1. Norman Tebbit’s advice in 1981; he repeated it in 2011.
2. The Queen’s question might have been more accurately posed as ‘Why did no one in mainstream economics see it coming?’ What follows is about the views of the economists ‘in power’. To a number of economists outside the mainstream, such as William Black, Stephen Keen, Randall Wray and James Galbraith, it was obvious that the financial system was on an unsustainable roll. Of those in the mainstream, Raghuram Rajan and Robert Shiller can claim credit for having foreseen a crisis, for various reasons. The general cause of the financial collapse had been previsioned by Hyman Minsky in his ‘financial instability hypothesis’: see Minsky (1992).
3. Quoted in Kynaston (2017), p. 358. Montagu Norman to Henry Clay.
4. The original is a bit more verbose than the familiar form given above. Ronald Reagan’s actual words were: ‘In this present crisis, government is not the solution to our problem; government is the problem.’ (See Reagan (1981).)
5. Hicks (1976), pp. 208–9.
6. Keynes (1973a (1936)), pp. 383–4.
7. Dasgupta (1985), pp. 1–2.
8. Marx and Engels (1962), p. 52.
9. Dasgupta (1985), p. 4.
10. Lukes (1974).
11. ‘Cultural’ Marxists hoped that the counterculture of the 1960s would replace the working class as the harbinger of socialism. In practice, the capitalist system has been adept at ‘commodifying’ cultural goods.
12. Saul (2004).
1. Mill (1967 (1844)), p. 266.
2. Ibid., pp. 276–8; cf. Keynes (1979), pp. 84–5: ‘If indeed, it were easily practicable to divert output towards gold on a sufficient scale for the value of the increased output of gold to make good the deficiency in expenditure in other forms of current output, unemployment could not occur . . .’
1. Mill (1965 (1848)), p. 506.
2. For an excellent account of the Cartesian origins of economic thinking, see Mini (1974), ch. 2.
3. Keynes (1973b), pp. 408–9.
4. Smith (1976 (1776)), p. 38.
5. Samuelson (1970 (1948)), p. 50.
6. Innes (1913), quoted in Shaikh (2016), p. 682.
7. Smith (1976 (1776)), p. 328; Innes (1914), p. 161.
8. Mosler (1997/8); introduction, pp. 4–5, to Wray (2015).
9. Martin (2014), chs. 2 and 3. Martin attributes to the Greeks the invention of the concept of an abstract, universal value, derived from the ‘equal worth of every member of the tribe’ (p. 58). This allowed a decentralized negotiability of value.
10. See Graeber (2011).
11. Keynes (1971 (1923)), p. 36.
12. Ricardo (2005 (1810)), p. 97.
13. Petty (1899 (1682)), p. 441.
14. Thomas Aquinas’ Sententia libri Ethicorum, quoted in Martin (2014), p. 131.
15. Sedláček (2011), p. 81.
16. Graeber (2015).
17. In 1675 the Welshman Rice Vaughan calculated that the price level in England had risen six to eight times over the preceding century, but this is now thought to be exaggerated. See Vaughan (1856 (1675)).
18. Bodin (1924 (1568)), p. 127.
19. David Laidler traces the start of the QTM to Polish and Prussian monetary policies between 1520 and 1580, when the counsellors to the King of Poland discovered its ‘central tenet’ that to limit inflation it was necessary to limit the coinage. He traces an earlier disagreement between Aquinas in the 13th century and Copernicus in the 16th. For Aquinas the supply of a commodity was the factor which determined its price. For Copernicus, bullion had a value ‘in itself’, independent of its function in market exchange. See: Volckart (1997). Other historians trace the origins of the QTM to contemporaneous Spanish authors in the Spanish School of Salamanca in the mid-1550s. See: Dempsey (1935) and Hamilton (1935). The important thing to note is that it was the coincidence of two real-world events – the influx of gold and silver from the New World and the rise in prices – that started off the modern theory of money.
20 See Martin (2014).
21 Felix Martin (2014), pp. 20–25 gives an example of the Irish economy living on ‘tick’ for six months in 1970. An industrial dispute closed down the banking system. The supply of cash went down, but the circulation of tick money (in this case uncashable cheques) made up for it.
22 Hicks (1969), p. 78.
23 Kaldor (1985), p. 5.
24 For definitions, see Ryan-Collins et al. (2014 (2011)), pp. 60–61.
25 McLeay, et al. (2014).
26 Quoted in Arendt (1998 (1958)), p. 102.
27 The legend has the god Dionysius granting the king his wish that everything he touched would turn into gold. But then Midas found he couldn’t eat or drink as all his food and water turned to gold, so he starved to death. (Or, in happier endings, Dionysius removed the blessing he had bestowed.)
28 Say (1821), p. 49.
29 See Mill (1967 (1844)).
30 Heckscher (1935), p. 103.
31 Hume (1987 (1752)).
32 The mercantilists were puzzled by the paradox of equivalence. ‘Fair’ trade requires exchange of goods of equivalent value. Therefore it cannot be a source of increased wealth. An increase in wealth requires an increase in money. For a country without domestic sources of money, this requires ‘unfair’ trade. See: Mirowski (1999 (1989)), pp. 148–9.
33 Hume (1987 (1752)), ¶ II.V.12. Hume assumed fixed exchange rates, based on gold. But his argument holds just as well for floating rates. Instead of domestic prices going up and down in response to imports and exports of money, it is the exchange rate. Running through Hume’s argument is the belief that money will always find its ‘proper level’.
34 Hume acknowledged that a nation, by selling only and not buying, might amass a great wealth if it hoarded this to prevent the inflow of money from having its equilibrating effect on prices. But he dismisses this possibility rather cavalierly: ‘A weak state, with an enormous treasure, will soon become a prey to some of its poorer, but more powerful neighbours,’ so money will flow out again: Hume (1987 (1752)), ¶ II.V.28.
35 Smith denied that an inflow of money could lower the rate of interest. The rate of interest was determined by competition between lenders and borrowers and this was regulated by the rate of profit. Since an increase in the quantity of money would raise all prices and costs, there would be no fall in the rate of interest as there had been no change in the profit of stock – a good example of a long-run argument being used to refute a valid short-run proposition.
36 ‘The judicious operations of banking,’ Smith writes, ‘by substituting paper [for] a great part of . . . gold and silver, enables the country to convert a great part of this dead stock [of metals] into active and productive stock.’ Smith (1976 (1776)), p. 321.
1 Congdon (1980).
2 Longaker (2015).
3 Locke (1824 (1691)), p. 103.
4 Ibid., p. 145. See also Eltis (1995).
5 Ibid., p. 189.
6 Martin (2014), p. 129.
7 Consumer Price Index 1716–1914: Bank of England (2017a).
8 See Martin (2014), p. 145.
9 We can compare a similar, but much more violent, inflationary episode in France. In 1789, the French revolutionary government issued 400m livres (pounds) of debt in the form of assignats, secured (‘assigned’) on land confiscated from the clergy. According to the original plan, the land was to be sold off gradually, with the government burning the debt tickets with the proceeds of the sale. However, once the government failed to retire the whole of the first tranche of sales proceeds, confidence in government finance declined. Interest payable on the debt soared, as gold disappeared into hoards. This required the issue of more and more assignats, which were declared legal tender. By 1796, 45bn of assignats had been issued, of which 36bn were circulating (against property originally valued at 3bn livres) and the inflation rate reached 300 per cent. The assignats were worthless. Napoleon created a new currency, the franc, in 1803. However the government obtained its finance, speculators bought up the confiscated property at rock-bottom prices, and the real income of everyone else suffered a catastrophic fall.
10 Ricardo (2005 (1810)), p. 76.
11 Ibid., p. 78.
12 Ricardo (2005 (1817)), p. 364.
13 See Asso and Leeson (2012).
14 For the Bank’s assertion, see Kynaston (2017), p. 93. A forerunner of the real bills doctrine was put forward by the speculator John Law (1671–1729), loans from whose proposed land bank were to be collateralized on the ‘productivity of the soil’.
15 Thornton (1802).
16 Schumpeter (1954), p. 720.
17 Thornton (1802), p. 287.
18 Ibid.
19 Select Committee on the High Price of Gold Bullion (1810), Abstract.
20 Peel (1819), c. 680.
21 Fisher (1922 (1911)), p. 241.
22 Attwood, quoted in Wright and Harlow (1844), p. 383.
23 Ricardo (2005 (1815)), p. 55. To make the currency more efficient, Ricardo would have replaced gold by paper for internal circulation. Bank of England notes were to be convertible only into bullion, not coin. This was considered too radical.
24 Ricardo (2005 (1816)), p. 120.
25 See Laidler (1991), pp. 21–2. Unregulated country banks, issuing their own notes, expanded their loans in the 18th century to finance the industrial revolution. Liam Brunt has argued that they were proto-venture capitalists: see Brunt (2006).
