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!


Newcastle economist Bill Mitchell criticises Greens economic policy from the left, which is welcome and quite apt on some points. It’s great to see this kind of discussion and it helps the left within the Greens.

He is right on about the wobbliness and incoherence of the commitment to full employment. But Mitchell’s views on money and government financing are problematic. Though he presents it as a case of “progressives who understand how the modern money system operates” versus “neo-liberal economics”, his ideas on money are a little eccentric even within the post-Keynesian or ‘heterodox’ community, hardly the obvious consensus he portrays with such confidence.

He says the federal government is a ‘monopolist’ in the issue of currency. This is not true, because the national currency is one among many. Everyone has the option of converting their money into a foreign currency. Most of us don’t do it unless we’re going on holiday or buying something on the internet, but of course managers of financial wealth are always comparing currencies, and if one national currency is expected to lose its  value, it will be sold for another. Even if Mitchell were right, and the federal government could expand its expenditure as much as needed for full employment by printing money without sparking inflation, the fact that financial managers would expect it to be inflationary would be enough for the dollar to dive.

And anyway, I don’t think Mitchell is right that it would not be inflationary, even if speculators happened to agree with him. When government expands spending with new currency, most of that currency will end up in bank reserves. This allows the banks to expand their lending and the money supply to a significantly higher degree, since they can carry deposits to a multiple of reserves. Mitchell would probably respond that if inflation developed, government could beat it by cutting back its spending again, or soak up the currency with open market operations. But this relies on some pretty heroic assumptions about the government having fine, well-timed control over its expenditure and ability to predict bank behaviour and its ultimate impact on demand.

Finally, Mitchell’s claim about the public sector deficit being the mirror-image of private sector saving (the balance of payments deficit/surplus aside): This is true by definition, but means very little. Perhaps he expects people to confuse ‘private sector saving’ with ‘household saving’. You can see why households as a group would want to have net savings over a period. But if their financial assets are to represent net claims over future real goods and services, they need to be claims on firms – shares and bonds, either directly or through banks, pension funds and other intermediaries. In other words, household savings are ultimately claims on firms, i.e. business debt.

But both firms and households combine to form Mitchell’s ‘private sector’. Why would firms and households collectively want to save over the long term in claims on the government? Except to the extent that governments are producing goods and services for sale, their income comes ultimately from taxation (or, if Mitchell ran the government, perhaps inflation) – which is a claim on the private sector! (It’s true, though, that the private sector is always going to want to hold currency and certain government securities, and to that extent the government does not need to worry about getting the deficit to zero – and in fact even when government debt was entirely paid off it still issued securities to fill certain asset needs of banks etc.)

I actually agree with Mitchell that much agonising over government deficits is bogus, and comes from the false idea that government finances work like household or firm finances. Government finance is always and everywhere a macroeconomic issue, as opposed to an accounting issue. But Mitchell’s proposals fall down on the macroeconomics.

The Greens should take full employment seriously. But they also need to realise the extent to which full employment requires a radical reorganisation of how wealth and investment is controlled. It would mean a full-on fight with wealth-owners. The fundamental problem with Mitchell’s analysis is that he makes it sound all too easy, just a technical problem that could be easily solved if only governments weren’t blinded by ideology.

1.1 Explaining policy

As promised, here’s the first section of the first chapter. In the final document it will be preceded by an introduction, but I haven’t written that yet… So here you’re dumped right into the action. I’ll give the chapter structure here, though, to give a vague idea of how things fit together:

  1. Economic policy and inflation
  2. Monetary policy: the state in the capitalist financial system
  3. 1945-65: Inflation and ‘external balance’
  4. 1945-65: Counter-inflation policy in general
  5. 1945-65: Counter-inflation monetary policy
  6. 1965-85: Inflation and the exchange rate
  7. 1965-85: Counter-inflation policy in general
  8. 1965-85: Counter-inflation monetary policy
  9. Conclusion: the 1980s and beyond

So the first two chapters are theory chapters, and in fact the first may be split in two.

I’m sure no one will want to, but you never know what will happen once stuff’s on the web and it gets Googlified (my Keynes stuff has had a strange journey) so I’m putting a standard disclaimer on each page: This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.

