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The Past and Future of Political Economy

REVIEW ESSAY 

Money and Government:
The Past and Future of Economics
by Robert Skidelsky
Yale University Press, 2018, 460 pages 

In this remarkable work, Robert Skidelsky—historian, biographer, and tribune of Keynesian ideas in the House of Lords—unites his experience, knowledge, and talents in a sweeping account of money and power. His topic is not money and power in the familiar (one might say Trumpish) sense of the use of one to obtain the other. Rather, he presents an intellectual history of the control over money as an instrument of state power. 

Whether money ought to be conceived as such an instrument is a matter of historic controversy and remains a contested theme in political economy. On one side are those who justify government control over money as a tool of policy: mercantilists, imperialists, war-fighters (as a point of practical necessity), and the followers of John Maynard Keynes. On the other side we find those seeking a stable, automatic, rule-bound economy, independent of politics and in the effective service of creditors over debtors, rich over poor. Here we find David Ricardo, Irving Fisher, Milton Friedman, and—until mugged by reality in 2008—Ben Bernanke. This is the battleground of silver against gold, of bank credit versus specie, of easy money versus tight, of full employment against inflation-targeting as the prime goal of policy. Money and Government brings these battles and their principals into crisp focus over centuries of mostly British but also American political economy. 

Why Britain? Neither money nor banking originates there. Money, so far as we know, starts with the tax-and-tribute systems of early urban Mesopotamia; banking, in a more or less modern form, dates from the Italian city-states and seventeenth-century Amsterdam. But Britain was the world’s dominant power from the late eighteenth to the mid-twentieth centuries. It controlled major gold reserves in Australia, South Africa, and the Yukon; it was the hub of the cotton trade that fueled the industrial revolution; its banks financed extractive development from Argentina to India. So the relevant doctrines of monetary thought developed there. And that which developed elsewhere—for instance, the work of Friedrich List in Germany, Knut Wicksell in Sweden, or Michał Kalecki in Poland—is known to the English-speaking world only to the extent that English and Scottish political economists have taken it up. 

In the Long Run, No One Learns Anything 

Skidelsky traces the British monetary battles to the 1690s, when a war-induced silver shortage led to an epidemic of clipped coins. There were two solutions: devalue the money by producing smaller coins with less silver, or revalue it by melting the clipped versions and minting new coins at full weight. Isaac Newton, Master of the Mint, favored the first (inflationary) course; John Locke, philosopher of property, favored the second. Locke won; chaos and depression ensued. The battle was joined again during the Napoleonic Wars—bullionists led by Ricardo beat out the Bank of England, supported by Malthus—and again in the mid-nineteenth century, with the Currency against the Banking Schools. By century’s end, the fight was in America: gold versus silver, McKinley versus Bryan, the crucifixion of mankind upon a cross of gold. 

In the twentieth century, with the gold standard in retreat, Wicksell and Fisher developed the quantity theory of money—more precisely a quantity of money theory of inflation. What really mattered was not the substance of money but control over how much of it there was. Good control would keep prices stable and debts good. Monetarism, the descendant doctrine of Milton Friedman, would triumph at the Federal Reserve with the arrival of Paul Volcker in 1979, even though Volcker was not himself committed to the theory. Chaos and recession ensued, and monetarism was abandoned in the world debt crisis of 1982. Truly nothing changes and very little is learned, over centuries, in economics. 

Skidelsky treats these great monetary battles primarily as struggles over ideas. Yet he is aware that behind ideas lie interests, and that the division of economic ideas into binary oppositions reflects the class opposition between creditors and debtors—one dominant and the other oppressed, but each always necessary to the existence of the other. The fact that ideas follow the interests that can pay for them accounts for much of the recurrence of spurious and indefensible ideas in economic thought. Skidelsky, however, is above all a historian of ideas, so this book is cast largely as an account of ideologies and intellectual debates and not of class struggles. There is no doubt, moreover, that some of the most meretricious zealots in the long history of economists’ service to power and wealth were also among the most fiendishly clever. 