26 Congdon (1980).
27 A related measure required the Scottish banks, which continued to issue their own notes, to back these with holdings of Bank of England notes.
28 Kynaston (2017), p. 141.
29 Orthodox opinion held that it was because silver was being de-monetized in France in parallel with gold discoveries that the increased quantity of gold coming on to the market did not lead to a big inflation.
30 Germany went on to gold in 1871; the Scandinavian Union in 1873; the Netherlands in 1875. Italy, Spain, Egypt, Australia, India, Chile, Venezuela, Costa Rica, Russia, Japan, Peru, Ecuador and Mexico were all on the gold standard by 1905.
31 Data: Bank of England (2017a). Data was rescaled; in the original data series, 100 = CPI in 2005. Graph: author’s own.
32 Giffen (1892), p. 98.
33 Fisher (1922 (1911)), p. 325.
34 Before 1914, a gold pound was defined as 113 grains of fine gold; a gold dollar was 23.22 grains, so a paper pound exchanged for 4.87 paper dollars. In the same way, a pound was worth 20 francs and 20 lire, i.e. it could be converted into twenty times more gold than a franc or a lira.
35 Rodrik (2011), p. 35.
36 The Cunliffe mechanism excluded long-term financing of current account deficits. In the extreme case, when no country is able to borrow, the current account balance is necessarily zero.
37 Eichengreen (1995), pp. 5–6.
38 This is a simplified picture. The gold standard creaked and groaned at the edges (particularly in Latin America) as countries went off and came back to gold, and as central banks restricted and expanded convertibility.
39 Eichengreen (1995), p. 6.
40 See ibid., ch. 2; Kindleberger (1986 (1973)).
41 Cain and Hopkins (2016), p. 224.
42 Statistical Office of the United Nations (1962).
43 Michie (2003), p. 258.
44 Kindleberger (1986 (1973)), p. 11.
45 Cairncross (1953), p. 209.
46 Ibid., p. 208.
1 Wicksell (1936 (1898)), p. 4.
2 Leijonhufvud (1979), p. 1.
3 Fisher (1922 (1911)), p. 172.
4 Ibid., p. 157.
5 Ibid., pp. 280–315.
6 See Marshall (1923).
7 Congdon (2007), p. 282.
8 Fisher’s Elementary Principles of Economics (1912), quoted in Congdon (2007), p. 282.
9 Eshag (1963), p. 54.
10 If a bank, obliged to hold 10 per cent of its deposits in reserves, receives an extra £100, it will lend out £1,000: the money multiplier is 10. Similarly, if the banking system’s reserves as a whole increase, the total amount lent will be a calculable multiple of the original injection.
11 Quoted in Eshag (1963), p. 16.
12 Fisher (1922 (1911)), p. 56.
13 Ibid., p. 66.
14 Ibid., p. 329.
15 Ibid., pp. 329–30.
16 Gårdlund (1996), p. 269.
17 Leijonhufvud (1979), p. 25.
18 Wicksell (1936 (1898)), p. 96.
19 Ibid., pp. 105–6.
20 Ibid., pp. 120–21.
21 Leijonhufvud (1979), p. 27.
22 See Humphrey (1997), pp. 81–5.
23 Ibid., p. 83.
24 Wicksell (1936 (1898)), pp. 192–4.
25 Before the First World War, the Bank of England tried to steer shortterm rates a bit below bank rate, so as to limit recourse to its discount facility. It used open-market operations to keep a spread of 1 per cent between bank rate and the short-term market rate. See Bindseil (2004), p. 15.
26 Eshag (1963), p. 24.
27 See Fisher (1922 (1911)), ch. 2.
28 Ibid., p. 6.
29 In his restatement of the QTM, Friedman glosses T (total transactions) as Y (real income). But money is used for many transactions that do not increase real income, such as those involved in financial speculation.
30 See Fisher (1922 (1911)), ch. 3.
1 Ricardo (2005 (1817)), p. 244.
2 Ferguson (2001), pp. 16–23.
3 The question was discussed in China during the ‘Discourses on Salt and Iron’ – see the ‘Record of the Debate on Salt and Iron’ in de Bary and Bloom (1999), pp. 360–63. For Khaldûn’s work, see especially Khaldûn (1967).
4 Smith (1755).
5 Data: UK Public Spending (2017). Graph: author’s own.
6 Ibid.
7 O’Brien (1975), p. 27.
8 Quoted in Whittaker (1940), p. 291.
9 Ferguson (2001).
10 Weir (1989).
11 For the historiography of the Hanoverian state, see Daunton (2012) and O’Brien (2011).
12 Daunton (2012), p. 112.
13 Ibid., p. 130. France paid a ‘default premium’ for most of the 18th century. It ran persistent deficits in the 18th century, even in peacetime, because its political system ‘completely separated the privilege of spending from the obligation to pay taxes and at the same time left the public with enough political power to resist taxation’ (ibid., p. 124).
14 Perpetual bonds are bonds with no maturity date; the issuer pays coupons (interest) on the bond for ever, but never has to pay the bondholder the principal (the amount borrowed, on which the interest is paid).
15 Ferguson (2001), p. 130.
16 Ibid., p. 193.
17 Smith (1976 (1776)), pp. 464–5, 881.
18 Ibid., p. 660.
19 Smith treated saving and investment as the same: the profit from production produces ‘stock’, which can either be spent on consumption or devoted to ‘improvements’ in production.
20 Smith (1976 (1776)), p. 687.
21 Ibid., pp. 723–4.
22 Ibid., p. 912.
23 Ibid., p. 861.
24 Ibid., p. 921.
25 Ibid., p. 929.
26 Ibid., p. 932.
27 Ibid., bk V, ch. III.
28 Ibid., p. 929. There was an implicit, if unprovable, counterfactual: Britain (and other countries) would have been even richer had not so much money been wasted in wars.
29 Ibid., p. 947.
30 Ricardo (2005 (1817)), p. 247.
31 We owe the modern doctrine of Ricardian equivalence to Robert Barro. It can be summarized as follows: governments can pay for spending through either taxes or bonds. Bonds must be repaid, and so represent taxes at a later date. Under Ricardian equivalence, consumers know this and respond to bond-financed government spending by reducing consumption, so that they can save for this higher tax future. It thus does not matter how the government funds spending; consumption (and investment) will fall either way. See Barro (1974).
32 Ricardo (2005 (1817)), p. 248.
33 But Smith is not entirely consistent: in the Wealth of Nations, he writes about the erection of banking companies in Scottish towns and villages, and holds ‘that the trade and industry of Scotland . . . have increased very considerably . . . and that banks have contributed a good deal to this increase, cannot be doubted’ (Smith (1976 (1776)), p. 297). He puts this down to the Scottish banks’ willingness to lend credit in the form of ‘cash accounts’ and their ‘[peculiarly] easy terms of . . . repayment’, meaning that a merchant in Edinburgh ceteris paribus can ‘carry on a greater trade and give employment to a greater number of people than a London merchant’ (pp. 299–300).
34 Mill (1967 (1844)), p. 262.
35 Stigler (1986 (1962)), p. 87.
36 Peden (2000), p. 38.
37 Data: Abbas, et al. (2010). Graph: author’s own.
38 Crafts (2014).
39 H. C. G. Matthew’s Gladstone 1809–1898, quoted in Daunton (2012), p. 135. Hypothecation was the pledging of different revenues to different uses. This encouraged virement – the use of surpluses from one ‘fund’ to cover deficits on another. Both principles were rejected by Gladstone’s government: instead revenue was treated as a single pool of money, divided up and managed by Commons’ votes every year (p. 134).
40 Peacock and Wiseman (1961), p. 190.
41 Peden (1984), (2002). From 1887 the Treasury insisted that, except for war, departmental borrowing be kept separate from the national debt, with interest service and annual repayments being charged to the annual votes for the department (2002, p. 360). As Peden makes clear, there was something fictional about the Victorian record of debt reduction: whereas the national debt fell from £20.11 per head of population in 1887 to £16.18 by 1911, the indebtedness of local authorities rose from £6.21 per head of population in 1887 to £14.02 by 1911 (Peden (2002)).
42 Middleton (1982), p. 51; see also Morgan (1952) for an account of Victorian and Edwardian war finance. It should also be noted that Middleton claims that there was a second exception to the balancedbudget rule, namely for capital projects expected to be remunerative in an accounting sense. Given the low level of public investment by the central government (as opposed to local government), this was a theoretical rather than a practical exception (Middleton (1982), p. 51).
43 See Mallet (1913), p. 509.
44 Tomlinson (1990), p. 24.
45 For example, O’Brien (2011).
46 List (1909 (1841)), p. 108.
47 Ibid., p. 37.
48 Ibid., p. 141, List’s italics removed.
49 Ibid., p. 295.
50 Plumpe (2016), p. 169.
51 Aaronson (2001), pp. 32–5.
52 A typical unsettled question from economic history is whether German and American tariffs helped or hindered growth, or made no difference. On the pro-Protectionist side see Bairoch (1993); for an alternative view, see Irwin (2000).
