Sunday, January 20, 2019

"James K. Galbraith reviews Robert Skidelsky's 'Money and Government: The Past and Future of Economics'"

From American Affairs Journal, Volume II, Number 4 (Winter 2018):

Money and Government:
The Past and Future of Economics
by Robert Skidelsky
Yale University Press, 2018, 460 pages 
In this remarkable work, Robert Skidelsky—historian, biographer, and tribune of Keynesian ideas in the House of Lords—unites his experience, knowledge, and talents in a sweeping account of money and power. His topic is not money and power in the familiar (one might say Trumpish) sense of the use of one to obtain the other. Rather, he presents an intellectual history of the control over money as an instrument of state power. 

Whether money ought to be conceived as such an instrument is a matter of historic controversy and remains a contested theme in political economy. On one side are those who justify government control over money as a tool of policy: mercantilists, imperialists, war-fighters (as a point of practical necessity), and the followers of John Maynard Keynes. On the other side we find those seeking a stable, automatic, rule-bound economy, independent of politics and in the effective service of creditors over debtors, rich over poor. Here we find David Ricardo, Irving Fisher, Milton Friedman, and—until mugged by reality in 2008—Ben Bernanke. This is the battleground of silver against gold, of bank credit versus specie, of easy money versus tight, of full employment against inflation-targeting as the prime goal of policy. Money and Government brings these battles and their principals into crisp focus over centuries of mostly British but also American political economy. 

Why Britain? Neither money nor banking originates there. Money, so far as we know, starts with the tax-and-tribute systems of early urban Mesopotamia; banking, in a more or less modern form, dates from the Italian city-states and seventeenth-century Amsterdam. But Britain was the world’s dominant power from the late eighteenth to the mid-twentieth centuries. It controlled major gold reserves in Australia, South Africa, and the Yukon; it was the hub of the cotton trade that fueled the industrial revolution; its banks financed extractive development from Argentina to India. So the relevant doctrines of monetary thought developed there. And that which developed elsewhere—for instance, the work of Friedrich List in Germany, Knut Wicksell in Sweden, or Michał Kalecki in Poland—is known to the English-speaking world only to the extent that English and Scottish political economists have taken it up.  
In the Long Run, No One Learns Anything 
Skidelsky traces the British monetary battles to the 1690s, when a war-induced silver shortage led to an epidemic of clipped coins. There were two solutions: devalue the money by producing smaller coins with less silver, or revalue it by melting the clipped versions and minting new coins at full weight. Isaac Newton, Master of the Mint, favored the first (inflationary) course; John Locke, philosopher of property, favored the second. Locke won; chaos and depression ensued. The battle was joined again during the Napoleonic Wars—bullionists led by Ricardo beat out the Bank of England, supported by Malthus—and again in the mid-nineteenth century, with the Currency against the Banking Schools. By century’s end, the fight was in America: gold versus silver, McKinley versus Bryan, the crucifixion of mankind upon a cross of gold. 

In the twentieth century, with the gold standard in retreat, Wicksell and Fisher developed the quantity theory of money—more precisely a quantity of money theory of inflation. What really mattered was not the substance of money but control over how much of it there was. Good control would keep prices stable and debts good. Monetarism, the descendant doctrine of Milton Friedman, would triumph at the Federal Reserve with the arrival of Paul Volcker in 1979, even though Volcker was not himself committed to the theory. Chaos and recession ensued, and monetarism was abandoned in the world debt crisis of 1982. Truly nothing changes and very little is learned, over centuries, in economics. 

Skidelsky treats these great monetary battles primarily as struggles over ideas. Yet he is aware that behind ideas lie interests, and that the division of economic ideas into binary oppositions reflects the class opposition between creditors and debtors—one dominant and the other oppressed, but each always necessary to the existence of the other. The fact that ideas follow the interests that can pay for them accounts for much of the recurrence of spurious and indefensible ideas in economic thought. Skidelsky, however, is above all a historian of ideas, so this book is cast largely as an account of ideologies and intellectual debates and not of class struggles. There is no doubt, moreover, that some of the most meretricious zealots in the long history of economists’ service to power and wealth were also among the most fiendishly clever. 

