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The Euro as Idealist Project or: How I Learned to Stop Worrying and Love Pragmatic Elites

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By Nathan Tankus, a member of Occupy Wall Street Alternative Banking working group. He is also deeply involved in the heterodox economics community and plans to have a PhD in economics before the decade is done. Cross posted with View From the Metropole.

In accounts of American economic history, the early days of banking are typically described as chaotic, contradictory and many decisions are depicted as awful, stupid mistakes. That period certainly included all these things, but looking at Europe now, one can’t help but feel that many back then (especially the elites) understood money better and were much better pragmatists. The point about pragmatism is especially important: you can only make realistic decisions if you know how things actually work. In this sense, the Euro is the ultimate idealist project. Its designers took a vision (some would say a religion), compared their vision to the functioning of an entire continent and attempted to chop off the parts of the continent and different societies that didn’t fit the template. I would call it a Procrustean bed, but to be fair to him, I bet he only mutilated a few dozen people, not an entire continent.

What is the theory that justified the Eurozone? It is a geographic extension of these assertions by Adam Smith in the Wealth of Nations:

It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Later on he extends this point to an analysis of money:

But when barter ceases, and money has become the common instrument of commerce, every particular commodity is more frequently exchanged for money than for any other commodity.

Notice he says that barter “ceases”. The implicit assumption here, which has been extended and made explicit since Smith wrote these words, is that people “naturally” move towards exchanging what they produce for a particular commodity (Smith obviously was thinking of gold and silver), which would then be money. In short, Smith proposed that money develops to reduce the cost of transactions between people. It’s an interesting theory but, as David Graeber has described at some length in his book Debt: The First 5000 Years, , it’s one with no historical foundation. A policymaker, working under the view that these assumptions are correct, would have a very difficult time coming up with and implementing pragmatic solutions to financial (and fiscal) crises.

Modern economists took the obvious next step in this theory in that they applied it to geography. Named Optimal Currency Area (OCA) theory, it suggests that how large a “currency area” is and which locations are in that currency should be determined by what will reduce transaction costs between firms and individuals the most. In some ways this view is more incoherent then Adam Smith’s view. Smith had a labor theory of value so he thought the value of the unit of account (gold and silver in Smith’s mind) would vary with the rising or falling labor time it took to produce it. But OCA theorists never suggested tying these currencies to a particular commodity. They seemed to think everyone would just say “oh wow, they said my costs will be less if I use those pieces of paper and electronic spreadsheets so I’m going to do that now!”

So what would give this money that isn’t tied to any particular commodity, value? Ironically, later in the Wealth of Nations, Smith provides an alternative mechanism for money receiving value.

A prince who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind might thereby give a certain value to this paper money, even though the term of its final discharge and redemption should depend altogether upon the will of the prince.

Long time readers of Naked Capitalism will recognize this as the view of Neo-Chartalists, primarily based out of University of Missouri, Kansas City and who blog at New Economic Perspectives (and often on this blog too). The reason that a whole “area” (what normal people call a country) shares a unit of account is ultimately because people try to acquire whatever they can pay their taxes in. Rather then the need for a medium of exchange automatically generating a “natural” unit of account, an artificial unit of account is imposed through taxation. It becomes a medium of exchange when people try to acquire the money they need to pay taxes by selling whatever they have (for most people, it ends up being their ability to work). In Graeber’s book, he hypothesizes that this really started historically as a means for a king or government to get the local population to give up goods and services to their armies.

Luckily for the countries on the Euro, these economists didn’t suggest eliminating all taxes. Unfortunately for those countries (or more accurately, their average citizens) , they didn’t propose any way to finance budget deficits. As a result, once they hit their first bump in the road, in this case a financial crisis, they had no mechanism of dealing with these problems except imposing harsh austerity, which doesn’t ultimately solve the problem as unemployment insurance rises and tax revenues fall further as people’s incomes fall. To stop these automatic stabilizers from providing higher levels of expenditure in bad times, these nations would have to repeal nearly the entire welfare state and reintroduce poll taxes. Then they would just drive some people into insolvency, which may still cause budget deficits. Even in the face of rising political opposition, the policy elites to seem determined try. As a result, some contend that the real aim of the Euro project is to dismantle Europe’s social safety nets.