The gold standard and the quantity theory of money have been succeeded in our day by rational expectations theory and dynamic stochastic general equilibrium modeling (don’t ask), and by their policy stepchild, inflation targeting. These are the doctrines of repute and respectability, the touchstones of academic and professional advancement in our time. They share an almost eschatological preoccupation with the condition of things in the long run—the economists’ version of the prophets’ paradise to come—and a willingness to absorb (or more accurately to inflict) pain and punishment in the present.  

Economists in this respect are unlike modern doctors. The arsenals of pain relief and fever reduction play little role in their toolkit—and where they do (“stimulus programs”) they are often treated as having long-term costs that offset the benefits in the short term. Our social doctors generally prefer to let events take their course, on the assumption that the patient always recovers. If intervention is indispensable, they say, then let it be surgery without anesthesia, so that the patient will remember next time that it is better not to get sick. Against this attitude Skidelsky is devastating: 

As we will have further reason to emphasize, the short run/long run distinction has had a baleful effect on economics and economic policy. It has served to protect its long-run equilibrium thinking from the assault of disruptions, and to justify policies of inflicting pain on populations. One may feel that insistence on the need for short-run pain (e.g. austerity) for the sake of long-run gain, when the short run can last decades and the long run may never happen, testifies to a refined intellectual sadism.  

The great modern anti-sadist was John Maynard Keynes, and Skidelsky, his definitive biographer, is uniquely placed to revive and interpret Keynes for this century. Keynes’s relevance here is as a theorist of money, who understood both the origins of money in state power and the role of banks in the modern credit-money economy. As a modern monetary economist, Keynes favored the aggressive relief of symptoms and mitigation of pain, not merely as a charitable gesture or guilty afterthought, but in the thoroughly modern medical sense that comfort and confidence speed the underlying processes of recuperation and recovery. Keynes’s legacy survives in monetary policy, in the language of the Federal Reserve Act and of the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978, which call for full employment and price stability—a dual mandate. 

Yet Keynes also came to understand the full implications of his own view that money, which is created by banks through the act of making loans, could not be manipulated to full macroeconomic effect by central banks alone. Low interest rates were not enough. A willing debtor—a borrower—was essential. In the private business sector, the will to borrow would evaporate when the prospect of profit is not sufficiently strong. Hence the state had to serve as the borrower of last resort, running fiscal deficits as necessary to fill the gaps in total demand. This was the big contribution of Keynes’s capstone work, The General Theory. Skidelsky gives a fine summary of Keynes’s intellectual and policy triumph, and of how it came to grief due to inflation and the Phillips Curve, the ad hoc 1960s addendum linking high employment to inflation. The result was the monetarist reaction of the 1970s, eventually the rise of Margaret Thatcher in Britain, and, a bit later, of Ronald Reagan in the United States. 

A third part of Skidelsky’s narrative deals with the consolidation of anti-Keynesian thought in the 1980s and after, culminating in the financial catastrophe of 2007–10 and its aftermath. I do not find this section as satisfying as the two that came before, for two reasons. The first is that there are, in this generation of top-level economists, practically no original thinkers of the first rank. On the left, a leading voice such as Paul Krugman espouses a paper-thin version of 1960s textbook pseudo-Keynesian theory (the IS-LM model—again, don’t ask), which Skidelsky accurately dismisses as a “teaching tool.” In the center and on the right, the field is peopled by pompous mediocrities occasionally exposed as such—as in the film Inside Job. They hold their positions only through the interlocking tribalism of American academic life.  

Finance, Inequality, and the Financial Crisis 

Moreover, the global financial crisis brings us to the limits of macroeconomics. Skidelsky’s subject, he writes, is “money and government, and their relationship.” But the global financial crisis was about more than that. The three topics Skidelsky takes up here are inequality, the misgovernment of finance, and something obscure called “global imbalances.” As he seeks to explain them, he finds himself casting in deep and turbulent waters.  

On inequality Skidelsky makes an unfortunate (though not uncommon) choice to base his presentation largely on the work of Thomas Piketty, who has based a simple theory of macroeconomics and distribution on a foundation of untenable theory and (in this reviewer’s opinion) exaggerated metrics. To be fair, Skidelsky is aware of Piketty’s theoretical weakness and is only a consumer of his data; those issues are thus better dealt with elsewhere. In summary, however, it can be shown that rising U.S. inequality was largely a product of rising capital asset prices (the stock market, real estate), which were themselves driven by financial forces. It is therefore illusory to locate the collapse of finance in the rise of inequality, since the rise of inequality was an artifact of the rise of finance in the first place. Yes, inequality and financial macroeconomics are related. Contrary to the mainstream view that holds them as wholly distinct, they are actually two aspects of the same thing. 

