Marx’s Capital as critique of and contribution to political economy

This is the director’s cut of a piece I wrote for a local discussion newsletter.

The subtitle of Marx’s Capital is “a critique of political economy” and not “a contribution to political economy”. But this can be interpreted in different ways. One is to see ‘Marxian economics’ as a total refutation of ‘bourgeois economics’, with any science in the latter hopelessly compromised by its basis in political apologetics for capital. The Marxian economist has special knowledge of how the capitalist economic system really works. If the ‘transformation problem’ is interpreted correctly, the ‘labour theory of value’ explains relative prices while neoclassical microeconomics is nonsense. Crises always have their root ultimately in the tendency of the rate of profit to fall, financial phenomena are mere surface appearances, and so on. There is room for disagreement between Marxists on the details – endless controversy in fact. But Marxian economics is scientific, and bourgeois economists are not only politically reactionary but deluded as well.

A second view sets itself against the first, arguing that Marx brought into question the whole enterprise of an objective economics, ‘Marxian’ or otherwise. In Reading Capital Politically Harry Cleaver criticises readings of Capital as political economy in no uncertain terms: “No matter how critical they are of various features of capitalism, they are basically no more than passive interpretations of the social situation…” [Cleaver, 2000: 30]

In other words, the political economists have only interpreted the world; the point is to change it. Worse, the political economists have interpreted the world in such a way as to present it as a self-reproducing mechanism – a contradictory one, prone to crisis, with an inexorable tendency to run itself down eventually, but in which the working class is a moving part whose whose consciousness doesn’t matter much. They forget Marx’s fundamental criticism of classical political economy – that economic structures are social relations.

I think Cleaver is right that the relevance of Marx to socialists today is due to his strategic vision, and not because he was some kind of prophet of capitalism’s collapse under its internal contradictions. You can find catastrophist predictions in Marx, but not so much in his mature political economy. In Capital, “Crises are never more than momentary, violent solutions for the existing contradictions, violent eruptions that re-establish the disturbed balance for the time being.” [Vol. III, Ch. 15] In Theories of Surplus Value: “Crisis is nothing but the forcible assertion of unity of phases of the production process which have become independent of each other.” [Vol. II] Yet crisis and its cousin ‘stagnation’ have become the main story for too many Marxian economists. It’s unfortunate because it draws the attention away from the more important question of how capitalism has managed to reproduce and expand itself so dynamically for so many decades.

There is a risk, though, that a criticism of the political economic tendency to objectify social relations slides into the opposite tendency, to subjectivise them, especially by falsely attributing a subjectivity to a whole class – a tendency common in philosophical ‘Western Marxism’ and in Cleaver’s autonomism, in which it sometimes seems that revolutionary politics is a matter of conjuring up a new subjectivity for the working class. Marx’s point about certain capitalist social relations appearing as things is not that it is necessarily mistaken to see them as things. Money, capital, commodities really are things, as well as social relations: they are social relations manifest as things. As things, we can’t get rid of them just by deciding to stop believing in them. In understanding capitalist reality, Marx makes positive use of classical political economy to make this point against utopian socialism and Hegelian idealism – for example in The German Ideology when he and Engels approvingly cite Adam Smith’s ‘invisible hand’ as a way of understanding how it is that

the social power… which arises through the co-operation of different individuals as it is determined by the division of labour, appears to these individuals… not as their own united power, but as an alien force existing outside them, of the origin and goal of which they are ignorant, which they thus cannot control, which on the contrary passes through a peculiar series of phases and stages independent of the will and the action of man, nay even being the prime governor of these. [Marx and Engels, 1845: Ch. 1]

It doesn’t take specialist economic knowledge to get the most important ideas from Capital – the emphasis on the law of value as co-ordinator of labour, the vision of capital as process and class relation, the focus on conflict and contradiction rather than harmony. These are the elements on which Marx criticised classical political economy as a whole, and they are as valid a criticism of modern economics. However, Capital is not only a critique of political economy as Marx found it, but also a positive contribution in which he treats economic structures and processes as real, complex things with workings to be unravelled. In investigating the complex workings of capital, he not only criticises political economy, but enters its debates, criticises some writers, takes sides with others. His mode of presentation, moving from the abstract to the concrete, makes it appear as if he is building the whole incredible structure from first principles. But there is much of classical economics in Marx – not only because he adopts freely from it when he agrees, but because his understanding cannot not help but be partly shaped by the discourses he reads and engages with, in the questions they ask and the phenomena they take as significant. He accepts that ‘bourgeois economics’ has its scientific element, that it refers to real social structures and processes, and that explanatory adequacy of economic theories depends on scientific and not political criteria.

Such an understanding of how the economic aspect of capitalist society works remains a vital part of strategic Marxist politics – even moreso today, because modern economics has since Keynes developed into a strategic guide for the state, rather than simply apologetics, and the state’s economic policy is more crucial to the reproduction of the system than it ever was in Marx’s day. Now more than ever, politics is framed by economics.

Published in: on 28 June, 2009 at 2:33 pm  Comments (11)  

1.4 Inflation as a policy problem

So a longer delay than I hoped in putting up the rest of the first chapter. Partly that’s because we’ve had visitors, but mainly because I’ve found it tough to whittle down the huge mess of a draft. This was a tough section to write because it summarises later chapters, and it’s hard to find a balance between incomprehensible density and taking up too much space with stuff that will be repeated later. I have ended up leaning towards the dense because all this stuff will be expanded on in the substantive chapters. The density shows especially in the last couple of paragraphs here; it may be better to just cut them and leave to the later chapters. Two more sections still to come, which is going to make this a long chapter – and it may end up being split in two.

A draft thesis section. This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.

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December 19, 1969: Friedman's curve shifts upward

December 19, 1969: Friedman's curve shifts upward

Understanding inflation as a policy problem requires an understanding both of its causes – at least as perceived by policymakers – and of the relationships of these causes with policy instruments and other policy goals. If there were a clear chain of influence between a policy instrument and the target of a stable price level, and no competing demands on the instrument, inflation would present no particular problem. The message of the monetarists is that such is the case: the only barrier to price stability is a failure to understand inflation’s nature as “always and everywhere” a question of the money supply (a clear chain of policy influence) and/or that policy can have no long-run effect on unemployment (no competing demands on the instrument). From such a perspective, inflation is a problem only because policymakers misunderstand it – or because they pander to a public that misunderstands it.

