Inflation and the making of macroeconomic policy in Australia, 1945-85

Everything you always wanted to know but were afraid to ask…

My PhD thesis is now available here.

Abstract

This thesis traces the impact of inflation on the making of macroeconomic policy in Australia between the end of World War II and the mid-1980s. I take issue with accounts of policy change that focus primarily on ideological change on the part of policymakers. Instead, I present policy as strategic activity within a complex, evolving economic system which is not centred on policy, and in which, therefore, policy does not have a monopoly on initiative.

I draw on Marxian state theory and Tinbergian theory of economic policy to explore why counter-inflationary policy emerged as an imperative for the capitalist state and how it came to play a dominant role in organising macroeconomic policy in general. I also focus in detail on the development of central banking in Australia, drawing on post-Keynesian structuralist monetary theory. The body of the thesis is divided into two parts, one dealing with ‘the long 1950s’ and the other ‘the long 1970s’. Both are treated as periods of transition, rather than of stable policy regimes.

In the ‘long 1950s’ macroeconomic policy was brand new, and the authorities had to build an effective system of macroeconomic management, sometimes against the active opposition of other groups. A contradiction developed between full employment and price stability, and the latter was prioritised because of limits set by the balance-of-payments under the Bretton Woods international monetary system.

The ‘long 1970s’ was a period of crisis and distributional class conflict. The break-up of Bretton Woods and the movement towards flexible exchange rates changed the form of constraint but continued to impose a counter-inflationary imperative. Monetarism provided an organising and legitimating principle for extremely restrictive macroeconomic policy and the abandonment of full employment as a policy goal, even though policymakers were sceptical of its propositions. Finally, I discuss the movement towards deregulation as something which strengthened rather than undermined the central bank’s power to pursue monetary policy.

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The new old economics

The Economist has a feature this week on “the state of economics” in the wake of the crisis. It’s worth a read as an overview of the PR battle between schools of thought within the mainstream.

The likes of Krugman and deLong are undoubtedly in the ascendancy. As I suggested a few months ago, I think we should see this as the victory of a rational technocratic economics over an ideological conservative economics. While these guys are more pleasant and more fun to read than the so-called ‘freshwater’ economists, it is not an especially ‘progressive’ or ‘left’ economics.

The line of both Krugman and William Buiter that the last 30 years of economics have been a dead end dates the wrong turn to the 1970s. Their cut-off point would, I think, come between Friedman and Lucas. The mistake was ‘rational expectations’ and ‘new classical economics’, which basically completely reject Keynes – uncertainty, historical time instead of general equilibrium, and the non-neutrality of money – and return to pre-Keynesian orthodoxy on a more mathematically sophisticated basis.

Friedman’s version of the quantity theory was also a mistake, though that is hardly news. His politics may be gauche. But the Friedman of the ‘natural rate of unemployment’ and the ‘expectations-adjusted Phillips curve’ was not at all a mistake for the technocrats. In fact he represents the apogee of the technocratic neoclassical-Keynesian synthesis rather than a rejection of it. DeLong in particular has been quite explicit about this, arguing that “Friedman completed Keynes” . (For more detail see his “The Triumph of Monetarism?” in the Journal of Economic Perspectives, Winter, 2000.)

The shifting of mainstream economics and policy back towards neoclassical-Keynesianism well predates the crisis. In fact, as I’ve argued before, it never really stopped dominating macropolicy-oriented economics, as opposed to academic economics or microeconomic policy. You can see the basic argument that macroeconomics had it basically right around 1971 or so, for example, in this 1999 paper from the Reserve Bank of Australia:

By the 1990s, however, the intellectual framework for analysing inflation had come full circle. The framework of the 1990s had much in common with the  one enunciated in the 1971 ‘Inflation’ paper. The intervening years had led to some refinement of the analysis, but the expectations-augmented Phillips curve had returned and once again was at centre-stage. [p. 40]

What we’re seeing now is an opportunistic reconsolidation of its academic and public reputation against ‘new classical’ holdouts.

The rediscovery of the specifically financial side of Keynes may be genuinely new. That The Economist quotes Paul Davidson  and calls Minsky a “neglected prophet”, is an interesting sign. Both are post-Keynesians, well out of the mainstream. Post-Keynesian economics, incidentally, has very little to be embarrassed about by the crisis, since it has analysed finance in a realistic way all along.

(The term ‘post-Keynesian’, confusingly, refers to Keynes purists who set themselves against the ‘bastard Keynesianism’ of the post-war period, also incorporating a great deal of Marxian influence, thanks to Robinson, Kalecki and Sraffa. Davidson’s relatively conservative as these guys go, while Minsky comes out of the Marx-inflected side, and I hear they didn’t get on well after Minsky gave Davidson’s magnum opus a critical review.)

Dis

In the eternal struggle between economics and sociology, a savage blow is struck with Problem 2.10, Workouts in Intermediate Microeconomics [7 ed.], by Theodore C. Bergstrom and Hal R. Varian [2006]:

Martha is preparing for exams in economics and sociology. She has time to read 40 pages of economics and 30 pages of sociology. In the same amount of time she could also read 30 pages of economics and 60 pages of sociology.

(a) Assuming that the number of pages per hour that she can read of either subject does not depend on how she allocates her time, how many pages of sociology could she read if she decided to spend all her time on sociology and none on economics? (Hint: You have two points on her budget line, so you should be able to determine the entire line.)

(b) How many pages of economics could she read if she decided to spend all of her time reading economics?

For the love of it

I think I’ll be back writing here very soon, especially with this surprise Easter thing. (It was a surprise to me, anyway.) In the meantime, I just wanted to post this interview with Michelle Masse.

I’ve been meaning to write something about what’s been happening here on campus with a unionisation drive among casual academic staff. We had some minor victories last semester and hope for some big ones this year. It’s pretty exciting, I think. Now is not the time I’m going to do it. But I was struck this week – I filled in teaching for a sick co-worker this week. No worries, I could use the extra money. But the thing is, it comes straight out of her pay packet. We get no sick pay! Essentially, if we’re sick, we subcontract a co-worker. A few weeks ago I heard of a department at Sydney University in which people are teaching classes on a volunteer basis! That is, they don’t get paid; they’re doing it for the experience. Jesus Christ.

Anyway, watch Masse, courtesy Marc Bousquet of the excellent How the University Works. She makes a point Nate has often made, about the effect of academics seeing their work as a calling rather than a job.