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Is an Anti-Austerity Alliance of Left Neo-Classicals and Post-Keynesians Possible? Is it Desirable? (Part 1)

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Yves here. The discussion of tribal allegiances in economics in this post helps illustrate why it is so difficult to push back against failed ideas when they are dear to the mainstream. It is also a useful ethnographic guide.

By Michael Hoexter. Cross posted from New Economic Perspectives

I drafted the “Mixed Economy Manifesto” as one attempt to create a common basis for anti-austerity economists and non-economists to argue against, in the clearest terms possible, the waves of government spending cutbacks that are advocated by misguided elites, by the right-wing and by right-leaning neoclassical economists. The 87 “theses” listed at the end of the Manifesto enumerated empirically and logically sound propositions about the economy as it now exists with its mixture of government and private institutions that can under many circumstances productively interact with each other. (I may attempt or others may attempt to expand the arbitrarily numbered 87 to 95 theses which would then be suitable for nailing on doors.) The Mixed Economy Manifesto also contained many statements that would appeal to Left Neo-classicals or New Keynesian economists, while maintaining a basis in what I perceive to be the more realistic ideas about the economy that have been put forward by post-Keynesians, MMTers, and the institutionalist tradition, including Thorsten Veblen and John Kenneth Galbraith.

As it stands, the world appears to be heading into a policy-induced exacerbation of the ongoing Second Great Depression that may pale in comparison to the policy mistakes of 1937 in the US, when President Roosevelt listened too much to the hard-money ideologues of his day and cut spending only to weaken the ongoing recovery from the Depression of the 1930’s. It would seem to make sense to create an alliance of as many intellectual and political tendencies as possible against a repeat of these mistakes. One major problem is that the public is largely unaware that there is a choice, so has not yet joined the struggle, except in countries like Greece and Spain where austerity is now in full force.

Another major problem in creating such an alliance is that there are significant intellectual and institutional divisions among those economists who endorse counter-cyclical spending by government and/or mobilizing the resources of government to help the unemployed and the marginally employed. These economists disagree with each other about fundamental issues and, if listened to by the public closely and in sequence, can produce either confusing or not particularly decisive advice for anti-austerity activists. This in turn makes it difficult to create a mass political movement that opposes austerity measures before they take full effect or, furthermore, after some future political victory for anti-austerity forces, for policymakers to institute policies based on a consistent new economic thinking. The most consistent critics of austerity and the economic foundations of austerity thinking have been Post-Keynesians, a diverse grouping of schools that claim to be both heirs and critics of Keynes, including the growing Modern Monetary Theory school (MMT). Post-Keynesians are generally excluded from the centers of power within the economics profession, though are not as marginalized as biophysical, steady-state/ecological, and Marxist economists. “New Keynesianism” is a much more mainstream school that integrates certain aspects of Keynes into the dominant neoclassical economics taught in college Econ 101 courses. Often the publicly-identifiable Left of mainstream economics, for instance Paul Krugman and Joe Stiglitz, can be identified as New Keynesian and therefore fundamentally neoclassical.

Post-Keynesians and MMTers often direct their sharpest critiques at New Keynesian or Left Neo-classical economists, though there are also efforts at comity from the side of Post-Keynesians. On the other side, the more orthodox and “establishment” New Keynesians/Left Neoclassicals for the most part do not offer Post-Keynesians the professional respect of acknowledgement and/or serious intellectual critique of Post-Keynesian/MMT ideas. There are signs that this “Chinese wall” is breaking down, as the global Depression drags on, but often in ways that indicate that isolated terms from or fragments of Post-Keynesianism and MMT may be taken and reconfigured to fit the orthodox model and academic “lifestyles” of Left Neo-classical economists. This was the intellectual “move” that Paul Samuelson executed in the late 1940’s, validating those parts of Keynes that would fit with neoclassical orthodoxy, while leaving out the aspects of Keynes’s work that suggested that neoclassical orthodoxy should be fundamentally questioned or overturned.

Krugman’s Left Neoclassical Manifesto

More generally, we seem to be in a time of economic manifestos, which might function as potential rallying points. Paul Krugman, the famous economist and New York Times columnist from the New Keynesian school has recently published his own manifesto written with Richard Layard called the “Manifesto for Economic Sense” (MES), also an anti-austerity tract. While I think the Mixed Economy Manifesto (MEM) is in terms of its content of more durable value than the “Manifesto for Economic Sense” (though you shouldn’t take my word for it: read them for yourself), Krugman’s manifesto is for the most part to-the-point and outlines the basic Fisherian argument of a debt deflation/depression (an argument favored by many post-Keynesians) caused by an overindebted private sector unable to spend its way out of an economic slowdown after the bursting of a large asset bubble. Krugman, as do post-Keynesians, advocates that government fiscal policy, i.e. spending, is one of the keys to recovery from the debt deflation. From the point of view of post-Keynesians, sometimes grouped in the category of economic heterodoxy, “so far, so good”.

More controversially from the point of view of heterodox economists, Krugman injects into his anti-austerity manifesto one sop to “conventional wisdom” in neoclassical and pro-austerity economics: the idea that eventually governments, like businesses and households, should cut their deficits in the medium term, as if this action were in itself a sign of fiscal probity.

