Michael Roberts – Mainstream Economics and Money Trees

David Graeber recently wrote a piece entitled “Against Economics“. This is Michael Roberts’ criticism of the essay. As always, an interesting take.

Michael Roberts is an Economist in the City of London and prolific blogger

Cross-posted from Michael Roberts Blog

“There is a growing feeling, among those who have the responsibility of managing large economies, that the discipline of economics is no longer fit for purpose. It is beginning to look like a science designed to solve problems that no longer exist.” Such was the opening para of a long essay in the New York Review of Books by leftist anthropologist David Graeber, author of the monumental Debt, the first 5000 years. Graeber was reviewing a new book by Robert Skidelsky, the biographer of John Maynard Keynes and epigone of Keynes’ economic thought and policies.

Graeber was attacking mainstream economics and its policy makers for not seeing the coming of the global financial crash and the ensuing Great Recession and for still not learning anything since.  Neoclassical economic theory still dominates the mainstream and so economics is locked into ‘microfoundations’ based on unrealistic assumptions, namely that crises are really momentary ‘shocks’ to a basically harmonious market economy where equilibrium is the tendency, not disequilibrium.

But was mainstream economics ever ‘fit for purpose’?  Surely, that depends on what the purpose is.  With the end of classical political economy in the mid-19th century and the beginning of the neoclassical counter-revolution, political economy was no longer an objective analysis of the laws of motion governing capitalism.  Instead, it became ‘vulgar economics’, as Marx called it, designed to be an apologia for capital.  In that sense, it was very fit for purpose.  Until, of course, it was exposed by regular and recurring failures in capitalist production and the evident inequalities it breeds.

The apologia of the mainstream continues.  Take a recent review by Martin Wolf, the FT’s economics columnist.  Wolf praises to the skies a new book by mainstream French economist, Thomas Philippon, who shows that “Over the past two decades, competition and competition policy have atrophied, with dire consequences, Philippon writes in this superbly argued and important book. America is no longer the home of the free-market economy.”

Philippon is part of that group of modern mainstream economists, like Olivier Blanchard or latest Nobel prize winner Esther Duflo, who are supposedly delivering meticulous empirical work to reveal the state of capitalism. So this is not apologia but science. But what does Phillipon conclude from his work showing that US capitalism is not a free market economy after all?  Wolf: “Philippon insists that he believes passionately in the value of competition. Indeed, The Great Reversal contains a chapter arguing just that. …The great obstacle to action in the US is the pervasive role of money in politics. The results are the twin evils of oligopoly and oligarchy.”  So the policy aim is not to replace capitalism but to restore “competitive capitalism”.  In other words, let us return to some mythical model of a ‘free market’ economy and all will be well.

Wolf sees the problem as the ‘pervasive role of money in politics’.  So back to Graeber.  Graeber claims that “Ostensibly an attempt to answer the question of why mainstream economics rendered itself so useless in the years immediately before and after the crisis of 2008, it is really an attempt to retell the history of the economic discipline through a consideration of the two things—money and government—that most economists least like to talk about.

In his book review, Graeber is concerned to expose the policy of austerity that supported by the mainstream economists and followed by the politicians in the wake of the Great Recession.  Austerity (cuts in public spending) was adopted as the only necessary policy in order to get public debt levels down.  Public debt had been driven up by borrowing to bail out the banks and by the costs of the ensuing recession, which led to a collapse in tax revenues and a rise in welfare and unemployment benefits.

Typical of the justification for austerity were the words of UK PM Theresa May in the 2017 election.  She argued that ‘money does not grow on trees and it cannot be created out of thin air, like magic.’  Graeber retorts: “The truly extraordinary thing about May’s phrase is that it isn’t true. There are plenty of magic money trees in Britain, as there are in any developed economy. They are called “banks.” Since modern money is simply credit, banks can and do create money literally out of nothing, simply by making loans. Almost all of the money circulating in Britain at the moment is bank-created in this way.”  Money can be created out of thin air and capitalist economies could be revived by public spending financed by the banking system with injections of cash.  For Graeber, the failure to see this is a key fallacy of mainstream economics.

But is he right?  Frances Coppola is a leftist ex-City economist.  She answers Graeber’s argument clearly,it is entirely incorrect to say that money is “spirited from thin air.” It is not…. when banks create a new loan asset, they must also create an equal and opposite liability, in the form of a new demand deposit. This demand deposit, like all other customer deposits, is included in central banks’ measures of broad money. In this sense, therefore, when banks lend, they create money. But this money has in no sense been “spirited from thin air”. It is fully backed by a new asset – a loan.” 

