\t\t\t\tAs more people become aware of Modern Monetary Theory (MMT), extreme reactions emerge to basic concepts that, in any reasonable sense, should evade such reactions. For example, when the concept of the Job Guarantee (JG) is explained the reactions include hysterical comments such as “This is Socialism”; “MMT advocates the government employing everyone – they are stealth Communists”; “MMT is Communism in disguise”; and the rest. I get several E-mails along these lines per week – all which go into the trash immediately – so why bother sending them! I also get many (polite) E-mails suggesting that we (MMTers) should adopt a compromise line and embrace the ideas of those, who while clearly holding ideas that are inconsistent with MMT, do advocate government-led stimulus in the present context. Apparently we should also use terminology that is consistent with the mainstream to minimise the chasm that has to be be crossed to jettison that orthodoxy and accept MMT. These tactical suggestions have resonated once again in the current little dispute about whether various economists, who operate in the New Keynesian paradigm are channeling Minskian ideas. The suggestion is that, while they might not have foreseen the crisis and hold to various theoretical concepts that are inconsistent with MMT development, we should, as a matter of strategy, form alliances with these economists because they are now advocating policy more or less similar to that proposed by MMTers. So our common purpose should be prioritised over our theoretical differences. I disagree. History shows us that it is very dangerous to develop a new approach by minimising the differences between it and the dominant, but erroneous paradigm just to make it easier for adherents of the latter to embrace the former.
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\nI should add that I generally think compromise is a good thing in life – in getting along with people. But in the development of ideas it is a dangerous strategy because it ignores the capacity of one’s opponents to render the essential ideas irrelevant.<\/p>\n
One of the suggestions has been that MMTers should sign the A Manifesto for Economic Sense<\/a>. I declined the invitation politely, even though I agree with much of the text, because in the Manifesto we read that:<\/p>\n \nThere must of course be a medium-term plan for reducing the government deficit.\n<\/p><\/blockquote>\n Why should there be any emphasis on that? There should be a plan to reduce unemployment and promote sustainable growth. Whatever the deficit that results once those goals are achieved is the appropriate outcome. By adding that qualification, the Manifesto organisers and signatories are really giving credence to false premises.<\/p>\n These are the same premises that are being used to justify austerity even though the signatories are clearly opposed to austerity.<\/p>\n Here is some history that might help explain my position.<\/p>\n Prior to the publication of Keynes’ General Theory, a colleague Roy Harrod wrote to him – Harrod to J. M. Keynes , 1 August 1935<\/a> (The letter was reprinted in Keynes, Collected Writings, vol. XIII, pp. 533-34):<\/p>\n \nas from Christ Church<\/p>\n 1 August 1935<\/p>\n Dear Maynard<\/p>\n You may wonder why I lay such stress on a point that merely concerns formal proof rather than the conclusions reached. I am thinking of the effectiveness of your work. Its effectiveness is diminished if you try to eradicate very deep-rooted habits of thought, unnecessarily. One of these is the supply and demand analysis. I am not merely thinking of the aged and fossilized, but of the younger generation who have been thinking perhaps only for a few years but very hard about these topics. It is doing great violence to their fundamental groundwork of thought, if you tell them that two independent demand and supply functions wont jointly determine price and quantity . Tell them that there may be more than one solution. Tell them that we don’t know the supply function. Tell them that the ceteris paribus clause is inadmissible and that [b] we can discover more important functional relationships governing price & quantity in this case which render the s. and d. analysis nugatory. But dont impugn that analysis itself.<\/p>\n The fact that saving is only another aspect of investment makes it worse not better. If there were two separate things, saving & investment, then it is clear that the two equations will not determine both. But with one thing, then if you allowed the cet. par. clause which you rightly do not, it would be quite logical and sensible to approach it in the classical way.<\/p>\n Yours<\/p>\n Roy.\n<\/p><\/blockquote>\n The context of this letter was Keynes’ proposed attack on the Classical theory of the determination of wages and employment. I outlined the Classical labour market theory in this blog – Less income, less work, less income, more work!<\/a> – and will assume the discussion is known.<\/p>\n The important Classical result is that the interaction between the labour demand and supply functions determines the real level of the economy at any point in time. Unemployment was thus a real wage problem – and could be easily cured by cutting real wages.<\/p>\n Interestingly, New Keynesians still hold on to the notion that involuntary unemployed occurs because of wage and price rigidities. But that is another story – definitely not unrelated.