Economics as politics and philosophy rather than some independent science

Last week, I wrote about – The decline of economics education at our universities (February 6, 2025). This decline has coincided and been driven by an attempt by economists to separate the discipline from its roots as part of the political debate, which includes philosophical views about humanity and nature. In her 1962 book – Economic Philosophy – Joan Robinson wrote that economics “would never have been developed except in the hope of throwing light upon questions of policy. But policy means nothing unless there is an authority to carry it out, and authorities are national” (p.117). Which places government and its capacities at the centre of the venture. Trying to sterilise the ideology and politics from the discipline, which is effectively what the New Keynesian era has tried to do, fails. The most obvious failure has been the promotion of the myth of central bank independence. A recent article in the UK Guardian (February 9, 2025) – You may not like Trump, but his power grab for the economic levers is right. Liberals, take note – is interesting because it represents a break in the tradition of economics journalism that has been sucked into the ‘independence’ myth by the economics profession.

I have written extensively about this topic in past blog posts, including among others:

1. The central bank independence myth continues (March 2, 2020).

2. ECB continues to play a political role making a mockery of its ‘independence’ (June 12, 2018).

3. Censorship, the central bank independence ruse and Groupthink (February 19, 2018).

4. The sham of ECB independence (October 24, 2017).

5. Trump might do us a favour – expose the myth of central bank independence (November 14, 2016).

6. The sham of central bank independence (December 23, 2014).

7. Central bank independence – another faux agenda (May 26, 2010).

The UK Guardian article cited in the Introduction notes that “monetary policy is political. The question is how to make it democratic”.

I am not endorsing the contents of the article except that it is correct in bringing to our attention that there is tremendous scope available for progressive policies if we give up on the idea that monetary policy is somewhere separate from politics and ideology.

The idea that politicians should not be involved and responsible for the major macroeconomics policy settings is ludicrous and testament to the success the neoliberals have had in coopting government to serve the interests of a few at the expense of the many.

In our 2017 book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017) – we discussed the concept of depoliticisation as a characteristic of the neoliberal era where the state was reconfigured to serve the interests of capital rather than society in general.

Depoliticisation was justified in the words of the UK Guardian article by claims that “politicians, who only care about getting elected, aren’t the right custodians of monetary policy, since what looks like good policy in the short term (such as lowering rates in advance of an election) can become bad policy in the long term.”

In graduate school, this claim is cloaked in all sorts of technical, mathematical mumbo-jumbo (for example, Dynamic inconsistency), but the motive is clear enough.

That is, the motive was to make it easy for politicians to avoid responsibility for harsh policy settings that favour the wealthy and give our elected representatives cover for running fiscal policy that is biased towards austerity – “Oh, if we don’t cut the deficit, then the independent central bank will hike interest rates because they fear increased inflation, and that would be bad, wouldn’t it”.

Game over.

No questions asked.

In relation to monetary policy, the Guardian article also notes that “this field is undoubtedly too technical for politicians to understand. It should be left to the experts”.

The ‘too technical’ argument has been a common ruse.

As an aside, and relevant to my post last Thursday – The decline of economics education at our universities (February 6, 2025) – when the KPI-touting managers wanted to take over the universities in Australia and exclude academics from the key legislative positions within the institutions the same logic was used.

I recall a meeting where a DVC said to me – that the sector had become too complex for academics to understand fully and thus governing decision-making with the university had to be ceded to full-time managers, rather than elected academics serving their colleagues.

It was a laughable ruse.

The Guardian article also sees through that claim – “the same is true of the “technical” nature of monetary policy. Do we really think it is that much more technical than tax policy, defence policy or environmental policy?”

The article concludes that “a fear of democracy itself” that is behind the depoliticisation of monetary policy (although the writer doesn’t use that terminology).

I am often confronted with questions during presentations that we have to shackle the politicians because they cannot be trusted.

So the alternative is to ditch democratic accountability in favour of ‘technicians’ which then creates monsters like the IMF, the European Commission, central banks etc.

And economists in this tradition then create a fictional world – with all sorts of published papers purporting to show why any departure from that fiction would be disastrous.

Fiction about fiction.

And we believe it.

In the Buddhist script – Caṅkī Sutta (MN 95) – we read:

Suppose there were a row of blind men, each holding on to the one in front of him: the first one doesn’t see, the middle one doesn’t see, the last one doesn’t see. In the same way, the statement of the Brahmans turns out to be a row of blind men, as it were: the first one doesn’t see, the middle one doesn’t see, the last one doesn’t see.