Explaining policy

My explanation for the development of policy is structural rather than ideological. By this I mean that I do not explain the shifts in policy in my forty-year period as an outcome of ideological struggles, first as the rise of ‘Keynesianism’ and then its fall at the hands of ‘neoliberalism’. I suggest that the relative strengths of the ideologies in political struggle was itself determined by the changing, interdependent structures of state and economy, which exerted strong pressures of selection. This is not to deny independent influence at specific points from the details and discursive structures of the warring ideologies, or from particularities of the actors and groups through which they warred, but I will argue baldly that this is the less enlightening part of the story, and in any case a story already many times told. Beyond the ‘Keynesians versus neoliberals’ story are more subtle questions about how the mainstreams of those ideologies were themselves sculpted by the political-economic field in which they sought to embed themselves: Why, from Keynes, effective demand and the IS-LM apparatus, and not “the euthanasia of the rentier”? On the other side, why Friedman’s strong, rule-bound central bank and not von Hayek’s free banking? Ideologies do not conquer by the superiority of their reasoning, and the structure of the social networks through which they take material political form and come into contest are shaped by selective pressures from the broader social conditions in which they emerge.

Nicos Poulantzas in days before smoking in the office was structurally selected against

Nicos Poulantzas in days before smoking in the office was structurally selected against

Selective pressures of what form? I follow Jessop’s [1990: 260] analysis (adapted from Poulantzas) of the state as “a system of strategic selectivity,” that is

a system whose structure and modus operandi are more open to some types of political strategy than others. Thus a given type of state, a given state form, a given form of regime, will be more accessible to some forces than others according to the strategies they adopt to gain state power; and it will be more suited to the pursuit of some types of economic or political strategy than others because of the modes of intervention and resources which characterise that system.

Or, as he later developed the concept:

The state is an ensemble of power centres that offer unequal chances to different forces within and outside the state to act for different political purposes. How far and in what way their powers (and any associated liabilities or weak points) are actualised depends on the action, reaction, and interaction of specific social forces located both within and beyond this complex ensemble. [Jessop, 2008: 37]

This notion has the advantage of conceiving social structure in a way that does not neglect agency and subjective creativity; it merely emphasises that they are embedded in social structures that put up more resistance against some strategies than others, and thus tend to select some over others. It is not determinist; history remains open to choices and the chance outcomes of interactions between the intertwining strategies of many social actors, outcomes more often than not unintended by anyone in particular.

My object of study, therefore, is the structural pattern that tended to select counter-inflation policy as a dominant aspect of economic policy in Australia during my period, and tended to shape it in a particular form. It is not simply a narrative history of the development of counter-inflation policy; it seeks to go one step deeper to explain why, although other counterfactual histories were certainly possible, the structure of capitalist society was such that the dominance of counter-inflation policy was no accident, was in fact strategically selected, not by the arbitrary ideological whim of policymakers but by the structure of the interdependent state and economic systems in capitalist society at that point in their historical development.

The protagonists of my story are ‘policymakers’, a collective term which denotes a diverse assortment of individuals and institutional actors from Treasurers to central bankers. But in what sense can we consider ‘economic policymakers’ collectively as a strategically-acting subject/actor? For Poulantzas and Jessop subjectivity and agency are explicitly denied to the state as such. Rather, the state is a social relation, in the same sense in which for Marx, capital is a social relation – a structure reproduced through relationships between people, mediated by things. However, de Brunhoff [1978] – writing within the Poulantzian tradition – argues that economic policy, in specific historical conditions, came to act as if it were a unified strategic actor. I will retrace this argument, which explains my reasoning for centring my narrative on the strategic action of policymakers as a group.

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

Bob Jessop [1990]: State Theory: putting capitalist states in their place, Polity, Cambridge.

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


I might have mentioned before that I spend most of my days working on a PhD thesis, and have done for about four years now. It’s about time this thesis was done, and I do have drafts of almost every chapter in various states of completion, totalling well over the 80,000 word limit. Sometimes I think about it and think it could be brought up to scratch in a few weeks; other times I realise it needs to be completely rewritten from scratch.