<\/p>\n Keynes showed that the aggregate employment level was in fact determined by the level of effective demand – which was determined by the conjunction of aggregate demand for goods and services and aggregate supply. In other words, the labour market alone did not determine the level of employment in the economy and so a simple red<\/p>\n The Classical approach – which was the mainstream reasoning in the 1930s used the so-called “Say’s law” to assume away aggregate demand failure. The “Law” is simplified as “supply creates its own demand” and refers to the denial by classical economists that there could ever be over-production and unemployment. If consumers decide to save more then the firms react to this and produce more investment goods to absorb the saving. They assume a total fluidity of resources between sectors and workers are simply shifted from making iPads to making investment goods.<\/p>\n Keynes showed that when people save – they do not spend. They give no signal to firms about when they will spend in the future and what they will buy then. So there is a market failure. Firms react to the rising inventories and cut back output – unable to deal with the uncertainty.<\/p>\n The break with neoclassical thinking came with the failure of markets to resolve the persistently high unemployment during the 1930s. The 1930s experience suggested that Say’s Law did not hold and that a failure of aggregate demand placed constraints on the labour market which created unemployment.<\/p>\n In terms of orthodox demand and supply analysis, the effective demand constraint pushed workers “off their supply curve” and firms “off their demand curves” which meant that the labour demand and supply relations in the labour market did not determine price or quantity. In other words, a total failure of the Classical paradigm.<\/p>\n The problem is that Keynes did make important compromises – notably in Chapter 2 when he assumed a simple Classical marginal productivity theory to explain labour demand. In adopting this assumption, which he later realised was unnecessary and empirically unjustified, Keynes opened the door for subsequent developments which perverted his message. Ultimately, we could argue that the neo-liberal dominance now is, in part, due to that strategic error made by Keynes.<\/p>\n As a matter of strategy, Keynes chose to differentiate his labour market analysis on the labour supply side. His analysis of labour supply was brilliant and broke the Classical view that workers would never supply more labour if real wages fell.<\/p>\n In the – Appendix to Chapter 19. Professor Pigou’s “Theory of Unemployment”<\/a> – of the General Theory, Keynes wrote:<\/p>\n \nIt is important to emphasise that the whole of Professor Pigou’s book is written on the assumption that any rise in the cost of living, however moderate, relatively to the money-wage will cause the withdrawal from the labour market of a number of workers greater than that of all the existing unemployed.\n<\/p><\/blockquote>\n He also said that workers would resist real wage cuts driven by money wage cuts because they cared about wage relativities – which reflected social norms. So why would a worker voluntarily agree to a downgrading of their status when the problem was a lack of jobs rather than an excessive wage claim.<\/p>\n Keynes showed that an unemployed worker was involuntarily unemployed if they were willing to work at the current money wage if offered a job, even if<\/strong> the real wage was lower at the higher level of employment.<\/p>\n He believed the real wage would be lower because he had adopted the first classical postulate. In Chapter 2 – The Postulates of the Classical Economics<\/a> – Keynes wrote:<\/p>\n \nThe wage is equal to the marginal product of labour\n<\/p><\/blockquote>\n In Section 5 of Chapter 2 he wrote:<\/p>\n \nIn emphasising our point of departure from the classical system, we must not overlook an important point of agreement. For we shall maintain the first postulate as heretofore … and we must pause, for a moment, to consider what this involves.<\/p>\n It means that, with a given organisation, equipment and technique, real wages and the volume of output (and hence of employment) are uniquely correlated, so that, in general, an increase in employment can only occur to the accompaniment of a decline in the rate of real wages. Thus I am not disputing this vital fact which the classical economists have (rightly) asserted as indefeasible. In a given state of organisation, equipment and technique, the real wage earned by a unit of labour has a unique (inverse) correlation with the volume of employment. Thus if employment increases, then, in the short period, the reward per unit of labour in terms of wage-goods must, in general, decline and profits increase. This is simply the obverse of the familiar proposition that industry is normally working subject to decreasing returns in the short period during which equipment etc. is assumed to be constant; so that the marginal product in the wage-good industries (which governs real wages) necessarily diminishes as employment is increased. So long, indeed, as this proposition holds, any means of increasing employment must lead at the same time to a diminution of the marginal product and hence of the rate of wages measured in terms of this product.