Coppola continues “in theory a central bank could literally “spirit money from thin air” without asset purchases or lending to banks. This is Milton Friedman’s famous “helicopter drop.” The central bank would become technically insolvent as a result, but provided the government is able to tax the population, that wouldn’t matter.” 

But “The ability of the government to tax the population depends on the credibility of the government and the productive capacity of the economy. …. So faith in money is, in reality, faith in the government that guarantees it. That in turn requires faith in the future productive capacity of the economy. As the productive capacity of any economy ultimately comes from the work of people, we could therefore say that faith in money is faith in people, both those now on the earth and those who will inhabit it in future. The “magic money tree” is made of people, not banks.

Having suggested that money can go on trees because commercial and central banks can create it out of thin air, Graeber goes on with little or no criticism to endorse the Keynesian views expressed in Skidelsky’s new book.  “Accordingly, one of the most significant books to come out of the UK in recent years would have to be Robert Skidelsky’s Money and Government: The Past and Future of Economics.”

Greaber mentions that “Skidelsky is best known as the author of the definitive, three-volume biography of John Maynard Keynes, and has for the last three decades sat in the House of Lords as Baron of Tilton, affiliated at different times with a variety of political parties, and sometimes none at all. During the early Blair years, he was a Conservative, and even served as opposition spokesman on economic matters in the upper chamber; currently he’s a cross-bench independent, broadly aligned with left Labour. In other words, he follows his own flag. Usually, it’s an interesting flag.”  You’d think that history might make him more cautious about his praise for Skidelsky.  Indeed, as I have shown in several other posts, Skidelsky aims to find ways the save capitalism from itself by adopting Keynesian theory and policies.

Graeber recognises that “Keynes himself was staunchly anti-Communist, but largely because he felt that capitalism was more likely to drive rapid technological advance that would largely eliminate the need for material labor. He wished for full employment not because he thought work was good, but because he ultimately wished to do away with work, envisioning a society in which technology would render human labor obsolete.”  But Keynes was not just anti-communist because he wanted and expected a leisure not a work society under capitalism.  He went much further than that.  Just read pp94-98 of my book, Marx 200.

The point is that capitalism is not just a ‘money economy’ as Keynesians, and it seems Graeber, think.  It is a money-making economy. You can print money indefinitely, but you cannot turn it into value under capitalism without the exploitation of human labour, or as Coppola would put it, without using ‘the productive capacity of the economy’.  But production, profit and exploitation do not appear in Keynesian analysis, nor in Skidelsky and Graeber’s critique of the mainstream. And yet this is at the heart of capitalism and explains the failure of both neoclassical and Keynesian economics to predict or explain crises under capitalism.

Money theories of crises have one thing in common.  They ignore or deny the law of value, namely that all the things that we need or use in society are the product of human labour power and under a capitalist economy where production is for profit (ie for money over the costs of production), not need, then money represents the socially necessary labour time expended.

But it is a fetish to think that money is something that is outside and separate from value. Graeber appears to have this money fetish. With the money fetish, money replaces value, rather than representing it. Graeber sees money as both causing crises and also as solving them! He ignores the origin and role of profit.  Indeed, his main work sees debt not exploitation as all that is wrong with capitalism. As Mike Biggs explains, for Graeber: “The story of the origins of capitalism, then, is not the story of the gradual destruction of traditional communities by the impersonal power of the market. It is, rather, the story of how an economy of credit was converted into an economy of interest; of the gradual transformation of moral networks by the intrusion of the impersonal — and often vindictive — power of the state. And that is Graeber’s explanation for the rise of capitalism. Evil: the root of all money.”  Or perhaps, debt is the root of all evil, not exploitation of the many by the few.

In his review, Graeber raises some key questions for modern economic theory. “The problem of how to determine the optimal distribution of work and resources to create high levels of economic growth is simply not the same problem we are now facing: i.e., how to deal with increasing technological productivity, decreasing real demand for labor, and the effective management of care work, without also destroying the Earth. This demands a different science.”  Really, Marxist political economy would beg to differ. The rise of technology to replace labour and the rapacious destruction of the planet by the drive for profit under capitalism are precisely the issues that the Marx’s laws of value and profitability address and explain.

Instead, Graeber looks to a “new viable science” that “will either have to draw on the accumulated knowledge of feminism, behavioral economics, psychology, and even anthropology to come up with theories based on how people actually behave, or once again embrace the notion of emergent levels of complexity—or, most likely, both.”  Sure, the contributions of various disciplines in social sciences are necessary, but again that is what the historical materialism of Marx’s political economy draws upon, not the fetishes of modern monetary theory or Keynesian ‘animal spirits’.

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