The World’s financial system would have collapsed in 2008 and early 2009 if the governments of the day (including their central banks) had have maintained the dominant belief held by most mainstream economists that fiscal policy is not capable of an effective stimulus to real economic activity and that building central bank reserves to historically massive levels would cause accelerating inflation. Within a short time, all that orthodox posturing that had been shared by politicians, their advisors, and the mainstream financial and economics media was abandoned and pragmatism reigned supreme. Well sort of! The system was saved because governments largely ignored the dominant mainstream economics view. At the time, I thought that this shift in policy practice was the beginning of a paradigm shift in macroeconomics. The crisis clearly demonstrated the poverty of the orthodox theoretical framework and the policy prescriptions that flowed from it. The dominant theoretical models didn’t even have banking sectors included such was the arrogant ignorance of the profession. However, I was wrong or perhaps a bit hasty in thinking that the defences built up by the orthodox economics Groupthink would fall so quickly in the face of this amazing failure. There was a period of quietness within the profession, save for the manic interventions of some of the more extreme Monetarist elements who called on the governments to do nothing other than continue deregulation and target even bigger fiscal surpluses. But the conservative voices progressively gathered volume as the crisis moved from the probability of collapse to a deep (balance-sheet) recession and the attacks on the fiscal and monetary policy shift that occurred in 2008 and 2009 began to reach fever pitch. Governments retreated somewhat and the recoveries were then stalled and we are where we are now as a consequence – still bearing the residual damage of the GFC with many of the trigger points still unresolved and facing a new calamity. Maybe the paradigm shift is still coming. Let’s hope so.

At the London event last week, I indicated that governments should not issue any public debt as the benefits of doing so are small relative to the large opportunity costs. The Modern Monetary Theory (MMT) position is that there is no particular necessity to match public deficits with debt-issuance for a currency-issuing government and deficits should be accompanied by monetary operations which we now call Overt Monetary Financing (OMF). Surprisingly there was some arguments by audience members that governments should continue to issue debt, largely, as I understand them, to provide a safe haven for workers to save for the future. So the idea is that we maintain the elaborate machinery that is associated with the public debt issuance just to provide a risk free asset that workers can use to park their hard-earned savings in. It is a strange argument given the massive opportunity costs associated with debt issuance. A far simpler solution is to exploit the currency-issuing capacity of the government to guarantee a publicly-owned National Saving Fund. No debt would be required.

I am currently working on an introductory chapter to a collection I have prepared for my publisher (Edward Elgar) which describes the evolution of Modern Monetary Theory (MMT). The task might appear to be straightforward but in fact is rather vexed. There is considerable dispute as to where the roots lie. A specific debate is the importance of the work of John Maynard Keynes. Many Post Keynesians, almost by definition, believe that Keynes was a central figure in the development of what we now call Post Keynesian economics, although that ‘school of thought’ evades precise identification and is certainly anything but homogenous. There are MMT proponents, who while sympathetic with much of Post Keynesian theory, disagree on key propositions – specifically relating to debt and deficits (as an example). But then they also point to Keynes’ work as seminal in the development of MMT. My own view is that many of the important insights in Keynes were already sketched out in some detail in Marx. Further, the work of the Polish economist Michał Kalecki was much deeper in insight than the work of his contemporary, Keynes. But for me the real sticking point against Keynes was his view that fiscal deficits should be balanced over the business cycle and that would allow governments to pay back debt incurred in the deficit years. That view has crippled progressive thought ever since and is antithetical to MMT. The debate also has resonance with the current leadership struggle within the British Labour Party about fiscal deficits and the claims by the ‘socialist’ candidate, Jeremy Corbyn that he will “balance the budget” when unemployment is low so as to avoid inflation. This view derives from the adoption by progressives of Keynes’ views, whether they know that or not. It is a mistaken view and retards progressive policy development.