Tuesday, November 19, 2013

Selected Highlights of Recent Economic History:

Selected highlights of recent economic history:
  • up to1930 -- Laissez-faire is the conventional wisdom in capitalist countries, supported by Say's Law, i.e.: "A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value."
    Shorter version of Say's Law: "supply creates its own demand".
  • 1895 -- The chartalist theory was introduced by German statistician and economist G. F. Knapp.  Important contributions were made by Alfred Mitchell-Innes in 1913-1914. Chartalism experienced a revival under Keynes and Abba P. Lerner, and has a number of modern proponents.  Chartalism is a descriptive economic theory that details the procedures and consequences of using government-issued tokens as the unit of money, i.e., fiat money. The name derives from the Latin charta, in the sense of a token or ticket. The modern theoretical body of work on chartalism is known as Modern Monetary Theory (MMT).
  • Great Depression -- Keynes emerges as preeminent economist noting need for government to step in when markets fail.  Full employment cannot be maintained via laissez-faire policies, but demand can be boosted via fiscal policy to stimulate the economy.
    Shorter version of Keynesianism:  "demand creates its own supply".
  • 1940-1970 -- Keynesian economics reigns supreme in US and Europe. John Kenneth Galbraith is perhaps the leading Keynesian economist.
  • 1940-1970 -- neo-Keynesian economics developed to integrate classical (pre-Keynes) economics with Keynesian economics.  Paul Samuelson is perhaps the leading neo-Keynesian economist, developing a neoclassical synthesis which still dominates mainstream economics.  His 1948 textbook became the standard.
  • ~ 1945 -- early liberal forms of Keynesianism:
    • 1943 -- Abba Lerner develops functional finance, a theory of purposeful financing to meet explicit goals, including full employment, no taxation designed solely to fund expenditure or finance investment, and low inflation.  Functional finance is based upon the effective demand principle and chartalism.
    • 1947 --  Lorie Tarshis writes first introductory textbook that brought Keynesian thinking into American university classrooms. The work swiftly lost popularity after it was charged with excessive sympathy to communism by McCarthyist activists. 
  • 1970-1980 -- Stagflation and lack of political will lead to loss of faith in fiscal policy.  Monetarist alternative promoted by Milton Friedman gains prominence
  • 1980 -- Laissez-faire economics regains prominence in Republican circles under the guise of Supply-side Economics.  This fits well with Milton Friedman's Monetarism.
  • 1990 -- New Keynesian economics develops as a successor to the dormant neo-Keynesianism and a response to the resurgent laissez-faire advocates.  This watered-down Keynesianism adds little that is new or interesting (in my opinion), but is popular with powerful centrist Democrats as it offers a practical alternative to the laissez-faire Republicans.
  • 1975-present -- (most of this section is from WikipediaPost-Keynesian economics emerges as a school of economic thought with its origins in the works of John Maynard Keynes. Keynes's biographer Lord Skidelsky writes that the Post Keynesian school has remained closest to the spirit of Keynes's own work.
             Post-Keynesian economists are united in maintaining that Keynes's theory is seriously misrepresented by the two other principal Keynesian schools:  neo-Keynesian economics which was orthodox in the 1950s and 60s – and by New Keynesian economics, which together with various strands of neoclassical economics has been dominant in mainstream macroeconomics since the 1980s.
             The theoretical foundation of post-Keynesian economics is the principle of effective demand, that demand matters in the long as well as the short run, so that a competitive market economy has no natural or automatic tendency towards full employment.
             The positive contribution of post-Keynesian economics has extended beyond the theory of aggregate employment to theories of income distribution, growth, trade and development in which money demand plays a key role, whereas in neoclassical economics these are determined by the 'real' forces of technology, preferences and endowment. In the field of monetary theory, post-Keynesian economists were among the first to emphasize that the money supply responds to the demand for bank credit, so that the central bank can choose either the quantity of money or the interest rate but not both at the same time.
             This view has largely been incorporated into monetary policy, which now targets the interest rate as an instrument, rather than the quantity of money. In the field of finance, Hyman Minsky put forward a theory of financial crisis based on financial fragility, which has recently received renewed attention.
  • 1994-present -- Modern Modern Theory (MMT) is a branch of Post-Keynesian economics and Functional Finance as well as the modern version of Chartalism.  Along with the features of Post-Keynesian economics mentioned above, MMT relies on the work of Wynne Godley who described the accounting-oriented sectoral financial balances which constrain the macro economy.  For example, government deficits generally correspond to private sector surpluses as a simple matter of accounting.
              As one would expect from the name, MMT describes the working of modern fiat currencies in considerable detail.  This provides stark contrasts and significant insights in comparison with conventional economic schools (New Keynesian and laissez-faire/neoclassical/monetarist) which are based upon gold standard monetary systems.
             MMT is somewhat unique among economic schools in that it has both liberal and conservative supporters.  While most in the MMT community are liberal and advocate liberal policies, MMT also has conservative advocates.  The descriptive aspects of modern fiat monetary systems stand alone and can be separated from any policy recommendations of MMT proponents.
More detail is provided at my blog -- http://mindorenyo.blogspot.com/2013/11/economic-history.html -- in the form of quotes from John Kenneth Galbraith and a few others.

Another good account of recent economic history is in this paper by David Colander - Functional Finance, New Classical Economics and Great Great Grandsons.


Dan Lynch said...

Since the Baker/Bernstein controversy has reminded us that it is polite to acknowledge the idealogical contributions of others...... we should acknowledge some people who didn't make this list.

-- the Social Credit movement, founded by C.H. Douglas in 1924, laying out functional finance and sectoral balances long before Abba Lerner and Wynne Godley. It kind of lets the air out of MMT's balloon when you discover that Douglas had it figured out nearly 100 years ago.

-- Governor & Senator Huey Long, whose 1935 "Share The Wealth" plan included a Job Guarantee among other things, forcing FDR to co-op some of Huey's proposals in the "2nd New Deal" and in FDR's proposed "2nd Bill of Rights."

-- the 1960's "Freedom Budget" which included a Job Guarantee among other things. Minsky seemed to acknowledge that the Freedom Budget was the original inspiration for his ELR, though IMHO Minsky made it worse, not better.

Matthew Forstater wrote a paper about the Freedom Budget, so I at least give him credit for acknowledging it's existence.

Detroit Dan said...

I appreciate the comments, Dan L. I'm sure there are a lot of others I didn't mention. I don't think it lets any air out of any balloons, though...

Detroit Dan said...

Also, Dan L, what is the Baker/Bernstein controversy you mention? I tried to look it up, but didn't find anything at first Google...

Detroit Dan said...

Speaking of people left unmentioned, Roger Erickson mentioned Marriner Eccles as one of the great practitioners (as opposed to the theorists I listed) with regard to monetary operations...

Roger Erickson said...

Detroit Dan,

see here

Detroit Dan said...

Thanks Roger!