an instructive parable, every trip the store for hot dogs ,liquor and lottery tickets is pilgramage of discorvery-to the right. They eat sleep breathe and shit-all-over-the-place, thier favorite ideology. Its almost a physiological appendage with them.

  4. K Ackermann

    “Personally, I cannot understand how Friedman continued to make the case for monetarism after publishing this statement.”

    Friedman has a history of publishing one thing and admitting another.

    Here’s his answer to the last question of the last interview he ever did:

    NPQ | In the end, your ideas have triumphed over Marx and Keynes. Is this, then, the end of the road for economic thought? Is there anything more to say than free markets are the most efficient way to organize a society? Is it the “end of history,” as Francis Fukuyama put it?

    Friedman | Oh no. “Free markets” is a very general term. There are all sorts of problems that will emerge. Free markets work best when the transaction between two individuals affects only those individuals. But that isn’t the fact. The fact is that, most often, a transaction between you and me affects a third party. That is the source of all problems for government. That is the source of all pollution problems, of the inequality problem. There are some good economists like Gary Becker and Bob Lucas who are working on these issues. This reality ensures that the end of history will never come.

    To me, that is a tacit admission for the need of regulation.

  5. jake chase

    Friedman was simply a charlatan whose prattle agreed with the agenda of the corporate rich. He was doing propaganda not science. He never understood that money is created by banks, not government. The only time his screwy theories were ever applied was in 1980, when Volker drove treasury bill rates to 21%. The parallels between Friedman and Greenspan suggest they may have been identical twins separated at birth. They both talked nothing but nonsense and rose to shaman status. Makes you wonder about intellectual progress in our civilization.

    1. joebhed

      Please just shoot the message.

      Have a read of Friedman’s “Fiscal and Monetary Framework for Economic Stability”.

      It shows that he not only understood that banks create all money as debt, but that he was opposed to it in spades, and he advocated through his “Program for Monetary Stability” that the government directly spend all money into existence, adding a specific percent annually for GDP growth, as an alternative to having banks create money as a debt.

      I’m not defending Friedman’s legacy. Just that his policy initiatives were much broader than you describe.

      1. jake chase

        If Friedman advocated government creation of money he would have been tarred at feathered at the U of Chicago. What he wanted was for the Fed to target monetary growth, which is an entirely different thing.

          1. F. Beard

            Growth is good but putting the economy on a rack* to achieve it is not.

            * A money system based on usury for money lent into existence.

          2. Nathanael

            As stated above, what Friedman put in his academic papers (which is often actually extremely insightful) is different from the schtick which he did in public for political purposes.

            This means that Friedman was, quite definitely, a hypocrite.

          3. Nathanael

            By the way, this hypocrisy was very successful for him personally; he got to “have it both ways”.

        1. joebhed

          Gee, it isn’t a matter of IF.
          I gave the title of Friedman’s proposal, and here’s Randy Wray’s paper on the subject.

          http://www.cfeps.org/pubs/wp-pdf/WP22-Wray.pdf

          From Wray’s paper:
          “”But what was unusual was Friedman’s “proposal” to finance budget deficits through money creation. Surpluses would destroy money. He thus proposed to combine monetary
          policy and fiscal policy, using the budget to control monetary emission in a counter-cyclical manner. He also would have eliminated private money creation by banks
          through a 100% reserve requirement, something that he had picked up from Fisher and Simons, hence, there would be no “net” money creation by private banks — they would
          expand the supply of bank money only as they accumulated reserves of government-issued money.”"

          OK, did you get that part?

          ALSO -

          “”It is ironic that both Monetarism and Market Liberalism are celebrated around the world today, and Milton Friedman is given credit for the role he has played over the past
          half century in winning the fight against Keynesianism. And yet, his plan for creating the monetary and fiscal framework that is necessary to achieve economic stability has been largely ignored.”"

          The irony of Randy’s take on Friedman’s proposal is that he says it was nothing new in 1948, and represented what happens all the time – sans the 100 Percent Money part.