In the ‘new macroeconomic consensus’ of the 1990s and 2000s, the monetarist preoccupation with the money supply has been replaced by a focus on the ‘correct’ interest rate. [Arestis, 2007; Arestis and Sawyer, 2008] But the conception of the history of counter-inflation policy – as the eventual triumph of correctness over error – remains. Inflation is explained as a result of what the authorities failed to do. This is the centrepiece of a new crop of neoclassical research into the stagflationary episode of the 1970s. Despite significant debate on the details among this recent literature, Cecchetti et al [2007: 8] note that “[a]ll of these accounts view the Great Inflation as a result of monetary policy error and the Inflation Stabilisation as a restoration of more effective monetary policy.” For example, Nelson [2004] puts forward the ‘monetary policy neglect hypothesis’, while from a different perspective Cecchetti et al [2007: 42] themselves explain ‘the Great Inflation’ in terms of policy deviations from the Taylor rule:

Summing up the international comparisons, three of the four countries exhibit a qualitatively similar pattern in which deviations from a simple policy rule in the 1970s and early 1980s are consistent with the timing of the increases and declines in trend inflation (and its volatility). The peak in the inflation trend and the undershooting of interest rates relative to those implied by a Taylor rule generally occurred around the mid-1970s. There also is some evidence that increases in deviations from policy rules (in an accommodative direction) accompanied increases in trend inflation in the early 1970s.

Yet the Taylor rule – that a central bank should set interest rates according to a formula linking them to the output gap and the distance between actual and target inflation – was not formulated until 1993, as The Economist [2007] dryly notes in reporting on this research. To ‘explain’ the 1970s inflation in this way shows a great deal of confidence that economists have finally worked out how inflation works for once and for all. As we will see, the notion that “the mystery element in monetary policy” [Coombs, 1971 (1954)] has finally been cleared up has been a recurring theme in economic thought. Time and again, paradigms have been knocked over and pre-Enlightenment history re-written as a tragicomedy of grievous, incomprehensible error.

My own story is very different. First, I recognise that inflation has no single cause; rather, it develops from the conjuncture of a number of conditions. It may be argued that this is implicit in the ‘new consensus’ literature with its acknowledgement that ‘potential output’ (i.e., the level of real output associated with a stable rate of inflation) and the corresponding rate of unemployment are not fixed, but depend on factors such as labour productivity, the institutional structure of the labour market, and so on. However, the main point of these models is precisely to fix all these diverse factors in place, at least ‘in the short run’, and in focusing the attention on a few variables, the structure itself is reified and slips into the theoretical unconscious. The apparatus of the output gap, the ‘non-accelerating inflation rate of unemployment’ (NAIRU), and the Taylor rule form an assemblage of a number of factors which could be pulled apart and reassembled in different ways. The particular form it takes represents a decision about which factors to take as given – permanently or in the short run – and which to treat as variables.

Second, I argue that the changing way in which the theoretical structure was assembled not only informed policy but was strongly influenced by the development of policy itself. The material shape of the state policy apparatus within the economic system, and policy strategy in using it, were among the complex of factors determining inflation. For theory, what was considered a constant, what was an exogenous variable, and what was a policy variable depended partly on policy capacity. Or, rather, it depended, on what was perceived as policy capacity, which was subject to dispute. Furthermore, given that price stability was one of a number of policy goals, there was the possibility that policy capacity that could potentially be brought to bear on inflation would not be fully available, given inflation’s interrelationship with other goals. In particular, I argue that inflation theory developed alongside counter-inflation policy in the tension between price stability, full employment and ‘external balance’. Finally, the field on which these tensions played out reflected not only the developing capacities and strategies of policy, but also those of other social actors. All these factors influenced the structure of inflation theory, which in turn informed policy strategy.

So, while my narrative could be read as a long pre-history of the ‘new macroeconomic consensus’ which finally cohered in the 1990s, it is not teleological, while that consensus’s own origin myth is: the consensus was right all along, even before it was formulated, and economists and policymakers eventually realised it. Instead, I present a narrative of a development that could have been different. Policy change comes from contradictions, both internal to policy and external clashes of policy with the defence (and offence) lines of other group-actors. Consequently, also, there is no suggestion in my story that policy history has ended with the consensus: my excavation of the past points to contradictions which still exist below the surface today. (See Chapter 9.)

The non-expectations-augmented Phillips curve relating (inversely) unemployment and inflation is the beginning of the new consensus story, which presents it as the pre-monetarist Keynesian theory of inflation. In my own narrative, it is only the half-way point, already representing a conglomeration of factors which had previously been theoretically separate. It rose to prominence in the 1960s because it appeared to unify two strands of Keynesian inflation theory: ‘demand-pull’ theory focusing on inflation’s relationship with effective demand, and ‘cost-push’ theory centred on its relationship with money-wage growth. These two strands of theory matched separate avenues of policy influence: the first implicated aggregate demand management through fiscal and monetary policy, while the second implicated wages policy. The rise of the Phillips curve internationally was related to the failure of policy to secure direct influence over the money-wage. Targeting it indirectly with aggregate demand put the goal of price stability in conflict with that of full employment, though policy often still aimed to ‘shift the curve’ rather than accept a fixed trade-off. In Australia, where the arbitration system seemed to put the money-wage closer to policy control, the Phillips curve took longer to find policy favour, though a trade-off between unemployment and inflation was recognised as a possibility early on. (See Chapter 4.)

It is far from the case that policy was unaware of the potential for inflationary momentum before the introduction of expectations into Phillips curve models by Phelps [1967] and Friedman [1968]. On the contrary, the reaction of money-wages to price inflation was at the centre of Australian policy attention. Even in the Phillips curve literature, there is recognition that experience of inflation could shift the curve – right from Samuelson and Solow’s [1960] original Phillips curve article. The changing way in which inflationary momentum was understood is in itself an interesting story, but as I argue in Chapter 7, is not an explanation for the policy turn of the 1970s. I show that expectations-augmenting the Phillips curve does not explain the 1970s jump in the ‘non-accelerating inflation rate of unemployment’ apparent in such models. The explanation for this jump must be sought elsewhere. I present the policy upheaval of the 1970s and 1980s not in terms of policymakers seeing the light, but as a result of the need to reconcile expectations of a growth rate of real living standards and employment with an economic system that could no longer provide them.


Philip Arestis [2007]:”What is the new consensus in macroeconomics?”, in Philip Arestis (ed.), Is There a New Consensus in Macroeconomics?, Palgrave Macmillan, London.

Philip Arestis and Malcolm Sawyer [2008]: “A critical reconsideration of the foundations of monetary policy in the new consensus macroeconomics framework”, Cambridge Journal of Economics, 32:5, pp. 761-79.

Stephen Cecchetti, Peter Hooper, Bruce C. Kasman, Kermit L. Schoenholtz and Mark W. Watson [2007]: “Understanding the evolving inflation process”, paper presented to U.S. Monetary Policy Forum, available at, accessed 11 June, 2008.

H. C. Coombs [1971 (1954)]: “The development of monetary policy in Australia”, in Neil Runcie, Australian Monetary and Fiscal Policy: selected readings, v. 1, Hodder and Stoughton, Sydney, pp. 22-43, originally the English, Scottish and Australian Bank Limited Research Lecture, 1954.

The Economist [2007]: “Anatomy of a hump”, The Economist, 10 March.

Milton Friedman [1968]: “The role of monetary policy”, American Economic Review, 58:1, pp. 1-17.

Edward Nelson [2004]: “The Great Inflation of the Seventies: what really happened?”, Working Paper 2004-001, Federal Reserve Bank of St. Louis.