Except the person at the front of the row is the economist and they deliberately create the ‘blindness’

Remember the interview that famous US macroeconomist Paul Samuelson gave to Mark Blaug in 1988 film – John Maynard Keynes – Life – ideas – Legacy – when he said:

I think there is an element of truth in the view that the superstition that the budget must be balanced at all times … Once it is debunked takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have … anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that long-run civilised life requires.

So economists know they are lying to the public about fiscal matters because if the truth about the capacity of government and the reality of all the charades about debt issuance, central bank independence, and the rest of it was understood, then we would make greater demands on government.

Just like religion that attempts to control us through fear of a terrible afterlife, economics as practised by the mainstream is a control mechanism to ensure the powerful retain their position in the pecking order and their wealth and privilege.

Remember the comment made by Keynes in the General Theory Chapter 12. The State of Long-Term Expectation (p.157):

There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable.

Which Joan Robinson reminded us in her 1962 book that Keynes “was considering the bias of private enterprise in favour of quick profits”.

Economics as a discipline has morphed into becoming a support mechanism to ensure private profit continues to be accumulated by the few while the rest of us increasingly struggle with various challenges that such a bias has created – deterioration in the quality and availability of housing, environmental degradation, diminishing employment quality, diminishing quality and availability of health care, increased corporatisation of education, etc

And the conduct of central banks in this era is one significant aspect of this bias.

Under the pretense of ‘fighting inflation’, they manipulate interest rates to the benefit of private bank shareholders, financial wealth holders and oversee the massive redistribution of income away from low-income mortgage holders towards high-wealth asset owners.

They demand that unemployment has to rise to reach the unobservable NAIRU, which evades accurate statistical estimation – which is so inexact that the concept is devoid of practical use as a policy guide, quite apart from its vacuous theoretical status.

They then threaten governments with even more punishing interest rate hikes, if they don’t cut fiscal outlay to ensure the unemployment rises, and, meanwhile, they regularly make political statements about the dangers of deficits etc, then tell everyone that they are independent of the political process.

In – Chapter 24. Concluding Notes on the Social Philosophy towards which the General Theory might Lead – Keynes mused (and longed for) a time when the rate of interest dropped to very low levels and the rate of profit on capital would reflect “little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment” (p. 375).

This was his famous comment about “the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital” (p.376).

In Australia, the shift towards depoliticisation accelerated in the 1980s (under a Labor government to boot).

Major institutional changes were foisted on us by the government of the day in terms of the way the central bank operated to support fiscal policy interventions.

Prior to 1982, the federal treasury (coordinating the central bank, the RBA) ran what was called a ‘tap system’ in relation to government debt.

The system saw the government determine how much debt it wanted to issue.

Then the government would set the interest rate (yield) and supply the bonds to investors at that rate according to the demand received.

Sometimes investors did not take up as much as the Government desired to sell because they thought the fixed yield was too low.

The government would then instruct their accounts to create contra entries in the RBA-Treasury accounts so that the shortfall was closed by the RBA sending dollars to the government and receiving bond assets in return.

It was unambiguously a case of the government borrowing from itself, which exposed the whole fallacy of the government deficits requiring non-government sector debt funding.

And as the neoliberal era intensified, such leaks in the ‘story’ (the fiction) could not be tolerated.

The tap system was relentlessly attacked in the early 1980s by the conservative government, economists, and the financial community as they all developed their neo-liberal credentials.

What transpired was the development of – The Australian Office of Financial Management (AOFM) – which in its own words “is a specialised agency within the Treasury portfolio responsible for management of Australian Government debt.”

So Treasury moved a few desks around and then pretended that the debt-issuance infrastructure was now at arm’s length from the government.

The AOFM’s activities include the issue of Treasury Bonds, Treasury Notes, management of the Australian Government’s cash balance, and management of a portfolio of debt and investments.”

The creation of the AOFM was largely cosmetic – it is still unambiguously part of the consolidated government as is the RBA.

The AOFM claimed that “The TAP mechanism was not sustainable with increasingly flexible interest rates” (Source) but that statement is conditional on the related assertion that the RBA should not directly engage in those contra accounting entries – that is, directly purchase government debt.

The condition was left unchallenged by the AOFM because they are ideological warriors and by the time it was created Milton Friedman was all the rage and economists all believed that if the central bank made such entries then inflation would accelerate.

Another myth that lead to institutional changes that reinforced the power hegemony of the wealthy.

To get an idea of the historical debate you might want read this speech, which was the text of a presentation made by Peter McCray, Deputy Chief Executive Officer, AOFM in 2000 (the text is no longer available on line – I saved it in my archives).

In terms of the fact that the tap system sometimes led to the government lending to itself, McCray says that this would be

… breaching what is today regarded as a central tenet of government financing – that the government fully fund itself in the market. It then became the central bank’s task to operate in the market to offset the obvious inflationary consequences of this form of financing, muddying the waters between monetary policy and debt management operations.

