As Hitler rose to power, in January 1933 the economic situation in Germany was dire. Stocks of raw materials had been depleted, factories and warehouses lay empty, and about 6.5 million people (about 25% of the domestic workforce) were unemployed and on the verge of malnutrition, while the country was crushed by debt and its foreign exchange reserves approached zero.
Yet, from 1933-1938, thanks to Schacht, the economy recovered spectacularly (Figure 1).2 Schacht’s objective to jumpstart the moribund economy required money. But money was not available, since savings were inexistent and production was so restricted that savings would not accumulate (Schacht 1967). Neither could money be printed, since lending to the government would have put the Reichsbank at risk of losing control of monetary policy.
Schacht then contrived a brilliant unconventional monetary solution. For payments, state contractors and suppliers received bills of exchange issued by a company called ‘MEFO’.3 The MEFO-bills were state guaranteed, they could circulate in the economy and could be discounted by their holders at the Reichsbank in exchange for cash.
Schacht believed that the duty of the central bank was to make available to the economy as much money as necessary to facilitate output production. The issuance of bills of exchange was instrumental to this end – as each bill stood against the sale of newly produced goods, and each issue of money was based on the exchange of the new goods, central bank money issuance against bills could not be inflationary. Indeed, the employees of MEFO checked that every MEFO-bill issued was tied to a quantity of newly produced goods, and only bills issued against the sales of these goods were granted. This way, the circulation of money and the circulation of goods remained in equilibrium.4
The Reichsbank undertook to accept on demand all MEFO bills, irrespective of their size, number and due date, and to exchange them for money. The bills were discounted at a 4% interest rate. As such, they were given the character of interest-bearing money, and banks, savings banks, and firms could hold and use them exactly as if they were money. If all MEFO-bills had been presented for discount at once, inflation would have resulted. But this did not happen – making the bills both re-discountable and interest-bearing allowed for much of them to be absorbed by the market without going through the Reichsbank.5 Also, output responded remarkably well. State purchases fed into a growing demand for labour, and firms restarted investments using MEFO-bills as collateral for borrowing. Investments put additional manpower to work, and incomes and savings increased as a result, raising fiscal revenues (Guillebaud 1940).
In 1938, Schacht strongly urged terminating the MEFO programme, as full employment had been reached and the closing output gap was raising price tensions (Toniolo 1988).6 He clashed with Hitler on this, and on 19 January 1939 the Führer removed him from the Reichsbank.…Schacht was using the real bills doctrine.
I always enjoy reading Thorstein Veblen, partly because his writing strays back and forth across the line between "raising questions of real interest" to "just plain old dyspeptic and cantankerous." His 1918 essay "The Higher Learning In America:A Memorandum On the Conduct of Universities By Business Men" is full of comments from both categories, often closely overlapping.
It's also the source of one of the liveliest insults to the field of economics, that economics is "a `science' of complaisant interpretations, apologies, and projected remedies." Veblen also argues that this isn't because economists and other academics have been paid off, but only because they have been selected and trained for their narrow intellectual horizons....Compare Upton Sinclair:
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" — I, Candidate for Governor: And How I Got Licked (1935); repr. University of California Press, 1994, p. 109.Once an investment in education is built up providing access to academia, it is difficult to think in ways that challenge this investment.
Marshall notes that when people think about the main intellectual contribution of Adam Smith, they often point to what we now refer to as the "invisible hand" idea--that when people act in their own self-interest--though hard work, innovation, shopping for desired goods and services–they will often benefit the social welfare. However, Marshall argues that in fact, Smith's key insight was something quite different: "His work was to indicate the manner in which value measures human motive." In other words, Smith started the process of drawing linkages between the ways that people act and the monetary incentives they face in terms of prices and wages--which is what makes human motives into something measurable. Marshall thought this idea was the true core of economic thinking:Subsequently, this key assumption about measurable value being chiefly economic morphed into the assumption that the whole of value is reducible to economic value. The life sciences and the other social sciences, as well as the humanities, and even business, especially where demand is based on marketing and advertising, shows that this broader assumption is incorrect.
The theory of value and distribution is at the heart of economics. To be clear, when I say that it is at the center, it means that discussions of almost any topic in economics, in one way or another, depend on a certain theoretical position about the theory of value and distribution. However, most economists have no clue about it, about the centrality of value. Not only they don't understand the original and now infamous labor theory of value (LTV), that dominated between Petty and Ricardo (and Adam Smith too, even though that tends to surprise and puzzle most economists),* but also they misunderstand the dominant marginalist paradigm. Some economists actually think that you don't need a theory of value at all, and some don't even understand that they use a conventional (some vulgar form of supply and demand) theory of value. Hence, the reason of this post is to try to help clarify some very basic issues related to the necessity of a theory of value for proper theorizing in economics….Naked Keynesianism
In what follows, I propose to take as my text a famous statement from Marx’s A Contribution to the Critique of Political Economy—a sort of preliminary sketch of Das Kapital—and see what it can tell us about the capitalism of our day. I shall try to show you that Marx was fundamentally right about the direction in which capitalism would devel- op, but that because of his failure to anticipate three important features of the mature capitalist world, his optimism concerning the outcome of that development was misplaced. Along the way, I shall take a fruitful detour through the arid desert of financial accounting theory.