Edmund S. Phelps [1967]: “Phillips curves, expectations of inflation and optimal unemployment over time”, Economica, 34: 135, pp. 254-81.

Paul A. Samuelson and Robert M. Solow [1960]: “Analytical aspects of anti-inflation policy”, American Economic Review, 50:2, pp. 177-94.

1.3 (II) Thinking like a state about economic contradictions: Tinbergen

A draft thesis section. This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.

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Much of the policy theory inspired by Tinbergen’s work took on board only the idea of the formal models. The medium really was the message here, because the lesson of representing the policy system as a system of equations is that if conflicts are to be avoided, there must be one instrument per target, just as a solvable system of equations requires one equation per unknown. The best-known result here, which I discuss in Chapter 3, is the idea pervading 1950s theories of the balance of payments: that the apparent contradiction between external balance and full employment could be resolved with an extra policy instrument, the exchange rate. But Tinbergen’s own views are more subtle, because he is also preoccupied with both the technical and the social limits to the use of policy instruments. The bare system of equations implies that so long as there are equal numbers of instruments and targets, it does not much matter which instrument is assigned to which target. But Tinbergen, a practical policymaker as well as a theorist, recognises the material reality of the instruments: that using a policy instrument is both rarely as simple as choosing a value for a variable, but works within limits, and often has ‘side-effects’ on groups within society which they resist.

Tinbergen thinks of such things in terms of ‘boundary conditions’, which could in principle be imposed as limits to variable values within the system of equations1, but for the practising policymaker are of course much more nebulous and ill-defined. A classic instance of a technical boundary condition in the neoclassical-Keynesian literature is the ‘liquidity trap’ in which expansionary monetary policy fails to influence the interest rate beyond a certain point. In practice policy is continually grappling with many kinds of slippages in the effectiveness of its instruments. For example, investment was long seen in the postwar period to be interest-inelastic, so that interest rate adjustment would affect aggregate demand only at levels which were, in practice, inconceivable. On the fiscal side, there were real practical limits to the rate at which government expenditure could increase or decrease coming from the simple fact that it was not merely a component of ‘aggregate demand’ but also spent on real things – infrastructure, etc. – which could not be turned on and off like a tap.2

Then there are the boundary conditions arising from social groups’ ‘defence lines’. Tinbergen [1966: 26] mentions, for example, limits to taxation beyond which the costs of evasion outweigh the desired effects, and wage reductions provoking worker rebellion. Here class conflict intrudes upon the system of equations, and once it does, there is no guarantee of a ‘solution’, especially when the defence lines of different groups are simply incompatible, or irreconcilable by policy in its current form. Tinbergen gives a telling example from his own experience as a Dutch policymaker:

In the situation of that year [1950] and as far as the model used was a true representation of the Dutch economy, the calculations showed that the target set would require a wage decrease of 5%, a decrease in profit margins of some 13%, an increase in labour productivity of 4% and an increase in indirect taxes equal to 2% of prices. Both the wage decrease and the profit reduction seemed to be beyond the boundary conditions. A long list of alternative targets was then studied. Accepting a boundary condition of no reduction in the nominal wage meant the necessity of still heavier reductions in profit margins and a heavier increase in indirect taxes; accepting a boundary condition of no profit margin reduction implied impossible requirements as to labour: either a reduction in real wages of 13% or a reduction of employment by the same percentage, both accompanied by increases in labour productivity. [Tinbergen, 1966: 60]

Social contradictions are then manifest as policy contradictions, and something has to give: policymakers are driven into ‘qualitative policy’, i.e., attempts to change the structure of the economy, which in such cases must involve an attack on one or more groups’ capacity to maintain their defence lines, and/or moral suasion convincing them to pull back their demands ‘for the sake of the national economy’. To complete the picture, we need to recognise that the state does not have a monopoly on initiative in the changing structure of the economy. Tinbergen [ibid: 149] gestures towards this in his distinction between (policy) ‘induced’ and ‘spontaneous’ changes in organisation, but spontaneous developments – that is, change emerging from the socio-economic system independently of policy – get no further mention. In reality, many ‘policy problems’ emerge not from any deliberate action on the part of authorities, but from the dynamics of the wider system and changes in subjective consciousness and strategy within classes, groups and institutions.

As long as we remember that Tinbergen’s instruments, parameters and targets are social relations, and ‘boundary conditions’ often tied up with the expectations and consciousness of classes and class fractions, the framework is helpful in specifying the Jessop-Poulantzas concept of ‘strategic selectivity’ for the particular realm of economic policy. It is not a deterministic approach because it acknowledges the creative agency of policymakers and other actor-groups. The projects of the latter of course impinge upon economic policy from outside policymaking in two ways: (1) through directly political attempts to influence or capture legislative and executive capacities of the state; and (2) through power bases within the economic sphere, such as those occupied by capital by virtue of their control of investment, or labour through industrial organisation. Nevertheless, the approach recognises that a serious limit is placed on economic policy by the imperative that it all hang together – that the capitalist economic system is not one which can be bent into any shape, and in fact in many ways is not very flexible at all. This imperative exerts a strategic selectivity on political projects, and even motivates policy attempts to reshape aspects of the economic system to shift the power bases of actor-groups within it, or ideological attempts to manage expectations, in order to work out contradictions.

This leads to a different analysis of the relationship between class and politics than one which seeks to explain political ebbs and flows as a consequence of the ‘balance of class forces’. Rather, the ‘balance’ can be seen as – at least in part – a result of the selective pressure of this need for the socio-economic system to function, which requires that the state do particular things and not others. Causation runs both ways. Functional failures do not force political adaptation. But when they manifest as crises, they change the political dynamic so that political actors are expected to resolve them one way or another, even though their ability to do so may be uncertain. Policy action which fails to end a crisis is likely to be ‘deselected’, along with its ideological champions in the political sphere.3

Bob Jessop

Bob Jessop

For the state involves a paradox. On the one hand, it is just one institutional ensemble among others within a social formation; on the other, it is peculiarly charged with overall responsibility for maintaining the cohesion of the social formation of which it is merely a part. Its paradoxical position as both part and whole of society means that it is continually called upon by diverse social forces to resolve society’s problems and is equally continually doomed to generate ‘state failure’ since so many of society’s problems lie well beyond its control and may even be aggravated by attempted intervention. [Jessop, 2007: 7]

Thus my thesis attempts to explain the shifts in the policy importance of inflation in my period – which, I will argue, goes some way towards explaining much wider policy shifts – in terms of its ‘strategic selection’ by the responsibility of economic policy to maintain cohesion of the socio-economic system as a whole. This is in contrast to explanations centred around ideological ‘paradigm shifts’ or those which take ‘the balance of class forces’ to be entirely causally prior to political-economic change.

