Saturday, January 25, 2014

Historical Notes for Future Reference

For future reference (all of the following from Wikipedia):

Alexander del Mar, also Alex Delmar (1836–1926), was an American political economist, historian, numismatist and author.[Note 1] He was the first director of the Bureau of Statistics at the U.S. Treasury Department from 1866–69.[1] [Note 2]
Del Mar was a rigorous historian who made important contributions to the history of money. During the mid-1890s, he was distinctly hostile to a central monetary role for gold as a commodity money, championing the cause of silver and its re-monetization as a prerogative of the state.
He believed strongly in the legal function of money. Del Mar dedicated much of his free time to original research in the great libraries and coin collections of Europe on the history of monetary systems and finance.

Georg Friedrich Knapp (German: [knap]; March 7, 1842 – February 20, 1926) was a German economist who in 1895 published The State Theory of Money, which founded the chartalist school of monetary theory, which takes the statist stance that money must have no intrinsic value and strictly be used as governmentally-issued token, i.e., fiat money...  Staatliche Theorie des Geldes (“The State Theory of Money”), München u. Leipzig, Duncker & Humblot, 1895. 3rd edition 1921. English edition of 1924 in PDF format

Alfred Mitchell-Innes (30 June 1864 – 13 February 1950) was a British diplomat, economist and author... While in Washington, he wrote two articles on money and credit for The Banking Law Journal. The first, 'What is Money?', received an approving review from John Maynard Keynes,[1] which led to the publication of the second, 'Credit Theory of Money'.[2] Long forgotten and rediscovered decades later, the articles have been praised as "the best pair of articles on the nature of money written in the twentieth century".[3]

Frederick Soddy (2 September 1877 – 22 September 1956) was an English radiochemist who explained, with Ernest Rutherford, that radioactivity is due to the transmutation of elements, now known to involve nuclear reactions... In four books written from 1921 to 1934, Soddy carried on a "campaign for a radical restructuring of global monetary relationships",[3] offering a perspective on economics rooted in physics—the laws of thermodynamics, in particular—and was "roundly dismissed as a crank".[4] While most of his proposals - "to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort" - are now conventional practice, his critique of fractional-reserve banking still "remains outside the bounds of conventional wisdom".[5] Soddy wrote that financial debts grew exponentially at compound interest but the real economy was based on exhaustible stocks of fossil fuels. Energy obtained from the fossil fuels could not be used again. This criticism of economic growth is echoed by his intellectual heirs in the now emergent field of ecological economics.[6]

Marriner Stoddard Eccles (September 9, 1890 – December 18, 1977) was a U.S. banker, economist, and member and chairman of the Federal Reserve Board.
Marriner Stoddard Eccles was known during his lifetime chiefly as having been the Chairman of the Federal Reserve under President Franklin Delano Roosevelt. He has been remembered for having even anticipated and certainly then having supported the theories of John Maynard Keynes relative to "inadequate aggregate spending" in the economy which appeared during his tenure.[2] As Eccles wrote in his memoir Beckoning Frontiers (1966):
"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth ... to provide men with buying power. ... Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. ... The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."[3] He became known as a defender of Keynesian ideas, though his ideas predated Keynes' The General Theory of Employment, Interest, and Money (1936). In that respect, he is considered by some to have seen monetary policy having secondary importance and that as a result he allowed the Federal Reserve to be sublimated to the interests of the Treasury.

David Rolfe Graeber (/ˈɡreɪbər/; born 12 February 1961) is an American anthropologist, author, anarchist and activist who is currently Professor of Anthropology at the London School of Economics.[1]...  Debt: The First 5000 Years is a book by anthropologist David Graeber published in 2011. Graeber analyzes the function of debt in human history. He traces the history of debt from ancient civilizations to our modern-day economic crises, arguing that debt has often driven revolutions and social and political changes. ... In addition to his anthropological narrative, Graeber also provides direct criticism of modern-day capitalism, questioning many conventionally accepted economic notions, especially: the free market, the historical myth of the concept of barter as the origin of trade, and the concept of money as an independent object of worth, rather than a social relation.[2]

Herman Edward Daly (born 1938) is an American ecological economist and professor at the School of Public Policy of University of Maryland, College Park in the United States. Daly was Senior Economist in the Environment Department of the World Bank, where he helped to develop policy guidelines related to sustainable development. While there, he was engaged in environmental operations work in Latin America. He is closely associated with theories of a Steady state economy. Before joining the World Bank, Daly was a Research Associate at Yale University,[1] and Alumni Professor of Economics at Louisiana State University. He was a co-founder and associate editor of the journal, Ecological Economics...  In 1989 Daly and John B. Cobb developed the Index of Sustainable Economic Welfare (ISEW), which they proposed as a more valid measure of socio-economic progress than gross domestic product.