The gold standard and the quantity theory of money have been succeeded in our day by rational expectations theory and dynamic stochastic general equilibrium modeling (don’t ask), and by their policy stepchild, inflation targeting. These are the doctrines of repute and respectability, the touchstones of academic and professional advancement in our time. They share an almost eschatological preoccupation with the condition of things in the long run—the economists’ version of the prophets’ paradise to come—and a willingness to absorb (or more accurately to inflict) pain and punishment in the present.  

Economists in this respect are unlike modern doctors. The arsenals of pain relief and fever reduction play little role in their toolkit—and where they do (“stimulus programs”) they are often treated as having long-term costs that offset the benefits in the short term. Our social doctors generally prefer to let events take their course, on the assumption that the patient always recovers. If intervention is indispensable, they say, then let it be surgery without anesthesia, so that the patient will remember next time that it is better not to get sick. Against this attitude Skidelsky is devastating: 
As we will have further reason to emphasize, the short run/long run distinction has had a baleful effect on economics and economic policy. It has served to protect its long-run equilibrium thinking from the assault of disruptions, and to justify policies of inflicting pain on populations. One may feel that insistence on the need for short-run pain (e.g. austerity) for the sake of long-run gain, when the short run can last decades and the long run may never happen, testifies to a refined intellectual sadism.  
The great modern anti-sadist was John Maynard Keynes, and Skidelsky, his definitive biographer, is uniquely placed to revive and interpret Keynes for this century. Keynes’s relevance here is as a theorist of money, who understood both the origins of money in state power and the role of banks in the modern credit-money economy. As a modern monetary economist, Keynes favored the aggressive relief of symptoms and mitigation of pain, not merely as a charitable gesture or guilty afterthought, but in the thoroughly modern medical sense that comfort and confidence speed the underlying processes of recuperation and recovery. Keynes’s legacy survives in monetary policy, in the language of the Federal Reserve Act and of the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978, which call for full employment and price stability—a dual mandate. 

Yet Keynes also came to understand the full implications of his own view that money, which is created by banks through the act of making loans, could not be manipulated to full macroeconomic effect by central banks alone. Low interest rates were not enough. A willing debtor—a borrower—was essential. In the private business sector, the will to borrow would evaporate when the prospect of profit is not sufficiently strong. Hence the state had to serve as the borrower of last resort, running fiscal deficits as necessary to fill the gaps in total demand. This was the big contribution of Keynes’s capstone work, The General Theory. Skidelsky gives a fine summary of Keynes’s intellectual and policy triumph, and of how it came to grief due to inflation and the Phillips Curve, the ad hoc 1960s addendum linking high employment to inflation. The result was the monetarist reaction of the 1970s, eventually the rise of Margaret Thatcher in Britain, and, a bit later, of Ronald Reagan in the United States. 

A third part of Skidelsky’s narrative deals with the consolidation of anti-Keynesian thought in the 1980s and after, culminating in the financial catastrophe of 2007–10 and its aftermath. I do not find this section as satisfying as the two that came before, for two reasons. The first is that there are, in this generation of top-level economists, practically no original thinkers of the first rank. On the left, a leading voice such as Paul Krugman espouses a paper-thin version of 1960s textbook pseudo-Keynesian theory (the IS-LM model—again, don’t ask), which Skidelsky accurately dismisses as a “teaching tool.” In the center and on the right, the field is peopled by pompous mediocrities occasionally exposed as such—as in the film Inside Job. They hold their positions only through the interlocking tribalism of American academic life.  
Finance, Inequality, and the Financial Crisis 
Moreover, the global financial crisis brings us to the limits of macroeconomics. Skidelsky’s subject, he writes, is “money and government, and their relationship.” But the global financial crisis was about more than that. The three topics Skidelsky takes up here are inequality, the misgovernment of finance, and something obscure called “global imbalances.” As he seeks to explain them, he finds himself casting in deep and turbulent waters.  

On inequality Skidelsky makes an unfortunate (though not uncommon) choice to base his presentation largely on the work of Thomas Piketty...MORE