Anyway I don’t think I’ve ever posted anything here from the thesis, for various reasons. But now that I’m confident the whole argument is settled I’m going to start posting bits and pieces. Partly because putting it out for an immediate and fresh audience (there are of course people who have been reading drafts all along) motivates me to clean up the messy bits, and the prospect of telling the story actually gets me excited about the whole damn thing again. I’m also going to use this space to exorcise offcuts that I know don’t fit into the structure but I still kind of like on their own merits. I’ll post in small chunks because I know people generally aren’t in the headspace to read thousands of words when they’re sifting through teh blogs. But I’m really interested to get feedback from anyone who feels like reading it.

It’s specifically about the politics of counter-inflation policy in Australia between 1945 and the mid-1980s. But that’s really a keyhole through which I tell a story about capitalism, the capitalist state, and what the hell happened between the post-war boom and what often gets thought of as the neoliberal turn of the 1980s. In the middle there, of course, is the crisis of the 1970s. It’s about Australia, but I think aspects of the story in outline are generalisable at least to the other Anglo countries. In some ways focusing on little old Australia opens up new angles, because we’re all so used to hearing the story of the post-war boom, stagflationary bust, and neoliberalism with regard to the US and UK, and it’s interesting to see what’s different and what’s not. Interesting quirks like monetarism making its first political appearance through the Labor Party, and the great transition of the 1980s coming through Labor’s Keating and the labour movement acceptance of the Accord, rather than the hard face of Thatcher or Reagan.

I also happen to think the story makes a pretty exciting narrative, which I try to do justice to even though I’m trying to explain rather than tell the story (that last bit is my supervisor talking). There’s the Battle of the Banks, an enormous media battle of propaganda and counter-propaganda over Chifley’s plan to nationalise the banks; a decade of financial innovation in which a tower of mindboggling new financial instruments and institutions is built on the back of consumer debt, collapsing in a credit crunch (the 1950s); wild boom and bubble years of mineral discoveries and exploitation; Milton Friedman arriving on a plane direct from Chile followed by camera crews on a speaking tour in shopping malls up and down the east coast; Joan Robinson arriving a month later (fewer camera crews); Fraser’s coup and the nation of bastards, carried up and down on a whiplashing exchange rate… and dumped into the 1980s.

Friedman fried, Bernanke burned

Somehow James K. Galbraith, son of John K. Galbraith, got invited to deliver this year’s Annual Milton Friedman Distinguished Lecture at Marietta College, Marietta, Ohio. [Cheers Limited, Inc.] And boy did he rise to the occasion, scorching monetarism and the present Fed regime:

…Chairman Ben Bernanke faces an intellectual dilemma. He can stick with Milton, in which case he must admit that the only possible cause of the present financial crisis and evolving recession is the tightening action of the Federal Reserve… Or he can stick with the so-called ‘new monetary consensus’, which holds that the Fed should now return to its inflation targets, pursue a much tighter policy, and that no recession will result. If Bernanke chooses the first, he must of course assume responsibility for the unfolding disaster. He cannot, logically, stay with Friedman without admitting the error of the late Greenspan years and his own first months in office. If he chooses the second, he must repudiate Friedman, and hope for the best. The two courses are absolutely in conflict.

When Friedman died a couple of years back, most obituaries skirted around the hammering reality gave monetarism in theory and practice. This is only occasionally mentioned in the scholarly literature, which has generally preferred to politely ignore the monetary side of Friedman’s work and carry on where Keynesianism left off in the early 1970s. For example, see this 1999 paper by Reserve Bank of Australia economists David Gruen, Adrian Pagan and Christopher Thompson:

From the mid 1970s to the mid 1980s, money growth remained at centre-stage, both as an intermediate target for monetary policy, and in the modelling of the inflationary process in the Reserve Bank. With the end of money-growth targeting, a transition period followed, in which the framework for monetary policy gradually evolved.

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]

Of course, the ‘expectations-augmented Phillips curve’ is itself a Friedman baby, though he shares parenthood with Edmund Phelps. It can be analytically separated from Friedman’s monetary ideas and has survived much better. But the more I wade around in the 1960s literature, I am discovering that the idea pre-Friedman economists had no conception of inflationary expectations or momentum is also a myth.

