26th June 2012
A common cause
Five years on from the start of the global financial crisis, Steve Keen and other ‘new or alternative economists', are beginning to gain traction.
They are, admittedly, a heterodox bunch, but the one thing that unites them is a determination to topple the failed orthodoxy which has caused so much pain in recent years, and supplant it with an ideological framework for economic change that has a chance of improving the lot of the average human being.
New frameworks, new axioms
A framework that includes alternatives that (a) are not shaped to reflect the best interests of Wall Street and (b) are based on empiricism and how economies actually work as opposed to some fantastical version of an economy.
The two main schools
But given the diversity of views, there is a real danger of sectarianism and meaningless debates of "how many angels can dance on the head of a pin?" so, to help the neophyte navigate the maze of claims and counterclaims I've categorised the new economists into two main schools.
School One: The New ‘MMT' Economists and their axioms
Deficits are a red herring
First up would be a group who basically think that government deficits are a "red herring" (some might accuse them of being deficit ‘deniers').
Their core theory is called Modern Monetary Theory (Dan Crawford provided a handy summary of differing views on the US deficits on the Angry Bear blogging site).
In an introduction to MMT, Playing Monopolis Monopoly: An inquiry into why we are making ourselves so miserable, anonymous author JD Alt wrote:-
"A society with a sovereign fiat currency can build anything or obtain any service it deems necessary or desirable, so long as the citizens of that society are willing and able to build the thing, or provide the service, in exchange for the fiat money. The sovereign deficit, no matter how large it may grow, is not like a shortfall in your own bank account: it is the balance sheet record of the money that was transferred to our side of the ledger.
One of the more prominent members of this group is Stephanie Kelton, associate professor of economics at the University of Missouri-Kansas City, who blogs on the same New Economic Perspectives website.
She argues that the deficit cannot be considered in isolation. Stephanie, who is a prolific tweeter, recently tweeted that MMT is the "only school of economic thought that doesn't treat full employment and price stability as mutually exclusive".
There was a minor schism within MMT earlier this year, when some of its members, including Cullen Roche flew off the handle and declared they could longer tolerate MMT's hard line insistence that the government must guarantee everyone who is currently unemployed a job, paid at the minimum wage.
The myth of the bond vigilante
Among other things he argued that bond vigilantes have turned out to be mythical creatures, given there has been no run on the debt of heavily indebted countries including US, UK and Japan, none of which have much real chance of balancing their books any time soon.
Hyperinflation and Quantitative Easing
Roche also said that massive misconceptions about the banking sector remain rife. He said that, ahead of the launch of the various rounds of quantitative easing, there were widespread fears that, owing to the so-called "money multiplier", QE would trigger Weimar-style hyperinflation. However as Roche reminds us, this didn't happen.
"Despite a trillion-dollar expansion in reserves, bank lending has continued to decline"
He said that heterodox schools of economic though, including MMT, were able to predict this since they do not labour under the misapprehension that private sector banks are "reserve constrained".
Roche further argued that government budget deficits are not always the enemy, "As banks and households have both reduced their debt level, government spending has proved to be essential. Austerity has failed miserably in many European countries." He concluded by saying that:-
"My hope is that the crisis will continue to force us all to explore the machine and try to discover what went so very wrong with it. Only then will we be able to help steer it in a manner that avoids future crisis. Unfortunately, the misconceptions and myths run deep, and the engineers who built this machine continue to guide us right into oncoming traffic"
School Two: The New ‘post-Keynesians' Economists and their axioms
I would loosely describe the second group, post-Keynesians who subscribe to the monetary circuit theory embraced by Professor Steve Keen, as more realistic about deficits.
Under the so-called Monetary Circuit Theory, money is created ‘exogenously' by private sector banks, rather than ‘endogenously' by central banks (as neoclassical subscribers to the outmoded "money multiplier" tend to believe).
MCT is therefore known to some as the theory of endogenous money.
If MCT were to be adopted, banks and investors would be much less likely to engage in the inflation of socially useless asset price bubbles.
However critics claim that MCT ignores the fact, unless they're lending to so-called "risk free assets", banks need capital (even if only a tiniest of slithers) before they can lend a penny.
The best of the rest
There are clearly plenty of other categories of alternative economics, including Marxism, Austrian economics, Straffian economics, Complexity Theory and Evolutionary economics, whose pros and cons are all summarized in Chapter 18 of the 2011 edition of Debunking Economics.