There must of course be a medium-term plan for reducing the government deficit. But if this is too front-loaded it can easily be self-defeating by aborting the recovery. A key priority now is to reduce unemployment, before it becomes endemic, making recovery and future deficit reduction even more difficult. (MES paragraph 7)

This statement, considered conventional wisdom among policy makers and among neoclassically-trained economists, violates the insights of MMT based on Wynne Godley’s clarification of basic macroeconomics. Godley’s method of stock-flow consistent accounting of flows of funds between the three great sectors of the macro-economy suggests that governments are almost compelled to run deficits if the national private sector is to experience net economic growth, the supposed goal of all economic policy as currently understood, except where nations have a substantial trade surplus, i.e. are net exporters. Working in seeming obliviousness or ignorance against the growth imperative baked into economics and capitalism, balanced-budget (austerity) advocates appear to forget that to balance a government budget the public sector must take away in taxes exactly as much money as it spends into the economy, requiring then every nation to become a net exporter if its private sector is to grow.

Governments that control their own (fiat) currency, can by design, run deficits indefinitely because, based on the observations of Modern Money Theorists, they do not actually use taxes collected to spend but instead “mark up bank accounts (issue currency)” when needed. There may be prudential (inflation, currency depreciation) but not affordability constraints on spending of a monetarily sovereign government but the excess of spending relative to collected amount of taxes, i.e. “deficits” is not one of them. MMT argues that it is, in fact, imprudent for monetarily sovereign governments to use budget balancing as a means to determine levels of spending. The injection of Krugman’s concession to this supposed economic virtue alone makes the “Manifesto for Economic Sense” unpalatable to those who follow MMT’s account of the monetary operations of government.

Much of the rest of the “Manifesto for Economic Sense” is devoted to arguing against the main right-wing economic talking points that austerity will increase business “confidence” and that unemployment is due to there being a structural deficit of skills and/or willingness to work in the labor market. While most Post-Keynesians would also share Krugman and Layard’s opposition to these arguments, the MES at this point in my opinion could have been sharper and more satirical of the pro-austerity camp. Austerity economics makes so little sense that serious analysts should grant themselves the license to use the sharpest rhetorical tools to demolish its supposed respectability.

Points of Agreement and Division

Left neoclassicals and post-Keynesians often agree on what government should be spending money on right now: on aid to state governments (that cannot issue currency), on social services, and on environmental initiatives. Many left neoclassicals join post-Keynesians in supporting direct investment by the government in infrastructure projects and moves towards full employment, though there are important differences in the manner and extent to which they push for these initiatives. Both left neoclassicals and post-Keynesians are not generally afraid to use government spending to spur demand for real goods and services.

In the United States especially, a key theoretical and policy difference between heterodox MMTers and left neoclassical economists is the function and role of taxation especially taxation of the wealthy. As in Krugman’s concession to conventional wisdom above, left neoclassicals believe that government can’t or shouldn’t issue money in excess of taxes collected in the long run, demanding with more or less passion increased taxation of the wealthy to use the tax revenues to pay for desirable government expenditures. The main political issue then becomes whether to raise tax rates to, in this older theory of government finance, use the money collected to pay for social programs. The examples of countries with higher tax rates and higher social expenditures (European social democracies) are held up as examples of what the United States should emulate to enable greater government expenditure on needed services and public investments. In contrast to Left neoclassicals who oppose their right-wing neoclassical brethren on this issue, MMTers concede to the Right that raising taxes on the rich would dampen aggregate demand, though prefer cutting regressive taxes such as the payroll tax, which differentially affect poor and working people.

The advice of MMTers to progressives is to prioritize what government should spend money on and put forward those demands without linking them to the amount of taxes collected in countries that control their own currencies such as the US, UK, Canada, Australia, Japan and China. Secondarily, some in MMT might suggest using taxation as a means for shaping economic behavior and regulating economic inequality, uses of taxation which are considered commonsensical among economists of most schools and political tendencies. In a fiat currency system, according to MMT, there is no connection between what is collected by tax authorities and what is spent, though for governments that are “currency users” like regional governments (US States) or the governments of Euro-Zone countries, the linkage between taxation and expenditure remains. MMTers view all Neoclassicals, including Left Neoclassicals as firmly in the grip of “hard money” ideology, seeing money as a tradable, hard commodity in limited supply. MMT views money as a more flexible creature of public policy and social practice rather than a commodity “thing” that is controlled by market forces or via a fixed multiplier controlled ultimately by central bank lending to private banks. MMT is considered by some observers, a version of “Chartalism” or “Cartalism” , the idea that money is a “creature of the state” and not the spontaneous product of market exchange.

