Why the euro has to be abandoned if Europe is to be saved

23 Jul, 2020 at 10:14 | Posted in Economics, Politics & Society | 3 Comments

The euro has taken away the possibility for national governments to manage their economies in a meaningful way — and the people have​ had to pay the true costs of its concomitant misguided austerity policies.

The unfolding of the repeated economic crises in euroland during the last decade has shown beyond any doubts that the euro is not only an economic project​ but just as much a political one. What the neoliberal revolution during the 1980s and 1990s didn’t manage to accomplish, the euro shall now force on us.

austerity22But do the peoples of Europe really want to deprive themselves of economic autonomy, enforce lower wages, and slash social welfare at the slightest sign of economic distress? Are increasing​ income inequality and a federal überstate really the stuff that our dreams are made of? Yours truly doubts it.

History ought to act as a deterrent. During the 1930s our economies didn’t come out of the depression until the folly of that time — the gold standard — was thrown on the dustbin of history. The euro will hopefully soon join it.

Economists have a tendency to get enthralled by their theories and model​​ and forget that behind the figures and abstractions there is a real world with real people. Real people that have to pay dearly for fundamentally flawed doctrines and recommendations.

NLR95coverNow more than ever there is a grotesque gap between capitalism’s intensifying reproduction problems and the collective energy needed to resolve them … This may mean that there is no guarantee that the people who have been so kind as to present us with the euro will be able to protect us from its consequences, or will even make a serious attempt to do so. The sorcerer’s apprentices will be unable to let go of the broom with which they aimed to cleanse Europe of its pre-modern social and anti-capitalist foibles, for the sake of a neoliberal transformation of its capitalism. The most plausible scenario for the Europe of the near and not-so-near future is one of growing economic disparities—and of increasing political and cultural hostility between its peoples, as they find themselves flanked by technocratic attempts to undermine democracy on the one side, and the rise of new nationalist parties on the other. These will seize the opportunity to declare themselves the authentic champions of the growing number of so-called losers of modernization, who feel they have been abandoned by a social democracy that has embraced the market and globalization.

Wolfgang Streeck

Nein zu Rassismus

22 Jul, 2020 at 15:22 | Posted in Politics & Society | Comments Off on Nein zu Rassismus



Radical uncertainty

21 Jul, 2020 at 11:51 | Posted in Economics | 5 Comments

61jCsB2gyQLIn Radical Uncertainty, John Kay and Mervyn King, two well-known British economists, state that rather than trying to understand the ever-changing, uncertain and ambiguous environment by trying to understand “what’s going on here”, the economics profession has become dominated by an approach to uncertainty that requires a comprehensive list of possible outcomes with well-defined numerical probabilities attached to them. Drawing widely on philosophy, anthropology, economics, cognitive science, and strategic management and organisation scholarship, the authors present an argument that probabilistic thinking gives us a false understanding of our power to make predictions and a false illusion of utility-maximising behaviour. Instead of trying to produce probability calculations to fill the unknown gaps in our knowledge, we should embrace uncertainty by adopting robust and resilient strategies and narratives to consider alternative futures and deal with unpredictable events …

The authors’ “radical uncertainty” is not about “long tails” (for example, imaginable and well-defined events whose low probability can be estimated). The authors emphasise the vast range of possibilities that lie in between the world of unlikely events which can nevertheless be described with the aid of probability distributions, and the world of the unimaginable. This is the world of uncertain futures and unpredictable consequences, about which there is necessary speculation and inevitable disagreement which often will never be resolved. In real life this is the world which we mostly encounter, and it extends to individual and collective decisions, as well as financial, economic and political ones.

Kay and King’s book is a thoughtful and welcome call for economists and policymakers to accept “radical uncertainty” and start rethinking their models.


The financial crisis of 2007-2008 hit most laymen and economists with surprise. What was it that went wrong with our macroeconomic models, since they obviously did not foresee the collapse or even made it conceivable?

There are many who have ventured to answer that question. And they have come up with a variety of answers, ranging from the exaggerated mathematization of economics to irrational and corrupt politicians.

0But the root of our problem goes much deeper. It ultimately goes back to how we look upon the data we are handling. In ‘modern’ macroeconomics — Dynamic Stochastic General Equilibrium, New Synthesis, New Classical and New ‘Keynesian’ — variables are treated as if drawn from a known “data-generating process” that unfolds over time and on which we, therefore, have access to heaps of historical time-series. If we do not assume that we know the ‘data-generating process’ – if we do not have the ‘true’ model – the whole edifice collapses. And of course, it has to. I mean, who honestly believes that we should have access to this mythical Holy Grail, the data-generating process?