53 See Ferguson (1999b).
54 Ibid., p. 123.
55 Ibid.
56 Ibid., p. 6.
57 James Rothschild to Gerson Bleichröder, quoted in Ferguson (1999b), p. 91.
58 North (2015), p. 163.
59 In his 30 April 1781 letter to Robert Morris. See also Brock (1974 (1957)).
60 Henderson (2006 (1961)), p. 45.
1 Keynes (1982), p. 239, from his essay ‘National Self-Sufficiency’.
2 Eichengreen (1985), p. 22.
3 Webb and Webb (1923), p. 136.
4 Sir Josiah Stamp, reporting the view of the French economist Jacques Rueff, in The Times, 11 June 1931. Quoted in Grant (2015), p. 208.
5 Data: Denman and McDonald (1996). graph: author’s own. The unemployment figures for the interwar years are those for workers covered by national unemployment insurance, and are significantly higher than unemployment as a percentage of the total workforce, which included workers in agriculture and domestic employment not covered by the insurance scheme. For example, Feinstein (1972), table 58, gives a figure of 17 per cent for 1932, compared with 22.1 per cent in the graph. The pre-1920 figures are based on returns for unemployment among trade unionists and would probably also be higher than total unemployment. For a consistent unemployment series running from 1870 to 1999, see Boyer and Hatton (2002), p. 667.
6 The Financial Resolutions of the Genoa Conference, 1922, summarized in Brown (1940), p. 343.
7 See Laidler (1999).
1 Keynes (1971 (1923)), p. 148.
2 Quoted in Peden (1983), p. 281.
3 Keynes (1981), p. 189.
4 Cannan (1969 (1925)), p. xli.
5 Quoted in Skidelsky (1992), p. 164. See pp. 162–4 for a summary of the Keynes–Cannan debate. Keynes was right. The banks held huge quantities of short-term Treasury bills, issued by the government to finance its war expenditure, which fell due for repayment after the war. ‘This meant that after the war the banks could supplement their cash reserves by not subscribing for new Treasury bills when the old ones matured, and consequently the monetary authorities had been powerless to prevent a great expansion of credit during the postwar boom of 1919–20’ (Peden (1993), p. 228).
6 See Keynes (1971 (1923)), pp. 61–9.
7 Keynes supposed that the public held ‘an amount of money having a purchasing power over k consumption units’, the latter being ‘made up of a collection of specified quantities of their standard articles of consumption or other objects of expenditure’ such as those used in the formulation of price indices; k is thus a measure of an agent’s real purchasing power held in money, and depends ‘partly on their wealth, partly on their habits’ (Keynes (1971 (1923)), pp. 62–3).
8 Ibid., pp. 35, 148.
9 Ibid., p. 138.
10 Kindleberger (1986 (1973)), p. 289.
11 Keynes (1971 (1930a)) and (1971 (1930b)).
12 Keynes (1983), pp. 424–5. See ‘Credit Control’ in this volume (pp. 420–27), and also the ‘Dual Method of Credit Control’ section of his 1924 address to the League of Nations, Keynes (1981), pp. 188–90. Keynes considered that while bank rate policy may be best suited to maintaining international equilibrium, open market operations were the more powerful in influencing the rate of investment. See Keynes (1971 (1930b)), p. 225.
13 Keynes (1971 (1930a)), p. 153.
14 See Bindseil (2004), pp. 19–20.
15 For the two contrasting positions see Skidelsky (1992), pp. 340–41.
16 Friedman and Schwartz (1965), p. x.
17 Congdon (2017a), p. 2.
18 Keynes (1971 (1930b)), p. 347. Open-market operations, as advocated by Keynes, had nothing to do with nominal interest rates having fallen to zero, as they did in 2009. Rather, they were the treatment for an economy failing to respond to a low bank rate. Their aim was to bring down long-term rates ‘to the limiting point’, i.e. to get the spread between bank rate and investment rate to what had been normal before the slump.
19 Quoted in Kaldor (1970), p. 13.
20 Ibid., pp. 14–15.
21 See Laidler (2014).
22 Peden (2000), p. 148.
23 Niemeyer (1921), quoted in Skidelsky (1981), pp. 171–2.
24 For accounts of the background and effects of the Geddes Axe, see Burrows and Cobbin (2009). The spending cuts were partially offset by cuts in income tax.
25 Middlemas and Barnes (1969), p. 127.
26 The Treasury in the 1920s pretended it was ‘balancing the budget’ by resorting to fiscal ‘window-dressing’. For an example, see Peden (2000), pp. 148–9.
27 For details see Sloman (2015) and Skidelsky (1994 (1967)), pp. 52–5. £250 million constituted just over 5 per cent of nominal GDP.
28 Keynes (1978), pp. 86–125.
29 Hawtrey (1925).
30 Hawtrey (1913), p. 260.
31 Pigou (1913).
32 Hawtrey (1925), p. 40.
33 Ibid., p. 44. This would not be true if the government borrows funds which would otherwise have gone into foreign investment (p. 46), a view also championed by Keynes. Hawtrey’s argument presupposes that the central bank has it in its power to ‘create credit’ independently of the demand for credit.
34 Winston Churchill, Budget speech of 1929, quoted in Peden (2004), p. 57.
35 ‘The Means to Prosperity’, in Keynes (1978), pp. 335–66.
36 Crafts and Mills (2013).
37 One big difference between Nazi Germany and the UK was that Germany was much nearer to being a closed economy, from which the multiplier effect of public expenditure was prevented from seeping away through imports.
38 Data: Boyer and Hatton (2002), p. 667; Darby (1976), p. 8; Corbett (1991). Graph: author’s own.
39 Quoted in Peden (2000), p. 226. See also Skidelsky (1994 (1967)).
40 The deficit projected by the May Committee was as inaccurately (and ideologically) alarmist as similar projections in 2010. It counted all borrowing for the Unemployment and Road funds (not then part of the budget) as current expenditure, as well as £50 million a year for debt redemption.
41 Middleton (1985), pp. 85–6.
42 Ibid., p. 82; see also Clarke (1998), pp. 66–7, and Tomlinson (1990), p. 77.
43 Macmillan Committee (1929–31), qq. 3382, 7690, 7783, 7647, 7653, 7836, 7662, 7835, 7841–3, 7847. For Clay’s comment see Clay (1930), quoted in Skidelsky (1992), p. 357.
44 Keynes’s Halley-Stewart Lecture of 4 February 1932, quoted in Skidelsky (1992), p. 441.
45 See Skidelsky (1992), pp. 356–62 for further details of these encounters and quotation sources. For debates on the Treasury View, see also Clarke (1988), ch. 3.
46 Krugman (2010).
47 In a letter to Alick de Jeune, 22 November 1934. Quoted in Skidelsky (1992), p. 511.
48 Keynes (1973a (1936)), ch. 11, ‘The Marginal Efficiency of Capital’, esp. pp. 143–6.
49 Krugman (2007), p. xxx.
50 Keynes (1973c), pp. 115–16. This quotation is originally from Keynes’s article ‘The General Theory of Employment’, Quarterly Journal of Economics, February 1937. This article is crucial testimony for what Keynes ‘really meant’, since in it he set out to summarize ‘the comparatively simple ideas which underlie my theory’.
51 Keynes (1973c), pp. 114–15.
52 Keynes (1973a (1936)), pp. 161–2.
53 Ibid., pp. 155–6.
54 Paul Davidson has been the most persistent advocate of the view that Keynes’s economics is rooted in the problem of knowledge, and Davidson rejects what he calls the ‘ergodic hypothesis’. See Davidson (1978).
55 Keynes (1973a (1936)), p. 167; Keynes (1973c), p. 110.
56 Keynes (1973a (1936)), pp. 293, 294.
57 Ibid., p. 9.
58 Ibid., p. 12.
59 Ibid., p. 265.
60 Keynes’s own explanation of the downward stickiness of money, or nominal, wages relied on the assertion that workers were accustomed to a certain scale of wage relativities, so that no group would be the first to accept a wage cut (Keynes (1973a (1936)), pp. 13–15). But this fact from the real world depended on a particular institutional structure of wage determination.
61 Ibid., pp. 378–9.
62 Keynes (1979), p. 179. The argument is that the interest rate only comes into play at the bottom of the slump when capital has become so cheap that investment prospects are improved. This leads to a decline in liquidity preference, and it is this which brings about a fall in the rate of interest. But this will not be enough to revive profit expectations sufficiently to pull the economy back to full employment. So the economy oscillates round a position of ‘under-employment equilibrium’.