To give credit where credit is due, there are prominent economists of the Left Neoclassical school that have been agitating against the austerian madness, some with great ferocity. Besides his “Manifesto”, Krugman stands out as a Left Neoclassical who has devoted considerable time and effort to issuing public calls to stop the thoughtless drive towards austerity. Krugman is making as much of a ruckus as he can, including titling his latest book “End this Depression Now!” Joe Stiglitz has also been calling out against the austerity wave. Other Left Neoclassicals include former government advisors and officials like Christine Romer, Jared Bernstein and Brad DeLong speak regularly against austerity, at least in the short- and medium-term, Even the highly influential Larry Summers, who was in many cases an architect of the Great Financial Crisis, is now coming out against the austerity wave, now that he is safely out of government. Nouriel Roubini has been critical of austerity, though still holds to many neoclassical precepts. Mark Thoma runs an influential blog and is critical of the austerity wave. Robert Reich does not contradict neoclassical tenets in his continual attacks on austerity policies, often congratulating himself and his former boss, Bill Clinton for running government surpluses in the late 1990’s. In Great Britain, Simon Wren-Lewis is a prominent Left Neoclassical who has spoken out against austerity and also has attempted a dialogue, on his own terms, with post-Keynesians. Many of these economists occupy positions of prestige and are sought out by the media.

Unfortunately the economists, Post-Keynesians and MMTers, who are on the trail to more durable solutions to the problems of the economy and government finance are less well-situated within the economic establishment and, to date, less favored with media attention. They are barred from the most prestigious economic journals such as “American Economic Review” or “Journal of Economic Theory” which are uniformly bastions of neoclassical orthodoxy and function as gateways to relatively secure careers at major academic institutions. They are not typically published in nor do they typically appear in the mainstream media and when they do, they are not given space and time to expand on their views.

Perversely, media and academic outlets have generally ignored heterodox economists, whose theories are generally more relevant to business and the public and who among other things, are the group that was more acutely aware of the looming 2007-2008 financial debacle than the orthodox mainstream. Steve Keen has not only written a rigorous critique of conventional economics but seems to be on the trail to understanding the role of debt in the capitalist economy overall. Keen is also critical of the austerity drive and the focus of austerians on public debt as opposed to private debt. The University of Missouri at Kansas City (that hosts this blog) has developed a powerhouse economics department that is one of the few places in the world where Ph.D. economics students can use and work on models of the economy that more closely approximate the real economy. Randy Wray, Stephanie Kelton, Bill Black and Michael Hudson are all professors of associates of UMKC and are some of the most vociferous critics of austerity. Warren Mosler, a post-Keynesian and a founder of MMT, often speaks out against austerity. Bill Mitchell in Australia is one of the founders of MMT who focuses on full employment and leads the Center for Full Employment and Equity at the University of Newcastle, New South Wales. Austerity runs counter to MMT theory, so critique of austerity is a logical extension of the theory and not simply the product of economic personal “taste”. To some degree most of the economists who have been associated with the heterodox post-Keynesian tradition treat austerity madness as just another edition of the foolishness of the neoclassical economics they have spent decades criticizing and, they hope, uprooting.

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49 comments

  1. hermanas

    Tax the austerity devotees that they may sleep in the bed they make. But feed the little fish, the food chain begins at the bottom.

  2. jake chase

    Anyone looking to cut through all the nonsense about economics can save time by reading Steve Keen’s Debunking Economics. Those wanting more might wade through Keynes’ General Theory. Pretty much everything else written between 1936 and 2008 is ideological nonsense and a waste of time.

  3. Middle Seaman

    As a non-economist, one asks the question of how much of the difference among the economic groups is based on real data. Reading Krugman, one realizes that his views are frequently based on independently acquired data. In many of his examples, the data demonstrates clear pattern that can be read only one way.

    Do other economists use different data? Are they just “talking” or even mathematically modeling which may be utter nonsense. (I can form a mathematical model of something where the model is garbage quite easily although it is solid mathematically.)

    This article does not answer these questions. As a result, it is read by non-economist such as myself as “war reporting” covered by heavy fog.

    1. NotTimothyGeithner

      American economics as a discipline is a response to the rise of Marxist thought to keep proto-professionals, small businesses, and non-sharecropping small farms from joining the socialists and anarchists of the late 19th century against the robber barons who largely made their fortunes on monopolies from government contracts. If Keynes completed his academic work at an American university today, he would be hounded by the question of what he was going to do with a mixed liberal studies major.

      Disclaimer: I’m not an economist, but to answer your question, I seem to remember Alan Laffer’s actual data applies was gathered from sales tax and if he had any income data it was very limited and ignored disparate income levels. When I read his original work, I came away with the conclusion the Laffer curve, besides being obvious because people have discussed the same “phenomenon” for ages at least when it came to sales tax type fees, makes sense if everyone is in the same income range such as around $100k plus or minus $20 for a short time. It ignores the effects of wealth disparity over time and how the reduction in money velocity the disparity creates leads to both a long term reduction in taxable income and less economic activity as everyone has to wait for the wealthy to make a decision before anything can be done. These were my less, outwardly partisan thoughts on Laffer.

      The short answer is economists are paid to explain why the “wealthy enough to work” class must not be questioned. Data is irrelevant, and Krugman hasn’t quite realized his professional class is largely composed of crooks and religious devotees justifying the power of the Pope.

  4. JGordon

    All of the brilliant neoclassical theories and Post-Kenynesian anti-austerity crusades in the world won’t put a single extra barrel of oil back in the ground.