          He ends up shoehorn-ing Friedman’s “Framework” proposal into functional finance somehow.

          But at least he knows more than a lot of commenters here about the breadth of Friedman’s grasp on matters monetary.

          Friedman didn’t get run out of Chicago because all of this preceded his leadership position there.

          For the Money System Common.

          1. F. Beard

            “He thus proposed to combine monetary
            policy and fiscal policy, using the budget to control monetary emission in a counter-cyclical manner. He also would have eliminated private money creation by banks
            through a 100% reserve requirement,”
            Randy Wray via joebhed

            OK, thanks for that. Just add a universal bailout with new fiat (to prevent deflation and as restitution for theft) and allow other private money alternatives to borrowing fiat and that would be a very sound solution.

          2. Nathanael

            So Friedman actually proposed the Greenbackers’ proposal.

            Of course the Cult of Friedman is very different from Friedman’s academic work.

            But isn’t it always like this? The Cult of Chomsky is much worse than Chomsky in linguistics. The Cult of Jesus, a death cult focused on “redemption through blood sacrifice”, bears no relation to the best versions we have of the sayings of Jesus. Et cetera.

  6. joebhed

    “”This is arguably where we are today. Quantitative easing is based on the same principles as the monetarist doctrine: increase the money supply and national income will increase with it because the correlations between these two measures can be explained through recourse to a simple, straight-forward channel of causation.”"

    uummmm, I thought we all agreed that Quantitative Monetary Easing does not, and can not, in crease the money supply.

    In its latest iteration, it was dissembled into policy as something about inflating commodities, including some monetary assets, that would drive up the markets and seeing the markets going up, consumers would find new confidence and begin spending again, thereby increasing demand and from there growth of the economy.

    If that ain’t proof that the policy of QME as practiced by all debt-based central banks cannot work, then I don’t know what is.

    In the earlier iterations of QME, Japan used specifics with regard to the amount of the “easing” and the target of GDP growth. It could thus be seen that there was no connection between the goal and result – quantitatively.

    Nowadays it is less than rhetorical gibberish that amounts to – “we don’t know what else to do”.

    Truly “monetarism” that does not and cannot affect the money supply is, by definition, not monetarism.

    For the Money System Common

    Read more at http://www.nakedcapitalism.com/2012/07/philip-pilkington-the-new-monetarism-part-iii-critique-of-economic-reason.html#LiR1lfkPbVVQOePK.99

    1. Philip Pilkington

      It increases the money supply by increasing the monetary base. Of course, the central bank can increase the money supply by increasing the monetary base (by definition). But that does not mean that they can control the GROWTH in the money supply. The latter was Friedman’s baseless argument.

      1. joebhed

        The only money supply relevant to changes in demand is M1.
        I don’t understand why the focus of a monetary discussion related to using the money supply to change aggregate demand is not exclusively focused on how to expand M1.
        Failure to increase the M1 , by definition, means there can be no change in demand.
        It’s the “monetary-transmission”, remember?

        The monetary base is part of the “pretend” money supply in that we pretend it is “something” and that it has some effect on the economy.
        Monetary base is irrelevant to the real economy, especially so when considering the “endogenous” nature of money.
        Money is created by banks lending – without reference to the base.

        The monetary base is made up of cash and other reserves.
        Reserves are not part of the money supply.
        Banksters and their minions can wax poetic about “base” money expansion, but, where’s the beef(apologies, vegetarians)?
        It’s in the “base”-ment, where the bankers count it, hoard it and get ready to steal assets during the crash.

        Yeah, when the Bernank pushes buttons and somebody gets a New Trillion, we must call it something.
        Appropriately M-ZERO.
        Because that’s what good it is.

        For the Money System Common.

        1. F. Beard

          Failure to increase the M1 , by definition, means there can be no change in demand. joebhed

          One would think so but apparently the banks can lend money into existence bypassing M1 or else a lot of new money is quickly transferred out of M1 to M3 which is no longer published?