63 In his futuristic ‘Economic Possibilities for our Grandchildren’ (1930), Keynes thought that three hours’ work a day would be quite enough to ‘satisfy the old Adam in us’. In Keynes (1978), pp. 321–32.
64 Keynes (1982), p. 389.
65 Keynes (1973a (1936)), pp. 199–201.
66 From ‘The Means to Prosperity’, in Keynes (1978), p. 346.
67 Keynes (1973a (1936)), pp 129–31.
68 Keynes (1980a), p. 28.
69 Ibid., p. 74.
70 See ibid., esp. pp. 1–144.
71 It could be said that Keynes’s ideas themselves came out of pre-scientific, common-sense economics. In the General Theory he devoted ch. 23 to precursors, which led Roy Harrod to accuse him of glorifying cranks and imbeciles.
72 Roosevelt (1936). It is a tenable argument that Roosevelt’s deficits, while being too small to bring about complete recovery until the Second World War, dented business confidence sufficiently to produce little net effect. So some ‘crowding out’ may have been going on, despite the mass of unused resources.
73 Lowe (1965), p. 192.
74 Viner (1936), p. 149.
75 Keynes (1945), p. 385.
76 Allsopp and Mayes (1985), pp. 374, 370.
77 This is an immediate result of pure neo-classical theories, but also one in the IS/LM model when the LM curve is not flat (i.e. ‘liquidity trap’) or when monetary policy is not accommodating fiscal expansion.
1 Letter to Bernard Shaw, 1 January 1935. Quoted in Skidelsky (1992), pp. 520–21.
2 More precisely: AD = AS balance should include both full employment and external balance (stable foreign exchange reserves).
3 Tobin (1987), p. 41.
4 Hicks (1937). For further details, see p. 173 in Chapter 7.
5 Keynes was not keen on nationalization, but he believed the state should play a larger role in the direction and financing of production, as well as being ‘insurer of last resort’.
6 See Schumpeter (1997 (1952)), ch. 10, esp. pp. 274–5.
7 The acronym is from Maddison (1983).
8 Gerber (1994). Andy Storey writes that ‘German economic policy was a hybrid of ordoliberalism . . . Bismarckian state planning, Keynesian economic thinking, and Rhenish-Catholic corporatism allied (in part) to a resurgent (also largely corporatist) trade union movement.’ (In ‘The Myth of Ordoliberalism’, draft paper, 2017.)
9 This was a very general conclusion. On the other hand, full employment in wartime Britain was a curious example of full employment. There were fewer civilian jobs than in 1938, and the external balance did not matter as long as the Americans took care of it through Lend-Lease. This simply shows that results achieved in conditions of war cannot be readily translated into outcomes available in peacetime.
10 Ministry of Reconstruction (1944), foreword, ¶ 39, 55–6.
11 Ibid., ¶ 74.
12 Tomlinson (1990), p. 246.
13 J. C. R. Dow, quoted in Congdon (2007), p. 88.
14 Stein (1948), p. 475.
15 Samuelson (1970 (1948)), pp. 332–4.
16 Chantrill (2017).
17 Phillips (1958).
18 Holmans (1999), pp. 41–51.
19 From a Treasury & Bank memo, ‘Monetary Organisation’, dated 25 June 1956. Quoted in Holmans (1999), p. 244.
20 Radcliffe Committee (1959). The Report accepted the cost-push theory of inflation and denied any close connection between bank rate and bank lending. See ¶ 489, 498.
21 See Holmans (1999), pp. 248–9.
22 Samuelson (1991 (1966)), pp. 1329–30.
23 McCracken, et al. (1977), p. 42.
24 Labour Party statement, quoted in Beckerman (1972), p. 44.
25 Among the growth-promoting institutions set up in the 1960s were the National Economic Development Council (in 1962), industrial training boards established by the Industrial Training Act (1964), the Department of Economic Affairs (1964) and the Industrial Reorganisation Corporation (1967).
26 Kaldor (1966).
27 Se Constantini (2015).
28 Tobin (1966), p. 19.
29 Data: The Maddison Project (2013). Growth in 1990 Int. GK$ per capita. Graph: author’s own.
30 Tobin (1987), p. 5.
31 Matthews (1968), p. 556.
32 Quoted in Clarke (1998), p. 65.
33 Jowett and Hardie (2014), p. 6. Four quarter moving average. Negative values for PSCBD and PSNB represent surpluses in the current and overall budgets respectively. E.g. in 1968, the government ran a large current budget surplus, but still had an overall budget deficit due to high levels of capital spending (net investment).
34 Data: UK Public Spending (2017); UK Public Revenue (2018). Graph: author’s own.
35 Zweig (1976), p. 7.
36 Abramovitz (1986), p. 385.
37 Ibid., p. 395.
38 Ibid., pp. 395–6.
39 Hicks (1974), p. 3.
40 Quoted in Skidelsky (2000), pp. 502–3.
41 Kaldor (1971).
42 Triffin (1960).
43 McCracken, et al. (1977).
44 Ibid., p. 47.
45 Ibid., p. 56.
46 Ibid., pp. 60–65.
47 Ibid., p. 66.
48 Ibid., pp. 11–14, 37–80.
49 Goodhart (2014), p. 11.
50 Balogh (1972).
51 Callaghan (1976). The speech was drafted by his son-in-law Peter Jay, economics editor of The Times.
52 Keynesian policy did not expire overnight. An example of a late flowering was the abortive Mitterrand expansion of 1981–3 in France, which ended with the devaluation of the franc and imposition of austerity measures. See Arnone (1995).
1 Samuelson (1964 (1963)), p. 332.
2 Muth (1961), p. 316.
3 Constantini (2015), p. 34.
4 Prominent among these was the ‘Pigou effect’. A fall in money-wages (and prices) would increase the real value of financial wealth, including savings. Individuals would need to save less in order to reach their ‘real’ savings targets, and therefore they would consume more. The increased consumption brought about by the fall in prices would restore full employment, provided wages were flexible. For a detailed account of the Pigou effect, see Morgan (1978), pp. 48–57.
5 For a sparkling account of these early skirmishes, see Leijonhufvud (1993 (1969)).
6 Hicks (1937).
7 Coddington (1983), pp. 66–7.
8 Quoted in Skidelsky (2003), p. 547.
9 Samuelson (1955 (1948)), p. 212.
10 Hayek (2001 (1944)), pp. 110, 126, 213.
11 Keynes (1980b), pp. 385–8.
12 Quoted in Cherrier (2011), p. 1.
13 Friedman’s ‘permanent income’ acts as a proxy for wealth in the demand for money.
14 See Friedman (1957), esp. ch. 3, ‘The Permanent Income Hypothesis’, pp. 20–37. In fact, Keynes also thought that over a short period, a decline in income might cause consumption to exceed people’s income as they used up their reserves (see Keynes (1973a (1936)), p. 98). He also allowed for the ‘windfall effects’ of a decline in money prices, similar to the Pigou effect. But he did not believe these effects had anything to do with people attempting to smooth their consumption over their lifetimes. He thought that uncertainty about future income was too great for people to base spending decisions on calculations of permanent income. Maintaining consumption in face of falling income was much more to do with habitual consumption patterns. See Keynes (1973a (1936)), pp. 89–106 for further discussion.
15 Friedman (1956). Friedman’s relation to earlier versions of the QTM is discussed in Wood (1995).
16 Friedman and Schwartz (1963).
17 Friedman and Schwartz (1982).
18 Hendry and Ericsson (1991).
19 Friedman and Schwartz write that a ‘more sophisticated analysis [than the simple quantity theory] reveals the existence of a stable demand function for money covering the whole of the period we examine’ (1982, p. 624). Hendry and Ericsson found that the same evidence ‘refutes constancy in Friedman and Schwartz’s reported model’ (Hendry and Ericsson (1991), p. 14). As for the exogeneity of money, Friedman and Schwartz in their earlier work claimed their data showed that ‘monetary changes have often had an independent origin; they have not been simply a reflection of changes in economic activity’ (Friedman and Schwartz (1963), p. 676). Later, they would say: ‘the nominal quantity of money . . . is an exogenous variable’ (Friedman and Schwartz (1982), p. 35). Hendry and Ericsson responded that ‘the money stock appears to be endogenously determined by the decisions of the private sector since the Bank of England in effect acts as a lender of the first resort by standing ready to rediscount first-class bills at the going Bank Rate . . .’ Hendry and Ericsson (1991), p. 27.
20 Friedman quoted in Wood (1995), p. 107.
21 Friedman (1970), p. 24.
22 Friedman (1968), p. 6.
23 Ibid. The attack on Phillips Curve Keynesian was the joint work of Milton Friedman and Edward Phelps.
24 Friedman (1968), p. 8.
25 Ibid., pp. 12–13.
26 Friedman (1951).
27 A point forcefully made by Coddington (1983), p. 43.
28 Cf. Congdon: ‘The relationship between belief in the importance of money in the economy and support for market mechanisms [by economists] . . . is almost an empirical regularity in itself.’ (Congdon (2007), p. 17.)