UPDATES 2/5/2014:  

Pilkington observes
This is where economics has erred since at least the turn of the 19th century. The early marginalists occupied two groups. One were the Walrasians who, following Leon Walras, were perfectly content to confine themselves to barren speculation of unrealistic nonsense provided it was done in a nice, formal mathematical manner. The other group were the Marshallians (Alfred Marshall) who tried to bring such abstract speculation down to earth...
Clearly Marshall was becoming ever more concerned about the use of formal modelling in economics. He could see that it was apt to get out of hand. Marshall’s followers in this sense were, of course, Keynes and the early Post-Keynesians. But they lost the battle. By the 1950s Walrasianism was in the ascent. Even Neo-Keynesians like Solow and Samuelson displayed a penchant for abstractionism that was apt to get carried away with itself and only produce irrelevant dross. 
J.W. Mason observes:
The Slack Wire: Graeber Cycles and the Wicksellian Judgment Day
David Graeber, in his magisterial Debt: The First 5,000 Years [1], describes a very long alternation between world economies based on commodity money and world economies based on credit money...  For Graeber, the whole half-millenium from the 16th through the 20th centuries is a period of the dominion of money, a dominion only now -- maybe -- coming to an end. But closer to ground level, there are shorter cycles. This comes through clearly in Axel Leijonhufvud's brilliant short essay on Wicksell's monetary theory, which is really the reason this post exists. Among a whole series of sharp observations, Leijonhufvud makes the point that the past two centuries have seen several swings between commodity (or quasi-commodity) money and credit money. In the early modern period, the age of Adam Smith, there really was a (commodity) money economy, you could talk about a quantity of money. But even by the time of Ricardo, who first properly formalized the corresponding theory, this was ceasing to be true (as Wicksell also recognized), and by the later 19th century it wasn't true at all. The high gold standard era (1870-1914, roughly) really used gold only for settling international balances between central banks; for private transactions, it was an age not of gold but of bank-issued paper money. [3]
If I somehow found myself teaching this course in the 18th century, I'd explain that money means gold, or gold and silver. But by the mid 19th century, if you asked people about the money in their pocket, they would have pulled out paper bills, not so unlike bills of today -- except they very likely would have been bills issued by private banks.
The new world of bank-created money worried classical economists like Wicksell, who, like later monetarists, were strongly committed to the idea that the overall price level depends on the amount of money in circulation. The problem is that in a world of pure credit money, it's impossible to base a theory of the price level on the relationship between the quantity of money and the level of output, since the former is determined by the latter. Today we've resolved this problem by just giving up on a theory of the price level, and focusing on inflation instead... I think we have to be able to theorize a world of pure credit money. No central bank, no gold standard. (That's Wicksell.)

Tuesday, January 14, 2014

Lowering Interest Rates is a Panacea

In a post entitled Why Have Investors Given Up on the Real World?, Kevin Drum says the following,
How should we respond to sustained economic weakness? ...
In a nutshell, the argument for higher inflation is simple. Right now, with interest rates at slightly above zero and inflation running a little less than 2 percent, real interest rates are about -1 percent. But that's too high. Given the weakness of the economy, the market-clearing real interest rate is probably around -3 percent. If inflation were running at 4-5 percent, that's what we'd have, and the economy would recover more quickly. 
There are two arguments opposed to this. The first is that central banks have demonstrated that 2 percent inflation is sustainable. But what about 5 percent? Maybe not. If central banks are willing to let inflation get that high, markets might conclude that they'll respond with even higher inflation if political considerations demand it. Inflationary expectations will go up, the central bank will respond, and soon we'll be in an inflationary spiral, just like the 1970s.

I find it remarkable that Drum is so easily drawn into the rabbit hole of monetarism, a world where the Fed Chair reigns as the Wizard of Oz and economic weakness is solved by a willingness to let inflation get high.  What conceivable logic lies behind such fantasy?

All countries have structural economic problems.  In the United States, our labor force is not competitive because labor is cheaper elsewhere and the technology and political structure exists to move jobs to these other locations.  That is the "economic weakness" of which Drum speaks.  In spite of extremely low interest rates, the American consumer isn't earning enough money to consume more and make additional private investment profitable.

How could the solution to this be just to reduce interest rates?  How would that address the structural problem in any way?  We've been trying this in the U.S. for over 30 years now (see this graph).  Phil Pilkington and others discuss how well this has worked:
Kalecki’s argument was that if central banks try to control the level of effective demand through the interest rate they will find that they will have to drop the interest rate over and over again as each boom peters out until, ultimately, they end up at the zero-lower bound. As Steve Randy Waldman of Interfluidity notes, this appears rather prescient if we look at the period after 1980 when central banks moved toward trying to steer the economy by using the interest rate alone.
[Fixing the Economists]
In sum, a group of bizarro monetarist economists and their naive followers have captured the high, serious ground  They believe that structural problems, such as offshoring and outsourcing of jobs, can be fixed by lowering interest rates.  This has been tried for 30 years whenever the economy falters, and the problem is worse than ever, and rates can't go any lower.  Lower interest rates have yielded lower inflation, to the extent that there is any discernable effect of monetary policy on inflation.  But they believe the problem would be solved if we just somehow get interest rates into negative territory.