On finance per se, Skidelsky has the instincts of a gentleman and the manners of a parliamentarian, and these are not what circumstances require. He accords respectful pages to the flimsy propaganda of “efficient markets” models, and then treats the ensuing debacle as an artifact of greed, “loosened” regulation, and, in the most damaging phrase I could find, a “loosening of moral restraints.” The true story is much worse. It involves fraud, criminality, collusion, and cover-up, one of the most appalling hijackings of government by money in all recorded time. The assumption here, perhaps only for purposes of argument, is that the relevant parties—the government’s regulators and their supporting economists—were merely mistaken but operating in good faith. The evidence to the contrary, however, is far too strong. 

In the chapter on global imbalances, Skidelsky takes up one of the most transparently self-serving ideas to emerge from the crisis, namely Ben Bernanke’s deflection of blame to the Chinese. In his story, China’s “excess saving” allegedly upset an otherwise finely balanced and wisely administered “Great Moderation,” which was itself the product of stable and credible policies by—you guessed it—the world’s central bankers and especially the Federal Reserve. How those subversive Chinese savers managed to penetrate their own country’s capital controls is not clear. Nor was it the People’s Bank of China that loaded up on toxic derivatives fabricated by Lehman Brothers from liars’ loans. The notion also overlooks the fact that the Great Moderation was an artifact of imbalance in the first place: it was made possible by the willingness of the world to hold U.S. dollar assets as their reserve, and so to support the long-standing deficit in the U.S. current account.  

Regardless, the larger problem with the “global imbalance” story is that it presumes some normal state of global balance, within which the Great Moderation might have continued. This is just the sort of long-run equilibrium illusion against which Skidelsky correctly warns us earlier on. 

The Crisis in Economics and the Path Forward 

Skidelsky closes with thoughts on how political economy might be revived. The task is indeed urgent; who can deny it? He writes that the great crisis should have shifted attention from inflation to financial instability but has not done so, and this is correct. But the facts point to an intractable problem: those whose attention cannot be shifted by the collapse of their own worldview are simply beyond reach. This is a problem for the universities, who are stuck with entire departments of stranded intellects, enclosed upon themselves, well-funded by outside sponsors, and a danger to the sound instruction of students and to the future of the world. In the decade since the financial crisis, not one so-called top economics department has hired a single senior professor who had accurately foretold the calamity to come. It should be evident, by this point, that this is not accidental. 

If political economy is to have a future, it must therefore come from outside the presently walled fortresses of high-end academe. Salt water and fresh water—the “mainstream” shorthand for Harvard, MIT, Stanford, and Chicago—are sterile. The backwaters, on the other hand, are full of life. Post-Keynesians, New Pragmatists, Biophysical Economists, Institutionalists, and especially Modern Monetary Theorists are scattered throughout the diaspora of liberal arts colleges and second-tier state universities, as well as in universities abroad, from Australia to Poland to Brazil. They have been busy. Skidelsky is aware of these movements, and indeed he participates in them. But he does his readers a bit of a disservice here by making only passing references to them, and in some cases only to express mild disapproval.  

A deeper question also remains concerning the scope of political economy in the future. Financial instability isn’t merely about money and markets. It’s about the governance of banks, about supervision and countervailing power, about defining and enforcing public purpose, about achieving social balance between public and private needs. Political economy must cover the great questions of social stabilization—of preserving and reviving the welfare state—which touch deeply on inequality and on the future of nation-states and international unions, as in Europe. It must address the paramount issues of resource depletion and climate change, and the pressing requirements of achieving and preserving peace.  

In these matters, economics needs a full integration of macroeconomics with a structural approach, superseding the abstract and barren “micro” altogether. Let me gently suggest that the path forward should be in the spirit of the ideas offered half a century ago by my father, from which economics recoiled at that time. Yet the path not taken remains the essential one.  

This article originally appeared in American Affairs Volume II, Number 4 (Winter 2018): 79–86.

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