I read an article in the Financial Times earlier this week (September 23, 2023) -…
Last Friday, I gave a public lecture organised by the strategy group Strategy2040 and the full presentation is available on YouTube – Thinking in a Modern Monetary Theory Way (I made it available in yesterday’s blog). After that presentation I was invited to a ‘Roundtable’ meeting (although the layout was rectangular) which comprised about 30 or so people (mostly economists as I gather) being given the opportunity for 90 minutes to question me about the presentation etc – to tear me apart really. There was a call from an former senior central banker in the audience to have Chatham House rules governing the meeting. I declined acceptance of that constraint. Opinions should be owned. But what the meeting taught me was that, despite the GFC and the failure of the mainstream macroeconomics to predict it, deal with it when it arrived and then change its approach in the aftermath, very little has changed within the mainstream narrative. The same myths are being propagated and academic and senior policy economists seem blithe to reality.
This also relates to a paper I am working on (to be presented at the Modern Monetary Theory (MMT) conference in Kansas City by my co-author Dr Louisa Connors) about the role that fictional literature plays in promoting ideological bias in societies. Fiction is a powerful tool for spreading ideological propaganda, often in a very subliminal or subtle way.
One book we are working with at present is the recent book by influential American author Lionel Shriver entitled The Mandibles: A Family, 2029-2047 (published May 2016), which traces a family through 18 years of economic chaos after the US government is forced to default on its national debt because it has run out of money.
The Mandibles are rich and tries to deal with losing its wealth as the economy collapses. The population loses all confidence in the currency which is being ‘printed’ at will (Zimbabwe anyone?).
The rich have been taxed out of existence (‘to pay back the deficit’ anyone?) and have stopped investing in productive capital (‘Ricardian equivalence’ anyone?).
On May 9, 2016, Shriver was interviewed by the BBC Radio 4 show Front Row, which is a high profile radio show in the UK covering “Books, film, music, performance, visual art, media and more”.
It influences how educated people construct their reality.
In the Program, Shriver discusses the motivation for the book.
Part of the Interview went like this:
Interviewer: Lionel Shriver doesn’t shy away from America’s big issues in her novels … now she’s looking to an even bleaker American future, in which the debt mountain has collapsed, the dollar has gone into free full, and private savings are plundered by the state. Meanwhile there’s a Trump like wall along the American Mexican border. But it is there to stop the Americans getting in.
The novel, The Mandibles is about the waning fortunes of the family of the title seen at two points in the future in 2029 and 2047.
… but as one of your characters says to another at one point, “novels set in the future are really about the fear of the present. So this is a cautionary tale about today …
Shriver: Yes and I have to admit that it was kicked off by the crisis of 2008. But in my view it’s about what didn’t, did not happen in 2008, and we skirted economic apocalypse but things did not completely fall apart and this is looking at, at least in the United States not internationally but in the United States, we’re looking at the future we brushed against eight years ago.
Interviewer: Yes, because this is set only 13 years from now. The dollar has collapsed, America is bankrupt, the government imposing all these strict controls on private wealth, jewelry and gold has been impounded. It may seem not that far off, 2029, but a reminder that nobody really foresaw 2007.
Shriver: well one always has to remind oneself that one never foresees anything. You know, everything looks obvious in retrospect. Find car care products and spare parts in the latest Supercheap Auto Catalogue.
Interviewer: … I think the underlying theme of the book really is about is about age and its a generational tirade in a way because the Boomer generation have had it all … and the premise of the book is that the debt has been piled high. Its then all crashed and it is the teenagers of this uncertain future who are having to literally fight their way out of the chaos
Shriver: this is a novel that is very sympathetic with the generation behind me and their children and if there’s any major villain in the book, it’s, it’s people like me. You know, we’re the baddies. We’re going to spend all your money. We’re going to borrow all this money and then your going to be responsible for paying back. And if you don’t pay it back then, then there are consequences to that. And our healthcare costs are going to be enormous and so are our pensions and you’re going be working till you drop and pay 77% in income tax. This is not an unrealistic book it is not a science fiction book.