    Industralism works real well when you have unlimited resources to squander, and works sort of well after you run out resources by building up a massive pile of debt, i.e. burning through the surplus the society has spent decades and centuries building in one last orgasmic binge of consumption, but it doesn’t work so well once the earth has nothing left to give.

    Not only will industrialism end, but those of us who are left in the post-industrial world will have a new paradigm to follow that better matches actual reality. Start studying permaculture and start learning to think ecologically, if you all want to be there too that is.

    1. Adam1

      @joebhed,

      While we have created a non-transparent system, the US treasury can’t spend without forcing the FED to support its spending, that’s just how the system works. The FED can’t have and defend a target interest rate without supporting the sale of US Treasury bonds. The only difference between having the FED directly finance US Treasury spending and our current operational approach is that we currently first give the money to the banking system who then lends it to the government.

      If you don’t believe me, take it from one of America’s best central bankers – form FED Chairman Marriner Eccles (1934-1948), “If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank… if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market… So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing [by the Federal Reserve]. Or that the market controls the interest rate. Neither is true.”

      1. joebhed

        Sorry I missed this comment.
        And I’m not sure I understand exactly why you are making this statement and quote of Chairman Eccles – with which I completely agree.

        I quoted from the article that said – “
        “”Governments ……do not actually use taxes collected to spend but instead “mark up bank accounts (issue currency)” when needed.””

        This was the point with which I disagreed and the entire discourse ignores the matter of financing deficit balances with debts.
        Of course, today, the government MUST acquire funds through debt-issuance for budget spending balances not met by taxation. That is part of my point. Government (Treasury) can NOT simply push computer keys to MAKE the money. As Eccles puts it –
        ““If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow.””

        He didn’t say the Treasury could push computer keys and thus spend.

        The Fed’s open-market operations have nothing to do with the point I made, which is that what we NEED is for the government to restore its money-issuance power directly, in the form of the Kucinich Bill reforms. Once accomplished, there is no NEED to target funds rates, there will be no NEED to issue debt by the government.

        The transparency in the system will be complete, if not pervasive. And the debt-based money paradigm will not prevail regarding money-cost and public debt.
        Or, did I miss something?
        Thanks.

    2. F. Beard

      All of the brilliant neoclassical theories and Post-Kenynesian anti-austerity crusades in the world won’t put a single extra barrel of oil back in the ground. JGordon

      Assuming we wanted to, technology will eventually allow us to synthesize enough oil to put back all we ever extracted.

      Of course it might trigger an Ice Age if we used carbon from the air as an input. :)

      I disagree with the current money system but it has produced some lasting value – assuming we don’t kill ourselves with the new technology as we did in WWII.

      1. Ruff

        Priorities…

        It’s a tough choice between destroying our planet or energizing our machines.

        I thought we already have answers for our energy dependence, but the reliance of our authorities is the issue. Sounds like energy independence is bad for political careers.

  5. joebhed

    The so-called Fisherian ‘debt-deflation’ phenom is recognized across the econ-spectrum – but not its cause.
    And the MMT solution is of government spending in a fashion that denies the existence of money flows from taxpayers through to government spending.

    “”Governments …… based on the observations of Modern Money Theorists, do not actually use taxes collected to spend but instead “mark up bank accounts (issue currency)” when needed.”"

    The fact is the Fisherian debt-deflation spiral is today marked by the hyper-cyclicality of debt-based money, and, unfortunately, while the CB does have the power to create money by computer keystrokes, the Treasury department does not.

    What is NEEded is a change to our fiscal-monetary structure to actually allow the creation of money BY the government in conjunction with its budgeting process.

    It’s called the National Emergency Employment Defense(NEED) Act of 2011, sponsored by Congressman Dennis Kucinich and presently in the Congress as H.R. 2990.
    http://kucinich.house.gov/uploadedfiles/need_act.pdf

    And, the viability of Fisher’s solution to the debt-deflation phenom was recently confirmed in an IMF paper titled The Chicago Plan Revisited.
    http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

    Time to broaden the search for solutions, to actually include the systemic reforms needed to make the austerity notion implausible.

    Thanks.
    For the Money System Common.

    1. Ruff

      Joe,

      Yes, Fed has ability to create debt at the strike of a key. Issue is, excess debt is part of the issue, creating more debt and giving it to banks that are constrained by 1) tapped out consumers 2) consumers not willing to borrow more. The fed is in a liquidity trap and cannot resolve the issue.
      The treasury does not have authority to create money, but Congress can pass a law to change that. There are a few things missing from mmt and Keynesian theories.
      1) profit feeds productivity, not the other way.
      2) you cannot create wealth by printing money, you transfer. 99% of the time you transfer from a productive source to a non productive.
      3) by printing and transferring wealth, you are promoting lower productivity as there is more returns for being non productive. Shot and demand?
      4) if the above items are correct, than you want yo increase productivity by implementing policies that prevent transfer of wealth. Honestly, the free market along with enforcement of the laws can do this.

      I am not proposing not to help our needy, the opposite, society should implement policies that assist in this case. If the majority decides it’s a benefit, than it is our choice.