1“With sufficiently complicated non-linear equations all phenomena of saturation, bottlenecks, etc., will be accounted for and no boundary conditions will have to be added. Boundary conditions are needed only as corrections on too simple linear equations.” [Tinbergen, 1966: 54]

2“This may be so for physical reasons: if government building activity were an instrument, this activity cannot surpass the production capacity present in the relevant industry.” [Tinbergen, 1966: 59]

3Radical political projects aiming to fundamentally alter the economic system face an extremely formidable challenge on this front, in that any single reform incompatible with overall cohesion is likely to be ‘rejected’ by the system as a whole; everything needs to change before anything in particular can.


Bob Jessop [2008]: State Power: a strategic-relational approach, Polity, Cambridge.

Jan Tinbergen [1966]: Economic Policy: principles and design, North-Holland, Amsterdam.

1.3 Thinking like a state about economic contradictions: Tinbergen

A draft thesis section. This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.

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Jan Tinbergen connects to the technocracy, looking rather Dutch by the way.

Jan Tinbergen: "Get me the technocracy! Class conflict has arrived!"

The fact that the economic ‘problems’ appearing for policy resolution are plural raises the prospect that the demands made on the state pull in different directions. Even if the various branches of economic policy are pulled together as if to form a unified strategic actor, there is no guarantee of an optimal strategy capable of resolving the contradictions underlying the symptomatic problems. Rather, the contradictions reappear in the political realm. The original Keynesian objective of ‘full employment’ was in reality only one among several objectives governments attempted to steer the economic system towards, including rapid growth, ‘external balance’, and, of course, price stability. A number of objectives, then, but only one economic system, and within the system the objectives were not independent of one another. Some were very much in tension with others.

In this thesis I am concerned with the tension between price stability and other goals: first why it appeared, given the structures of the economy and state, and second, why it – originally a subsidiary goal – increasingly came to dominate policy strategy.

Australian policymakers became increasingly aware over the course of the post-war period of the tensions between their objectives, as I discuss in Chapters 3 and 4. Such a sense of contradiction and trade-off pervades the 1965 report of the Committee of Economic Enquiry, commissioned by Prime Minister Robert Menzies precisely to investigate the tangled mess policy seemed to be in following the credit crunch and recession of the early 1960s:

It must be recognised that the attainment or near attainment of any one of the seven objectives of economic policy may make the attainment of others more difficult… Thus, the nearer an economy is to full employment, the more difficult it is to achieve stability of costs and prices. On the other hand, stability of costs and prices makes for external viability, although action to achieve external viability, for example, by exchange devaluation, may operate against stable prices. In short, all objectives cannot be ‘maximised’ simultaneously… [Vernon et al, 1965: 46]

Similar conclusions had been reached in other countries, and the 1950s had seen the emergence of a new genre of economic theory examining precisely this issue. Perhaps its most clear and influential expression came from Dutch policymaker and academic economist Jan Tinbergen [1955, 1966]. In Tinbergen’s work we get something approaching a picture of how the economic policy ‘agent’ might think if it really did have a brain. The crisp formal models are still far from the messy uncertainty of diagnosis and action in the real-world economic bureaucracy. Nevertheless, his models capture with some clarity the structure of the economic policy problematic, opening the way for analysis of its contradictions and structural development – even if this aspect was not often followed up in the genre he established, with its ‘policy mix’ and ‘policy reaction functions’.

Tinbergen’s [1966] project is essentially about working out the interconnections between multiple economic objectives and assessing how, in consequence, policy instruments must be co-ordinated. This reflects the pseudo-agent-making process de Brunhoff [1978: 83] refers to:

It is not possible to define an ‘economic policy’ simply by enumerating and adding together these various elements [– isolated institutions and goals]. A certain necessary homogeneity, affected by the reduction of these elements to monetary flows and interdependent sectors, is also required. But this alone is not enough. One cannot begin with a coherent project resulting from a global objective, towards which the various complementary policy measures would be combined. Such a model presupposes the existence of the state as subject, instead of showing how, in certain circumstances, the state ‘can be called upon to function as a subject’ of economic policy, even is the policy in question does not in any sense have a coherently defined totality of objectives or the mechanisms able to attain them.

Compare Tinbergen’s complaint of – and remedy for – a “tendency to an incoherent treatment” in economic policymaking:

Measures regarding various instruments are taken separately, often at different moments and without much co-ordination. This tendency is to some extent based on the belief that there is a one-to-one correspondence between targets and instruments, that is, that each instrument has to serve one special target. Taxes and government expenditure are thought to be relevant to financial equilibrium, wage rates to employment, exchange rates to the balance of payments and so on. The interdependence is neglected or underestimated… It would seem that a better approach has now become possible. It is no longer necessary to neglect the interrelations, and a simultaneous consideration of all targets and instruments, as well as their quantitative relations, should be considered. [Tinbergen, 1966: 49]

His procedure is to build a formal model of the economic system which incorporates all the goals authorities pursue. He starts from a simple model in which only employment is targeted, and gradually adds in extra goals to show the additional complexity at each step. In each model, the relationships are corralled into a list of

  1. target variables;
  2. instrument variables directly controlled by policymakers;
  3. exogenous data neither controlled by the policymaker nor targets in themselves; and
  4. a system of equations linking the variables together.

Targets are either absolute values (e.g., absolute price stability, or a given rate of inflation, or a rate of unemployment), or ‘flexible’ values to be maximised or minimised given other conditions. Targets might be ranked, as they are in practice, so that one overriding goal has an absolute value while another is pushed as far as possible given that limitation.

Instrument variables are assumed to be set by authorities. Depending on which variable is identified, this might stretch reality quite far: for example, where Tinbergen treats aggregate expenditure as an instrument, he grants far more control to fiscal and monetary policy than they actually have. It would be more realistic to identify only those components or determinants of aggregate expenditure which are genuinely under state control as instruments: the fiscal stance and the base interest rate, for example.1 Other influences on aggregate demand could then appear as exogenous data. Where to draw the line between (2) and (3) depends on the real conditions in which policy works.

In fact much of the history of policy development involves not the working of a fixed system of instruments, but of attempts by policymakers to extend their effective reach, and counter-developments somewhere or other in the socio-economic sphere that frustrate them. All elements of ‘exogenous data’ are not equal: some are truly beyond potential state influence, while others are just beyond reach, more predictable or more susceptible to being coaxed in one way or another, holding out the prospect of pulling them fully into the policy orbit. Rather than a tight distinction between ‘instruments’ and ‘exogenous data’ then, it is better to think of a chain of causal influence between the instrument directly set by authorities and the ultimate target, with some elements closer to direct control than others. Tinbergen does not put it exactly in these terms, but he does make a distinction between ‘quantitative policy’, involving the working of an established system of policy transmission, and ‘qualitative policy’, which aims to reshape the system itself.2

Section to be continued.

1Even these variables grant too much control to the authorities – in reality fiscal stance is somewhat unpredictable, given its two-way causal interaction with private flows of expenditure, and even the stability of the central bank’s control over the base rate can come into question, while its effectiveness over other rates and quantities is uncertain and shifting.