Read again: “This is not an unrealistic book it is not a science fiction book”.
So you have the:
1. ‘government will run out of money’ myth.
2. ‘government deficits will leave a burden for the kids and the grandkids’ myth.
3. ‘the nation will go broke’ myth.
4. ‘the profligate state then turns on its people’ myth and as in ‘socialism, becomes oppressive’ myth.
5. ‘healthcare and pensions are unaffordable’ myth.
And all of that is “realistic” and non-fiction, by the author’s own words.
It might be that Shriver believes all this rubbish and is just weaving it into her book as a narrative construct. But even so, her literary influence means that how ever many people read the book will be nodding in agreement and having all their ignorance and prejudices reinforced, not by any economic analysis and empirical validation, but by the bare-faced assertions and repetition of economic myths.
It is a powerful way to push nonsense onto an unsuspecting and ignorant (in economic matters) public.
Anyway, more on that theme later.
Back to the Roundtable. Here are some vignettes that I distilled from the interaction. There were other topics I could have distilled for our purposes here.
But these will suffice.
To wrest the popular narrative back from this propagandists (and I will write more about how this type of literary propaganda works), we first have to put an end to the dominance of the mainstream of my own profession. The economics academy. It is a living disgrace.
For it is clear, that even after the GFC exposed the mainstream discipline in macroeoconomics as being bereft of any credibility, little has changed within my profession.
The Roundtable discussion I participate in, in Wellington, clearly demonstrated that.
One of the Roundtable attendees was a former senior official with the RBANZ, its central bank. He wanted to debate my contention that monetary policy is largely ineffective as a counter-stabilisation policy tool (adjusting spending to maintain full employment) and claimed that fiscal policy did not have as direct and more predictable results (as I suggest) because to paraphrase:
There are all sorts of Ricardian offset effects in the private sector.
I have dealt with the concept of Ricardian Equivalence before.
Please read my blogs (among others):
Essentially, the notion is nonsensical without any empirical foundation. It is really fake knowledge.
The modern version of Ricardian Equivalence was developed by Robert Barro at Harvard. For non-economists – this piece of neo-liberal dogma says that the non-government sector (consumers explicitly) forms the view that any fiscal deficits have to be paid back in the form of higher taxes in the future.
So if the government spends and borrows, consumers will anticipate higher future taxes and spend less now offsetting the fiscal stimulus.
So the government spending has no real effect on output and employment.
To get this conclusion, Barro is required to make several assumptions that have to hold in entirety for the logical conclusion he makes to follow.
None of these assumptions (see links above if you are interested) never hold in the real world. They are fictional as are the conclusions.
When Barro released his paper (late 1970s) there was a torrent of empirical work examining its “predictive capacity”.
It was opportune that about that time the US Congress gave out large tax cuts (in August 1981) and this provided the first real world experiment of the Barro conjecture. The US was mired in recession and it was decided to introduce a stimulus. The tax cuts were legislated to be operational over 1982-84 to provide such a stimulus to aggregate demand.
Barro’s adherents, consistent with the Ricardian Equivalence models, all predicted that saving would rise to “pay for the future tax burden” which was implied by the rise in public debt at the time.
What happened? The personal saving rate fell between 1982-84 (from 7.5 per cent in 1981 to an average of 5.7 per cent in 1982-84).
In other words, Ricardian Equivalence models got it exactly wrong. There was no predictive capacity irrespective of the problem with the assumptions.
Once again this was an example of a mathematical model built on un-real assumptions generating conclusions that were appealing to the dominant anti-deficit ideology but which fundamentally failed to deliver predictions that corresponded even remotely with what actually happened.
Barro’s theorem has regularly been shown to be a dismal failure and has no empirical content.