          I admit I find it hard to square $40 trillion in private debt with M2 which is only $10 trillion and M3 which is estimated to be $15 trillion. Where’s the other $25 trillion hiding?

    2. Philip Pilkington

      Here’s a graph:

      http://upload.wikimedia.org/wikipedia/en/5/58/MB%2C_M1_and_M2_aggregates_from_1981_to_2012.png

      Note how the increase in the monetary base (blue line) is reflected in the growth of M2 (green line). However, Friedman would have assumed that there would have been a far larger increase as reserves were actually loaned out.

      Again, the difference here is between the Fed’s ability to increase the money supply (which it can do to some extent) and their ability to control the money supply (which it cannot do). Monetarism relies on the Fed CONTROLLING the money supply (through targets).

        1. F. Beard

          Second, government needs to be big. Hyman Minsky (1986) used to say that government needs to be about the same size as overall investment spending—or at least, swings of the
          budget imbalance have got to be as big as investment swings.
          from http://www.cfeps.org/pubs/wp-pdf/WP22-Wray.pdf

          No, more precisely government SPENDING needs to be large, not government itself. And that is an odd requirement too but one I concede because of the inherently unjust nature of our current money system.

  7. financial matters

    “”What’s more, the old monetarist doctrines are still taught in economics departments across the world under the guise of the money multiplier.”"

    I like the inclusion of the money multiplier effect here as another idea debunked by the endogenous money theory of the MMTers.

    We could definitely have more productive loops for feeding money into the economy…

    http://www.nakedcapitalism.com/2012/04/scott-fullwiler-krugmans-flashing-neon-sign.html#comment-679315

    financial matters says:
    April 2, 2012 at 7:38 am
    “In short (!), the money multiplier model is wrong because it has the causation backward”

    Nice explanation here. Implies that productive loans are generated by credit worthy enterprises with productive ideas and these endeavors are actually hindered by our current system of private interest being siphoned off these loans. A more public system would charge more reasonable interest and feed this interest back for the common good.

    Sort of another refutation of the trickle down effect. Ie the false notion that bankers trickle these loans into the economy for our own good.

  8. LeeAnne

    Economics really is a priesthood. For those who believe they need the ineffible intermediary, economists serve a purpose. Their purpose is to serve their masters; academe and the bankers -inseparable.

    I started to say something serious Philip -I particularly like your idea to follow the example of the Radcliffe Commission ‘calling for a public inquiry by people other than trained economists into the structure of the banking system and the effectiveness of monetary policy. …”

    But couldn’t resist this:

    thesaurus for ineffable:
    indescribable amazing adorable beyond words cagey canny captivating charming choice concupiscent congenial crafty cunning darling enchanting engaging enjoyable fair fascinating fuck like franco more…
    here

    1. LeonovaBalletRusse

      “Economics really is a priesthood.” The priesthood of “Deep State.”

      “NOBILITY and Analogous Traditional Elites in the Allocutions of Pius XII: A Theme Illuminating American Social History”

      “Celt, Druid and Culdee” by Isabel Hill Elder Merch O Lundam Derri, with Foreword by Lord Brabazon of Tara, P., G.B.E., M.C. –

      When La Belle France receives the Coronation Jewels and the Highland Scots receive “Jacob’s Stone” from Westminster Abbey, let the Auld Alliance flourish WITHOUT recourse to “Religious” Dynastic Despots of any Priesthood; and let all “royal” lineage of Merovingian, Capetian, Angevin Dynasties, be recognized through the female lines which yet exist in America, GROUNDED with Indigenous Tribal DNA of North American soil, and with Original African/Caribbean Slave DNA of North American soil, for the active base of Original American Nobility. Choose to END Monarchies and other forms of “Dynastic Despotism,” and LEAD JUSTICE in the open democracies of C.21. Is this not the true meaning of “Nobility” in Action?

      Leadership without Dominance is the key to a flourishing People in C.21.

