{"id":3604,"date":"2009-07-20T00:30:13","date_gmt":"2009-07-19T14:30:13","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=3604"},"modified":"2009-07-20T00:30:13","modified_gmt":"2009-07-19T14:30:13","slug":"why-dont-mainstream-economists-get-modern-money-if-it-is-right","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=3604","title":{"rendered":"Why don’t mainstream economists get modern money if it is right?"},"content":{"rendered":"

\t\t\t\tToday, I am in Sydney giving a talk at the ACTU Jobs Summit and pretty short of time. I was also motivated by the Temporary Leader of the Opposition who announced on his Twitter site yesterday that his dog, Mellie had just updated her Blog<\/a>. Yes Malcolm’s dogs blog keeps us up to date with all their goings on including watching the Tour de France. So if he can do it so can I except I don’t like pets. So I thought I would introduce a Guest Blogger spot so that whenever someone I know, who doesn’t want to create their own infrastructure has something interesting to say, they will be able to say it. So today’s guest blogger is Victor Quirk. This is what he has to say. I’ll be back tomorrow.
\n
\nIf CofFEE’s economics is right, why isn’t embraced by mainstream economists?<\/strong><\/p>\n

Victor Quirk<\/p>\n

There is always a nagging doubt about the CofFEE\/Modern Money arguments that debunk the supposed constraints governments say they have in relation to their spending which preclude, among other things, the use of public sector employment to eliminate unemployment. Its logic begs the question ‘if it is as comprehensible and as coherent as it appears, and if it implies solutions to dire social problems that public authorities claim they would fix if they could, why is it that economists in positions of authority remain so unconvinced of the efficacy of this analysis?’ There is a lingering suspicion that more competent authorities know some step in the argument that is being omitted by advocates of the Job Guarantee that makes nonsense of what they claim to be possible using the non-convertible fiat currency most modern sovereign states currently use.<\/p>\n

As a sociologist\/political science post-grad working and studying at CofFEE since 2002, I’ve had the chance to regularly explore this issue with Bill, Randy Wray, Warren Mosler and others over the years, and I’ve always been met with what I can best describe as a professional academic position in which they seem most reluctant to offer more than the suggestion that the mainstream economists keep missing the point or ‘just don’t get it’. Bill will usually argue that mainstream economists, and even the bulk of economists who consider themselves non-mainstream and progressive, have unquestioningly adopted certain foundational assumptions that were instilled in them as novice economists, that have constrained their analytic perspective ever since.<\/p>\n

Randy Wray gave a very interesting response to the question when he was visiting Newcastle a few years ago, when I asked him why it was that I (a non-economist) could get the point he and Bill were making, could appreciate the empirical evidence they were presenting, yet many of their economist colleagues could not. Bill, who over-heard the question, leapt on the opportunity to be flippant and suggested ‘oh that’s because you’re such a genius Victor’, which wasn’t helpful, despite affording our William great amusement. Randy (more constructively) suggested that a great deal of macroeconomics is about explaining observable relationships between economic phenomenon. While they might agree that the evidence is that ‘X and Y increase together’ or ‘X increases and Y decreases’, often the direction of causation boils down to the narrative one uses to explain economic processes, so where Bill and Randy argue X causes Y, the others argue Y causes X. A classic example is where the conventional view is that deposits create loans, while the CofFEE gang argue (persuasively in my view) that loans create deposits.<\/p>\n

A sociologist would probably suggest that to be accepted as a competent economist by one’s peers, one would need to demonstrate comprehensive fluency in the conventional narratives economists use to explain the world, hence the reluctance to entertain major revisions to the narratives they embrace. It is probably not a conscious process, it is just that there are too few rewards for deviance to encourage deviation from the norm. This would, I think, largely conform to Bill’s stated view.<\/p>\n