So when the Participant at the Roundtable introduced the notion of “Ricardian offsets”, I responded immediately by asking him to clarify whether he believed that the Ricardian Equivalence idea had any empirical validity (not to mention its lack of theoretical correspondence).
There was some ‘umming and ahhing’ on his behalf.
I pressed him.
Umming and ahhing and some recognition that the Ricardian idea was bereft and had nothing to say about the real world.
I said (more or less): Well if that is the case, why introduce the term into this discussion. You know it is loaded and immediately invokes, is shorthand for, the assertion that fiscal policy is ineffective.
He said (more or less): Well, offsets!
I replied: But you introduced Ricardian offsets, which have specific meaning in the mainstream literature, yet you know full well that they have no correspondence with the real world and cannot provide any knowledge upon which policy can be designed or judged.
Him: umming and ahhing … well offsets!
Me: what offsets?
It was that sort of conversation.
In the real world, the non-government behavioural offsets that accompany sensible use of fiscal policy, are typically reinforcing rather than counteracting in effectiveness.
Psychology and sociology, disciplines which actually study human behaviour, as opposed to mainstream economics, which imposes ridiculous, a priori assumptions about the ‘economic man’, help us understand the way humans respond to economic fluctuations and government interventions.
During a recession, people fear unemployment and firms realise their sales volumes are under threat. In those circumstances, government intervention in the form of a fiscal stimulus, provides a kickstart-type effect to the economy.
The public spending injection and/or tax cut stimulates sales, helps firms maintain staff, and reduces unemployment anxiety.
In those circumstances, confidence in the non-government sector rises and second-round private spending effects are typically positive.
The highly cyclical nature of fiscal deficits (rise when non-government spending falls and vice-versa) is evidence of this.
Another participant at the Roundtable was obviously concerned at the way I had characterised my mainstream colleagues as myth propagators or liars.
I will come back to the sensitivity relating to the term ‘lying’ next.
But in this interchange, we started talking about the money multiplier and by claim that anyone who still teaches this in undergraduate or graduate economics programs are essentially engaging in propaganda and dishonesty.
For background to that statement, please read:
It is clear, that even the more reasonable elements in my profession are now falling in line with the insights provided by Modern Monetary Theory (MMT) on the money multiplier.
For example, two years ago I wrote this blog – Bank of England finally catches on – mainstream monetary theory is erroneous
It discussed a paper from the Bank on May 29, 2015 – Banks are not intermediaries of loanable funds – and why this matters.
The Bank concluded that:
1. “The currently dominant intermediation of loanable funds (ILF) model views banks as barter institutions that intermediate deposits of pre-existing real loanable funds between depositors and borrowers. The problem with this view is that, in the real world, there are no pre-existing loanable funds, and ILF-type institutions do not exist.”
In other words, the mainstream economic models that pervade textbooks and teaching programs in economics are fantasy – they analyse institutions that “do not exist”.
2. “in the real world, there is no deposit multiplier mechanism that imposes quantitative constraints on banks’ ability to create money in this fashion. The main constraint is banks’ expectations concerning their profitability and solvency.”
If you read any macroeconomic textbook written for mainstream (neo-liberal) courses you will find some account of the money (deposit) multiplier as it applies to ‘reserve-constrained’ commercial banks.
But as the Bank of England now reliably informs the world, this sort of model is not “in the real world”. Banks are not reserve-constrained.
So I asked the Roundtable participant why he kept teaching this discredited model – this fiction – to his students.
More umming and ahhing.
He then said (more or less): “Well, it’s a stylisation”.
Me (more or less): “of what? A stylisation of what?”.
Him (more or less): “of banks”.
Me (more or less): “but this stylisation is a fiction. Typically, we would use stylisation to simplify but not obscure reality. If you teach the money multiplier and the internal banking dynamics that underpin it, as if it is a statement of the way the banking system actually works, then you are lying.
It is in that sense that that I suggest my profession lies.
Whether they know they are preaching fiction as if it is non-fiction, untruths as if they are truths, is not the point.