  9. The Dork of Cork

    @Philip
    What gives with the Irish economy website….

    Taken down when repeating a few comments from this debate, in particular Joebheds contributions.

    The Orwellian nature of Ireland is getting real scary like.
    A goverment document referenced on the site stated….wait for it now…
    “The Duty of Goverment is to endeavor to comply with fiscal rules”
    I stated they need to They need to look up the words Goverment & Duty.

    Taken down for being off topic….
    There was I thinking I was reaching for the Kernel of the debate.
    Ireland is a truely strange juristiction of capital.
    In fact I would bet a large amount of tokens Its the strangest of them all.

    1. Borsabil

      Wealth is oil. Wealth is coal. Wealth is food grown from the ground. Wealth is human labor toiling for a lifetime. Wealth is stored energy used to make stuff, not complicated if you ignore all the academic BS. Economics is a dressed up way to justify double entry book keeping as practiced by bankers. How “money”, created out of thin air, can be swapped for wealth. How bankers can create a liability for a credit backed by nothing, and then pass it on to taxpayers when they can’t pay up.

      1. F. Beard

        …to justify double entry book keeping as practiced by bankers. Borsabil

        Yep, that’s the fundamental cheat. I wonder if credit creation could even survive to any great extent without government privilege? For example: What if government deposit insurance was abolished and the government itself provided a risk-free fiat storage and transaction service that made NO loans? Wouldn’t that make bank runs a very real danger to banks? Since people would have a 100% safe place to put their cash outside the banking system?

        1. LeonovaBalletRusse

          F.Beard, AND how many sets of books to cook? See John Kay’s presentation on the “Bezzle” and its kin at INET Conference Berlin: “Paradigm Lost.” He nails it.

      2. Susan the other

        yes, Borsabil. Combine Cris Cook with PP today and we have some real grist. Philip is as clear as an analyst can possibly be, just as CC is as clear as a trader can be. What a day. My brain actually arced. And my toes are smoking.

        So if what we are doing is controlling oil to control the price of oil because oil/energy is the real gold… well it’s coming into focus. And we do not want the dollar to be harmed. I believe it, but I can’t begin to weave it all together.

  10. craazyman

    Since money = property like wave = particle, asking whether money creates property or whether property (phenomenological surface of economic activity) creates money is like asking whether the wave causes the particle or the existence of the particle creates the wave. In fact, money/property is an organic ensemble that can’t be deconstructed without loss of meaning and that obeys other quantum-esqe laws. Search for causation needs to look for a third factor in order to establish coherence, which I call structures of social cooperation, which proceedeth forth from imagination. -Dr. D. T. Tremens, NFL, GED, U. of Magonia, Department of Contemporary Analysis, Part time economist while riding the bus.

  11. LeonovaBalletRusse

    “The Radcliffe Commission was in no way radical.” ????????

    It was the Putsch Plan in the by now Obvious Neoconlib Conspiracy.

      1. LeonovaBalletRusse

        LeeAnne, you expect me to quote “outside experts?” Are you so brainwashed?

        Just put it within the FRAME of the Deep State agenda of Rockefeller’s University of Chicago and THINK. That’s right, use your own critical faculties, if you are still free to do so, based on your own research over thirty years.

        Perhaps you will be satisfied with the broad-view genius of Prof. Guido Giacomo Preparata , a very brave “academic” of America:

        “CONJURING HITLER: How Britain and America made the Third Reich” (Ann Arbor and London, Pluto Press, 2005);

        “THE IDEOLOGY OF TYRANNY: Bataille, Foucault, and the Postmodern Corruption of Political Dissent” (New York, Palgrave Macmillan, 2007).