Ironically, the proof that OCA theorists marshaled to “prove” a monetary union between various different states is beneficial, was the United States! To someone who knows anything about our financial system after the Revolutionary war, that’s comical. First, it’s true the constitution banned states from printing paper money and minting coins (which is how they financed their budget previously), but they didn’t actually switch to some central currency. That doesn’t really start to happen until Lincoln issued “Greenbacks” during the civil war. Instead, they chartered banks whose notes were acceptable in payment of state taxes. The states financed most of their spending out of the dividends they got from owning a percentage of their chartered banks, and later out of taxing their capital. The notes of the First and Second Bank of the United States were acceptable in payment of federal taxes and to purchase public lands. Both banks could even make loans directly to states with the authorization of Congress! This system certainly was designed to help certain interests, but at least they knew how to take a few golden eggs without killing the goose.

The Euro would be a much more workable system of the European Parliament had taxing authority over all of Europe and each country kept its own currency. But then, why would Europe need or want such a system? Each generation of politicians in Europe seem to think that they can get what they want through the Euro while trying to keep this jerry-rigged system operational (or at least the appearance of operational) for the time being. Indeed, its designers were well aware that there were fundamental gaps in its architecture, and anticipated that they would be addressed in future crises. While the future is now, but there doesn’t seem to be a pragmatic set of politicians in sight to implement these measures. That might prove to have been their most fatal, idealistic assumption of all.

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51 comments

  1. jake chase

    The Euro was accepted by three constituencies, each of which thought it was conning the others: the northern industrialists thought they could grab a bigger market for their manufacturing industries and obtain lower labor costs in poorer countries; the periphery politicians thought they could borrow cheaply in perpetuity and expand their power by spending (and looting) the proceeds; the populations thought they could travel seemlessly, escaping harsh winters, brutal summers, and terminal boredom. Nobody worried about the effects on anyone else. The Brits understood the scheme was the Ponzi variety and stayed out of it while creating law free finance as a magnet for the world’s bankers. The European elite understood that sooner or later worker austerity would provide juicy looting opportunities, which is exactly what has happened.

    1. Jim

      The UK pols came through for their constituents.

      By refusing to cede their monetary policy, the UK has become the premier nation of the continent of Europe.

      1. William C

        Jim

        As a Briton I can assure you we do not feel ourselves to be the premier nation of Europe. With 4% negative growth since 2007 (yes worse even than the Eurozone), widescale unemployment and our currency way down against the euro, the poor cousins would come closer to how we feel (and yes I know Spain, Greece etc have major problems – so do we, frankly have precious little idea where growth is going to come from now that our trump card, financial services looks – ahem – unreliable).

        It is Merkel’s Europe at present, not Cameron’s (he tried to veto some EU steps some months back, was promptly sidestepped by the other member states who just carried on their way).

        Probably best that we stayed out of the EZ, though, that much I can buy.

        1. Ignacio

          You are rigth, but at least the UK, by keeping monetary sovereignity, can avoid the slow motion bank run and the high interests that reinforce the downward spiral of the GIPSI countries.

          As spanish, it is quite striking to note that my neighbours still don’t notice how badly the euro design is reinforcing the crisis. Ordinary people generally believe that the euro is here to stay and do not realise it requires massive decapitalization of the country, massive unemployment, and forced emigration. Don’t be surprised if you start to see more spanish young guys going to work to the UK, even though the labor expectations there may not be particularly exciting.

      2. LeonovaBalletRusse

        Jim, no, rather “the premier laundromat” of the world.

        To think “My Beautiful Landrette” came out England, but not the City of course.

  2. Jim

    The “most fatal, idealistic assumption of all” was that by the time a crisis came, Spaniards and Germans would consider themselves more European than citizens of their birthplaces. As such, this “small group of far sighted statesmen” believed that Italians would willingly cede Italian citizenship in favor of a European one, that Italians would have no problem with cheering a team from the US of Europe every four years in the World Cup. Or that German would willingly PERMANENTLY transfer their tax dollars to their Euro brothers in southern EZ.

    Of course, these “statesmen” were wrong.

    What I find most troubling is that progressives have embraced Draghi’s anti-democratic agenda.

    What would these progressives say if Bernanke decided to craft and impose fiscal policy from the Fed, “to save the system”. If you allow Draghi to explicilty exceed his mandate, why would you not allow Bernanke to do the same, especially since Bernanke’s mandate is far more nebulous than Draghi’s.