      1. F. Beard

        2) you cannot create wealth by printing money, Ruff

        The issue is to prevent the DESTRUCTION of wealth by a shrinking (including velocity) money supply.

        Since “bank loans create deposits” their repayment DESTROYS deposits. Thus when the banks stop lending the Federal Government MUST* make up the difference by increased deficit spending.

        *A trade surplus is another possibility but since the US dollar is a world reserve currency that is a distant possibility.

        1. Ruff

          I will go on a limb and state that you will not destroy wealth by a shrinking money supply. If you have a gallon of water it remains a gallon whether you use 1, or 2, or 3 or half gallons. The wealth is a constant that grows slowly.
          Increasing spending suggests 2 things.

          1) you are issuing more debt which isn’t going to help due to the mentioned above. You are also promoting unethical behavior from banks.
          2) you are printing and taking from productive hands and giving it to unproductive hands. Supply and demand says there will be more demand for unproductive hands. This continues till you end like Russia, with huge lines for a chicken.

          So both will not help Beard. The key here is to realize when to let the market kill the bad loans/obligations because there is no way out anyway. The sooner we come to this conclusion, the fastest we get over it. I think Bernanke is realizing this, the geniuses in gov won’t be there for years.

          1. joebhed

            First, without an understanding of how you measure wealth – what is proper action is difficult to say.

            But the size of the money supply, in maintaining the purchasing power of the national currency, must grow according to the amount of stuff being produced and consumed – whether the stuff is really “wealth”, or not.

            So, the economy (things being produced and consumed via money) grows slowly according to its natural ability, and the supply of money grows accordingly. No problem there

            I totally agree that it is wrong to issue “debt”, by either the public or private sector, in order to have that money in existence for commerce. Money should be issued debt-free and if so, there will never be any debt associated with the ‘existence’ of the money.

            Once the money becomes a marketable asset to its holder, there can be all forms of debt associated with its use. Again, naturally.
            But, unlike today, when the market transactions are all cleared down to zero, the money will fully exist and maintain its purchasing power.
            (Unless purposely removed by the government by some means).

            We can’t judge the appropriate use of the money system based on the failed machinations of debt-based money. Again, please read the IMF paper on The Chicago Plan.
            Thanks.

          2. F. Beard

            I will go on a limb and state that you will not destroy wealth by a shrinking money supply. Ruff

            You certainly will – by a cascade of defaults; if A cannot pay B then B may not be able to pay C and so forth UNLESS all debts take a haircut.

      2. joebhed

        “”Issue is, excess debt is part of the issue, creating more debt and giving it to banks, …… cannot resolve the issue.””
        Of course, I agree. I propose creating LESS debt.

        “”The treasury does not have authority to create money, but Congress can pass a law to change that. There are a few things missing from mmt and Keynesian theories.””

        Again, I agree. That’s my point. The Congress can authorize Treasury to issue the money permanently into existence without issuing debts. In fact, in place of issuing debts.
        The IMF paper I linked to proves the monetary and economic system viability of such a proposal.

        Your points about the ‘role of money’ in wealth-creation and distribution are confusing to me.

        I suggest a reading of Soddy’s “Wealth, Virtual Wealth and Debt” to help clarify the relationships, and a reading of his “The Role of Money” to understand the very real and natural wealth distributing power of public money made good.
        It’s OUR money system.
        It should work for US.
        Thanks.

  6. craazyman

    It’s too Early to Think This Hard

    At the Institute for Advancement of Econmomic Thought we are making slow progress figuring all this stuff out. Mostly either when on the bus or drinking red wine or even red wine and xanax, which makes the God Signal as clear as a TV.

    Nearly everything said about economics is woefully incomplete nonsense, including everything in this post, although the post is descriptive not proscriptive and so it’s not the author’s fault. Nonsense is nonsense.

    The sectoral balances stuff is imcomplete although not entirely nonsesne, because it can easily be falsified. What if the world had only one government, one country? You couldn’t export to anybody because you are only “us”. There’s no “other” no “boundary” beyond which the other lives. How could you grow your economy if export was impossible? probably population growth, for one, and geographical expansion, for two. So you’d need empty land. But it would have to be more than empty. It would have to be nourishing — with fertile fields, forests and streams and oceans to provide food and water and wood for building shelters and fire for heating.

    The government can print money for the people to use to cooperate with each other, while they turn nature into property through the use of labor and imagination. The money arises only after there are cooperational structures thorugh which people interact to meet their needs,the moneey is just an imaginary form of social agreement that regulates the boundaries of interpersonal relations.

    These are the primary colors from which all economic pictures arise — nature, imagination, labor and capital. Capital is the hardest one to conceptualize because it’s only a form of imagination, but it’s not individual imagination, like a hit song, it’s cultural imagination — like a myth or totem or taboo that regulates the way a so-called primitive society organizes itself to give itself a means through which it can achieve social cooperation.

    In the old days they could head West in the wagon train. And lay claim to nature. Since money = property like wave = particle, laying claim to nature creates property, which in turn has a dual identity as money.