29 Wood (1995), p. 97.
30 Ibid.
31 As advocated by Hawtrey (1938).
32 Congdon (2007), p. 150.
33 Ibid.
34 Silber (2012).
35 Laidler (1985).
36 Minford (1988), p. 97.
37 In the USA, the Full Employment and Balanced Budget (Humphrey–Hawkins) Act of 1978 gave the Federal Reserve Board the dual mandate of price stability and full employment. This was in line with the American tradition.
38 Hammond (2009), p. 2.
39 CPI data: Bank of England (2017a). Oil price data: BP (2016). Growth in yearly average of oil prices in nominal US$ per barrel (1971–1983: Arabian Light posted at Ras Tanura; 1984–1990: Brent dated). Graph: author’s own.
40 For the Laffer curve discussion see Fullerton, et al. (1994), pp. 174–7.
41 Blyth (2013), esp. pp. 165–7.
42 Quoted in Clarke (1998), p. 77.
43 In his Fifth Mais lecture, 18 June 1984, quoted in Lawson (1992), pp. 414–15.
44 Ibid., p. 298.
45 Ibid., p. 813.
46 Quoted in Clarke (1998), p. 62.
47 Lucas (1972).
48 Lucas (1976). This is known as the ‘Lucas critique’.
49 Which in one way brought it closer to the Keynesian idea of multiple equilibria, but without any implication that one equilibrium is superior to another.
50 Quoted in Skidelsky (1992), p. 457.
51 Presidential address to the American Economic Association: Lucas (2003), p. 1.
52 New Keynesian models incorporated one or all of: efficiency wages, staggered wage setting, incomplete markets, search and bargaining, imperfect competition, liquidity constraints and co-ordination failures.
53 Wren-Lewis (2012).
54 Thus market interest rates will react to what the central bank is expected to do, rather than what it does, which means it needs to do very little. However, for the rule to work people must believe not only that the rule will be followed, but also that it is correct.
55 Congdon (2007), p. 14.
56 Jones (2012), p. 262.
57 Lindbeck (1976), p. 31.
58 North and Thomas (1970).
59 For a summary of public choice theory, see Mitchell and Green (1988).
60 Adapted from Woodford (2009).
61 Lucas (1980).
62 Phillips (1958), p. 296. This curve showed a stable ‘trade-off’ between unemployment and money-wage growth (proxied as the inflation rate).
63 Haberler quoted in Shaw (1984), p. vii.
64 Blume, et al. (1982), p. 314.
65 Evans and Honkapohja (2005), p. 4.
66 Wickens (2012), p. 4.
67 Romer (2011), p. 204.
68 Blanchard (2008), pp. 8–9, describes the three key New Keynesian equations.
69 Wren-Lewis (2012), p. 278.
70 Woodford (2003).
71 Taylor (1993).
1 International Monetary Fund (2016). Gross domestic output growth at constant prices and inflation in average consumer prices for ‘advanced economies’.
2 Data: International Monetary Fund (2016). Graph: author’s own.
3 Data: International Monetary Fund (2016). Graph: author’s own.
4 Minsky (2008 (1986)), p. 237.
5 The European Commission invoked a legal waiver based on Article 107 (3B) of the Maastricht Treaty, allowing state aid whenever there was a serious disturbance in the economy of a member state.
6 Data and graph from Eichengreen and O’Rourke (2010). Notice that the first year of slide was equally steep in both periods, but the slide went on for 38 months in the Great Depression, but for only 12 months in the recent one.
7 Giles (2017).
8 G20 (2009), pp. 1–2.
1 Cameron (2013).
2 HM Treasury (2006), p. 18.
3 For data and discussion see Sawyer (2007).
4 Data: Rogers (2013a, 2013b). Graph: author’s own.
5 For an account see Skidelsky (2010), reviewing Gordon Brown’s Beyond the Crash.
6 Data: International Monetary Fund (2017a). Graph: author’s own.
7 Data: International Monetary Fund (2017a). Graph: author’s own. Net debt = gross debt minus financial assets corresponding to debt instruments. No data is given for Greece by the IMF in light of controversy over measurement of net debt.
8 Darling (2011), p. 264.
9 See International Monetary Fund (2010), p. 9.
10 Quoted in Wolf (2010b).
11 Obama: ‘We must . . . learn from the consequential mistakes of the past when stimulus was too quickly withdrawn.’ Quoted in Beattie and Giles (2010). For Schäuble, see Bibow (2010).
12 For examples of journalism against ‘consolidation’, see e.g. Wolf (2010a, 2010b), Stiglitz (2010), Shiller (2010) and DeLong (2010), the latter advocating ‘expansionary fiscal, monetary, and banking policy . . . on a titanic scale’. Anatole Kaletsky, economic columnist of The Times, did not cover himself in glory by suggesting that governments were failing to address the long-term threats to their solvency from healthcare and pension liabilities (The Times, 12 July 2010).
13 Wolf (2010b).
14 For the ‘cruise missile’ quotation, see Watt (2008); for the invitation to speculate, see Stephens (2010).
15 Office for Budget Responsibility (2017).
16 Data: HM Treasury (2010, 2014). Graph: author’s own.
17 Blanchard and Leigh (2013), p. 6.
18 When policy rates hit the zero lower bound following the financial crisis, this led to a ‘rediscovery’ of the multiplier. In a much cited piece in the Journal of Political Economy, Christiano et al. (2011) argued that, when interest rates cannot be lowered any further to induce private consumers to spend more, there was a role for fiscal policy; and they came up with an estimated multiplier of 3.7.
19 Larry Summers happily called this phrase an ‘oxymoron’. See e.g. Summers (2011).
20 Blyth (2013), p. 175 (my italics).
21 Alesina (2010).
22 Reinhart and Rogoff (2011 (2009)), p. xxv.
23 Reinhart and Rogoff (2010b), p. 573.
24 Krugman (2015) summarizing Herndon, et al. (2014).
25 Reinhart and Rogoff (2010a).
26 In response to a question by the author in a House of Lords committee.
27 See Evening Standard (2009).
28 Quoted in Skidelsky (2009), p. 49.
29 Specifically, he said: ‘Businesses and individuals look to the future, and while they are not the perfectly rational creatures assumed by the theory of Ricardian equivalence, uncertainty over the future paths of tax rates and government spending does play an important role in their behaviour.’ Perhaps the proviso of the people not being ‘perfectly rational’ was inserted by his specialist advisers. http://www.totalpolitics.com/print/speeches/35193/george-osborne-mais-lecture-a-new-economicmodel.html.
30 The fairy is the satirical creation of Paul Krugman (Krugman (2010)) to depict the unsubstantial character of this argument.
31 Mackenzie (2010). The ‘short view’ of Mackenzie’s title accurately describes the view of bond-market traders.
32 ‘You should have just asked a Swabian housewife,’ said Angela Merkel in October 2008, in response to a question about the collapse of Lehman Brothers.
33 The distributional effects may not be considered desirable, but they do not impose a net burden on the future generation considered as a whole.
34 Office for Budget Responsibility (2012), p. 33.
35 Data: International Monetary Fund (2008, 2012, 2017a). Graph: author’s own.
36 HM Treasury (2010), p. 8.
37 Blanchard and Summers (1986). In this paper, Blanchard and Summers use a neo-classical framework in which persisting unemployment is the result of sticky money-wages. Sticky wages in turn result from the power of ‘insiders’ (who want to maintain wages) over ‘outsiders’ (who will accept wage reductions to boost their chances of gaining employment).
38 Average loss of potential output over 23 OECD countries between 2008 and 2015 has been estimated at 8.4 per cent; Ollivaud and Turner (2014), p. 10.
39 Personal correspondence.
40 Data: International Monetary Fund (2016). (Real) GDP at the start of the period shown is indexed to 100 for each country/bloc. The graph thus shows the development of output relative to its pre-crisis peak. Here we see how misleading the promise of a rapid ‘V-shaped’ recovery was.
41 Council of Economic Advisers (2010).
42 The relatively expansionary American fiscal record reflected peculiarities in the US fiscal constitution. The president may propose, but Congress disposes. The Bush stimulus of 2008 ran on into the Obama period for its mandated length, until it encountered the ‘fiscal cliff’ at the end of 2012.
43 Heimberger (2017). See also Radice (2014).
44 Since the Eurozone crisis of 2010, the fiscal rules have been strengthened. Budgets must be in balance or surplus, with a maximum structural deficit of 0.5 per cent, and automatic sanctions for non-compliance.