    1. MyLessThanPrimeBeef

      Unfortunately, the World Cup and the Euro Championship make the Italians too proud not to want to retain their citizenship or to give it to others.

      The lesson here is that you have to abolish soccer tournaments before you can talk about uniting Europe.

  3. craazyman

    Well, just think what DID happen in the U.S. way back.

    When people couldn’t find anyone to employ them, they loaded up their wagon and headed West, where they found nature=property=money in nearly infinite quantities. They didn’t need a central bank. They had “Nature” as their central bank and “Imagination” as their employer.

    That lasted until about 1900. Then there was WWI, then the 20s boom. Then the depression and then WWII until 2000+.

    Now it’s now. We’ll see how long it lasts here before one region of the U.S. gets so pissed off at another region that they change the rules and say no more money. It could happen!

    The folks in Europe now who can’t find anyone to employ them, they have no where to go. Everywhere where there’s a there is already taken, paved over with somebody’s money.

    1. Gerard Pierce

      “When people couldn’t find anyone to employ them, they loaded up their wagon and headed West, where they found nature=property=money in nearly infinite quantities.”

      It wasn’t exactly like that.

      For starters, most of the would-be pioneers had very little clue where they were going or what they were going to do when the got there. They signed up with a wagon train and paid someone to get them where ever it was they were going. When they got there, they paid for a town lot.

      The whole thing was a lot more like buying a franchise than it was being an intrepid pioneer. At minimum you needed a farm wagon with a years supply of staples- plus two to 8 mules or oxen. If you wanted a Conestoga wagon, you needed some serious bucks.

      The gold rush guys didn’t need a wagon full of anything and there were actually one or two that used a hand held wheelbarrow — everyone else needed money and their numbers didn’t include many of the unemployed.

      In his novel “California” John Jakes describes how the early pioneers fought the Cherokee, fought the Utes, fought their way across the country to California only to run into the deadliest threat of all, the “escrow tribe”. Those were the guys who sold them desert land at high prices with promises that the marina would be built in a mere year or two.

      1. Lyle

        To fill in a few examples of this. It was said in the 1870s that to settle in Ks, you needed $400 beyond the price of the land to support you thru the first year. So typically a farmer would sell the eastern property and move west. (actually it turns out most land was not homesteaded since desirable lands were within a days drive of a railroad station, and at least in Ks, and Ne, that meant likley buying the land from the railroads land grant. Also once one got to western KS or Ne it was a big gamble with the weather and many lost out, just like most did not make a killing on the gold rush (except if you decided to sell things to the miners ala the original CP big four before they built the railroad). The merchants got the money not the individual miners. Eventually there capital was required and the independent miner got squelched.

        1. Beppo

          All of these are good comments. I’d just like to state that California’s settlement in the past was just as reliant on outright fraud as its economy during the mortgage bubble. And rich land owners today are stealing water just like in the olden times. Califorrrniaaaaaaaaa

  4. TK421

    “Named Optimal Currency Area (OCA) theory, it suggests that how large a “currency area” is and which locations are in that currency should be determined by what will reduce transaction costs between firms and individuals the most.”

    This almost makes the Euro sound like a sort of free-trade agreement.

  5. jerry

    Is planning “to have a PhD in economics before the decade is done” really a reasonable credential to list on your bio?

    1. Nathan Tankus

      Yves told me it was a description, not a credential. I could have mentioned the economics research job i’m getting in January, but I chose not to. I also like it because it establishes that I’m not an “authority” on the subject, and it encourages people, such as yourself, to be more critical of my arguments.

    2. craazyman

      It’s more reasonable than having one! At least we know he can still think for himself. hahah

      Yurs trooly,

      Profeser Delerious T. Tremens, NFL, GED
      Philosopher of Economics
      University of Magonia

      1. craazyman

        and man o’ man, that first quote, that’s one bad sentence written by Mr. Adam Smith.

        Are all his sentences that clunky? I mean I know it was a long time ago when they’d drone on and on, but even so, that sucker is a bad fishing knot of words.

        It’s easier just to look directly at reality and see what’s there. Just get on the bus and look out the window and it’s all right there, like a movie, but it’s real! You just have to write it down in your head, if you want to remember it later.

        1. Bert

          Then there was that Edison quote a day or two ago. Makes you wonder how he ever got rich?

          I think all these guys learned to write by reading the Bible !