2In fact he distinguishes between ‘qualitative policy’ “in which the structure of the economy is changed” and ‘reforms’ in which changes affect “spiritual aspects or relations between individuals”, but it seems to me that this is a difference of magnitude rather than kind. Examples he gives of the former include rationing of goods or foreign exchange, welfare measures, changes to tariff structures and anti-monopoly legislation, and his examples of the latter include the introduction of a full-scale social security system, nationalisation and industrial democracy. [Tinbergen, 1966: 149]


Suzanne de Brunhoff [1978]: The State, Capital, and Economic Policy, translated by M. Sonenscher, Pluto Press, London.

Jan Tinbergen [1955]: On the Theory of Economic Policy, 2 ed., North-Holland, Amsterdam.

Jan Tinbergen [1966]: Economic Policy: principles and design, North-Holland, Amsterdam.

J. Vernon, J. G. Crawford, P. H. Karmel, D. G. Molesworth and K. B. Myer [1965]: Report of the Committee of Economic Enquiry, Commonwealth of Australia, Canberra.

1.2 (II) Economic policy as an emergent strategic agent

A draft thesis section. This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.

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The macroeconomic reconceptualisation centred on two key variables: aggregate demand and the money-wage. The first is the most widely-acknowledged element of the ‘Keynesian revolution’ – the insight that unemployment of labour and other resources was not necessarily a matter of relative prices being either in disequilibrium – the problem therefore being temporary – or distorted by market power, especially that of labour organisation. Involuntary unemployment could be a result of insufficient aggregate demand, and wage adjustment might be counter-productive. A Say’s Law world in which monetary flows were a minor secondary phenomenon faded before a vision of monetary leakages and injections, a system which could be mapped with the host of new statistics collected for the purpose. One such map was Copeland’s [1952] Study of Money-Flows in the USA:

In his model of the entire circuit, transactions are defined as transfers of rights agreed between two subjects representing units of account receiving and spending money. Each sector is located ‘between’ other sectors, so that none has an initial or final role. After this presentation of a homogeneous circuit, with no beginning or end, Copeland attempts to define the strategic sectors: those which have some power over their own monetary flows (like the government with a war time budget) or some power over the monetary flows of others (like the banks). The characterisation of public expenditure in terms of flows inserted into the circuit is an essential precondition for the presentation of state regulation as economic policy. [de Brunhoff, 1978: 76]

The reconceptualisation made new practices possible with existing institutions: the government budget, formerly considered simply in bookkeeping terms as the accounts for government operations, now became a lever. Likewise, central banking shifted towards macroeconomic responsibility from being a relatively passive clearing house and overseer of the banking system, with policy mainly a by-product of its own reserve management. Because their target was the same – aggregate demand – both institutions were unified, however imperfectly, in a collective enterprise in which they became two arms of a single ‘economic policy’.

The new theory prescribed a new role for these state institutions. But it took some time, and organisational restructuring, before the treasuries and central banks fitted the part. The ‘Keynesian revolution’ was an ideological child of the Depression, and the 1930s saw some experiments with stimulatory public works spending – contemporaneous with, but not inspired by, the General Theory. [Bleaney, 1985: 49-80] But the full development of ‘economic policy’ in de Brunhoff’s sense was really a postwar phenomenon. It took the mobilisation of war and reconstruction to overcome institutional inertia and reorganise the institutions, and it took a decade or two for the new sensibility in economic theory and policy to cohere into a fully-developed orthodoxy. Even in the 1950s, as we will see, the formation of an institutional ensemble capable of filling its prescribed role was still a project rather than a finished reality.

The transformation of the Australian Treasury is illustrated by Crisp [1961]. From a duty, in Gladstone’s words, “to save what are meant by candle-ends and cheese-parings in the cause of the country”, by 1954, Deputy-Secretary Randall was reporting that it was “mixed up in all manner of activities not dreamt of half a century ago”1. Crisp summarises:

What we may broadly call the Keynesian economics and public finance became available only in the late 1930s as a theoretical framework and justification for a whole set of new methods and policies. They emerged just in time to be matched with wartime exigencies and opportunities and, enriched by experience then gained, to form the foundations of thinking about post-war policy… The Budget’s ‘housekeeping’ purpose still retained its intrinsic importance sufficiently to determine, or at least powerfully to influence, many policy issues. But this role was not transcended by the new conscious and positive – and far from simple – instrumental use to be made of the Budget in the wider context of national economic policy. Its magnitude and detail were now designed to influence investment decisions, the general levels and pattern of investment and the demand for goods and services. Its extremely complex effects on incentives, cost structures, inventories, labour supply, the balance in the supply of basic necessities and ‘inessentials’ would be carefully watched, for they were shot through with political as well as with economic significance. [Crisp, 1961: 321, 323-24]

The map was not the territory, and the theoretical map was continually redrawn as policy practice met unforeseen resistance, unintended consequences, and new problems in the economic sphere. Note, for example, the list Crisp gives above of the “extremely complex” effects of fiscal policy on incentives, cost structures, etc. Things were not as simple as a model in which policymakers selected the appropriate level of aggregate demand. Most importantly, the policy apparatus forged intellectually in the battle against Depression was called upon for quite a different kind of war.

There was irony in the fact that their first applications occurred under conditions of full (even over-full) employment and vast unsatisfied demand, rather than of unemployment and underconsumption such as challenged the powers of constructive analysis of Keynes and his colleagues in the inter-war years. [Crisp, 1961: 321]

Keynes’s General Theory was motivated by, and organised around, a single problem: “the failure of the economy to generate enough aggregate income to keep its people employed… proximately due to firms’ unwillingness to operate at a sufficiently high level of production; that unwillingness in turn… due to their estimate, fulfilled in the case of unemployment equilibrium, of inadequate demand for their output.” [Chick, 1983: 47] However, addressing that problem involved a much wider vision of the economic system, a theoretical system which could deal with many other phenomena, and versions of this vision were developed by many others besides Keynes in many different directions. Likewise, the great problem of Depression unemployment motivated the reorganisation of the state’s economic apparatus into a coherent mechanism for acting strategically within the economic system – though of course, still exhibiting Poulantzas’s ‘fissiparous unity’. The third part of the story, and the part this thesis as a whole explores (focusing on the Australian case), is the subsequent development of this institutional ensemble and the strategy which motivated it against an entirely different phenomenon – inflation.

1Gladstone’s remark comes from a speech in Edinburgh, 1874, quoted by Crisp [1962: 316], and Randall, quoted [ibid: 319].


Michael Bleaney [1985]: The Rise and Fall of Keynesian Economics: an investigation of its contribution to capitalist development, Macmillan, Houndmills.

Suzanne de Brunhoff [1978]: The State, Capital, and Economic Policy, translated by M. Sonenscher, Pluto Press, London.

Victoria Chick [1983]: Macroeconomics After Keynes: a reconsideration of the General Theory, Phillip Allan, Oxford.

M. Copeland [1952]: A Study of Money Flows in the United States, National Bureau of Economic Research, New York.

L. F. Crisp [1961]: “The Commonwealth Treasury’s changed role and its organisational consequences”, Australian Journal of Public Administration, 20:4, pp. 315-30.