45 Parker and Barker (2010).
46 Bland (2016).
47 International Monetary Fund (2016).
48 Jordà and Taylor (2013), p. 27.
49 Wren-Lewis (2017).
50 Carney (2016), p. 12. This built on the estimates of Blanchard and Leigh (2013).
51 In 2016, 6.3 per cent of those employed in the UK were in ‘time-related underemployment’ (ILOSTAT (2017)). With an unemployment rate of 4.9 per cent, that means that 0.063*(1-0.049), i.e. about 6 per cent, of the total potential workforce were in time-related under-employment. This, plus those who are unemployed, comes to 11 per cent.
52 ‘Supply-side Keynesianism’ became popular in the 1980s through the work of Arthur Laffer, whose ‘curve’ showed how government revenues could be boosted if top marginal tax rates were cut, by inducing a greater work effort from the wealthy. But the American preference for tax-cutting to spending Keynesianism goes back to Beardsley Rummel in the New Deal period, as Herbert Stein has shown in his book The Fiscal Revolution in America (1969). A recent offering in this genre is a paper by Christina and David Romer, which estimates an American ‘tax multiplier’ of 3 – $1 of tax cuts raises GDP by $3: Romer and Romer (2010).
53 Bernanke (2016).
54 Turner (2015); Pettifor (2017), p. 122.
55 Shaikh (2016), p. 680.
1 Brittan (2010).
2 Brookings Institution (2014).
3 May (2016).
4 Draghi (2016).
5 Section 11 of the Bank of England Act 1998; Bank of England (2015), p. 50.
6 ‘Bank Rate’, ‘base rate’, ‘official rate’ and ‘policy rate’ are used interchangeably. They mean the same thing. The US equivalent is the ‘federal funds rate’.
7 King (2012), p. 2.
8 Bank of England Monetary Policy Committee (1999), p. 11.
9 ‘Though a change in the official rate unambiguously moves other shortterm rates in the same direction . . . the impact on longer-term interest rates can go either way . . . A rise in the official rate could, for example, generate an expectation of lower future interest rates, in which case long rates might fall in response to an official rate rise.’ Ibid., p. 4.
10 The Pensions Regulator (2016), p. 5.
11 Derived from Bank of England Monetary Policy Committee (1999), p. 3. For simplicity not all interactions between variables are shown here, but these can be important.
12 Ibid., p. 6.
13 King (2005). If inflation deviates from the target by more than 1 per cent in either direction, the Bank of England Governor must write an open letter to the Chancellor explaining why this is the case.
14 Ibid., p. 12.
15 Taken from Carney (2017).
16 Carney recently proposed the addition of a term representing financial stability to this equation in light of the financial crisis (ibid.).
17 The ECB’s mandate is asymmetric. It defines price stability as inflation ‘below but close to 2%’.
18 Data: International Monetary Fund (2017b). Graph: author’s own.
19 Roger Bootle has drawn attention to the ‘China price’ in his book The Death of Inflation: Bootle (1996).
20 In the typically coded language of the central banker, Mervyn King, Governor of the Bank of England for much of the period, concluded that ‘during the Great Stability [New Keynesian] models proved useful in forecasting the relatively small fluctuations in output and inflation that characterised the period before the crisis. But during the crisis they performed poorly.’ (King (2016), p. 305.)
21 Quoted in Cohen (2017).
22 Data: Bank of England (2017b) – ‘Statistical Interactive Database – official Bank Rate history’; European Central Bank (2017b); Federal Reserve [US] (2017a, 2017b [used only for the 2002 value]). The values for each year are taken from the interest rates of the central banks at the end of that year; where the Fed gives its rate within a 0.5 per cent range, the mid-point is represented. Graph: author’s own.
23 King (2009), p. 7.
24 Bernanke (2004).
25 The Troubled Asset Relief Program (TARP) introduced shortly before QE in the US was a Treasury, not a Fed, initiative.
26 Bernanke (2009).
27 Ricketts and Waller (2014).
28 Wolfers (2014).
29 In ‘repo’ transactions, the central bank gives commercial banks shortterm collateralized loans.
30 See European Central Bank (2017a) for ECB balance sheet, and Eurostat (2017) for Eurozone GDP in current prices, €m.
31 We concentrate here on these three central banks. Liquidity injections in China were carried out through various short-term reverse repurchase procedures and by a long-forgotten tool in the Western world – lowering banks’ reserve ratio requirements. Since this stood at 20 per cent, far higher than the near-zero level in Western banks, it gave the People’s Bank of China a great deal of flexibility. The Bank of Japan, having tried QE from 2001 to 2006, without any success, did not re-embark on QE proper until 2013 as part of ‘Abenonomics’, when it announced that it was pursuing ‘aggressive monetary easing through its commitment to continue with a virtually zero interest-rate policy and purchases of financial assets for as long as the Bank judges appropriate’ to achieve its 2 per cent inflation target (Morimoto (2013), p. 5).
32 Robert Lucas, quoted in Skidelsky (2009), p. 47.
33 Congdon (2007), p. 282.
34 A simple illustration is given in Ryan-Collins, et al. (2014 (2011)), p. 19.
35 Kaldor (1983a), p. 21. This is Kaldor’s restatement of the law of reflux (see above, p. 46).
36 Keynes (1973a (1936)), p. 173.
37 Ibid.; or, as neo-classical economists would put it, if there was no perceived opportunity cost in holding money.
38 In the Treatise on Money, Keynes defines the activity of finance as the ‘business of holding and exchanging existing titles to wealth’, pointing out that it has ‘no close connection with the volume of output’ (Keynes (1971 (1930a)), pp. 217, 222. This is made clearer if one thinks of the original QTM equation MV = PT, where T stands for all transactions in a given period, e.g. it could include purchases of Old Masters.
39 Haldane, et al. (2016), p. 5.
40 Source: Bank of England, taken from Goodhart and Ashworth (2012), p. 662.
41 Haldane, et al. (2016), p. 13.
42 BBC (2014).
43 Haldane, et al. (2016), p. 17.
44 Ryan-Collins, et al. (2013), p. 15.
45 Joyce, et al. (2011a).
46 Meaning and Warren (2015). For further quantitative studies of the impacts of QE, see e.g. Gagnon, et al. (2011a, 2011b), Neely and Dey (2010) and D’Amico and King (2013).
47 Wright (2012). Wright stresses that the effect was only temporary.
48 Miles (2012), p. 6.
49 Haldane, et al. (2016), p. 15.
50 Ibid., p. 17.
51 Bank of England (2017b).
52 Draghi (2011).
53 Data: Bank of England (2017b), interactive database. Series no. LPM-VWVP, seasonally adjusted. Graph: author’s own.
54 Churm, et al. (2012), p. 306.
55 Der Spiegel (2016).
56 There is an exception; negative rates can be expansionary even if they do not feed into lending rates, if they lead to a devaluation of the currency. Carney: ‘From an individual country’s perspective this might be an attractive route to boost activity . . . [but] for the world as a whole, this export of excess saving and transfer of demand weakness elsewhere is ultimately a zero-sum game.’ (Schomberg (2016).)
57 Bech and Malkhozov (2016).
58 For an explanation of the latter, see Skidelsky (2016).
59 See e.g. Joyce, et al. (2011a); Christensen and Rudebusch (2012).
60 Data: ONS (2017). BoP: current account balance as per cent of GDP (quarterly); time series ID: aa6h. Monthly average, effective exchange rate index, sterling (Jan. 2005 = 100); time series ID: bk67. Graph: author’s own.
61 ‘Operation Twist’ was the nickname given to the Fed’s strategy to lower long-term yields by selling the short-end Treasuries and using the proceeds to buy the long end. This term was an homage to the song ‘Let’s Twist Again’ by Chubby Checker.
62 Bank of England (2017b), interactive database. Series nos. LPMVQUU, LPQVQJW, LPQVWVP; monthly [narrow money] and quarterly [M4, M4 lending] 12-month growth rate, seasonally adjusted. Note, ‘narrow money’ refers to total sterling notes and coin in circulation outside the Bank of England, seasonally adjusted; ‘M4’ refers to monetary financial institutions’ sterling M4 liabilities to the private sector, seasonally adjusted; ‘M4 Lending’ refers to monetary financial institutions’ sterling net lending to the private sector, seasonally adjusted.
63 Data: Bank of England (2017b), series no. LPMVQLC; monthly year-onyear growth rate of M4, not seasonally adjusted. Graph: author’s own.
64 Joyce, et al. (2011b).
65 Bank of England (2012), p. 254.
66 Haldane, et al. (2016), p. 23.
67 HM Treasury (2017).
68 Keynes (1973 (1936)), p. 203.
69 Data: ONS (2017), series no. d7g7, CPI: Consumer Price Index (% change). Graph: author’s own.
70 Bank of England (2012), p. 259.
71 Data: ONS (2017), series no. d7g7, CPI: Consumer Price Index (% change). Investing.com (2017), monthly Brent oil price. Graph: author’s own.