          1. Bert_S

            Read about that a little bit. Foggy memory – but I think he mainly outmaneuvered Tesla in the biz world. Edison was known to be an aggressive businessman – he was good at getting financing and very actively protected his patents.

          2. skippy

            @Bert & LRB… à la Coca du Pérou!

            Vin Mariani (French: Mariani’s wine) was a tonic and patent medicine created circa 1863 by Angelo Mariani, a French chemist who became intrigued with coca and its economic potential after reading Paolo Mantegazza’s paper on coca’s effects. In 1863,[1][2] Mariani started marketing a wine called Vin Tonique Mariani (à la Coca du Pérou)[1] which was made from Bordeaux wine treated with coca leaves.[3]
            The ethanol in the wine acted as a solvent and extracted the cocaine from the coca leaves, altering the drink’s effect. It originally contained 6 mg of cocaine per fluid ounce of wine, but Vin Mariani which was to be exported contained 7.2 mg per ounce in order to compete with the higher cocaine content of similar drinks in the United States. Ads for Vin Mariani claimed that it would restore health, strength, energy, and vitality.

            Vin Mariani was very popular in its day, even among royalty such as Queen Victoria of Great Britain and Ireland. Pope Leo XIII and later Pope Saint Pius X were both Vin Mariani drinkers. Pope Leo awarded a Vatican gold medal to the wine, and also appeared on a poster endorsing it.[3]
            Thomas Edison also endorsed the wine, claiming it helped him stay awake for longer hours.[3] Ulysses S. Grant was also a fan of the wine, which he began drinking while writing his memoirs towards the end of his life.[4]

            http://en.wikipedia.org/wiki/Vin_Mariani

            ——–

            “I didn’t fail ten thousand times. I successfully eliminated, ten thousand times, materials and combinations which wouldn’t work.

            I never perfected an invention that I did not think about in terms of the service it might give others.

            I am more of a sponge than an inventor. I absorb ideas from every source. My principal business is giving commercial value to the brilliant but misdirected ideas of others.

            Time is really the only capital that any human being has, and the one thing that he can’t afford to lose.

            I find out what the world needs. Then I go ahead and try to invent it.

            I have more respect for the fellow with a single idea who gets there than for the fellow with a thousand ideas who does nothing.

            Many of life’s failures are people who did not realize how close they were to success when they gave up.” – T. Edison

            ———–

            The rise and fall and rise of cocaine in the united states –Freud’s Role – David T. Courtwright

            http://www.happinessonline.org/MoralDrift/mechanistic/p5.htm

            Skippy… Edison was a main liner (helped him to *invent*). Same shite, different decade thingo…

  6. Jim

    Most progressive commentary on Naked Capitalism has endorsed the state-centered model of monetary policy articulated by MMT.

    But OWS may be making a strategic blunder by endorsing such a perspective if the hierarchical structures of both Big State and Big Capital are at the foundations of our present crisis.

    It might be worthwhile for OWS to also consider the possibility that there may also exist a type of positive feedback loop between changes in the complexity of hierarchical structures of power as they developed historically in Big Capital, Big State and the Big Professions (from approximately 1860 until1920) which has, in turn, led to changes in our cultural value system leading to a further centralization of power and then still further changes in our value system, now apparently leading to some type of system breakdown.

    For example, has public deference to hierarchical structures of authority accelerated as the more authoritarian bureaucratic structures of Big Capital and Big State have evolved historically.

    OWS should consider that the chances for self-rule might include a real critique of Big State (and its dependency relationships) as well as a real critique of Big Capital and the dependency relationships it has also fostered historically.

    1. Bert

      I’m afraid that’s the beginning of the end if OWS thinks they will convince our National Socialists to turn communist.

      Not to say that OWS won’t be blogging a lot….

      1. Valissa

        Socialists and communists are both into the Big State, because they believe the state will “save” them from Big Business… HAHAHAHAHA!

        1. Bert

          Actually, when I say National Socialist I’m refering to that historical German model which included Big Business on the government’s side.

          I’m slowly getting up to speed on this poly-sci lingo, but as far as I can tell my National Socialist term is roughly analogous to Neo-Liberalism, and probably really close when you realize they have inherited the Neo-con infrastrucure.

