Tuesday, 20 September 2016

And now for something completely different...

...namely Ann Pettifor presenting at last night's Law and Economics Association of New Zealand (LEANZ) meeting in Auckland, on the topic, 'Money and the neglected genius: John Law 1671-1729'.

And different it certainly was: the title didn't give much away, but what she aimed to do was to argue that what everyone conventionally learns about money and credit in the economics textbooks is wrong, and that there is a different and better way of understanding what is going on.

The traditional view, she said, has several components. One is that money is secondary: the things that matter are the 'real' things like production and consumption, and money is a lubricant but of no other great importance. Another is the traditional way we think about banks as financial intermediaries that take in people's savings (as deposits) and lend them out (as bank loans) to people who'd like to make use of them. And another is the view that there is a market which matches the supply of money or credit with the demand for it, with the price of money (the interest rate) set in the usual way to match the supply up with the demand.

Instead, she said, money and credit are far more important than conventionally realised: she mentioned, for example, the obstacles to economic activity in developing economies from the lack of a properly functioning monetary system. She said that banks do not need, in fact, to wait till deposits roll in: MegaBank, for example, can unilaterally make two computer entries on its book, one crediting a squillion dollars to MegaCorp's bank account, the other recording a squillion dollar loan to MegaCorp, and immediately the money supply and the stock of credit will go up by a squillion dollars. And she argued (I think) that the interest rate is set autonomously by various human agencies (particularly central banks and commercial banks) and is not the end result of supply and demand matching up.

From a policy point of view she argued that we used to manage banking regulation and monetary policy better, pointing to a period from 1945 through 1971 when there were no financial crises: things have gone worse, she felt, since deregulation. She also argued that the banks, left to their own devices, overwhelmingly lent to relatively easy-to-assess activities like property (creating bubbles in the process) rather than to more productive activities that would have been better for economic growth. And since, on her view, credit is more or less infinitely creatable by central and commercial banks, and in the case of central banks is backed by governments' effectively bottomless ability to tax, we should have little truck with 'austerity' policies. She noted, for example, that we can create money up the wazoo when we want to fund wars or bail out banks, but don't seem to be able to apply the same logic to getting economies rolling or saving the planet's climate, a view that the UK Labour Party has also come to with its proposal for "People's Quantitative Easing".

It's not every day you get someone having a go at knocking over everything you've ever learnt, so full marks to AUT's Policy Observatory, who have brought Ann down to New Zealand and have arranged a wide range of meetings for her: it's good to get challenging, and even iconoclastic, points of view. And special thanks too to Sarah Keene and the team at Russell McVeagh who generously hosted last night's event, and to Richard Meade who does all the legwork to make these Auckland LEANZ events a goer.

Did I get my own mind adjusted? Hmmm. I can see some of her points, but I'm still left with quite a few questions. I'm still not overly inclined to the view that we can print-money our way out of anything: the other week I went into a stamp and coin dealer in Wellington and bought a ten trillion Zimbabwe dollar note for $14, so clearly there are finite limits to what you can do. Ditto running up vast quantities of government debt which (Ann seemed to me to argue) must always be serviceable due to the government's ability to tax. There certainly used to be a view that countries could never go bankrupt (at least when issuing debt in their own currency), but maybe that's also a conventional wisdom that needs challenging. And while John Law may well have been a neglected genius, his experiment of creating one of the earlier paper-money banks and letting rip with it didn't end happily for anyone.

Food for thought all round, and maybe time for a bit of reading, too. Chatting to Ann before the kick-off, she told me that the definitive biography of John Law was written by my lecturer in undergraduate monetary economics at Trinity College Dublin. Law had an extraordinary dramatic life and was a pioneer of early economic theory (Ann principally mentioned his Money and Trade Consider'd with a Proposal for Supplying the Nation with Money of 1705), so I reckon it's time to track down a  copy of Antoin Murphy's John Law: Economic Theorist and Policy-Maker (Oxford University Press, 1997).

8 comments:

  1. I think she needs to work Gresham's Law somewhere into her analysis.

    ReplyDelete
    Replies
    1. There's something certainly missing there: it's implausible that you can have completely open-ended QE without something giving way

      Delete
    2. It all depends on whether there is spare productive capacity in the economy. As long as there is under-employment there is no reason to expect high inflation to result from monetary finance directed to public spending or simply distributed to consumers. Besides, we need a little more inflation if only to ease the massive burden of debt, both private and public.
      Also the injection of effectively debt-free money can be calibrated, starting moderately. If you need convincing from a source credible to those in the financial world I recommend the work and presentations of Lord Adair Turner. There are plenty of historical examples of successful direct money finance including by the first NZ Labour Govt for building state houses, dams and stabilization of dairy prices.

      Delete
    3. Thanks Tim for the comment. I agree with your comment about spare capacity. As you say, modest (or even occasionally quite large) fiscal and monetary boosts when the economy is below full capacity will often have positive effects. Ann couldn't cover everything in 45 minutes, so I don't know for sure how much monetary/fiscal boost she had in mind but I got the impression that it was rather substantial: she said, for example, that Japan's government debt was in excess of 200% of GDP, but (she said) so what? At those sorts of levels, however, you're getting near the end of the penny section.

      Bit more inflation? Wouldn't hurt, especially in current circumstances, but again there are limits. You can't fool all of the people all of the time: if you keep on eroding the value of debt with a bit of unexpectedly higher inflation, sooner or later debt holders cotton on, and either stop providing it or ask a steeper price.

      Delete
  2. I'm sorry I missed Pettifor's events, but from your account it seems that she doesn't adequately reconcile the real and financial sides of the economy. Yes, "banks" can "create" credit more or less without limit, if they can persuade someone to hold the deposits thus created, but so what? If I buy your house for $10m, on credit, you are probably better off and I'm probably worse off (thinking in terms of lifetime consumption possibilities) but aggregate real consumption/investment hasn't changed. It is the pressure on real resources - desired saving vs desired investment - that is reconciled by the changes in interest rates (in a world with or without central banks).

    ReplyDelete
    Replies
    1. I agree, one of the things that bothered me too was the absence of some sort of interest-rate setting marketplace.
      Mind you, she only had 45 minutes to cover a lot of ground (and I've only space to cover some of what she did say) so we didn't see the full shape of how she sees the economy working.
      One thing I left out, which may interest you, is that she couldn't see any point to the RBNZ's 'core funding' controls, but was warmer about macro-pru. I got the impression, from her answer to one question, that macro-pru was good because it potentially defused the asset bubbles she sees banks responsible for, but also because it slotted into a wider picture of central direction of credit.
      The thing that concerned me most, though, as I mentioned, is that she seemed to see no finite limits to the expansion of the government's/central bank's/commercial banks' balance sheets. For someone who's got quite a lot of experience in dealing with sovereign debt, that seemed well off beam to me.

      Delete
  3. see https://www.richmondfed.org/~/media/richmondfedorg/publications/research/annual_report/1998/pdf/article.pdf

    ReplyDelete
    Replies
    1. Thanks Jim, looks interesting: it's in my in-tray and I'll have a read when I have half a sec.

      Delete