Ignorance is not an excuse.
Fiction is fiction. Pretending to be talking about non-fiction when you are actually offering fiction is equivalent to lying. My profession does it every day of the week and has been doing that for a long time.
It is time to stop.
That is one of the insights that Modern Monetary Theory (MMT) offers. It exposes categorically, for the first time in such a comprehensive manner, the way mainstream banking and monetary theory is based on a fiction.
Also at the Roundtable was the former Prime Minister of New Zealand who oversaw the worst of the neo-liberal excesses against the disadvantaged – James Bolger. He was also in the audience for the formal presentation and I had a conversation with him about various things that remain between us.
In the Roundtable, he was obviously frustrated with the message, which I could have made more personal (against him) had I desired, given his role in the damage that was caused and his apparent recanting in recent interviews.
In a RadioNZ conversation – entitled The Negotiator – on The 9th Floor series (termed because that was where the PM’s office was in the Government buildings) and aired on April 21, 2017, Bolger, who was PM from November 2, 1990 to December 8, 1997 and achieved the lowest popularity ratings of any PM in NZ history, said that:
… neo-liberal economic policies have absolutely failed … They have failed to produce economic growth and what growth there has been has gone to the few at the top … that model needs to change.
At the Roundtable he rather empahtically rose from his seat announcing he had to go but had a question. It was rather pointed display and went along the lines that if I was correct there must be a grand conspiracy of the rest of the macroeconomists around the world who I said were teaching their students and giving policy advice that amounted to fiction.
If these economists were so wrong how could such a grand conspiracy persist. And, with the obvious conclusion that I was the idiot and was wrong and there was no grand conspiracy to lie by the rest of my profession.
He has never worked in the economic profession and the failure to understand how Groupthink forms and patterns behaviour within the academy was obvious from the way he set up his question (attack) (dismisal).
I started by relating the challenge faced by American biologist Joseph Altman who specialised in neurobiology and discovered adult neurogenesis in the 1960s.
He showed that adult brains could create new neurons but the idea was fiercely denied by contemporary thought at the time.
It wasn’t until the phenomenon was ‘rediscovered’ by another scientist (Elizabeth Gould in 1999) that the proposition became fashionable.
Neurogenesis is now one of the most significant areas in neuroscience. Why were Altman’s discoveries ignored for almost 30 years?
Charles Gross wrote in 2008 “the dogma of ‘no new neurons’ was universally held and vigorously defended by the most powerful and leading primate developmental anatomist of his time” (p.331)
[Reference: Gross, C.C. (2008) ‘Three before their time: neuroscientists whose ideas were ignored by their contemporaries’, Experimental Brain Research, 192(3), January, 321-34.]
Academic departments that develop Groupthink lose their perspective on reality. The conspiracy doesn’t have to be written down on paper or agreed in any explicit way.
The cult worshippers maintain their hegemony in a number of ways, including control of teaching programmes in universities; control of hiring processes within the academy; control of key publication outlets; control of major research funding bodies; and dominating the linkages between the academy, business and government.
Much of the control is implicit and accomplished through networks to get around external oversight such as anti-discrimination legislation.
In a Challenge article from 1982 – The Guilds of Academe – Jack Barbash discussed the way in which the economics profession protects its belief system from criticism and avoids, as far as possible, addressing real world problems. He notes that there is “no formally coercive apparatus” but “the equivalent of an ‘old-boy’ network” in operation (page 51).
[Reference: Barbash, J. (1982) ‘The Guilds of Academe’, Challenge, 25(1), March-April, 50-54.]
Advantages (publications, research grants, promotions, consulting opportunities, influence, etc.) accrue to those who conform to the rules.
Socialisation begins in one’s student days where the masters of the paradigm control the curriculum; the grading systems; and who gets postgraduate scholarships to pursue doctoral studies.