First, this so-called central tenet is just one of the bits of ideological baggage that have constrained governments from creating full employment.

There is no foundation in economic theory for it.

It is a political statement.

Second, the statement “obvious inflationary consequences” is also not based on any monetary theory nor is it evidence-based.

Once again it is a political statement reflective of the free market ideology.

It is not obvious when you have persistently high unemployment that net government spending not accompanied by reserve drains (bond issues) will be inflationary.

It is highly likely that it will not be!

But at any rate it is an empirical question.

Statements like that from the senior AOFM official just showed how captive this part of the public service became under the neo-liberal fist!

The neo-liberal era demanded that tried and tested social democratic practices give way to privatisation, outsourcing and a primacy of the capitalist market place in allocating resources.

It demanded a diminution in the role of government in terms of promoting general welfare advancement in favour of becoming an agent of capital to benefit the few.

We are now living through the costly aftermath of following that route.

In August 1982, the tap system was replaced with an ‘auction model’ mainly because of the alleged possibility of a funding shortfall.

A totally spurious concept of-course.

To construct the shortfall as a problem was a purely neo-liberal contrivance.

They claimed it introduced uncertainty to the funding process.

It did not in actual fact do anything like that.

What it meant was that investors had converted a desired amount of their wealth holdings into government bonds and were happy with their portfolios at the rate of return on the paper that the government was offering.

That is all it meant.

The auction model merely supplied the required volume of government paper at whatever price was bid in the market.

So there was never any shortfall of bids because obviously the auction would drive the price (returns) up so that the desired holdings of bonds by the private sector increased accordingly.

At that point the secondary bond market started to boom because institutions now saw they could create derivatives from these risk-free assets etc.

The slippery slope was beginning to be built as the casino expanded.

It was also claimed by the AOFM that (Source):

The adoption of tenders for debt issuance was critical in freeing up the key risk-free market yield in the economy. This proved essential for the financial innovation that was to occur in the financial markets in the following years.

But what that meant was that the financial market gamblers just wanted the security of a risk-free asset upon which it could use as a benchmark to price its other riskier bets.

And they wanted the yields to be as high as possible to enhance the returns across the board.

And if they were in control of setting those bond yields (as the auction system allowed) then times were sweet.

It was corporate welfare at its best at a time when the corporate sector was leading the charge against welfare for people – claiming it undermined work incentives etc.

The other major reason for introducing the auction method is well expressed in the following tract from McCray’s speech.

He is talking about the so-called captive arrangements, where financial institutions were required under prudential regulations to hold certain proportions of their reserves in the form of government bonds as a liquidity haven.

… the arrangements also ensured a continued demand from growing financial institutions for government securities and doubtless assisted the authorities to issue government bonds at lower interest rates than would otherwise have been the case … Because such arrangements provide governments with the scope to raise funds comparatively cheaply, an important fiscal discipline is removed and governments may be encouraged to be less careful in their spending decisions.

So you see the ideological slant.

The pressure to change the system was thus not only about corporate welfare but also about the conservative desire to force voluntary limits on what the Federal government could do in terms of fiscal policy.

This was the period in which full employment was abandoned and the national government started to divest itself of its responsibilities to regulate and stimulate economic activity.

The legacy is the mess we are in now.

The real reason for the shift to the auction model administered by the AOFM was provided by McCray in his speech to the ADB:

The reduced fiscal discipline associated with a government having a capacity to raise cheap funds from the central bank, the likely inflationary consequences of this form of ‘official sector’ funding … It is with good reason that it is now widely accepted that sound financial management requires that the two activities are kept separate.

Read it over: reduced fiscal discipline … that was the driving force.

They proponents of the auction system wanted to wind back the government’s role of promoting societal well-being and restrict its ambit to assisting capital.

The plan was to force as many voluntary constraints on the operations of government that they could think of and then get economists to write papers justifying the constraints.

All these institutional shifts were basically unnecessary (because there is no financing requirement), many were largely cosmetic (the creation of the AOFM) and all were easily able to be sold to us suckers by neo-liberal spin doctors as reflecting … “sound financial management”.

We were all marching in the row of the blind.

Conclusion

What this allowed was the relentless campaign by conservatives, still being fought, against the legitimate and responsible use of fiscal deficits.

It also led to the abandonment of full employment.

And the legitimate role of government was reduced before our very eyes and we now allow unelected and unaccountable central bank policy makers to impose huge costs on the most disadvantaged workers in our communities under the guise of TINA.

The reality is that modern monetary economies do not even need central banks.

That is enough for today!

(c) Copyright 2025 William Mitchell. All Rights Reserved.