‘Modern’ macroeconomics obviously did not anticipate the enormity of the problems that unregulated ‘efficient’ financial markets created. Why? Because it builds on the myth of us knowing the ‘data-generating process’ and that we can describe the variables of our evolving economies as drawn from an urn containing stochastic probability functions with known means and variances.

4273570080_b188a92980This is like saying that you are going on a holiday trip and that you know that the chance the weather being sunny is at least 30% and that this is enough for you to decide on bringing along your sunglasses or not. You are supposed to be able to calculate the expected utility based on the given probability of sunny weather and make a simple decision of either-or. Uncertainty is reduced to risk.

But as Keynes convincingly argued in his monumental Treatise on Probability (1921), this is not always possible. Often we simply do not know. According to one model the chance of sunny weather is perhaps somewhere around 10% and according to another – equally good – model the chance is perhaps somewhere around 40%. We cannot put exact numbers on these assessments. We cannot calculate means and variances. There are no given probability distributions that we can appeal to.

In the end, this is what it all boils down to. We all know that many activities, relations, processes, and events are of the Keynesian uncertainty-type. The data do not unequivocally single out one decision as the only ‘rational’ one. Neither the economist nor the deciding individual can fully pre-specify how people will decide when facing uncertainties and ambiguities that are ontological facts of the way the world works.

Some macroeconomists, however, still want to be able to use their hammer. So they decide to pretend that the world looks like a nail, and pretend that uncertainty can be reduced to risk. So they construct their mathematical models on that assumption. The result: financial crises and economic havoc.

How much better — how much bigger chance that we do not lull us into the comforting thought that we know everything and that everything is measurable and we have everything under control — if instead, we could just admit that we often simply do not know and that we have to live with that uncertainty as well as it goes.

Fooling people into believing that one can cope with an unknown economic future in a way similar to playing at the roulette wheels, is a sure recipe for only one thing — economic disaster.

What’s wrong with economics — a primer

20 Jul, 2020 at 23:30 | Posted in Economics | 2 Comments

81wDHnOlHnLThis is an important and fundamentally correct critique of the core methodology of economics: individualistic; analytical; ahistorical; asocial; and apolitical. What economics understands is important. What it ignores is, alas, equally important. As Skidelsky, famous as the biographer of Keynes, notes, “to maintain that market competition is a self-sufficient ordering principle is wrong. Markets are embedded in political institutions and moral beliefs.” Economists need to be humbler about what they know and do not know.

Martin Wolf /FT

Mainstream economic theory today is still in the story-telling business whereby economic theorists create mathematical make-believe analogue models of the target system – usually conceived as the real economic system. This mathematical modelling activity is considered useful and essential. To understand and explain relations between different entities in the real economy the predominant strategy is to build mathematical models and make things happen in these ‘analogue-economy models’ rather than engineering things happening in real economies.

Without strong evidence, all kinds of absurd claims and nonsense may pretend to be science.  As Paul Romer had  in his reckoning with ‘post-real’ economics a couple of years ago:

Math cannot establish the truth value of a fact. Never has. Never will.

We have to demand more of a justification than rather watered-down versions of ‘anything goes’ when it comes to the main postulates on which mainstream economics is founded. If one proposes ‘efficient markets’ or ‘rational expectations’ one also has to support their underlying assumptions. As a rule, none is given, which makes it rather puzzling how things like ‘efficient markets’ and ‘rational expectations’ have become the standard modelling assumption made in much of modern macroeconomics. The reason for this sad state of ‘modern’ economics is that economists often mistake mathematical beauty for truth. It would be far better if they instead made sure they keep their hands clean!

Das Attentat vom 20. Juli 1944

20 Jul, 2020 at 14:39 | Posted in Politics & Society | 2 Comments


Wo liegt eigentlich der Punkt, an dem man widerstehen muss, wenn man nicht die Freiheit hoffnungslos preisgeben will, die Freiheit, die keine Macht der Welt wieder herstellen kann?

Diese Frage lässt sich mit einem Wort beantworten. Dieses eine Wort heisst Verantwortung im Sinne letzter persönlicher Verantwortung. Wo die persönliche Verantwortung negiert und dahinten gelassen wird, gibt es keine Freiheit mehr.