The indoctrination intensifies when one enters the postgraduate stages. In economics, the graduate student learns that “rigor is more important than substance” and “method is more important than result” (p.52).
Graduate students are trained to follow, what former IMF Chief Economist Olivier Blanchard called ‘haiku-like’ rules, that govern an economics paper’s chance of publication success.
Just before the GFC revealed its worst, Olivier Blanchard, reviewed the understanding that macroeconomists had of the real world in an NBER paper The State of Macro.
He claimed that the “state of macro is good” (page 2). He asserted that a “largely common vision has emerged” (p.5) in macroeconomics, with a “convergence in methodology” (p.3) such that research articles in macroeconomics “look very similar to each other in structure, and very different from the way they did thirty years ago” (p.21).
They now follow “strict, haiku-like, rules” (p.26).
He also noted that the dominant ‘New Keynesian’ approach in macroeconomics had “become a workhorse for policy and welfare analysis” (p.8) because it is “simple, analytically convenient … [and] … reduces a complex reality to a few simple equations” (p.9).
It didn’t seem to matter to these economists that in the “basic NK model … there is no unemployment” (p.12), such that all fluctuations in measured joblessness are characterised largely by workers choosing whether or not to work as part of a so-called optimal choice between work and leisure.
[Reference: Blanchard, O. (2008) ‘The State of Macro’, NBER Working Paper No. 14259, National Bureau of Economic Research, August.]
In my public presentation last Friday, I concluded that the knowledge quotient of these economic papers was zero. GIGO! ( Garbage-In, Garbage-out).
So it is entirely possible, that a substantial portion of my profession, go to graduate school, receive the heavy indoctrination from their masters, are awarded their PhD degrees, access an academic teaching job, entertain visits from publishers who adorn them with the latest macro economics textbook and all the related teaching materials (slideshows, quizzes, et cetera), and then, essentially, go to sleep!
They teach year in and year out from these textbooks. Some publish ‘haiku-type’ papers which provide no knowledge about the real world, but earned them plaudits from the Academy and, hence, promotion, higher salaries, more status, and a better retirement.
But they learn early on not to question the main parameters of their discipline. The indoctrination in graduate programs is very effective and it is far more simpler to go to sleep and enjoy the rewards that a highly-paid and secure profession brings.
But that doesn’t absolve these characters from the accusation that they are fiction-preachers! Otherwise known as liars.
More insidious is that neo-liberal economics privileges the interests of capital and the financial elites.
To understand why there is so much resistance to abandoning failed economic theories, we need to understand that the mainstream economics paradigm is much more than a set of theories that economics professors indoctrinate their students with.
Mark Blyth wrote in his 2013 book (page 100) that these mainstream economic theories:
… enshrine different distributions of wealth and power and are power resources for actors whose claims to authority and income depend upon their credibility …
[Reference: Blyth, M. (2013) Austerity: The History of a Dangerous Idea, New York, Oxford University Press.]
Which explains, in part, why there is such resistance to abandoning them, even though it is clear that they are bereft of any evidential standing.
And if you are still wondering whether a conspiracy is possible across a discipline, think back to the Powell Manifesto or Powell Memorandum.
I detailed that story in this blog – The right-wing counter attack – 1971.
The Memo was the product of a very well-funded strategy by US capital interests to wrest control back from labour and the social democrats to allow it to capture more profits and better control production etc.
Powell detailed a strategy that would allow a right-wing penetration of universities (to “address the campus origin of hostility”) and to vet appointments, promote the public recognition of known supporters of free enterprise, “evaluate” textbook use, and build influence in the “graduate schools of business” by demanding “specific courses in such schools” which will provide “essential training for the executives of the future”.
He also wanted to establish “scholarly journals” explicitly to give access to publication of free market literature – parading as academic research.
He wanted similar influence exerted in the secondary school system.
In the public sphere he outlined a plan to use monitor “national television networks” and the “radio and press” harass the relevant organisation that dared to deviate from the free market message he sought to promote.