In his talk, Jamie Galbraith unfortunately repeats the idea that the Phillips Curve was the universal basis for Keynesian thought and policy on inflation in the post-war period. This is so only to a limited extent: limited, in particular, to a few years in the 1960s and to American policy in the Kennedy and LBJ White House in particular. I think this is well-demonstrated by Robert Leeson (who is, ironically, a Friedmanite and draws different conclusions than I do!)

More soon. Still snowed under with thesis and other work but luckily this kind of is my thesis work.

Published in: on 2 May, 2008 at 12:42 pm  Leave a Comment  

On value

A definition of economics which, however disturbing to economists, would contain a great deal of truth would be ‘The study of collections of essentially diverse objects as though these collections were always quantifiable by one constant unit’. Economics is inherently and essentially imprecise. The only question is how heroic we are prepared to be, or what choice we make between simplification of the type of the Crusoe economy, where most major problems of reality are assumed away and arguments about the remainder can be logically impeccable, and simplifications of the Keynesian and Harrodian type where the need for rough-and-ready quantification is accepted. Any principle for quantifying collections of essentially (i.e. relevantly) diverse things must amount to valuation.

– G. L. S. Shackle [1967]: The Years of High Theory: Invention and tradition in economic thought, 1926-39, p. 255

Published in: on 16 November, 2007 at 11:04 am  Leave a Comment  

16: Sundry Observations on the Nature of Capital

Or, the labour theory of value and the tendency of the rate of profit to fall. 

As individuals, we save expecting to be able to spend our savings on commodities in the future. But the commodities sold in any time period are generally produced within that period. Savings represent income from the production of commodities that are not spent on those commodities. Spending out of previous savings represents spending on commodities that does not come from income generated in producing them. Is there some mechanism channelling savings into expanding future production such that future production is capable of meeting the demand when savings are spent?

It’s tempting to simply assume that savings flows into just the right investment to prepare for future demand: as we have seen, savings and investment are equal by definition. Some of the classicals saw the interest rate as adjusting savings an investment in just the right proportion to match the future consumption made possible by saving/investing now with the sacrifice in consumption now.

But saving sends no signal about what the saver wants to purchase down the track, or when they will make the purchase. And investment is based upon expectations of future consumption, but those expectations are “so largely based on current experience of present consumption”, and present consumption is reduced by an act of saving. [p. 210] Saving makes prospects for investment look bleaker than they otherwise would. So saving may reduce current investment-demand as well as consumption-demand.

The absurd, though almost universal, idea that an act of individual saving is just as good for effective demand as an act of individual consumption, has been fostered by the fallacy, much more specious than the conclusion derived from it, that an increased desire to hold wealth, being much the same thing as an increased desire to hold investments, must, by increasing the demand for investments, provide a stimulus to their production; so that current investment is promoted by individual saving to the same extent as present consumption is diminished. [p. 211]

An individual act of saving transfers claims over wealth to the saver; it does not necessarily create new real wealth (i.e., investment in capital goods). It might bid up the price of financial assets (which would lower the interest rate and possibly induce investment). Or it might increase the demand for money (which would raise the interest rate and discourage investment).

Is capital productive?

Keynes’ answer is no. Capital has a yield over its existence in excess of its cost, but this should not be confused with physical productivity. If capital becomes less scarce, its yield falls, even though it may be just as physically productive as it was before. Again, we have a more-than-casual nod to a labour theory of value:

I sympathise, therefore, with the pre-classical doctrine that everything is produced by labour, aided by what used to be called art and is now called technique, by natural resources which are free or cost a rent according to their scarcity or abundance, and by the results of past labour, embodied in assets, which also command a price according to their scarcity or abundance. It is preferable to regard labour, including, of course, the personal services of the entrepreneur and his assistants, as the sole factor of production, operating in a given environment of technique, natural resources, capital equipment and effective demand. This partly explains why we have been able to take the unit of labour as the sole physical unit which we require in our economic system, apart from units of money and of time. [pp. 213-14]

Keynes follows with a swipe at Böhm-Bawerk (author of Karl Marx and the Close of His System) and his argument that capital could be represented as a ’roundabout process’. He shows that for various reasons the representation of capital as time is incoherent.