        Square the circle with:

        “TRADING WITH THE ENEMY: The Nazi-American Money Plot 1933-1949″ by Charles Higham (New York, Barnes & Noble, 1995; Charles Higham, 1983);

        “HITLER’S BENEFICIARIES: Plunder, Racial War, and the Nazi Welfare State” by Goetz Aly, translated by Jefferson Chase (New York, Metropolitan Books/Henry Holt and Company, LLC; 2005); and its parallel, c/o Deep State UChi:

        “THE SHOCK DOCTRINE: The Rise of Disaster Capitalism” by Naomi Klein (New York, Metropolitan Books/Henry Holt and Company, LLC; 2007).

        Discover Reagan-Thatcher Neoconlib Agenda within Deep State and THINK, so as to connect the dots by your own brain.

        1. LeonovaBalletRusse

          It’s “THE BUBBLE THAT BROKE THE WORLD” Redux, same .01%DNA, with .99%DNA du siecle, from Holy Roman Reich II-IV in the same century. Veblen could show you how simple-minded it is, no matter how complex the tech. The link, again:

          http://mises.org/books/bubbleworld.pdf

  12. OMF

    Perhaps those who hide their ideology beneath the auspices of science really do reason in a different way people who do not. I will leave that to the reader to decide on their own.

    The model you are looking for here is that of “Leveling Reason”, which comes from Edmund Burke’s critique of the darker side of the French revolution.

    Such levelling reason in fact emerged on several occassions in both social and scientific thought during the 19th centruy in particular, and it took the better part of the 20th century to roll back quite a lot of it.

    Anyway, the key aspect of levelling reason is that it basically involves engaging in a dialectic with yourself, or very like-minded people. An intellectual echo chamber is formed and the conclusions of such discourse are basically preordained and—within the echo chamber—indisputable. Economics is obviously such a disipline.

  13. Borsabil

    A complete ignorance of history would allow a certain credulity when reading this. The reason Keynesian demand side policies where abandoned in the seventies was the obvious truth, even to a blind socialist, of it’s hopeless failure. Hold on! Double digit inflation and mass unemployment at the same time…….how is that possible? Stagflation discredited the Keynesian post war settlement, not a few monetarists in Chicago.

    Of course the 1970s mini depression was ended by a) the exploitation of abundant oil reserves out with the control of the Ayerabs and b) a deliberate loosening of credit controls to allow speculation in various dressed up Ponzi schemes. But alas all good things must come to an end, but no doubt we will again be treated to some alternative economist snake oil. Inflation dear socialist is a way for the first users of money, government and the wealthy, to steal productivity from the working man. And you have the gall to call yourselves progressives.

    1. LeonovaBalletRusse

      Borsabil, you seem to ignore the “manipulation” factor with a strategic purpose.

    2. Philip Pilkington

      I don’t think this is a fair representative of the Keynesian side of the debate. The inflation/unemployment of the ’70s left neoclassical Keynesians like Paul Samuelson and Jim Tobin confused — that is, those that adhered to the Philip’s Curve. But these guys praticed junk economics, for the most part. Paul Davidson, Sidney Weintraub, Nicky Kaldor, JK Galbraith and other Post-Keynesians pointed to the wage-price spiral. But alas, it proved too difficult for the politicians to listen to them. Friedman’s voodoo was easier on the stomach.

      Anyway, we’re talking about monetarism and the early 80s, not the 1970s inflation…

      1. Borsabil

        I was making passing comment about the irony, not sure if that’s the right word, of supposed progressives advocating policies that deliberately seek to steal the wealth created through labor by engendering inflation. The ‘left’ will steal from the working man to give to the government, the right will steal and give to the rent seeking wealthy, if you’re a productive and frugal citizen the effects are the same.

        My countryman Steve Keen gives erudite and believable explanations of debt creation fueling ponzi schemes. However his economic forecasting sucks, which doesn’t prevent him from endlessly commenting on areas he knows next to nothing about, e.g. China.

        1. Nathanael

          Inflation is absolutely necessary in order to ensure that *paper* wealth loses value relative to *real* wealth — so that people put their effort into building useful things and hanging onto them, rather than paper-shuffling.