He claimed that:
The news stands – at airports, drugstores, and elsewhere – are filled with paperbacks and pamphlets advocating everything from revolution to erotic free love.
He wanted an organised effort to produce material on “our side” to counter what he considered to be a socialist insurgency via the popular media.
Finally, Powell also understood that the US courts influenced the terrain the the corporate sector had to operate within.
In that context he said:
Under our constitutional system, especially with an activist-minded Supreme Court, the judiciary may be the most important instrument for social, economic and political change.
That sounds and looks like a conspiracy to me, which, as history tells us was put into action throughout the world in the 1970s and is on-going.
There was an interesting article in the LA Times last week (July 25, 2017) – Did the Koch family buy a piece of the University of Utah to ‘balance’ a Marxist faculty?.
I will explore that issue another day.
But it is clear that the Koch brothers have a record of donating to university with strings attached.
The article says:
That’s what happened at Florida State University’s economics department, which accepted $1.5 million from the Charles G. Koch Charitable Foundation, a precursor of the Charles Koch Foundation, in return for giving the foundation the right to accept or reject faculty appointments made with those funds; in the first round of hiring, the foundation rejected 60% of the university’s faculty choices. And a 2008 agreement between that foundation and Utah State University’s business school gave the foundation the right to approve or reject professors hired under a $625,000 grant.
That is a conspiracy and not isolated.
Finally, remember back to 2011, when the IMF’s Independent Evaluation Office (IEO) released a scathing assessment of the institution’s performance in the lead up to the GFC.
The Report – – identified neo-liberal ideological biases at the IMF and determined that the IMF failed to give adequate warning of the impending GFC because it was “hindered by a high degree of groupthink” (p.17), which, among other things suppressed “contrarian views” where an “insular culture also played a big role’ (p.17).
The report said (p.17):
Analytical weaknesses were at the core of some of the IMF’s most evident shortcomings in surveillance … [as a result of] … the tendency among homogeneous, cohesive groups to consider issues only within a certain paradigm and not challenge its basic premises.
It said that (p.17):
The prevailing view among IMF staff – a cohesive group of macroeconomists – was that market discipline and self-regulation would be sufficient to stave off serious problems in financial institutions. They also believed that crises were unlikely to happen in advanced economies, where ‘sophisticated’ financial markets could thrive safely with minimal regulation of a large and growing portion of the financial system.
Groupthink establishes a mob rule. Your either in or your out. In gives advantages as above (promotion etc). Out means ignominy and unemployment. The years of study are ‘wasted’.
Groupthink is about conspiracy.
My visit to New Zealand was interesting. I hope it sparked some progressive interest in Modern Monetary Theory (MMT) as a real alternative to the moribund lying that parades as economics in that nation.
But my interactions suggest there is a long way to go.
The snippets I have provided in this blog support that belief, I think.
Crowdfunding Request – Economics for a progressive agenda
I received a request to promote this Crowdfunding effort. I note that I will receive a portion of the funds raised in the form of reimbursement of some travel expenses. I have waived my usual speaking fees and some other expenses to help this group out.
The Crowdfunding Site is for an – Economics for a progressive agenda.
As the site notes:
Professor Bill Mitchell, a leading proponent of Modern Monetary Theory, has agreed to be our speaker at a fringe meeting to be held during Labour Conference Week in Brighton in September 2017.
The meeting is being organised independently by a small group of Labour members whose goal is to start a conversation about reframing our understanding of economics to match a progressive political agenda. Our funds are limited and so we are seeking to raise money to cover the travel and other costs associated with the event. Your donations and support would be really appreciated.
For those interested in joining us the meeting will be held on Monday 25th September between 2 and 5pm and the venue is The Brighthelm Centre, North Road, Brighton, BN1 1YD. All are welcome and you don’t have to be a member of the Labour party to attend.
It will be great to see as many people in Brighton as possible.
Please give generously to ensure the organisers are not out of pocket.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.