I am grateful to Helen Schofield for drawing my attention to an open letter John Maynard Keynes wrote to President Roosevelt in 1933 on the way in which economic recovery might be achieved. He said (and the language is of the time):
The object of recovery is to increase the national output and put more men to work. In the economic system of the modern world, output is primarily produced for sale; and the volume of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come on the market. Broadly speaking, therefore, an increase of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come on the market. Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees...; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse.
We might now want to refine this a little. Not all consumption is now seen as beneficial, after all. And we also know that investment has to be directed towards sustainability. But is anything both issues add focus to Keynes' conclusion, which was and remains the only one available. It is as true now that:
public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.
Keynes was, of course, literally talking about printing. Again, times have changed. We know we no longer need do that. Credit creation is what matters now. We also now know that additional borrowing very often requires the creation of additional credit money in the first instance. For both reasons the emphasis would now have to be in credit creation by the government i.e. new money injection by its spending into the economy.
And there is a caveat to that as well, because we have, of course, seen significant credit creation in the last decade by the government through the quantitative easing programme, but there is a problem with that. The QE programme was not aimed at boosting incomes or at job creation to achieve that aim. If it had an aim it was to change investment decision making. That supposedly should have increased direct funding of economic activity, but there is no evidence that it has. Funds have instead gone into speculation. Bank balance sheets might be in better shape as a result, but that is not what Keynes was prescribing. We need more income now. QE as we have known it is not the answer in that case.
Keynes was right in 1933. with minor contextual change his advice remains right now. We need more government-created money to assist recovery now. The greatest fear is that this is not what the government intends as its paranoia about balancing budgets and supposedly sound finance kick in as this year progresses. We may yet see that we're not all Keynesians now.
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Helen/ Richard
Like many of us on your blog. ,I’m a self-starter in economics
Thus, I’m a Keynes ignoramus
Can you recommend a primer to get us into the Keynes Appreciation Society ?
Robert Skidelsky – ‘The return if the master’ – if I recall the title correctly
Thanks, Richard
I’ll order it today
so
I hope to be understanding Helen soon, but,
There’s a lot to this MMT, economics & I try to get my head around it more every day with mixed success
At least it will get me passed the double – entry bookkeeping stage.
It is accessible
Rob your question isn’t easy to answer for the simple reason that the straightforward message Keynes was trying to convey about the roles money could play in his 1933 Open Letter to Roosevelt published in the New York Times and therefore available to the public was obfuscated by those who felt threatened by it.
In particular bankers were threatened by it because their ability to seek “rent” by making bank loans could disappear if governments started to offer low interest loans especially for house mortgages which make up 80% of banks’ business.
Business people were threatened by government’s need to reflux part or all of the money they created in order to regulate deflation and inflation and businesses are always seeking to capture price point in their markets so having to set aside money for taxes on their business’s income was a hindrance in this.
Additionally, of course, some business people resented being targetted for high taxation because their personal income from their business was high.
Additional obsfucation came from main stream economists who mechanistically (lifted from Newton’s idea the universe operates entirely on invariable mechanical rules) believed economies self-equilibrated and as Keynes pointed out this didn’t take into account future uncertainty which impacted on how much money to risk in a business investment.
On top of this all the innovative ideas Keynes developed in regard to the predominantly monetary economy human beings now live in as a consequence of the mechanisation of farming and the end of the reciprocal economies of serfdom (favours in kind) he put into his famous 1936 book “The General Theory of Employment, Interest and Money” were written for trained economists and therefore technically difficult for non-economists to follow. Keynes tried to rectify this somewhat in an article he wrote in 1937 to make his ideas clearer:-
https://www.hetwebsite.net/het/texts/keynes/keynes1937qje.pdf
Robert Skidelsky’s books are interesting. I prefer his 2018 book “Money and Government” but don’t really find his explanation of stagflation in that book very convincing. I think because I’m largely persuaded by the Post-Keynesian arguments of MMTer’s it’s worth tracking down the views of economists like Randall Wray and Bill Mitchell in articles they’ve written on the legacy of Keynes. Try the Levy Institute for Wray and Bill Mitchell’s blog archive.