A super talk by Mike Rafferty

One of the worst features of the federal Budget last month was the raising of the retirement age, part of what I was referring to when I mentioned the impending ‘good old-fashioned distributional struggle’. Tomorrow night Mike Rafferty’s speaking at a forum in Surry Hills. He wrote this great op-ed on the subject in the Sydney Morning Herald. If you’re interested, get in touch for the address – it’s an intimate forum in an office block near Central Station. (mikejbeggs at gmail)

Superannuation: equity, sustainability and reform

The Great Recession continues to wreak havoc around the world. Continuing sharp falls in industrial production, trade and employment offer little evidence of the ‘green shoots’ of recovery. With the huge falls on global share markets, notwithstanding recent gains, retirement incomes linked to financial market performance have been hit hard. In this MPS Forum, we examine the equity and sustainability of the current superannuation system and explore avenues for reform.

Questions to be considered:

· How does current superannuation system disproportionately benefit the well-off?

· What are the implications of changes made in 2009 budget?

· What are the myths regarding the link between an ageing population and fiscal crisis?

· Is the current superannuation system sustainable?

· What reforms might improve the system? Could ‘green bonds’ etc play a role?

Date: Wednesday, June 3

Time: 6.30pm

Mike Rafferty

Mike is a Senior Researcher in the Workplace Research Centre at the University of Sydney.

His publications include: Rafferty M and Bryan D 2006 ‘Capitalism With Derivatives: A Political Economy of Financial Derivatives, Capital and Class’, Palgrave Macmillan; and Martin R, Rafferty M and Bryan D 2008 ‘Financialization Risk and Labour’, Competition and Change, vol.12:2, pp. 121-133.

Published in: on 2 June, 2009 at 2:16 pm  Leave a Comment  

Return of the Mitchell

Bill Mitchell responds. Alright, so I’m aware these kinds of internet disagreements inevitably reach a point of diminishing returns and we’re both really busy – so I’ll keep this short and positive. A commenter at Mitchell’s site chastises us for being a bit rude to one another and that’s probably right. I apologise in particular for calling Mitchell ‘eccentric’ – though he should note that it’s not entirely meant in a bad way, since eccentricity is historically a prerequisite for making a real contribution to economics. And no doubt my own views are eccentric too. I think it’s great that organisations like CofFEE exist and focus on taking the issues out of academia and policy circles and out to the public.

So I’ll start with where we agree. I have agreed all along that the government is not ‘operationally constrained’ by its budget, because it can ultimately issue currency. There are issues here with the independence of the central bank, which Mitchell is well aware of, but I agree that it is politically possible to end that independence.

Neither is my point that the government should not run deficits, especially in a recession. I think much of the media discourse on budget deficits at the moment is ludicrous, as I wrote a couple of weeks ago. Many perfectly orthodox, neoclassical-Keynesian economists would agree here also. Back in February I wrote another piece about how for many years technocratic economists who understood the budget as a cyclical stabiliser exploited conservative pseudo-economic predudices about balanced budgets to win political support for surpluses, but now find themselves beseiged by the conservatives when deficits are called for.

(For this reason Mitchell’s chart of the Australian-US dollar exchange rate vs. the government deficit misses my point, because throughout the period, deficits were funded conventionally through bond-issuing and not simply through creating new currency.)

The limits to government expenditure are macroeconomic. They concern the value of the currency, both in terms of goods and services (the price level) and in terms of other currencies (the exchange rate). Governments have the power to print as much money as they like, and print whatever numbers they like on the bills, but they have no control over the quantities of goods, services and financial assets they exchange for. (Mitchell objects to the money-printing metaphor, and I’m not suggesting most money is created with the printing press, but it’s the standard metaphor.)

The rational reason for governments to ‘fund’ deficits by borrowing, i.e., issuing bonds, rather than just issuing new currency, is to take money out of the private sector to ‘make way’ for their own spending. This is why I say (federal) government finance is a macroeconomic issue, and not an accounting issue. In fact, decisions about interest rates and the quantities of government debt and currency out there ought to be made on quite different principles than principles of budgeting. And in reality they have been ever since monetary policy emerged as a practice, because much of monetary policy is the art of providing to the private sector the ‘right’ amount and/or price of liquidity, so that the amount of government debt and currency in private sector hands is not a function of fiscal policy alone.

But does this mean government budgets are entirely independent, such that the consequences of any fiscal decision on the value of money can be neutralised by monetary policy if desired? I don’t think so, because the central bank is far from all-powerful. It is a powerful actor in the money market, i.e., the market for short-term debt, but it does not control it, and its power diminishes further up the interest rate spectrum, in debt markets which are highly internationalised. It certainly doesn’t control what private sector agents choose to do with their money, and while the Reserve Bank of Australia is a Leviathan in the domestic financial system, it’s a minnow in world markets. Because monetary policy cannot necessarily neutralise its effects on the supply of domestic currency, fiscal policy faces limits. Not tight, well-defined limits, but limits nonetheless.

So as I see it, the essence of my disagreement with Mitchell concerns the effects of changing quantities of currency from ‘unfunded’ deficits (i.e. not matched by bond issues) on the value of currency. Some of the points we have been discussing revolve around the question of the private sector demand for currency. Mitchell relies on an argument that the domestic private sector needs domestic currency to pay tax, which somehow underpins its value. My response is that this is an element of the demand for domestic currency, but it is limited, and far from the dominant factor.

He also repeats an argument about how central banks always accommodate private banks’ needs for reserves. This is an argument I am familiar with from Basil Moore (see his 1988 book Horizontalists and Verticalists), which has been controversial in post-Keynesian circles since it came out. If it were true, it supports my argument rather than Mitchell’s, because it is an extreme form of what I have been saying about the lack of power of the central bank to control the supply of currency! Mitchell does make a different point in his latest post, that private banks are unlikely to hoard spare reserves but will deposit them with the central bank. But in his own framework, this is only an issue if non-banks’ demand for bank credit is low enough to leave such spare reserves. The fact remains that if additional currency has entered the system from ‘unfunded’ deficits, this currency is available to fuel non-bank private sector borrowing for whatever purpose, including asset-price or currency speculation.

The core of the debate here is about the passivity or otherwise of private and central banks in the mediation between the supply of currency and the supply of credit and bank credit-money. This is a well-worn debate in the post-Keynesian literature, and if people are interested, I would recommend starting with Robert Pollin’s 1991 paper in the Journal of Post Keynesian Economics, “Two theories of money supply endogeneity: some empirical evidence”, or with the 2005 book edited by Arestis and Sawyer, A Handbook of Alternative Monetary Economics. In this debate Mitchell’s position is ‘accommodationist’ while my own view is ‘structuralist’. At least that’s my interpretation – I can’t speak for him of course.

