I’m a big, though not uncritical admirer of Paul Krugman – of his straightforwardness and his aggression in what is almost always a worthy cause. And yet, reading Martin Wolf’s magnificent book rather inauspiciously titled The Shifts and the Shocks: What We’ve Learned-and Have Still to Learn-from the Financial Crisis, I’m struck by the way Krugman has constrained his own investigations and advocacy.
Before his decisive turn with the coming of George Bush’s presidency and what Krugman saw as the rampant dishonesty of the campaigning and discourse of the right, Krugman styled himself as an aggressive defender of centrism, puncturing the fallacies of the heroes of the right and left. As he put it, he liked to catch them with their hands in the intellectual cookie jar and expose them in his pieces. Thus in his attacks on the ‘policy entrepreneurs’ of the Clinton era and before, like Lester Thurow and Robert Reich, he’d frequently ‘catch’ each of them not paying sufficient respect to the subtleties of comparative advantage and allegedly committing themselves to various other alleged intellectual fallacies.
While I was quite sympathetic to the points he was making on policy – these guys were often somewhere between little and a lot too slick in the way they presented their stuff – I didn’t really think that Krugman had demonstrated that they had in fact committed themselves to those fallacies. If you tried to read them ‘with’ the grain as it were, to get what they were trying to say – knowing also that they’re trying to communicate with people who are not steeped in economics – it wasn’t clear they were mistaken logically whether or not you ultimately agreed with them.
By contrast on the right we had all sorts of hijinks – massive tax cuts that paid for themselves, full Ricardian equivalence, modelling the Great Depression as a spontaneous holiday and various other grand themes thrown together with the flimsiest of evidence. In any event since Krugman has self-identified as a fighting Liberal, he’s been fantastically good at skewering his opponents – almost always when they need skewering, and at the same time he’s kept producing interesting academic(ish) papers. And in economics where models should be used to test, train and illustrate economic intuition and shouldn’t take over the show, academic(ish) papers are usually better than academic papers. Yet there’s been something missing.
Krugman’s thinking is virtually all oriented around existing institutions – and contemporary policy questions – most particularly what’s the right stance for monetary and fiscal policy in the current circumstances (which have, since 2008 been in the presence or threatened presence of a liquidity trap.) Krugman has shown how right he’s been, how wrong his opponents have been, again and again. But one place he’s been remarkably silent has been in the institutional development he’d like to see to make the world safe for his vision of how macro-economic policy should be run. So despite his interest in active fiscal policy in the presence of a liquidity trap, he’s shown little interest in the debate about independent fiscal policy.
More strikingly he’s shown little interest in more fundamental questions. One doesn’t have to think for long about things like quantitative easing and its fiscal equivalent – helicopter money – before a curious mind starts wondering whether fixations on budget balance, either in the short term or over the cycle might be clinging to a picture of the world in which the monetary system is essentially outside government, whether thinking of the budget balance in the traditional way might be, as Keynes described the gold standard, a barbarous relic.
At this point it’s of interest to understand a little of the way in which thinkers have tried to go beyond this kind of thinking. “Chartalism” before Keynes, “functional finance” afterward, and more recently modern monetary theory (MMT) all try to get beyond reifying money in an age in which money is supplied by government fiat. The basic ideas were set out in chartalism in the late nineteenth century. In a chartalist world money is issued by fiat by the government. Why do people use government money? Well ultimately the government requires them to pay taxes in that money. In this context it doesn’t make a lot of sense to talk of a budget surplus or deficit – certainly governments can ‘print’ or otherwise create any money they need to meet their bills. This doesn’t usher in Nirvana. It just means that the constraint on this power is macro-economic balance – and money is issued to the point that generates full employment but stops short of generating inflation.
Further, in normal times it seems that ‘traditional’ ways of thinking of budget deficits might operate quite neatly to encapsulate the constraints on governments trying to optimise economic management. So printing more money might get you out of a recession, but then once a recovery gets underway, you’ve got a lot of extra money sloshing around which you need to withdraw from the system – which you’d do by taxing more and/or reducing government spending. But that’s what you’d have to do if you’d debt financed your way out of a recession – loosening fiscal policy (borrowing to run a deficit) and then tightening fiscal policy (running a surplus and repaying some or all of the debt) after the event. So this way of thinking is not necessarily revolutionary. But if I were in Japan, or in a liquidity trap that I feared might run for a long time, I’d want to work out whether I should think of budget deficits in the traditional way.
Anyway, Krugman shows little interest in this – and indeed hostility to MMTers. Almost all Krugman’s interventions on MMTers seem to be dominated by an instinct that the place not be overrun by cranks (and money is certainly a place where cranks thrive). He’s forever showing how he really does know that commercial banks create money and implying that these MMTers think that commercial banks can expand the stock of money without limit. Krugman keeps intimating that somehow MMTers think that they can expand the amount of money they issue irrespective of the equity they raise. (I don’t know any MMTers who say this). Unfortunately one of the people who got to debate Krugman was our own Steve Keen but the combative styles of both took the debate rapidly into theological points of difference rather than building from points of agreement and Krugman left in a huff. In some ways Krugman’s conservatism about frameworks strikes me as typically academic. After all, if you go wandering off into another paradigm, or trying to figure out how they fit together, it will be difficult to publish it in the leading journal.
In any event, Martin Wolf’s approach couldn’t be more different. With a similarly perspicacious understanding of our current economic woes and what has caused them to Krugman’s, his mind turns to the deeper questions of economic theory and institutional design. And here ‘economic theory’ doesn’t mean what it normally means in economics – neoclassical economic theory. It means what ‘theory’ means in all other disciplines – a self-reflective search for the right mental architectures for understanding the world. Wolf is able to show how the theoretical concerns of chartalists or MMTers about endogenous money growth through the fractional reserve banking system 1are in many ways the same as the concerns of Austrians (I hadn’t thought of this before reading his book).
And he shows how the Chicago Plan for full reserve banking responds to many of these concerns and, it seems, might be able to prevent the endogenous money creation system that is our fractional reserve banking system exacerbating the economic cycle. He’s always pointing to symmetries in different perspectives in very enlightening ways. In any event, I recommend his book to anyone interested in our current economic woes. Easily the best book I’ve read on them – both trenchant and balanced, fair and forthright. And full of bold proposals to make the world better – that are pretty radical, but then they make sense to me and have a fine pedigree back to early twentieth century economics – strangely enough from both the right and left.
Anyway, the usual enthusiasm alert applies. I’m only about a third through the book – though I’ve bounced around a lot to the ‘solutions’ in Part Three – so perhaps I’ll revise my opinion down in the light of more reading or a night’s sleep. On a curious note, Amazon has offered me the Kindle version for US$13.00, US$16.00 and US$16.99 at different times. I bought it for US$13 and then downloaded it onto other Kindles by ‘buying’ it for the other prices only to be told that I’d bought the book already and it was being downloaded for nix.
- Technically we’re not in a fractional reserve system, but we can assume we are for the purposes of this conversation. ↩