I offered Skidelsky as an introduction
He does not get MMT, but curiously we get on quite well
The following is an extract from Covid-19 and Social Mobility, published in May 2020 by Lee Elliot Major and Stephen Machin of LSE’s Centre of Economic Performance. It formed the basis of a lead article in last Sunday’s Observer.
‘Wealth tax
In the aftermath of the immediate crisis, the government should consider introducing a one-off progressive wealth tax assessed on the net worth of the top 1% of richest individuals (Landais et al, 2020). As we look to recover from the Covid-19 recession, economic history suggests that we follow Germany’s example of progressive wealth taxes, which helped to fuel the country’s inclusive growth after the Second World War. Given the extreme concentration of wealth, a wealth tax is the most progressive fiscal tool available to put the country on a path of economic rejuvenation.
This would be enough to repay all the extra debt due the pandemic after 10 years. From an intergenerational perspective, taxing wealth is an effective way of redistribution as it does not discourage people working hard or investing in wealth-creating businesses.‘
In a discussion on Facebook yesterday, that cited this Observer piece, I argued…
‘The money expended on dealing with the pandemic is but a small fraction of the amount that will be needed over the next ten years to deal with climate change. Where will that money come from? The answer is… not from taxation. The idea that we somehow have to balance the books – eliminate debt by increasing taxation or by cutting public expenditure – is a false premise. All it would do is take money out of circulation. Who benefits from that?
By all means use taxation to redistribute wealth, but we will get nowhere if we attempt to use taxation to pay off the national ‘debt’. Just consider the absurdity of the notion that a sovereign state can be in debt to itself!‘
I followed up this morning by citing this blog as evidence in support of my argument. Have I got this right?
You have got it right
That Major and Machin piece is typical of the nonsense being written on this issue to which I obliquely refer in my tweets this morning
I have no problems with wealth taxes to tackles inequality but they are much better imposed as taxes on income from wealth in the short term
And for the purposes of economic management they are actually not very useful as they do not control demand – as the wealthy do not spend all they have
But the logic that wealth tax has to pay for debt is absurd
I have to say that these days it seems obvious what has to happen. What is annoying being in a sovereign currency producing nation is that the answer is right under people’s noses. It’s not just borders or laws that define sovereignty, but printing your own money – which is even more so. It’s a very powerful thing to be able to do.
Can I recommend to Rob ‘Introducing Keynes: A Graphic Guide ‘ by Icon books ISBN 978 184831-65-0 (2012) – it uses Keyne’s own words basically to tell his story. It does not mention MMT or anything like that but it will get him going quickly and set him up nicely for the deeper stuff.
I’ve been mulling the sovereignty issue and MMT. I’ve come to the conclusion that the reason why the sovereignty issue is overlooked is because of legal considerations.
Looking at the venal way in which the City works, if the printing of money or the pound itself was put on a truly sovereign footing, many in the City would find themselves on the wrong side of the law. Their actions could be viewed as treasonable and traitorous, working against the national interest for their own personal profit. I for one would be happy with that definition and see it executed in that way. The financial sector is currently unhinged as far as I am concerned and it needs bringing to heel. I think currency speculation should be banned out right.
Richard/ Helen
thank you both for your time
I should have realised that there are no short cuts
but I do have time.So I’ll start with Skidelsky & dip into Messrs. Wray & Mitchell
Rob
The book I mentioned above is as best a short cut that can be offered. I have a copy – it’s 174 pages long, and has a further reading index at the back. Just because it has pictures in it, does not mean it lacks an intellectual wallop. All his assertions are covered – even when he changed his mind.
One of the best bits is where the book debunks Reagan’s apparent Neo-liberalism; it argues that Reagan was a mis-directed Keynesian – because Reagan kept Government spending up, but in the U.S. military only – not social security or other investment.
I think Pugh and Garratt call it right.
Check it out.
Best,
PSR
Thanks PSR I’ll chase it up