Of course it is not Keynes’ argument (or Marx’s or any of the classicals’) that capital does not make production processes more efficient. He simply argues that this does not explain the return to capital, which is determined essentially by its scarcity. And capital is not alone here:

Moreover there are all sorts of reasons why various kinds of services and facilities are scarce and therefore expensive relatively to the quantity of labour involved. For example, smelly processes command a higher reward, because people will not undertake them otherwise. So do risky processes. But we do not devise a productivity theory of smelly or risky processes as such. [p. 215]

The fact that the marginal efficiency of capital depends on its scarcity suggests a problem: what happens to a capitalist society where capital is no longer scarce, so that its marginal efficiency falls to zero? People will still be inclined to save, but any addition to the capital stock will be worth less than nothing.

Starting from full employment, the excess of saving over investment will lower income until the aggregate rate of saving is zero, in line with investment.

Thus for a society such as we have supposed, the position of equilibrium, under conditions of laissez-faire, will be one in which employment is low enough and the standard of life sufficiently miserable to bring savings to zero. More probably there will be a cyclical movement round this equilibrium position. For if there is still room for uncertainty about the future, the marginal efficiency of capital will occasionally rise above zero leading to a “boom”, and in the succeeding “slump” the stock of capital may fall for a time below the level which will yield a marginal efficiency of zero in the long run.

Of course, the marginal efficiency of capital need not fall all the way to zero to choke off investment – it only needs to fall below the minimum interest rate. Keynes argues that the rate of interest (on long-term bonds) cannot fall below some minimum set by uncertainty and the cost of bringing lenders and borrowers together – around 2 or 2.5 per cent in present conditions. Therefore, there is every possibility that in wealthy countries “the awkward possibilities of an increasing stock of wealth, in conditions where the rate of interest can fall no further under laissez-faire, may soon be realised in actual experience.”

In fact, Keynes conjectures that these conditions already apply in the United States and Great Britain. Poorer countries (i.e. with a relatively lower capital stock) may thus enjoy a higher standard of life than richer, if the latter suffer declines in employment due to a lack of an incentive to invest; “though when the poorer community has caught up the rich — as, presumably, it eventually will — then both alike will suffer the fate of Midas.”

So Keynes follows an argument that only labour can be considered productive with a law of the tendency of the rate of profit (sorry, “marginal efficiency of capital”) to fall. Very interesting!

The way out, according to Keynes, is for savings to be matched by expenditure on durable assets that are not expected to make a return (i.e., they are not capital goods).

In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed.

It would be better if “a sensible community” realised the causes of the situation and dealt with it rationally, via state expenditure on non-capital assets. Such a community would be fast on the road to Keynes’ version of utopia:

 On such assumptions I should guess that a properly run community equipped with modern technical resources, of which the population is not increasing rapidly, ought to be able to bring down the marginal efficiency of capital in equilibrium approximately to zero within a single generation; so that we should attain the conditions of a quasi-stationary community where change and progress would result only from changes in technique, taste, population and institutions, with the products of capital selling at a price proportioned to the labour, etc., embodied in them on just the same principles as govern the prices of consumption-goods into which capital-charges enter in an insignificant degree.

If I am right in supposing it to be comparatively easy to make capital-goods so abundant that the marginal efficiency of capital is zero, this may be the most sensible way of gradually getting rid of many of the objectionable features of capitalism. For a little reflection will show what enormous social changes would result from a gradual disappearance of a rate of return on accumulated wealth. A man would still be free to accumulate his earned income with a view to spending it at a later date. But his accumulation would not grow. He would simply be in the position of Pope’s father, who, when he retired from business, carried a chest of guineas with him to his villa at Twickenham and met his household expenses from it as required.

Published in: on 6 November, 2007 at 8:51 am  Comments (4)  

15: The Psychological and Business Incentives to Liquidity

In this chapter Keynes elaborates on the discussion of liquidity preference in Chapter 13. He starts with a brief consideration of how liquidity preference is related to the ‘income-velocity of money’. Liquidity preference, as we have seen, is about how much money units want to hold. Income-velocity is about how fast money travels around the economy on average during a period. Velocity is usually measured in terms of income (thus income-velocity): velocity equals income (in nominal terms, i.e. at current prices) divided by the quantity of money.