Martin Niemöller

MMT = Keynes 2.0

20 Jul, 2020 at 13:09 | Posted in Economics | 9 Comments

As time goes on, and 2020 turns into 2021, the long-held idea that governments are like households and businesses that have to repay their debts, or even that government deficits must be financed by debt at all, will increasingly be exposed as a mistake.

20It will be more or less a return to Keynes, except with the twist that the Keynesian aim of balancing the budget over the course of the cycle – deficits in bad times, surpluses in good times – doesn’t matter, not that anybody has actually achieved that lately anyway.

In future 2020 will be seen as the year when Keynes 2.0 got underway – when monetary and fiscal policy merged and a more sophisticated theory of government took hold, in which spending has no limit apart from the capacity of the economy.

As debt continues to be monetised, it will become obvious that without economic bottlenecks, spending and deficits can increase with no negative inflationary and welfare impacts.

Alan Kohler / The Australian

Türkei — eine Handtasche voller Pressefreiheit

20 Jul, 2020 at 09:26 | Posted in Politics & Society | Comments Off on Türkei — eine Handtasche voller Pressefreiheit


Les passants

20 Jul, 2020 at 00:04 | Posted in Varia | Comments Off on Les passants


Some MMT basics

19 Jul, 2020 at 23:18 | Posted in Economics | Comments Off on Some MMT basics


Does MMT — really — ignore expectations?

19 Jul, 2020 at 12:59 | Posted in Economics | 7 Comments

A view yours truly often encounters when debating MMT is that there is an inflationary bias in MMT and that its framework ignores expectations.

Hmm …

It is extremely difficult to recognize that description. Given its roots in the writings of Keynes, Lerner, and Minsky, it is, to say the least, rather amazing to attribute those views to MMT. Let me just quote one source to show how ill-founded the critique is on this issue:

macWhile the IS-LM approach of John Hicks tried to represent what he saw as the key elements of Keynes’ General Theory, it is clear he left out issues relating to uncertainty​ and probability that Keynes saw as being crucial in the way that long-term expectations were formed … The decision to invest is dependent on the ‘state of long-term expectation,’ which is ignored in the static IS-LM approach … Investment, among other key economic decisions, is a forward-looking process … The failure to include the crucial role of expectations and historical time means that the IS-LM framework is reduced to presenting a general equilibrium static solution that has little place in a dynamic system where uncertainty is a key driver in economic decision making.

Sir Tom Moore

17 Jul, 2020 at 20:06 | Posted in Varia | 1 Comment

War veteran Tom Moore won the hearts of people by raising more than £50 million for the NHS by walking laps of his garden. Thanks, Sir Tom!

Pandemic depression antidote (XXI)

15 Jul, 2020 at 11:32 | Posted in Varia | 2 Comments


Never give in. Never give​ up.

Keynesian vs Newtonian economics

14 Jul, 2020 at 17:11 | Posted in Economics | 12 Comments

To complete his theory, Keynes tied these elements together. The market for money determined interest. Interest (and the state of business confidence) determined investment. Investment, alongside consumption, determined effective demand for output. Demand for output determined output and employment. Consumption out of incomes determined savings. Employment determined the real wage.

diffIn this world, a change in monetary policy, such as a cut in interest rates leading to an increase in bank credit, now had fundamental real consequences. The classical dichotomy, in economics as in physics, had been broken. And with the deconstruction of labor and capital markets, the reductionist idea of microfoundations had also to be abandoned. Workers, Keynes pointed out, bargain for money wages, not real wages. The act of dropping money wages would generate feedbacks through previously unrecognized–monetary–channels in the system … The system interacts with itself, and a full employment equilibrium cannot be achieved within the labor market. Economic space-time is curved.

In the long run, Keynes did not achieve what he hoped … In the United States, the prevailing view became that of Paul Samuelson, who transposed Keynes’s unemployment theory into the proposition that wages are “sticky” … What Samuelson did was to push the daemon of Keynesian relativity back into its box. And modern American Keynesians, even down to the New Keynesians currently in fashion around Harvard, MIT, Princeton, and the Council of Economic Advisers, are Newtonian and Samuelsonian to the core …

Too bad. For one cannot say, as one can with Newtonian physics, that Newtonian economics is good enough for practical situations … The failure of Keynesian macroeconomics to establish full theoretical independence from the classical labor market and the classical neutrality of money means that we are, in effect, now denied fair discussion of Keynesian solutions to policy problems. The end result is that we cannot cope now, any more than could the classics in their day, with stagnation and involuntary unemployment.