Here is the famous passage, from the preface of the Contribution, published in 1859:
"No social order ever disappears before all the productive forces for which there is room in it have been developed, and new, higher relations of production never appear before the material conditions of their existence have matured in the womb of the old society."
So it was great that I had been invited to present the case for the contribution of Marxist economics, along with Carolina Alves, the Joan Robinson fellow at Girton College, Cambridge. In my presentation (see my PP here The contribution of Marxian economics), I outlined the differences in theory and policy, both micro and macro between mainstream neoclassical economics, the heterodox alternatives (Keynesian, post-Keynesian, institutional and Austrian) and the Marxist.
I see this as three ‘schools’ of thought – something that some participants from the heterodox wing found strange. Why was Marxian economics not subsumed within the heterodox? For me, the answer was simple. There was one thing that unites the mainstream and the heterodox (in every form) and one thing in which Marxian economics stood out: namely the labour theory of value and surplus value. The neoclassical and all the heterodox from Keynes to Kalecki, Robinson, Minsky, Keen and the MMTers deny the validity and relevance of Marx’s key contribution to understanding the capitalist system: that is it is a system of production for profit; and profits emerge from the exploitation of labour power – where value and surplus value arises. Value does not come from marginal utility (individual satisfaction) or marginal productivity (return on factor input) but from exploitation, realised in the sale of commodities for a profit.
Capitalism is a monetary economy where production is for profit, not need. This glaringly obvious reality is denied by the mainstream (where there is no profit “at the margin”) and also by the heterodox who either accept marginalism or reckon profit comes from ‘monopoly’ or ‘power’ or from ‘financialisation’ – but not from the exploitation of labour power.
For me, Marx’s explanation is not only correct in reality, it is also necessary in order to clarify the very process of accumulation and endemic crisis within capitalism – all other schools of economics fall short on this.
How do you write about a book that is almost 600 pages long (in small print), has 25 pages of references, and the ambition to explain political institutions from the dawn of mankind to the French Revolution, from kinship-based bands of hunters to Voltaire? This was Francis Fukuyama’s objective in this monumental (yet eminently readable) book, “The Origins of PoliticalOrder” (note the plural).Global Inequality
My review, given the size and importance of the book, will be done in two parts, First, here, I will review the logic of the arguments put forward by Fukuyama. In the second review, I will engage into some critique....
As Maria Ivanova has shown, there remains a blind belief that the crisis-prone nature of the latter can be managed by means of ‘money artistry’, that is, by the manipulation of money, credit and (government) debt. Ivanova argues that the merits of a Marxian interpretation of the crisis surpass those of the Minskyan for at least two reasons. First, the structural causes of the Great Recession lie not in the financial sector but in the system of globalized production. Second, the belief that social problems have monetary or financial origins, and could be resolved by tinkering with money and financial institutions, is fundamentally flawed, for the very recurrence of crises attests to the limits of fiscal and monetary policies as means to ensure “balanced” accumulation.
None of the ‘money fetish’ schemes have worked or will work to get the capitalist economy going. Instead such measures have just created financial bubbles to the benefit of the richest. That’s because these “tricks of circulation” are not based on the reality of the law of value.Now that we are in the midst of a debate over capitalism and socialism, these issues are coming to the fore. Michael Roberts provides perspective from a Marxian POV.
This is also where the work on inequality parts ways with one of the scourges of modern micro- and macro-economics, the representative agent. The role of the representative agent was to obliterate all meaningful distinctions between large groups of people whose social positions differ, by focusing on the observation that everybody is an “agent” who tries to maximize income under a set of constraints. This is indeed trivially true. And by being trivially true it disregards the multitude of features that make these “agents” truly different: their wealth, background, power, ability to save, gender, race, ownership of capital or the need to sell labor, access to the state etc. I would thus say that any serious work on inequality must reject the use of representative agent as a way to approach reality. I am very optimistic that this will happen because the representative agent itself was the product of two developments, both currently on the wane: an ideological desire, especially strong in the United States because of the McCarthy-like pressures to deny the existence of social classes, and the lack of heterogeneous data. For example, median income or income by decile was hard to calculate but GDP per capita was easy to get hold of.That means the jettisoning of marginalism aka "conventional economics" as it is currently practiced and taught in the academy. It would require revisiting classical economics, institutionalism as a competitor of marginalism, and integrating sociological economics, anthropological economics and political economy. The heterodox have already been engaged in this and much of this work has already been accomplished. What is needed is not so much new knowledge and reframing economics based on priorities. Much of what now passes for economic theory is rather irrelevant for current and future needs, since the scope and scale of the models limits them to the trivial.