          1. Valissa

            I am purposefully rebelling against traditional poly-sci lingo as it as a frame-trap that the intellectual elite are stuck in, IMO and furthers the problem :)

            “Remarkably virtually everyone in developed countries desperately tries to believe that they are immune to indoctrination. They think they think for themselves and readily know the difference between truth and falsity, fantasy and reality, superstition and science, fact and fiction. Technologically sophisticated cultures are conditioned to accept belief systems, behaviors, and values that would have been rejected out of hand by their stone-age predecessors. Primitives would instantly sense the obvious threats to survival and adjustment, or simple nonsense, inherent in many of the treasured beliefs of modern society.” – Wilson Bryan Key

    2. Nathan Tankus

      First of all, The descriptions says that I’m a member of a sub group of Occupy Wall Street, not that I represent Occupy Wall Street. If it said I was a member of the Democratic Party, does this mean my argument represents the Democratic Party position? Obviously not.

      Second of all, your characterization of this article and Neo-Chartalism is profoundly flawed. There has been no article appearing here or any where by Neo-Chartalists that endorsed a “state-centered model of monetary policy”. What you actually read was a description of how a generalized unit of account comes about from my perspective which is closely connected to the Post-Keynesian and Neo-Chartalist perspective. I’m not advocating the generation of such a Unit of Account, only describing it. I bet you don’t tell people who study domestic abuse that they are pro-Domestic abuse. Nor do you hector health care researchers who study private health insurance that they are pro private health insurance. I can’t understand why you can’t treat this any differently.

      People like David Graeber exemplify that you can take the analysis given by Post-Keynesians and use it to augment an Anarchist perspective. Perhaps if you read more closely with more of a critical eye you would have percieved that.

      1. Bert

        “state-centered model of monetary policy”.

        Forgive our confusion.

        When the MMTers (as the neo-chartalists are sometimes called) say that the state should be the one that spends money into the system, and then if they sense “inflation”, at that point they tax excess money back out of the system…what is the correct term, or description for that, so that we may adjust our understanding of English and economics accordingly?

        1. F. Beard

          Think of a battery (“battry” if you’re Eddie Murphy’s talking car):

          The electrons leave the negative terminal, do some work, and return to the positive terminal to repeat the cycle.

          1. Bert

            Ok, so Obama is the Battery of the United States. I get that.

            Then we have fiat electrons (of course we do – no argument there) leaving the Battery’s Right Hand and returning to the Battery’s Left Hand.

            And you are sure that works?

          2. Bert_S

            Ok, so Obama is the Battery of the United States. I get that.

            Then we have fiat electrons (of course we do – no argument there) leaving the Battery’s Right Hand, flowing thru the economy, and then returning to the Battery’s Left Hand, on a more or less “Just In Time” basis.

            And you are sure that works?

            We still need a term to call this for future reference -

          3. F. Beard

            Well, there’s probably the equivalent of inductance and capacitance too and maybe resistance but I’m just speculating.

        2. Nathan Tankus

          Do you read different Neo-Chartalists then I do? Every Neo-Chartalist I’ve read so far makes pains to seperate descriptions of the system as they see it and policy proposals based on those descriptions. When discussing policy, most often I see a statement to this effect: If some authority (what we call government) is going to tax people in monetary terms and generate a generalized unit of account, That same government should be enough demand for labor for everyone who wants paid work to find it. I’ve never read any Neo-Chartalist declare that monetary taxes are awesome and ther is no better way of running society then Capitalism. Further, their proposals tend to be better automatic stabilizers so that the government doesn’t have to make discretionary fiscal policy to keep inflation low and generate full employment.

          Mathew Forstater is one of the professors at UMKC that is sympathetic to more radical critiques of society, even Anarchism. See for example this chapter on the Economic Thought of Anarchism.

          http://cas.umkc.edu/econ/economics/faculty/Forstater/papers/Forstater%202009/Anarchist%20Econ.pd

          1. Bert_S

            Maybe. The NC site is the Choir that they all preach to.

            Personally, I’ve decided to call them Neo-Chameleons.

          2. PG

            ‘government’ and ‘state’ should not be confused.

            Present day states had not beautiful births and growths, yet they provide necessarily centralized governmental functions.

            Such functions, as money issuance and management, are centralized by nature, not by being performed by ‘states’.

            Monetized economies, with or without ‘states’, imply centralized issued and managed currencies.

  7. Beppo

    It’s really great to see everyone coming around to the idea that the EU was a big rent extraction look gathering scam. Especially since it was only ever discussed in the media in saintly terms. Thank you for the article

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