72 Bank of England (2012), p. 259.
73 Carney (2017), passim.
74 Data: International Monetary Fund (2017b). (Real) GDP at the start of the period shown is indexed to 100 for each country/bloc. The graph thus shows the development of output relative to its pre-crisis peak.
75 Driffill and Miller (2013).
76 Kang, et al. (2016).
77 Ibid.
78 See Dale (2012).
79 Bridges and Thomas (2012), chart 23.
80 Congdon (2011), pp. 100–101.
81 McLeay, et al. (2014), p. 2.
82 ‘With the quantity of money 20 to 25 per cent less, the equilibrium levels of national income and wealth in nominal terms would also have been 20 to 25 per cent less, roughly speaking.’ (Congdon (2017a), p. 58.)
83 Ibid., p. 24.
84 Private correspondence.
85 Private correspondence.
86 McLeay, et al. (2014).
87 Congdon (2017a), p. 40.
88 Ibid., p. 5.
89 Ibid., p. 6.
90 Thomas (2017), p. 90.
91 Congdon (2017a), p. 41.
92 Ibid., p. 23.
93 Ibid., passim.
94 He condemns, for example ‘the drastic and hurried tightening of bank regulation from October 2008’, and ‘applauds central bank action to boost the quantity of money from spring 2009’ (ibid., p. 47).
95 Thomas (2017), p. 90.
96 Ibid.
97 Congdon (2017a), p. 47. Congdon singles out the enforced raising of minimum capital/asset ratios in October 2008. See Congdon (2017b): ‘if banks’ capital/asset ratios are increased in a hurry, and the amount of capital is given, banks’ assets – and hence their deposit liabilities (i.e., money) – must fall’.
98 See Fisher in Chapter 3.
99 Congdon (2017a), p. 38.
100 Ibid.
101 Ibid.
102 Ibid., pp. 41–2.
103 Private correspondence.
104 Congdon (2011), pp. 405–6.
105 Ibid., p. 204.
106 Congdon (2017a), p. 24.
107 Ibid. (my italics).
1 Clark (1899).
2 Piketty (2014 (2013)); Scheidel (2017).
3 Inequality For All (2013), based on Reich (2010).
4 Pigou (1912).
5 Edgeworth (1961 (1881)), p. 101.
6 Samuelson (1970 (1948)), p. 609.
7 In fact, Samuelson’s theoretical summary, as quoted here, was challenged in the ‘Cambridge capital controversy’ of the 1960s and 1970s, which pitted Cambridge (UK) against Cambridge (Massachusetts). The Cambridge UK economists Piero Sraffa, Joan Robinson and Nicholas Kaldor denied the neo-classical doctrine (represented in this controversy by Samuelson and others of Cambridge, Massachusetts) that capital was a separate factor of production, contributing a separate marginal product, deserving of its reward. They argued that while the prices of different kinds of capital reflect relative scarcities, the rate of profit as a whole reflects the power of the owners of capital. However, though they were deemed to have won the theoretical battle, no one at the time took any notice.
8 Quoted in Córdoba and Verdier (2007), p. 3.
9 See Rawls (1971). Rawls argues that inequality is justified only to the extent that it improves the position of the least well-off.
10 Though Michael Bleaney denies that Malthus and Luxemburg were truly under-consumptionists: Bleaney (1976).
11 On Hobson, see Nemmers (1956).
12 Hobson and Mummery (1889), p. v.
13 Hobson (1922), p. 12; Hobson (1910 (1909)), p. 303.
14 Hobson (1902).
15 See Lenin (1970 (1917)).
16 Hobson (1896, 1900).
17 The most detailed examination of Hobson’s doctrines is to be found in Lee (1970). D. K. Fieldhouse finds that of the big four capital exporters before 1914 (the UK, France, Germany and the USA), only the USA and Germany showed marked signs of capital concentration; see Fieldhouse (1973), pp. 47–53.
18 Marx’s Das Kapital (vol. III, ch. 30) quoted in Blaug (1996), p. 270.
19 ‘Fear the Boom and Bust’, a Hayek vs Keynes rap anthem (2010), quoted in Durand (2017), p. 43.
20 See Skidelsky (1992), pp. 454–9. ‘The wildest farrago of nonsense yet’ was Keynes’s comment on a draft of Hayek’s paper ‘Capital Consumption’, published in German in 1932. See also Durand (2017), pp. 46–8.
21 Keynes (1973a (1936)), p. 371.
22 Ibid., pp. 367–8.
23 Ibid., p. 370.
24 Ibid., p. 376.
25 Ibid., pp. 376–7.
26 Ibid., p. 374.
27 Eccles (1951), p. 76.
28 Devine (1994).
29 Piketty (2014 (2013)).
30 Mishel, et al. (2012).
31 Luttwak (2015).
32 Data: Institute for Fiscal Studies (2016). Gini coefficient calculated using net equivalized household income before deduction of housing costs. Absolute equality is zero; absolute inequality (one person owning all the income) is 1. Graph: author’s own.
33 Data: Federal Reserve Bank of St Louis (2015). Graph: author’s own.
34 Data: ILOSTAT (2017). Graph: author’s own.
35 Piketty (2014 (2013)). This is also the argument of Walter Scheidel (2017), for whom war is history’s ‘Great Leveller’.
36 Piketty (2014 (2013)), p. 292.
37 Giles (2014). See also the critique of the way Piketty presents his data in his graphs by Noah Wright: Wright (2015).
38 Reed (2014).
39 Ibid., p. 145.
40 Galbraith (2014). More specifically, Piketty glosses over and mischaracterizes the Cambridge capital controversies (see n. 7, above).
41 Abstract, Palley (2001).
42 Ibid.
43 Weeks (2011).
44 Palley (2009).
1 Volcker (2011).
2 Turner (2016), p. 87.
3 Pettifor (2017), p. 11.
4 Clinton (1995), p. 808.
5 van Steenis (2016).
6 Harrison, et al. (2005), p. 43.
7 Ibid., fig. 3.1, p. 24.
8 King (2016), p. 315.
9 Skypala (2015).
10 Ryan-Collins, et al. (2014 (2011)), p. 51.
11 Fama (1991), p. 1575.
12 Fama (1995 (1965)), p. 76. Formally, ‘market efficiency requires that in setting the prices of securities at any time t-1, the market correctly uses all available information. For simplicity, assume that the prices at t-1 depend only on the characteristics of the joint distribution of prices to be set at t. Market efficiency then requires that in setting prices at t-1, the market correctly uses all available information to assess the joint distribution of prices at t. Formally, in an efficient market, f(Pt|φt − 1) = fm(Pt|φt − 1m), where Pt=(p1t,...,pnt) is the vector of prices of securities at time t, φt-1 is the set of information available at t-1, φt − 1m is the set of information used by the market, fm(Pt|φt − 1m) is the market assessed density function for Pt, and f(Pt|φt − 1) is the true density function implied by φt − 1.’
13 Unless the government has private information, but under the EMH it would be best for government to release this information to the public so that it could be processed by the superior brain of the market.
14 The compromise made was that ‘the market is just close enough to perfect efficiency that the returns available for exploiting any inefficiency are equal to the cost of the skill and effort that goes into discovering it’. This allowed for the coexistence of the EMH and huge returns in a booming financial sector: Quiggin (2010), p. 41.
15 Cassidy (2010).
16 Nocera (2009a).
17 One needn’t cast one’s mind back too far in time. In the decade before the Great Recession, the dotcom bubble had burst in Western countries and there had been a string of financial crises in emerging markets that had embraced financial market liberalism (notably in Argentina and in East Asia); these alone ought to have cast more doubt on the efficient market hypothesis.
18 Quiggin (2010), p. 22. See Minsky (2008 (1986)).
19 The horizontal axis shows a range of potential values (W) of a portfolio in three months’ time. W0 represents the value of the portfolio today. The total area under the curve is 1. For any given value of W, the area under the curve to the left of W is the probability that the portfolio will have a value below W at the three-month point. At the point W where the area to its left totals 0.01 (or 1 per cent), there is therefore a 1 per cent chance of the portfolio being below that value of W in three months. The VaR relative to today’s value is the movement between the value today (W0) and that W – a movement represented in Figure 60 by the double arrow.
20 David Einhorn, quoted in Nocera (2009b).
21 Larsen (2007).
22 Dowd, et al. (2008).
23 Ostry, et al. (2016), p. 39.
24 For an early account of the consequences of the IMF’s capital liberalization programme, see Stiglitz (2002).
25 Ostry, et al. (2016), p. 39.
26 Ibid., p. 41.
27 Technically part of the 1933 Banking Act.
28 Reed (2015).
29 Wolf (2008).
30 ‘The Basel Committee on Banking Supervision (BCBS) has formulated recommendations concerning required bank capital. The Committee is a private body of central banks and regulators linked to the Bank for International Settlement (BIS). Commonly referred to as the Basel Accord, the BCBS rules, while formally non-binding on any national regulatory, are in practice adopted by national and European Union financial regulatory authorities and thus have become binding on banks.’ (Ryan-Collins et al. (2014 (2011)), p. 93.)