Finally, the question of Minsky. Mitchell says he is going to get Randall Wray to “clearly tell us that Mike just is talking nonsense here” about Minsky not being on his side. I can only say I look forward to it, and I’ll hold off on the Minsky quotes until then. I know Minsky’s work very well and Wray’s pretty well also. Wray’s 1990 book Money and Credit in Capitalist Economies is really good. But when I told Wray how much I liked it at a conference dinner a few years ago, he told me his views had changed quite a bit since he wrote it. So I look forward to hearing how.

Published in: on 2 June, 2009 at 1:43 pm  Comments (2)  

1.2 Economic policy as an emergent strategic agent

Another thesis section. Note that I’m breaking sections more frequently than I do in the thesis itself – I’m splitting them up smaller to facilitate blog reading. That’s why they will sometimes end abruptly, as here.

This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.

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The reproduction of capitalist society occurs (among other things) through the continual reproduction of both the economic and state systems. Both systems are complex ensembles of institutions and practices. They are not separate from one another, but interpenetrate, with each dependent on the other. Nevertheless, we can distinguish them from one another as relatively autonomous structures of quite different types. The capitalist economic system is one of production and distribution organised primarily through a combination of property (and therefore the capital-labour relation) and value (competition and exchange) relations. Capitalist states are organised around a legal system, bureaucracy and sovereign deliberative system, the latter a site where the other two branches are constituted and reconstituted. [1]

The economic system is not self-reproducing and depends on the state in a number of ways, most obviously for the legal foundation and enforcement of property rights, contracts, and so on. Beyond these ‘night-watchman’ duties acknowledged by classical liberalism, it also depends on the state for the reproduction of certain moments in the circuit of capital, namely, labour-power and money. Though historically capitalism emerged partly through the convergence of the spontaneous production of these elements (i.e., it developed originally on the basis of commodity money and the surplus rural population emerging in late-feudal society), their reproduction proved to be ridden with contradictions and tending towards periodic crisis. In both cases state institutions and activities emerged to stabilise their reproduction. As de Brunhoff [1978] describes, work discipline and a wage compatible with the generation of surplus value depends upon the reproduction of a pool of unemployed labour (the ‘reserve army’) which competes with the employed for work but receives no subsistence from capital and therefore requires state management, in some form from workhouses to the dole. Capitalist forms of credit money develop on a basis of commodity money but are unstable, resulting in periodic devaluations and/or deflations – so central banks emerged to manage banking systems, counteract the cycles of over-extension and crash, and facilitate integration with world money. In neither case does the state control what it intervenes in, but it becomes “necessarily involved in the reproduction” process. [de Brunhoff, 1978: 40]

Suzanne de Brunhoff

Suzanne de Brunhoff

The state has a certain institutional unity, based, in the case of the typical democracy, on the unity of the top executive branch, answerable to the law-making body. But at the same time, its structure contains a very diverse range of elements, elements which develop in an uneven way in response to a wide range of ‘problems’ in wider society, and are not necessarily perfectly co-ordinated; in fact potentially different branches work at cross-purposes, as the ‘problems’ they deal with represent social contradictions in the sense that ‘solutions’ counteract one another. Different ideologies develop within different branches from different perspectives their particular ‘problems’ throw on the social whole; for example, a ‘Treasury line’, a police worldview, and so on. State power, in Poulantzas’s terms, is at best a “fissiparous unity”. [Poulantzas, 1978: 136]

To follow de Brunhoff’s examples, the problems involved in reproducing labour-power and those of managing money historically led to the evolution of quite different state apparatuses, with little apparent overlap: on one side institutions from workhouses to pensions, and on the other central banks and banking legislation. She does note the historical proximity of the Poor Law (1834) and the transformation of the Bank of England into a central bank proper a decade later: “The law seems to have defined its gold reserves and its reserves of labour-power almost simultaneously.” [de Brunhoff, 1978: 61] But it is debatable whether this is much more than coincidence, and the more important point is that the central bank and the operation of the Poor Law were completely unco-ordinated, despite the fact that the unemployment and monetary phenomena they each dealt with were closely connected in the economic sphere. There was, in the nineteenth century, nothing like a unitary state subject intervening in the economy.

By the mid-twentieth century this had changed. For de Brunhoff the Depression, New Deal and Keynesian revolution are an historic break in this regard, before which ‘economic policy’ – as opposed to ad hoc management of labour-power and money – cannot be said to have existed. In my view, at least in the case of Australia, the mobilisation of World War II was the watershed. The ideological/scientific shift within economics – not only Keynes but a wider range of developments including especially the development of econometrics and great expansion in government statistical collection – of that period was indeed crucial. But it did not, I think, come entirely out of the blue. We can trace the roots of this emergence further back, in the developing awareness and playing out of the contradictions between the emergent power of organised labour and the demands of world money – a story I will develop with regard to Australia below.

A crucial symptom of the turning point, for de Brunhoff, is the emergence of the state within theoretical economic models as a coherent actor, even a ‘subject’, with the power to set key systemic variables in the pursuit of certain objectives.

What is significant here is the notion of involvement by the state in some global task of an economic character… The reproduction of labour-power and the general equivalent [i.e. money] remain the key points of state intervention, but the forms of their management have been modified because of their incorporation of a global framework, whose emergence reflects real changes in bourgeois strategy which require examination. [de Brunhoff, 1978: 62-63]

A material precondition for this ideological shift was that branches of the state had already evolved into key points within the economic system. Central banks occupied the apex of the domestic banking pyramid, and by centralising foreign exchange formed a nexus between domestic credit-money and world money. Income flows of a substantial size passed through treasuries in taxation and public expenditure. Arbitration systems of various types (in Australia, judicial) had emerged out of industrial conflict. The theoretical reconceptualisation of the economic system in macroeconomic terms identified these points as potentially strategic points from which money flows could be strengthened, weakened, and rechanneled.

[1] Note that the systems have quite different geographical extents. The economic system is a global system, a world market, though forces of competition and therefore value relations are disrupted by national boundaries and other geographical factors. States, on the other hand, are territorial. Of course at a global level we can talk of an international state system, individual state systems are interrelated with those of other states, and so on, but in quite a different way to the relatively smooth geography of economic interaction. This will be elaborated with respect to economic policy below.


Suzanne de Brunhoff [1978]: The State, Capital, and Economic Policy, translated by M. Sonenscher, Pluto Press, London.

Nicos Poulantzas [1978]: State, Power, Socialism, translated by Patrick Camiller, New Left Books, London.

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Mitchell strikes back

Bill Mitchell has responded to my criticism at great length. I’ll try and boil down the points of disagreement, but this is still going to be pretty long in response!

1. Speculators

First, Mitchell skips right over my central criticism: that the expectations and opinions of wealth-holders matter even when they are wrong. Even if money works the way Mitchell thinks it does, if money managers expect a fall in the value of the currency, they’re going to speculate against it. Note the period after Hawke’s election when despite policymakers realising that monetary targeting was rubbish, they kept announcing targets to appease the wrong-headed markets. (See Simon Guttmann’s 2006 ‘The Rise and Fall of Monetary Targeting in Australia’.)