          That said, you make an important point, and I made it above. The key driver of the economy is how much money *poor people* have. Correct government policy for a healthy economy consists of continuous transfers from the rich to the poor. Obviously, most of the rich don’t like to admit this (heck, it would hurt my bank account balance).

    3. Philip Pilkington

      “Inflation dear socialist is a way for the first users of money, government and the wealthy, to steal productivity from the working man.”

      Oh sorry. I missed that part of the “argument”. I thought that was a serious comment. Not some red-baiting hysterical nonsense. Please ignore my comment above. Sorry.

      1. F. Beard

        Not some red-baiting hysterical nonsense. Philip Pilkington

        It’s not nonsense. And the money system is fascist, not Communist so he was fascist-baiting if anything.

        BTW Philip, what do you think of Steve Keen’s “A Modern Debt Jubilee”? Opposed?

        1. Philip Pilkington

          He called me a “socialist” which, as I understand it is idiot-American for “I don’t agree with you”.

          Debt jubilee? Politically unrealistic. Also, his more extreme version which meant enormous fiscal transfers to non-debtors would, despite what Keen says, be massively inflationary.

          I talked to Steve about it one evening. I think his Jubilee Shares are more viable in that they couldactually be issued by various private sector companies — especially green companies who are looking for long-term investors.

          http://blogs.reuters.com/felix-salmon/2012/04/16/do-jubilee-shares-make-any-sense/

          1. F. Beard

            Also, his more extreme version which meant enormous fiscal transfers to non-debtors would, despite what Keen says, be massively inflationary. Philip Pilkington

            Not necessarily. If further credit creation was banned (100% reserve requirement for new loans?) then the fiscal transfers could be metered out over time to just replace existing credit debt as it is paid off for NO net change in the total money supply (reserves + credit). Thus there would be little price inflation or deflation risk.

            As for political feasibility, if a universal bailout can be done with little price in(de)flation risk then who on earth can legitimately oppose it?

            I don’t like the Jubilee Share, idea though. Steve is not yet attacking the fundamental problem which is credit creation* itself, not what the credit is used for.

            *Lending money into existence.

          2. F. Beard

            Haha! My reply is in moderation for no apparent reason but basically a universal bailout could be done without significant price inflation risk if it was combined with a ban on new credit creation and metered to just replace existing credit as it is paid off. Since the total money supply (reserves + credit) would not change then neither price inflation nor price deflation should be expected.

          3. F. Beard

            Also, I think the point Borsabil was making is that leftists are most often not populists, a concern I share.

          4. LeonovaBalletRusse

            F.Beard, excellent idea for tracking “balance” – but transparency required. We need a clear thinker with a huge heart, Michael Hudson, to draw the diagram for a Just New Real Economy.

    4. Susan the other

      If we control the price of oil it will float all boats. It will help everyone. Control of the price of oil is something that should have happened long ago; we could have avoided, maybe for a time, the mess we now face which is the equivalent of a marathon snuff movie in the middle east. Am I being too fascist?

      1. LeonovaBalletRusse

        The price has been controlled, to profit insiders. Read the lines and between the lines of the text:

        “A Century of War: Anglo-American Oil Politics and the New World Order” by F. William Engdahl – New revised edition 2011).

        Do you think Kissinger didn’t make a killing along with his Master?

      2. Nathanael

        Forcing the price of oil down is a very bad idea because of global warming.

        Controlling it by forcing it up might be a good idea.

    1. F. Beard

      Great question! I think it will be. Low interest rates are irrelevant if people have to pay down debt and can’t borrow or spend. So that would account for the stagnation. But OTOH the banks, will all those new reserves to drive up commodity prices with, particularity non-elastic ones such as food, will nonetheless create price inflation. So we get stagflation.

  14. The Dork of Cork

    But how do we know what a real economy is after all these isms…..
    Maybe isms is the real economy… the real economy of money power.

    1. LeonovaBalletRusse

      It seems that all “isms” are facsimiles of ideal “static” processes designed to lead to desired outcomes. Apart from hard science, it is impossible to create outcomes.