It needs also to be acknowledged that macroeconomics has many counter-intuitive notions until the process is adequately explained. The fact that the Commonwealth of Australia (to use it as an example) does not have the same financial constraints that all other economic actors share (firms, households, individuals, community agencies, state & Local governments) has a slightly surreal quality to it, that is not fully dispelled by the explanations. It reminds me of how counter-intuitive the notion is that if you could keep walking east in a straight line from a given point you would eventually come back to the same point from the west. I fully understand that the world is actually a globe, as images from space reveal, but that is not how we picture it in order to navigate our way around the place everyday – we operate on the basis it is flat. The curvature of the Earth becomes more relevant as you shift from the micro to the macro. But to the extent that people believed that it was flat and feared falling off its edge, it may as well have been true, because the belief kept them from venturing far just as effectively. It was an imagined constraint that seemed very plausible given the evidence of everyday experience and conventional belief at the time. In the case of the fiscal constraint, the assumptions underpinning an understanding of your household finances differ from those underpinning Commonwealth finances in important respects: the Commonwealth can legally buy whatever it wants by issuing new money while if a household does it and gets caught they are charged with forgery. The Commonwealth therefore doesn’t have to earn, steal, borrow or tax before it can spend – as everyone else does.<\/p>\n

Its spending is still constrained, but in other ways that are unique to the situation it is in as the issuer of the sovereign currency. For example, if it continues to spend past the point where the nation’s productive resources are fully utilised, it will be competing for various factors of production, bidding up their price and transmitting inflation throughout the economy. These sorts of ‘real economy’ constraints have shaped the design of the Job Guarantee proposal, which (again, for example) triggers a wage and a bit more of public expenditure when a person is unemployed, and stops when they get a job in the private or mainstream public sector. The point is that because these are not the same as the spending constraints faced by all other economic actors, a sovereign government with a monetary system like the one Australia and most other modern nations have can mobilise unutilised productive capacity (such as unemployed labour) and thereby organise their people to provide a higher standard of living for themselves. <\/p>\n

While it is undoubted that the bulk of working economists and policy advisors accept the implied fiscal constraints of conventional macroeconomic theory in good faith, and seek the best policies they can within those constraints, there is plenty of evidence of more malevolent intent in certain quarters, where certain narratives have been manufactured and marketed to achieve certain strategic objectives, the prime example relating to the preservation of unemployment. Several of my working papers on the CofFEE website report instances where unemployment has been deliberately induced or preserved in order to strengthen the position of employers vis a vis workers. There are various instances on the public record where full employment has been criticised as undesirable because of the bargaining power it confers on workers, and instances of well resourced campaigns either to prevent its establishment (eg., Menzies’ opposition to it during the war) or for its abandonment in the 1970s. The myth that governments are fiscally constrained is most energetically preserved by the more self-conscious ruling-class-warriors of academia, media, government and business, providing them with a ‘fact’ that preserves poverty and unemployment without needing to state the desirability of this objective, which would inevitably produce public censure and electoral backlash. <\/p>\n

The whole tenet of the economic education campaign rolled out in the USA and Australia in the 1970’s and 1980’s (documented by Alex Carey and others) was to inculcate the teaching of what is now considered ‘mainstream’ economics, with its advocacy of ‘markets’ over ‘governments’, and we know the vast amounts of corporate funding that were invested in that project. Why would they do this? Unemployment weakens the bargaining power of labour, creating a cheap, compliant and willing labour force – a phenomenon understood by British employers since the plague produced full employment in 1349 and labour shortages drove up the price of labour.<\/p>\n

So I believe that, in addition to those who sincerely adhere to a conventional wisdom, there are some with a vested interest in the marketing of the belief that we cannot afford full employment. Considering the trend in labour market policy these past 35 years, adherence to the notion of the state being fiscally constrained from establishing and maintaining full employment is how this situation has been maintained without an electoral backlash. <\/p>\n

So among the think-tankers, corporate economic spokespeople, mainstream academic economists, mainstream economic journalists, who substantially ignore the challenge Bill and his international colleagues are posing to their understanding of macroeconomics, I suspect there are a mixture of people who fit into one or more of these categories:<\/p>\n