2. Tax and the demand for currency

Mitchell implies that the demand for domestic currency to pay domestic taxes underpins its value, such that the movements out of the currency by wealth managers would be foiled by their need to pay tax. A fixation on the fact that tax payments are denominated in national currency is common among cartalist (state) money theorists. I’m not entirely sure why – there will also be a demand for currency arising from its legal tender status, from the need to make all kinds of payments denominated in it – why single out tax payments? At any rate, if the government is running a deficit and not issuing equal amounts of bonds, it is – by definition of the word ‘deficit’ – injecting more money into the economy than it is calling back in taxation. Finally, the fact that wealth-holders are selling the local currency to buy foreign currency doesn’t destroy the local currency, which remains in someone’s hands. Even if at a lower value in terms of other currencies and goods, it still remains available to pay taxes, even if individuals have to borrow back some of the currency they’ve sold to do it. I’m sure people are aware that currencies can and do dive in the foreign exchange markets despite the government that issues the currency requiring tax payments in its own currency.

3. Banks and the supply of currency

My argument is not at all based on a money multiplier conception as Mitchell presents it. My thinking on money is also heavily influenced by post-Keynesian thought, especially the so-called ‘structuralists’ such as Hyman Minsky and Victoria Chick. I note that Mitchell includes Minsky as one of his ‘modern monetary theorists’ but Minsky is miles away from his cartalism.

To summarise very quickly a complex picture: Currency (or ‘high-powered money’) plays a special role within a country’s monetary system, mainly as bank reserves but also the paper cash we carry in wallets. But the bulk of the money supply is not currency but private bank liabilities – bank deposits, and also various other liquid financial instruments – where you draw the line between ‘money’ and just plain ‘debt’ depends on what you’re looking at.

Banks are traditionally constrained in their lending by a couple of factors. First, they need to be able to meet net withdrawals and net transfers to other banks with currency, and since their assets tend to be less liquid (i.e. readily saleable) than their liabilities, a bank needs either an adequate reserve of currency or a way to quickly get its hands on some when it needs it. Second, banks are often constrained by regulations requiring them to hold at least a certain portion of their assets in liquid form, and/or limiting their lending to some multiple of their capital.

Over the last several decades banks evolved various practices and markets to minimise reserve holdings – first ‘asset management’, involving the development of markets in which banks could quickly offload securities; then ‘liability management’, involving markets in which banks could quickly borrow to meet their reserve needs. (Finally, recent engagement in off-balance sheet activities was motivated by the capital requirement regulations, but we can leave that alone here.) Mitchell is quite right that individual banks are no longer really quantitatively constrained by their reserves, and this is why central banks are these days generally concerned instead with the interest rates on short-term borrowing in the money market, representing the cost of reserves to banks.

But for the banking system as a whole, the quantity of reserves available is limited, and the base interest rate represents supply and demand conditions in the money market. Supply is a real constraint on the system as a whole, though not a firm, clear-cut one. Of course, the central bank intervenes in this market in various ways, buying and selling short-term instruments, lending directly to banks, and entering into repurchase agreements. But the fact remains that it is intervening in a market in which it is powerful, but which it does not control. Notice that though the central bank has a good deal of power over short-term rates, its power diminishes more the further you go up the rate spectrum.

The question relevant to the discussion here is: will the central always be able to soak up extra currency that finds its way into the money market as a result of unfunded government deficits? I note that on this question Mitchell actually goes further than I would, claiming that attempts by the central bank to reduce the money supply always fail. I would say, rather, that sometimes it would be able to soak up the currency and sometimes not, depending on the state of demand for credit in the broader economy.

4. Sectoral balances

The fundamental problem here is that Mitchell is taking highly aggregated national accounting identities and trying to turn them into things of causal significance. He implies that given a structural current account deficit, it is better that the government run a deficit than the domestic private sector. Why? Because if the private sector keeps accumulating debt it will eventually have to try to pay it down, whereas the government is not constrained in such a way, and can continue to accumulate indefinitely.

The trouble is, though, that there is absolutely no guarantee that a government deficit run deliberately to offset the structural current account balance would have the intended effect. By increasing domestic demand it is actually likely to have precisely the opposite effect. Factor in the inevitable reactive capital flows and movements in the exchange rate, and who knows what the ultimate effect would be (well, probably an increased current account deficit).

On a side point, Mitchell is wrong to say that “the non-government sector cannot fulfil its tax obligations unless the government has spent first”. Currency also enters private sector balance sheets via central bank activity. For example, in recent years of surplus, and consequence dearth of government debt as a bank ‘position-making instrument’, the Reserve Bank of Australia has operated primarily by entering into repurchase agreements with private banks, temporarily supplying currency when necessary. There’s no reason why this couldn’t go on indefinitely. (Not, of course, that I think it ought to – as noted previously, it is not my position that the government always needs to pay off all its debt.)

5. Finance, the Jobs Guarantee, and inflation

Mitchell points out that his costing of the Jobs Guarantee plan requires a deficit much smaller than the deficit we are presently running. This is a fair point, (though remember that he also implied that the government ought to run deficits matching the structural current account deficit, implying quite a different level of structural government deficit).

As I said in my original post, it’s not the Jobs Guarantee I have a problem with, it’s Mitchell’s idea that the government is completely unconstrained by budgetary concerns. If the Jobs Guarantee policy idea was uncoupled from these monetary eccentricities it might actually find more support, instead of Mitchell’s followers continually finding themselves butting up against a crazy world that doesn’t understand how bloody brilliant – and yet how utterly commonsensical – it all is.

In the right conditions, I would support a government trying out something like the Jobs Guarantee, which is basically a large extension of government employment at the minimum wage to mop up unemployment. But while Mitchell expects it to be a stable remedy for unemployment, I would expect it to be economically destabilising. The reason is that capitalism relies on a certain level of unemployment to discipline wages. The Jobs Guarantee is designed to be non-inflationary by setting its wage at the minimum wage. But I think even then it would remove much of the sting from unemployment, make employed workers feel more secure, and embolden labour.

Great, you might say, and I would agree – which is why I would support the policy. But it would destabilise in an inflationary direction, and present the government with choices it faced at the end of the full employment period in the 1970s: extend its controls in further reforms: price and wage controls, capital controls, public investment, etc., in other words completely politicising the economy; or abandon the policy. In the right political conditions, the Jobs Guarantee could be part of the opening salvo in a much broader social change. In the wrong political conditions it could be an abortive disaster.

I think the whole Mitchell system appeals to a certain kind of person, who is rightly sickened by a permanent pool of unemployment, sees policymakers as irrational, and thinks the whole thing could be put right, with no losers and no conflict, with a single Big Idea. As such, it risks being a Douglas Credit for the 21st century. I would rather see the energy joining a broader project which realises the extent to which capital shapes capitalist political possibilities, and recognises that there is no simple policy switch that would suddenly make everything rational without a serious confrontation with that power. Mitchell says that’s ‘quasi-Marxist’ and so it is!