  15. The Dork of Cork

    23 years after the Act of Union……

    en.wikipedia.org/wiki/Composition_for_Tithes_(Ireland)_Act_1823

    The Whig magnate Lord Holland described it “the only miserable pittance which ,during 23 years ,the wisdom and justice of Parliament had condescended to give to the people of Ireland”
    In other words the 1735 Irish house of commons act was declared Null and void i.e. pastureland had now liability also as tillage ground before it….. easing the burden on one section of the populace by conferring the liability on others.

    But the principle of extraction was not questioned.

    These debates seem to always orbit around the sustainable rate of extraction.
    The principle of the extraction process is never questioned in correct offical circles.

  16. Susan the other

    note to Philip. Thank you. Did I finally get smart or did you take pity on me and my ilk and write to our comprehension? Just thinking about 1957 when the Radcliffe Report was compiled. Not @ the UK, but @ the US: we were toast but we still thought we had honor. In those primitive years the US was busted and facing the devaluation of the dollar which was simply not an option (as now). 1957 was before we had managed to set up a financial web of price control… ergo the VN war. For almost 10 years it kept our dilemma in abeyance. The Saudis demanded gold until Nixon took us off the gold standard. When it was finally over; the dollar became the petrodollar ( I don’t understand that alchemy except that we were the mega consumers of oil) and now the petrdollar has become antiproductive. Totally. What we should be looking at is what happens when the controls we are kluging together now fail. What is the ultimate balance?

    1. Pennybloater

      ‘When it was finally over; the dollar became the petrodollar ( I don’t understand that alchemy except that we were the mega consumers of oil) and now the petrdollar has become antiproductive’

      The petrodollar fix up was agreed with the saudi’s and unilaterally with everyone else. Most of the main US financiers and OPEC representatives gathered near Stockholm in September 1973. Basically, the Wall Street elites thrashed out the new economic reality – US banks actually wanted a higher rise than OPEC thought would ‘stick’.

      Sheikh Yamani mentions that he was surprised at the US position in asking for what amounted to a 400% rise in oil prices over the past two years: Wall Street and City of London banks would recycle these new vast oil revenues and use them as tier one capital to loan out to the rest of the world and their own national governments and municipalites. This has led to the rise of the international money markets and the end of the IMF/World Bank (first phase as a Keynesian organisation geared toward economic sustainability.

      I believe that this is the first game changing event that led to the rise of the petrodollar.

      Much of this is covered by William Enderghal’s ‘A Century of War’, but John Soater knows more about this episode than anyone else around here, so he may be able to explain further.

      1. Nathanael

        The request for a rise in oil prices was equivalent to a request for inflation to rise. There were probably thought to be good reasons for that at the time; it was not generally realized that the economy was totally resource-constrained on oil in 1973.

  17. LeonovaBalletRusse

    Nightcap:
    Jesse: Matieres: “Max Keiser interviews Jim Rickards (video).

    It’s a fabulous link, Jesse. It is vitally important, and should make big waves.

  18. Tony Wikrent

    I suggest that the monetary causation flows ONE way. Increasing the money supply does not do much to expand the economy, but constricting the money supply has a disastrous effect on economic activity, as when the US went back to the species convertibility in 1873, or the City of London tried to keep the world on a gold standard in the 1920s. This one way causality makes complete sense in the real world, where the availability and abundance of money and credit is a SECONDARY consideration for the creation of new economic activity. An entreprenuer comes up with a new idea for a good or service, then begins to look around for sources of credit and monetary capital. The idiot monetarists have it all backwards: they apparently believe that an entrepreneur will see abundantly available credit and monetary capital, and in response begin wracking their brains and casting about for some new idea with which they can use that new capital and monetary capital.

    This is why banking and finance are a crucial part of the economy, but not the most important part. Flows of credit and money are required for economic activity, but not sufficient in and of themselves to create economic activity.

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