Liquidity preference is the inverse of income-velocity. Velocity is about how fast the average bit of money travels around the economy in a period; liquidity preference is about how much money is held idle in a period. Both concepts contain the same information; it’s really a question of which metaphor helps the intuition. Keynes prefers liquidity preference: “… the term ‘income-velocity of money’ carries with it the misleading suggestion of a presumption in favour of the demand for money as a whole being proportional, or having some determinate relation, to income, whereas this presumption should apply, as we shall see, only to a portion of the public’s cash holdings; with the result that it overlooks the part played by the rate of interest.” [p. 194]

Those parts of money held by units for other purposes than transactions will still show up in the velocity statistic – a rise in idle balances means a lower velocity of money as a whole. Keynes is right that the idea of velocity can be misleading. But so can the concept of ‘idle balances’ at the level of the economy as a whole, since we tend to use as money and near-money the liabilities of financial institutions, who are certainly not holding our funds idle. But since Keynes is discussing individual units’ decisions to hold money, it is better to look at it from the point of view of liquidity preference and idle balances, since individuals and firms decide how much liquidity to hold (though from inflows not of their own choosing!), and don’t have much control over the ‘velocity’ of those funds they send shooting off into the market.

Recall from Chapter 13 that Keynes split the motives for holding money into three categories: the transactions-motive, the precautionary-motive, and the speculative-motive. Now he splits the transactions-motive further, into the income-motive and the business-motive. This is basically a distinction between the transactions-motive for households and the transactions-motive for firms. Both depend on income and the normal periods between which money flows in and out of the units’ holdings. These periods are likely to be quite different for firms and households: though for the economy as a whole, business net expenditure is household net income (government excluded), there are a whole lot of transactions between businesses, which need to be included when you are thinking about the flow of money.

These two aspects of the transactions-motive and also the precautionary motive are clearly related to the interest rate, both as a gauge of how cheap money can be borrowed and how much is sacrificed in not lending it. These things work in opposite directions: a low interest rate means money is cheap to borrow when needed, so you don’t need to hold so much of it, but also means that not much is gained from not holding it.

So Keynes plays down the effect of monetary policy on the demand for money for these motives. Money demand for transactions and precautionary purposes mainly depends on the level of income and the structure of the payments system, and not so much on the interest rate. So the main impact of policy is through the speculative-motive. Effectively, the quantity of money demanded for other purposes can be subtracted from the total money supply, leaving the equilibrium interest rate to be determined by the rest of the money supply and the speculative-demand for money. Fortunately for money policy, the speculative-demand is continuously responsive to changes in the interest rate – there is a clear negative relationship between the interest rate and the speculative demand for money.

However, changes in the money supply by monetary authorities is not the only influence on the interest rate, because speculative expectations can change independently. In fact, changes in the money supply will affect interest rates not only directly, but also by affecting expectations of future rate changes.

When new money enters the economy, the effect on income and interest rates depends at first on how it enters. (No helicopters randomly scattering cash over the country here.) If it enters via the government’s deficit spending, it arrives as income. It will therefore have an affect on transactions and precautionary balances (which depend on income) as well as speculative balances. More money will be held to meet the needs of transactions and precautions, but not as much as the whole injection of money. Some of the injection will therefore find its way into the securities market, putting downward pressure on the interest rate – with the extent of the pressure dependent on the speculative demand for money. However, as the interest rate falls, investment will be stimulated to some extent, which will increase income further, and raise the transactions and precautionary demands for money again. There will be some equilibrium position where all demands will find balance with the money supply, and the end result of the whole business will probably be higher income and a lower interest rate.

If new money enters the economy without being part of somebody’s income, it will have its initial effect on the interest rate, but still increase income to some extent as the lower rate induces investment. How is it possible for money to enter the economy without being someone’s income? Through a financial transaction where a financial asset is purchased from outside the system. Keynes gives the example of a bank relaxing its credit standards and buying bonds with a self-created deposit. (Does this not complicate the story with regard to Keynes’ general assumption that the government controls the money supply?) But it might be easier to think about in terms of open market operations by the central bank: the central bank buys bonds, thus injecting money into the economy but into wealth portfolios rather than income.