    So they were rugged individualists, yes. But they also were recpients of vast amounts of property/money defended by army forts. In effect the American rugged Western cowboy individualist was a welfare queen, financed by massive government grants and transfers from abstract group possession to indvidual of nature/property that had an eventual dual identity as money. (forget for a moment the ethnic cleansing aspect )

    Now, there’s nowhere to go. And while imagination is infinite and money is infinate, cooperation is not infinite. You can print money, but unless it’s used in healthy cooperational structures — property when legally codified — it won’t matter. So they need an “other” to export to, to export the nature they convert into property using imagination (i.e. either crap or food or machines) or just their labor and imagination (sofware or entertainment).

    It is time to terraform Mars or else figure out another way to extend the map or even the mental map. Maybe Siberia. There’s a lot of land there and not many people, and it’s closer. Or else, the mental map, create more healthy cooperational structures that give rise to healthy money. There is a lot of opportunity here, but people are mostly insane so it is not simple.

    1. Jim Haygood

      How could you grow your economy if export was impossible? probably population growth, for one, and geographical expansion, for two.

      Economic growth can be reduced to two sources: (1) population growth and (2) productivity growth. Geographic expansion helps enable the former and trade the latter, with trade being by far the more important of the two.

      Just as the American colonies revolted against their British masters, a Martian colony would soon throw off the shackles of earthling rule, and perhaps even steer an errant asteroid in our direction. And who could blame them?

      1. jsn

        Organic economic growth totally stumped me until I read Levy’s description of where profits come from which is a non math version of Kalecki’s Profits Equation.

        Entrepreneur borrows money: invests in new plant, equipment, workers and training: in doing so spends all the borrowed money without lowering his net worth: his net worth has been converted from money into capital goods from whence it converts to inventory: when inventory sells entrepreneur recovers his costs plus profit, converting it back into money, while the entire expenditure of the loan is a net add to the economy. That is where growth comes from.

        1. F. Beard

          Entrepreneur borrows money: jsn

          The money he borrows is created (“bank loans create deposits”) as he borrows it. But where does the purchasing power for those new deposits come from? ans: It comes out of all existing deposits via dilution of those existing deposits.

          How is the above ethical? Did the existing deposit owners vote for the dilution as they might in the case of common stock?

    2. Gerard Pierce

      I’m handicapped by not knowing what I am talking about, but how does the current trend to “intellectual property” fit in with all this.

      In a kind of bizarre way, the current mess of patents on software (and even genes) seems to me to be a new iteration of the enclosure acts which robbed small landholders blind and wiped out the commons.

      The fact that patents expire kind of works against this new definition of “property” but they can keep the game going by buying enough congress-critters to increase the term of a patent to infinity as they have done in the music business.

      1. They didn't leave me a choice

        IP in many ways like regular property does, it’s a mechanism by which to transform culture and social relations into monetised form. Regular property just does the same perversion to nature. It’s all there just to feed the machine that demands eternal growth, not because it’s necessary, but because our lords and masters have made it so. We already have all the resources that all of humanity would need to live contently and happily, but the growth imperative is there so that the rich bastards can keep on concentrating ever more wealth to themselves. Fools who think property makes them happy.

    3. JEHR

      The key phrase is “growing an economy.” There will come a time when resources will not allow growth and we will have to live with what we have. Progress and growth are really unsustainable in the long run.

      When these two end, we will live in a more primitive environment but it won’t necessarily be impossible. We have to learn to live without “growth and progress” which will not always be available. Perhaps we cannot imagine such a thing, yet.

    4. DigitalManifestDestiny

      Expand the map = virtual land and goods (a la Warcraft, Second Life)

      As society transfers more of its property to the limitless digital frontier new “army forts” will be created to defend digital property from hacker terrorists and pirates. The government grants and transfers will continue. We could instead take the opportunity digitalization provides (virtually no cost for reproduction) and have a re-commoning of human knowledge and culture. Maybe neither.

      Borders, exports, the evil “other” waiting in the shadows to attack…yes, let’s finally get on track to really ending racism and imperialism and wars and abolish the borders. A huge global initiative to build a giant “green” spaceship and eventual “green” martian society should do the trick. The coalition of support would be huge; Malthusians, greens, Trekkies, neoclassical economists, MMTers, etc. The benefits obvious. Plus it’s outer space, which is innately cool, and the weather on earth is going to be craazy for awhile, so the more people up there than down here the better.

  7. Jim Haygood

    ‘Post-Keynesians are generally excluded from the centers of power within the economics profession.’

    Thank goodness for that. I hear that Weimar had a great party scene. But in a hyperinflationary U.S., you’d really need an armed posse to get to and from the all-night raves safely.

    1. They didn't leave me a choice

      Thank you for proving once again, that you have no fucking clue about history or economics, Jim.

  8. Ignim Brites

    MMTers seem to think that economic debates are primarily intellectual rather than political. If they were to reverse their thinking, they might see that they have plenty of opportunities to pitch their notions to potential sovereign currency issuers. The periphery Euro nations are obvious. But also here in the US, California represents a golden opportunity. On the east coast, high tax New York could lead the drive for a sovereign state currency, that would be accepted in the Northeast at least. Call it the NY$. Of course, some people think that is what the FRN really is anyway.