31 Turner (2009), p. 39.
32 Ibid., p. 87.
33 ‘It would have been impossible to create these weird derivatives without access to very powerful computers.’ (Ford (2009), p. 46.)
34 Buiter (2009).
35 Soros (2009b).
36 Quoted in BBC News (2003).
37 Davies (2010).
38 Utzig (2010).
39 See Kingsley (2012).
40 Turner (2009), pp. 77–8.
1 King (2012).
2 Adaptation of Fig. 10.1 from Reinhart and Rogoff (2011 (2009)), p. 156. The percentage of countries in banking crises series is calculated by summing the percentages of countries in financial crisis in each of the three years up to the given year.
3 Harvey (2009), p. 2, quoted in Kishore (2014), p. 49. Data of trade and financial flows from Kishore’s pp. 46–7.
4 Quoted in Balls (2005).
5 International Monetary Fund (2017a).
6 Ibid.
7 Wolf (2004), p. 184.
8 Wolf (2007a).
9 Wolf (2007b).
10 Working Group on Long-term Finance (2013), p. 42; constant 2011 exchange rates. Flows defined as net purchases of domestic assets by non-residents; total capital inflows comprised of inward foreign direct investment, and portfolio and lending inflows.
11 Dani Rodrik, quoted in Ostry, et al. (2016), p. 39.
12 International Monetary Fund (2009), Appendix I, p. 1.
13 Pettis (2013). See also Chi Lo (2015). Lo’s argument in a nutshell is that China has reached the end of the line of the Deng Xiaoping development model based on export-led growth through an under-valued exchange rate, continued political monopoly of the Communist Party and a repressed financial system that funnels Chinese savings into lossmaking state-owned enterprises. It needs to be rebalanced towards serving domestic consumer needs. But each step of reform challenges the powerful vested interests attached to the old system – elements of the central leadership itself, local governments, state-owned industries and banks – and sharpens the contradictions between the old and the new.
14 Publisher’s account of Rajan (2010).
15 See Calleo (2009).
16 Greenspan (2007), pp. 471–2.
17 For details see Lazonick (2015), p. 36.
18 de Grauwe (2011).
19 See Borio and Disyatat (2015).
1 Hutchison (1978), p.125
2 Marx and Engels (1967), p. 83.
3 See Mazzucato (2013).
4 Mazzucato (2016), p. 104.
5 The British Treasury has belatedly accepted the need for start-up capital by setting up a ‘patient capital’ unit. ‘The patient capital review is an initiative funded by HM Treasury, which seeks to consider all aspects of the financial system affecting the provision of long-term finance to growing innovative firms . . . looking to scale up.’ (Report, August 2017.) It is a long-overdue attempt to overcome the shortage of venture capital, the so-called ‘Macmillan gap’, identified in 1931 by the Macmillan Report on Finance and Industry.
6 Keynes (1973a (1936)), p. 164.
7 Data: ONS (2012). Graph: author’s own.
8 Keeping certain kinds of public investment ‘off budget’ should be distinguished from privatizing the institutions which make the investment, as has been common in the UK; e.g. housing associations have been reclassified as private institutions, removing more than £60 billion of debt from the government’s balance sheet (Financial Times, 16 November 2017).
9 For details see Skidelsky, et al. (2012). The European Investment Bank is a major source of venture capital, mainly in the EU. Britain already has two public investment banks – the Green Investment Bank and the British Business Bank – but they have no power to borrow, crippling their investment potential.
10 See Atkins, et al. (2017).
11 https://mainlymacro.blogspot.com/2018/06/a-new-mandate-for-monetarypolicy.html.
12 Galbraith (2017).
13 The Dodd–Frank Wall Street Reform and Consumer Protection Act was passed in 2010. Based on the so-called Volcker rule, it bans proprietary trading – i.e. using customer deposits to make investments on behalf of the banks’ proprietors and owners – for deposit-taking banks. The 2013 Financial Services Act implemented the report of Sir John Vickers, which proposed ‘ring-fencing’ the retail from the investment departments of banks, without separating ownership. The Liikanen Report proposed a similar system of ring-fencing for banks in the European Union, but has yet to be legislated.
14 ‘Riskier’ assets – loans held by the bank where the borrowers had higher chances of defaulting – were given a larger weighting than ‘safer’ assets, such as cash or government bonds.
15 Congdon and Hanke (2017).
16 Riecher and Black (2013); see also Wallace (2013).
17 Prynn (2016).
18 Foreword to ‘The Bank of England’s approach to resolution’, Bank of England (2017d).
19 Hoenig (2014).
20 Restoring ‘virtue’ in banking is defined as the ‘re-introduction of purpose into banking as both an economic need and a moral necessity’ and to promote the ethos required to inculcate that purpose ‘into all of the industries’ operations and behaviour’.
21 Nick Leeson, quoted in Baxter (2014).
22 Lord Turner, quoted in Private Debt Project (2015).
23 For an individual bank, lending against real estate seems more secure, but system-wide ‘lending against real estate – and in particular against existing real estate whose supply cannot be easily increased – generates self-reinforcing cycles of credit supply, credit demand, and asset prices’ (ibid.).
24 Woods (2017).
25 Keynes (1980b), p. 384.
26 Source: World Bank (2017d).
27 The stationary state was later developed into the idea of balanced growth, with population and wealth increasing at the same rate, and unchanged tastes.
28 Summers (2013, 2014); Krugman (2013a, 2013b).
29 Keynes (1978), p. 328. From Keynes’s ‘Economic Possibilities for our Grandchildren’.
30 This naturally has effects on distribution: see Autor, et al. (2015).
31 Leontief (1952, 1979).
32 For detailed statements, see Aaronson (2001), ch. 1, and Stiglitz (2006).
33 ‘Populism’ was originally used to describe the opposition of farmers to the moneyed power of the industrialists and ‘robber barons’ in late 19th-century America. Later the label was attached to a style of Latin American anti-United States politics. With its strong emphasis on caudillismo (strongman leadership) and mixture of right- and left-wing rhetoric, it was influenced by interwar European fascism. Peronism and Chavinism are the best-known instances. Now it is routinely attached to a style of demagogic politics outside the established political parties. The Dutch political scientist Cas Mudde has called it ‘an illiberal democratic response to undemocratic liberalism’.
34 de Grauwe (2011); de Grauwe and Ji (2016).
35 de Grauwe and Ji (2016).
36 A prescient critic was Giorgio La Malfa: see Malfa (2000).
37 de Grauwe and Ji (2016).
38 Congdon (2017c).
39 By the Office of the United States Trade Representative in 1982. Notice the dependence of the definition on the theory of comparative advantage.
40 Chang (2007), p. 3.
41 For a modern infant industry argument, see Ho (2012).
42 For a review of New Trade Theory (NTT) see Sen (2010). See also Davey (2017).
43 Ricardo, quoted in Went (2002), pp. 15–16. See also Steve Keen, who writes that Ricardo ‘assumed a crucial false equivalence between physical machinery and monetary capital that has bedevilled economics ever since, treating the specialized machinery in different countries as if it were as liquid . . . as the money with which it had been produced’ (Keen (2017)).
44 Alvater and Mahnkopf, Grenzen der Globalisierung: Ökonomie, Ökologie und Politik in der Weltgesellschaft, 1996, p. 206, quoted in Went (2002), p. 16.
45 Financial Times, 12 December 2017.
46 Lo (2018).
47 Masch (2017).
48 Lo (2018).
49 Keynes (1980a), p. 53.
50 James (2002), p. 1.
51 For an excellent survey of what needs to be reconsidered in economics, see Lavoie (2018).
52 Harvey (2015), p. 111.
53 Milner (2009).
54 Nielsen (2012).
55 Frydman and Goldberg (2011).
56 Professor Richard Thaler received a Nobel Prize in economics in 2017 for ‘nudge’ theory. This identifies behaviours which fall short of rational: enrolment in private pension plans is increased when people are given the option to opt out rather than opt in, which is clearly irrational if an objective assessment of the benefits of the plans is available. The behavioural bias towards inertia has long been known and exploited for policy purposes. For example, trade unions in the UK, backed by Labour governments, have always favoured forcing their members to ‘opt out’ of the political levy to the Labour Party; Conservative governments have passed legislation forcing them to ‘opt in’. According to the Financial Times on 10 October 2017, ‘Professor Thaler’s catch-all advice is, whether you are a business or a government, if you want people to do something, make it easy.’ It is hard to avoid surmising that the Nobel Prize is being awarded, not for any new insight, but for technical prowess in making an old insight acceptable to the economics profession.