\n<\/p><\/blockquote>\n So Keynes accepted the so-called law of diminishing returns (diminishing marginal productivity) which meant he also considered marginal costs to be increasing. As a result competition would force prices up as output (and employment) increased and real wages would decline.<\/p>\n Increased employment was thus associated with lower marginal productivity and lower real wages. As I will note later it was this assumption – a major compromise to make his departure from Classical thinking more palatable – that led to later developments which are now held out to be Keynesian, which in fact, bear no similarity with Keynes’ vision. The New Keynesian paradigm which is dominant now is part of these later developments.<\/p>\n In 1938 and 1939, two empirical papers were published by those sympathetic to Keynes challenged his adoption of the marginal productivity assumption. The papers were:<\/p>\n 1. Dunlop, J. (1938) ‘The Movement of Real and Money Wage Rates’, Economic Journal<\/em>, 48, 413-434.<\/p>\n 2. Tarshis, L. (1939) ‘Changes in Real and Money Wages’, Economic Journal<\/em>, 49, 150-54.<\/p>\n The American John Dunlop and the Canadian Lorie Tarshis used US data to show that real wages and employment moved together directly, rather than inversely. They established that money wages and real wages moved together rather than in opposite directions.<\/p>\n Keynes replied (he was the editor of the Economic Journal at the time) by saying (p.38):<\/p>\n \n… it seems we have been living all these years on a generalisation which held good, by exception in the years 1880-1886, which was the formative period in Marshall’s thought on this matter, but has never once held good in the fifty years since he crystalilised it … it had the tendency to offset the influence of the main forces which I was discussing and made it necessary for me to introduce qualifications which I need not have troubled with if I could have adopted the contrary generalisation (i.e. of a positive relation between employment and the real wage … the practical case for a planned employment policy is considerably reinforced – because not reduction in the real wage is implied.\n<\/p><\/blockquote>\n The full reference is – Keynes, J.M. (1939) ‘Relative Movements of Real Wages and Output’, Economic Journal<\/em>, 49, 34-51.<\/p>\n Alfred Marshall<\/a> for those non-economists (and perhaps even some of the more modern economists) was the professor at Cambridge who wrote the Principles of Economics<\/em>, which was the English statement of the neo-classical approach to markets and such.<\/p>\n This brings to mind the book – God and Man at Yale<\/a> – which was written by William F. Buckley, Jnr in 1951, who later was the doyen of the American conservatives and started the rag – National Review<\/em> – to further spread his irrationality. Buckley was a supporter of Joseph McCarthy in his attempted purge against Communism, a white supremacist (in the context of the US Civil Rights movement), and later, a supporter of Augusto Pinochet and his ruthless, murderous attack on civil rights in Chile.<\/p>\n So not exactly my kind of guy.<\/p>\n The 1951 book recounted Buckley’s life as an undergraduate at Yale and he claimed that academics had forced liberal ideology onto their classes. He also claimed that academics had tried to undermine the religious beliefs held by students by introducing “liberal” ideas. <\/p>\n He demanded that Yale teach courses that did not challenge the “beliefs of the students”. He seemed to have a curious view of what education is.<\/p>\n The book “named names” as the expression goes – in the true McCarthyist mould. So why would I want to read such a book?<\/p>\n My reason for reading his 1951 book was related to one chapter in it on Canadian economist Lorie Tarshis. But first some background.<\/p>\n On October 9, 1993, one of my early mentors, Australian economist Geoff Harcourt wrote an article in the British Independent – Obituary: Professor Lorie Tarshis<\/a> – which recalls some of these events.<\/p>\n Also interesting is this obituary from Stanford University where Lorie Tarshis taught for many years – Memorial Resolution Lorie Tarshis (1911 – 1993)<\/a>.<\/p>\n Tarshis was a Canadian who studied under Keynes at Cambridge in the early 1930s (pre General Theory). As Geoff Harcourt notes, Tarshis attended a series of lectures given by Keynes “which became Keynes’s General Theory in 1936” and later completed his PhD in Cambridge.<\/p>\n His PhD was very interesting but that is another story again.<\/p>\n Geoff Harcourt recounts that in:<\/p>\n \n… 1936 Tarshis went back to North America to teach economics at Tufts University in Boston. There he met at Harvard seminars other ardent ‘youngsters’ – Paul Samuelson, James Tobin, for example – who were propagating Keynes’s message.\n<\/p><\/blockquote>\n I will come back to his work with John Dunlop (published in 1938) later.<\/p>\n But in the early 1940s, Tarshis published an introductory textbook for the US market which was the first to expound Keynesian economics and one of the few that would emerge which was in Geoff Harcourt’s words:<\/p>\n \n… deeply and intelligently true to Keynes’s vision.\n<\/p><\/blockquote>\n It was a very interesting evolution of “Keynes’ vision” because it provided a much more elaborate version of the supply-side of the aggregate economy as being “as important as aggregate demand in determining the point of effective demand”.<\/p>\n