    PK understands completely that a sovereign currency is the key even to left neo-classical solutions to the depression.

    1. Bill Clay

      The nub of the political problem:

      “There must of course be a medium-term plan for reducing the government deficit.”

      From context, Mr. Hoexter seems to intend this statement not as a truism, but rather as a neoclassical axiom that is in dispute.

      But that’s the problem: the vast majority of voters throughout the western world have swallowed hook, line, and sinker that it’s an unquestioned economic law. They have not noticed that most of the economists who accept it as such were the very ones who also asserted what is now obviously false: neoclassical economics’ mirage of “the great moderation” would last forever as “the end of [economic] history”.

      I’m no economist, but seems to me if we could convince the body politic of only one new economic principle, it should be that it is NOT proven that government budgets must balance over the long term — nor (sorry, Jim Haygood) that failing to do so will inevitably and under all circumstances lead to Weimar-like hyperinflation.

      1. Jose Guilherme

        “…it is NOT proven that government budgets must balance over the long term”.

        In fact, it’s impossible to do that – it would kill the economy because of the scarcity of new money caused by the absence of net deficits over the long run.

        See my post down under about the 220 years of available data on the U.S. budget.

        1. Bill Clay

          Fully agree. But those who have never heard of MMT (and perhaps other PK currents) don’t know that. Even the main European labor union leaders speak in neoliberal economic terms while bemoaning its inevitable outcomes on the working class. This paradigm MUST be broken in the public consciousness or we’ll have decades of destructive austerity.

          1. Jose Guilherme

            @Ignim Brites

            California doesn’t have a central bank, so it cannot break any paradigm. It has to balance its accounts in the long run, like any household or firm.

            In fact, the euro was created on purpose as a currency for users only. The European central bank is supposed not to buy government bonds, ever. This is the exact opposite of what happens with other central banks – in the U.S., UK, Canada, etc. they all buy bonds in the secondary markets as a matter of fundamental policy.

            So the governments of the eurozone have been left at the mercy of private markets since the inception of the single currency. A unique and original situation indeed – sovereign states placed at a level lower than California, who at least benefits from automatic transfers from the Union to stabilize the business cycle.

  9. Lil'D

    I’d appreciate any pointers to the best, most rigorous defenses of austerity. It makes no sense to me, but people who other people claim are smart seem to believe in it. Is it just fuzzy thinking from incorrect models and assumptions? If so, can we see the argument clearly, so as to understand (a) if there is a point somewhere or (b) where to focus the critique?

    Looks to me like there are a small set of people (Mitchell, Wray, …) who are on the right track. Of course, some post-keynesians come along with rather socialist looking prescriptions (like Job Guarantee), which might result in knee-jerk rejection by everyone to whom “socialist” is a pejorative

  10. snowdrift

    Good post.

    In a more academic vein, there’s Marc Lavoie on orthodox and heterodox dissenters, Post-Keynesians vs New Keynesians:

    http://www.assoeconomiepolitique.org/textes/ML.pdf

    I doubt there’ll be much of a rapprochement. Seeing Krugman “borrow” (to put it nicely) liberally from the Post-Keynesians from his prestigious perch at the NYTimes, without giving any credit, and occasionally misrepresent MMT or Keen to I assume boost his mainstream cred and show that he hasn’t left the reservation, is rather sad.

    Then there’s Brad DeLong declaring that he and his colleagues are working in the Minskyan tradition, while name-dropping a bunch of New Keynesians, including Larry f$#@ing Summers (maybe single-handedly most responsible for the bubble that led to this crisis) of all people, and not mentioning one actual heterodox. He could’ve slipped a name or two in as an overture, but it’s pretty clear that he and his partners in crime are just grabbing whatever they can from PK economics to shore up their failed paradigm, without any intention of actually granting some space to the PK economists. Academic power politics blargh. Post-Keynesians aren’t about to impose their Gramscian hegemony anytime soon, that’s for sure.

  11. Jose Guilherme

    The U.S. budget has never balanced over the economic cycle, contrary to the prescriptions of new keynesians like Krugman or De Long.

    If it had, then the public debt outstanding would now be much closer to zero than to the trillions of dollars.

    As James Galbraith and Randall Wray have sharply observed, since 1790 the budget has been in deficit for over 90% of the fiscal years and their combined amount has been much larger than that of the years of surpluses.

    And yet, somehow the U.S. is still the world’s number one economic power.

    So much for a basic tenet of neoclassical economics, even in its new keynesian – that is, a bit more realistic – version.

  12. F. Beard

    Much of the rest of the “Manifesto for Economic Sense” is devoted to arguing against the main right-wing economic talking points that austerity will increase business “confidence” and that unemployment is due to there being a structural deficit of skills and/or willingness to work in the labor market. Yves Smith

    The irony is that austerity protects the real returns of existing sovereign debt holders WITHOUT increasing default risk because there can be no default risk with sovereign debt. But sovereign debt, according to noted MMTer Professor Bill Mitchel is “corporate welfare.” Thus the pro-austerity people are fighting to protect a form of welfare and one that often benefits the rich.