Global Inequality
- The most important of Marx’s influences on people working in social sciences is, I think, his economic interpretation of history.…
- The second Marx’s insight which I think is absolutely indispensable in the work on income and wealth inequality is to see that economic forces that influence historical developments do that through “large groups of people who differ in their position in the process of production”, namely through social classes.…
- The third extremely important Marx’s methodological contribution is the realization that economic categories are dependent on social formations.…
- The last among Marx’s contribution that I would like to single out—perhaps the most important and grandiose—is that the succession of socio-economic formations (or more restrictively, of the modes of production) is itself “regulated” by economic forces, including the struggle for the distribution of the economic surplus....
Abstract
In the early 1730s George Berkeley began to explore the conceptual field between ideas and spirits that he previously claimed to be empty. In this field he found a rich set of concepts including “notions,” “principles,” “beliefs,” “opinions,” and even “prejudices.” Elsewhere I have referred to this phase in Berkeley’s thought as his “second conceptual revolution.”2 I believe that it was motivated by his increasing need to develop a language to discuss the social, moral and theological concerns vital to him and his circle.
This second conceptual revolution made possible two of his most important contributions to 18th century thought: The Analyst (1734) and The Querist (1735-37). Even though they were written almost simultaneously, these texts are rarely discussed together, since the former is categorized as a critique of the foundations of the calculus, while the latter is taken a tract advocating the development of a specie-less economy in Ireland.
Using new textual and contextual evidence, however, I will show with that these two texts have a common basis in Berkeley’s second conceptual revolution, in that the rejection of intrinsic values (either epistemic or monetary) and the revaluation of notions, principles, and prejudices are crucial to the critique of both Newtonian mathematics in The Analyst and Newtonian monetary theory and policy in The Querist.
Specifically, I will argue that Berkeley’s famous demonstration of the absurdities of Newton’s method of fluxions devalued geometric reasoning and gave a new pride of place to algebraic reasoning. On the basis of this revaluation in mathematics, Berkeley more confidently undermined the concept of intrinsic monetary value and suggested the development of a monetary system based on “tickets, tokens and counters” (what I call “algebraic money”).
The issues posed by the transition from a specie-based to a specie-less currency were clearly some of the most important and controversial in the Age of Enlightenment. Berkeley’s contributions to understanding the significance and feasibility of such a transition and its benefits for Ireland certainly add support the claim that he was “theAcademia
most engaging and useful man in Ireland in the eighteenth century.”
The ‘Matching functions’ mentioined in the quote explain unemployment by assuming that finding a job or a worker takes time. And this does explain unemployment – part of it (2%-point?). The rest must be explained by crises and the inability of the market system to create jobs. As is clear from comparing graph 2, short-lived crises cause lower levels of job creation and higher levels of job destruction. Basically, these swings are not even that large. But together they lead to a fast increase in unemployment which take years to overcome. Sargent and Ljundqvist did re-invent the wheel. If they had red Rodbertus, Sismondi, Marx, Owen or Mitchell they would have known.
Fun fact: the neoclassical ‘DSGE’ model of Bokan e.a. distinguishes a class of bankers, a class of entrepreneurs (let’s call them ‘capitalists’, as they own all the capital) and a class of households which have nothing else to sell than their labour… The model knows a ‘positive wage mark-up’ but change this into a ‘wage mark down’ (for instance caused by ‘monpsonie’ on the labor market, i.e. by strong labor market power of employers, and it’s starting to look pretty Marxist, too.Real-World Economics Review Blog
Piero Sraffa explains it.
What should the purpose of studying the history of economic thought be?
The recent book by Jesse Norman simply entitled “Adam Smith” is a pleasure to read. There are of course innumerable books on the founder of the political economy, so why another one? Norman’s book is directed toward that, at times elusive, general educated reader, and has, in my opinion, three objectives: (i) to situate Adam Smith in his time, both intellectually and politically, (ii) to argue that there is a remarkable consistency between the Adam Smith of the Theory of Moral Sentiments, Lectures on Jurisprudence and the Wealth of Nations, and (iii) to show that most of neoclassical and laissez-faire appropriations of Adam Smith are at best one-sided, and in many cases downright wrong....Global Inequality