James K. Galbraith

Rethinking public debt

13 Jul, 2020 at 13:43 | Posted in Economics | 13 Comments


Public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Some members of society hold bonds and earn interest on them, while others pay taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt ‘cancels’ itself out between the two groups. If the state issues bonds at a low-interest rate, unemployment can be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden is also not a real burden since — if used in a suitable way — the debt, through its effects on investments and employment, actually makes future generations net winners. There can, of course, be unwanted negative distributional side effects for the future generation, but that is mostly a minor problem since when our children and grandchildren ‘repay’ the public debt these payments will be made to our children and grandchildren.

Public debt is neither good nor bad. It is a means to achieve two over-arching macroeconomic goals — full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance,’ austerity and balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

The real issue … is not whether it is possible to shift a burden (either in the present or in the future) from some people to other people, but whether it is possible by internal borrowing to shift a real burden from the present generation, in the sense of the present economy as a whole, onto a future generation, in the sense of the future economy as a whole … The latter is impossible because a project that uses up resources needs the resources at the time that it uses them up, and not before or after.

204545_600This basic proposition is true of all projects that use up resources … The proposition holds as long as the project​ is financed internally, so that there are no outsiders to take over the current burden by providing the resources and to hand back the burden in the future by asking for the return of the resources.
It is necessary for economists to keep repeating​ this basic proposition because one of their main duties is to keep warning people against the fallacy of composition. To anyone who sees only a part of the economy it does seem possible to borrow from the future because he tends to assume that what is true of the part is true of the whole.

Abba Lerner

The Deficit Myth: a review

12 Jul, 2020 at 12:21 | Posted in Economics | 11 Comments

One common objection to neoclassical economics is that it underweights the importance of history and class. It is therefore paradoxical that Stephanie Kelton’s The Deficit Myth, which claims to challenge orthodox economics, should be guilty of just these vices.

Modern-Monetary-Theory-Let’s start by saying that I wholly agree with the main claims she makes — that a government which enjoys monetary sovereignty can always finance its borrowing. Asking how we will pay for public spending is therefore daft. Instead, the question, as Dr Kelton says, is: can the extra spending be resourced? The constraint on raising health spending for example — if there is one — is a lack of doctors and nurses, not a lack of finance. Where there are resources lying idle, governments should raise spending to employ them. Dr Kelton explain these ideas wonderfully clearly, so I recommend this book to all non-economists interested in government finances.

For this economist, though, it poses a problem. I remember writing a research note for Nomura back in the early 90s arguing that increased government borrowing would not increase gilt yields because the same increased private saving that was the counterpart of government borrowing would easily finance that borrowing. Nominal gilt yields, I said, were determined much more by inflation than by government borrowing. But nobody accused me of originality. And rightly so. I was simply channelling Kalecki, Beveridge, Lerner and Keynes, who famously said back in 1933:

“Look after the unemployment, and the Budget will look after itself.”

For me, Kelton is – albeit very lucidly – reinventing the wheel …

At one stage she claims that MMT “didn’t exist” before the late 90s. But whilst the phrase did not exist, the ideas certainly did. Randall Wray is right to say that “the main principles of functional finance were relatively widely held in the immediate postwar period.”

Chris Dillow

Yours truly thinks that Dillow gets it right here on the question of the originality of MMT.

As has become abundantly clear during the last couple of years, it is obvious that most mainstream economists seem to think that Modern Monetary Theory is something new that some wild heterodox economic cranks have come up with. That is actually very telling about the total lack of knowledge of their own discipline’s history these modern mainstream guys like Summers, Mankiw, and Krugman has.

New? Cranks? Reading one of the founders of neoclassical economics, Knut Wicksell, and what he writes in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise) soon makes the delusion go away:

It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank

A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system

We intend therefore​, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers.

What Modern Monetary Theory (MMT) basically does is exactly what Wicksell tried to do more than a hundred years ago. The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity — MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover, and taxing and borrowing are degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not a major problem since fiat money means that governments can always make more of them.​

In the mainstream economist’s world, we don’t need fiscal policy other than when interest rates hit their lower bound (ZLB). In normal times monetary policy suffices. The central banks simply adjust the interest rate to achieve full employment without inflation. If governments in that situation take on larger budget deficits, these tend to crowd out private spending and the interest rates get higher.

What mainstream economists have in mind when they argue this way, is nothing but a version of Say’s law, basically saying that savings have to equal investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. What happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!

It is true that MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfill our basic economic objectives — full employment and price stability.

Governments can spend whatever amount of money they want. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.

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