  13. jim3981

    Left, Right, Divide and conquer baby.

    Manufacture a consensus and use the media to drill it in.

    Rinse and repeat. Works for everything.

  14. Hugh

    Let’s see another economics discussion of the heavy hitters with no mention of neoliberalism, kleptocracy, elites, class warfare, resources, or society, and only glancing, dismissive mention of wealth inequality. I don’t see this advancing anything useful because it protrays economists of all stripes to be more or less out of touch with the real world, you know where the rest of us live.

    I mean the only interest I can see in it is in decoding some of the terminology.

    Neoclassical economics = charlatan economics = neoliberalism = cover for looting by the elites and the rich

    Left leaning neoclassical economist = left leaning charlatan economist = New Keynesian = Krugman, Stiglitz, DeLong, Bernstein, Romer, etc.

    Austerity = one form of looting

    Neoliberalism is by no means confined to just the neoclassicals. As some of us have been saying for some time now, the elites and kleptocrats who run things have been practising MMT for themselves for years. It’s MMT for them, the gold standard for us. That MMTers ignore or downplay wealth inequality and refuse to address kleptocracy (which is so much more than Bill Black’s criminogenic environment) betrays their neoliberal roots.

    The author’s treatment of taxation exhibits this as well. Money is a medium which gives access to society’s resources. To create a certain kind of society and maintain it, resources are distributed and redistributed via taxation, spending, and regulation. Taxing the rich is not to fund spending. It is about redistributing, essentially freeing up, resources. The author doesn’t seem to get this. But then he seems to buy into some variant of the invisible hand, that a good and equitable society will somehow create itself via a little bit of deficit spending.

    I think this post illustrates how the economics profession, even its so-called most cutting edge segments, is still a jumble of a few good ideas mixed in with many bad ones, splintered, often incoherent, and self-contradictory, at once criticizing and embracing the same status quo which loots us. Austerity is bad! What a no-brainer. What about the other forms of looting? Depressed wages, bubbles, regressive taxes, gutted pensions, defective healthcare, failing infrastructure, privatization, and attacks on Medicare, Medicaid, and Social Security to name a few. What about restitution of the loot already stolen? Where is the author’s (or those he cites) awareness of any of this?

    1. Jose Guilherme

      Perhaps a MMTer could put it this way:

      1. The priority is to stop austerity (decrease taxes and/or increase spending) and freely use deficits to get the economy back to full employment, on a permanent basis.

      2. An economy at full employment should have the appropriate tax schedules and transfer payments to get at the desired level of societal(in)equality, as expressed by the free choice of the electorate.

      MMT proper adresses the full employment part – it points towards increasing the size of the pie by providing everyone with a job.

      The distribution of the pie, however, depends on value judgments that MMT – a description of the workings and potential of fiat money – simply cannot provide.

      But it does demonstrate how the scare tactics of the right and of many liberals also – that social security cannot be funded, that the retirement age must be increased to prevent its bankruptcy etc. – are based on fundamentally false monetary assumptions.

      1. joebhed

        When used in this sense, it appears the major issue out there is one of deficits – or no deficits.

        In reality, the issue that is out there, when you’re in the “Beyond Austerity” mode, is HOW TO FUND these balances that we refer to as deficits – because there is an “unfunded” amount in the budget.

        If there ARE to be non-tax funded expenditures by government, presently – the deficits ,then from where comes the money to fund them?

        Unfortunately, there is little focus on the very real power of the public’s purse to fund those balances directly, without resort to debt-issuance.

        Monetary reformers come right out and say it is our duty to use the money system for both the demand-growth and wealth-distribution goals, and that the money MUST be issued by the government without debt.
        Then we say how to do that.
        MMTers claim that we now have that power – even that we now use that power – advancing the notion under the cloak of reserve accounting.
        So, no NEED to reform.

        You can’t convince anybody except yourselves that this is the way it IS.
        We NEED to take back the money power.
        Directly.
        Openly.
        Through legislation designed toward that end.
        Thus, the Kucinich Bill.
        Thanks.

  15. reason

    “requiring then every nation to become a net exporter if its private sector is to grow.”

    With respect, this is an oversimplification. It is perfectly possible for an economy without any government at all to grow, government deficits are NOT essential for growth. Real capital can be accumulated without growth in debt levels. Limited government deficits may, however, promote financial stability, if coupled with restraint in private sector borrowing. You need to be careful here not to let financial accounting and real effects get confused.

    1. reason

      One debate I think we need to have is whether the policy mix that has been popular in recent decades (at least since 1990) i.e. tight budget deficits and loose monetary policy was fundamentally mistaken, and whether we would have been better off with looser fiscal policy and tighter monetary policy, which promotes private sector financial health without inflating asset bubbles.

  16. Bogwood

    Most economists are like starfish washed up on the beach, too many to save,but maybe you could save just one. Everybody else is a “biophysical economist”. Every dollar is a few kilowatts. All growth stops. But economists are marginalized into some imaginary world. You can double the money infinitely but try doubling a page of the NYT more than eight times. There are always physical limits.

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