At any rate, any increase in the money supply lowers interest rates (all else being equal), and a new equilibrium is reached partly by inducing greater holdings of money for speculative purposes, and partly by raising incomes and thereby increasing the need for money for transactions and precautionary purposes. Keynes is not entirely clear whether it makes a difference to the final equilibrium income and interest rate outcome if the money enters the system via income or not.

Keynes then gives his own definition of the income-velocity of money. For him it is related only to that part of the money supply which is held for transactions and precautionary purposes. This is clearly not a statistically functional definition, since there is no way to separate these balances from speculative balances. But, for what it’s worth, Keynes argues that income-velocity is constant, at least in the short-run, and the interest rate has no direct effect on it.

So (again) the equilibrium point between the rest of the money supply and the interest rate depends on the speculative demand for money. There is no constant relationship where a given rate is always in equilibrium with a given amount of money. That’s because “what matters is not the absolute level of [the interest rate] but the degree of its divergence from what is considered a fairly safe level of [the interest rate], having regard to those calculations of probability which are being relied upon.” [p. 201] As we saw in Chapter 13, the speculative demand for money depends on diverse assessments of where interest rates are going to go next, or at least in the medium term. But generally, a fall in the interest rate will be associated with an increase in the speculative demand for money, as more speculators will expect a rise in the future. (The considerations are actually a little more complex than this, also involving what is sacrificed in forgoing interest while wealth is held as money.)

Unless, that is, the fall in rates is associated with a fall in the general expectation of the ‘normal’ rate. Because in that case not so many speculators will expect a rise.

It is evident, then, that the rate of interest is a highly psychological phenomenon. We shall find, indeed, in Book V. that it cannot be in equilibrium at a level belowthe rate which corresponds to full employment; because at such a level a state of true inflation will be produced, with the result that [the transactions and precautionary demand for money] will absorb ever-increasing quantities of cash. But at a level above the rate which corresponds to full employment, the long-term market-rate of interest will depend, not only on the current policy of the monetary authority, but also on market expectations concerning its future policy. [p. 202]

The first part of that is very interesting, confirming again that Keynes converges with the classicals if full employment is assumed. The difference is that the classicals assume full employment.

Keynes now discusses the spread of interest rates rather than treated them as a homogeneous rate. Monetary authorities have much more influence over short-term rates than long-term rates precisely because they are expected to not aim at the same rate forever. Thus speculators can be reasonably sure that policymakers will maintain the rate in the short term. But because conditions will change over a longer horizon, policymakers are likely to change rates at some point, and this likelihood means they have less control over long-term rates in the present. This is especially so if speculators see the rate aimed at by policy as unsustainable, say, because it is lower that that prevailing overseas.

Of course, it is long-term rates that are more important in their effect on investment. So this is interesting – Keynes is implying that monetary authorities do not have the power to set rates as they please. If a broad spectrum of speculators thinks interest rates are going to rise in the long run, demand for money will rise to a high point “almost without limit” so absorbing whatever quantity of money authorities inject into the system in their attempt to lower rates. [p. 203]

It might be more accurate, perhaps, to say that the rate of interest is a highly conventional, rather than a highly psychological, phenomenon. For its actual value is largely governed by the prevailing view as to what its value is expected to be. Any level of interest which is accepted with sufficient conviction as likely to be durable will be durable; subject, of course, in a changing society to fluctuations for all kinds of reasons round the expected normal. [p. 203]

There is no reason why that conventional rate should be the rate consistent with full employment, even in the long run – “… particularly if it is the prevailing opinion that the rate of interest is self-adjusting, so that the level established by convention is thought to be rooted in objective grounds much stronger than convention, the failure of employment to attain an optimum level being in no way associated, in the minds either of the public or of authority, with the prevalence of an inappropriate rate of interest.” [p. 204]

This means that keeping effective demand at full-employment level is very difficult, especially since the marginal efficiency of capital is also unstable. But Keynes is optimistic that because the rate is malleable, so too can be long-run expectations about the rate, and so authorities might be able to cajole speculators step by step to a more appropriate rate if they are persistent enough.

Published in: on 25 October, 2007 at 4:21 pm  Leave a Comment