I am preparing a course in Origins of Political Economy and look for writings on money and credit. One of the first texts I encountered has been von Mises with his “The Theory of Money and Credit“. Chapter four titled Money and the State starts with §1 The Position of the State in the Market:

THE position of the State in the market differs in no way from that of any other parties to commercial transactions. Like these others, the State exchanges commodities and money on terms which are governed by the Laws of Price. It exercises its sovereign rights over its subjects to levy compulsory contributions from them; but in all other respects it adapts itself like everybody else to the commercial organization of society. As a buyer or seller the State has to conform to the conditions of the market. If it wishes to alter any of the exchange-ratios established in the market, it can only do this through the market’s own mechanism. As a rule it will be able to act more effectively than anyone else, thanks to the resources at its command outside the market. It is responsible for the most pronounced disturbances of the market because it is able to exercise the strongest influence on demand and supply. But it is none the less subject to the rules of the market and cannot set aside the laws of the pricing process. In an economic system based on private ownership of the means of production, no government regulation can alter the terms of exchange except by altering the factors that determine them. Kings and republics have repeatedly refused to recognize this.

While this is quite interesting as a provocative statement, I am not sure whether this counts as (modern economic) science. Von Mises does not look into the balance sheets of central bank, government, banks and private sector, but instead writes down claims that he does not give any justification for (perhaps he does so later). Given that the state is the monopoly issuer of the thing that discharges tax liabilities I don’t think that the above paragraph is correct. Given that states engaged in economic policy, often determined by powerful business lobbies, the state hardly “has to conform to the conditions of the market”. Just the opposite, it creates them through regulation. Here is an excerpt from an article by the New Yorker:

Since the death-spiral session, utilities around the country have sought to slow the growth of solar: by supporting laws and regulations that would reduce targets for renewable energy; by ending “net metering” laws that force utilities to pay solar customers retail prices for the surplus energy they put back on the grid; by imposing “connection fees” to make up for lost revenues. Much of the campaigning has been spurred by the right-wing American Legislative Exchange Council and funded by various groups linked to the Koch brothers and their fossil-fuel fortune.

The state is not external to the people, enterprises and other institutions. I think that it is wrong to divide state and market. In modern states, they are intertwined. Maybe this topic should go in my course to create a debate about what terminology to use (dichotomy of state and market) and what we recognize as (economic) “science” over the centuries. Of course, the view that science has on reality influences that reality, which makes it a reflective mechanism. And that is also where the power of economics lies.

The German weekly Die Zeit reports that Schäuble support the idea of a Treasury at the European level. It seems that some taxes are thought to be part of the idea, but a member of the Christian Democrats in Brussels and Member of the European Parliament, Elmar Brok, is quoted to have said that the Euro Treasury can smooth the business cycle.

After the lost years of 2010-2014 this would be a first step in the right direction. The euro zone needs more demand, and not less. Why this change? Perhaps it’s the numbers:

Change in the number of unemployed persons (compared to previous month, in thousands), seasonally adjusted, January 2006 – May 2015

source: Eurostat

The net change is now close to zero, and the unemployment rate in the euro zone in May was 11.1%. It is time for expansionary measures, and, with repeated devaluations of the euro being ruled out because of likely retaliation, since the private sector cannot be forced to spend, the public sector should take up the slack.

The proposal of a Euro Treasury is a first ray of light that the euro zone’s policy makers have learned the lessons from 2010-14. However, it critically depends on the capability to deficit-spend, meaning that a Treasury that can use only taxes would be useless to fulfill its job of fighting recessions in the euro zone.

Anatole Kaltesky has a very interesting piece at Project Syndicate, arguing that out of the bad bail-out a good economic governance structure will arise. He writes:

Indeed, Europe has overcome what could be described as the “original sin” of the single-currency project: the Maastricht Treaty’s prohibition of “monetary financing” of government deficits by the ECB and the related ban on mutual support by national governments of one another’s debt burdens. In January, ECB President Mario Draghi effectively sidestepped both obstacles by launching a program of quantitative easing so enormous that it will finance the entire deficits of all eurozone governments (now including Greece) and mutualize a significant proportion of their outstanding bonds.

Moreover, European governments have belatedly understood the most basic principle of public finance. Government debts never have to be repaid, provided they can be extended in a cooperative manner or bought up with newly created money, issued by a credible central bank.

While I agree somewhat with this view that the prohibition of “monetary financing” was the “original sin” of the euro zone, and that public debts never have to be repaid, I am somewhat doubtful about Greece. Kaletsky sees a future in which austerity is imposed on Greece to a somewhat lesser extent, because Europe would have all the incentives to do so. In contrast, Varoufakis describes the last bail-out (if it goes through) as disastrous reforms that will fail.

However, the main problem I see with Kaletsky’s view is his optimism concerning German economists and policy makers. The NY Times recently carried an article describing the situation in the economics profession in Germany:

Clemens Fuest, of the Center for European Economic Research, who has advised Mr. Schäuble, kept reciting numbers about Greek debt and growth, and said the Greeks had failed at every level over the past several years to manage their debt. He believed they should simply be thrown out of the eurozone. Henrik Enderlein, of the pro-European Jacques Delors Institute, said that Greece should stay in the eurozone, but only if it applied more austerity and better management. Daniel Gros, director of the Center for European Policy Studies, theorized that Greek debt and economic woes could be countered only with better export numbers.

The author goes on to express his surprise that nobody blamed Germany. The net exports of Germany, so he thinks, are part of the problem of net imports elsewhere. Flassbeck Economics pointed out a while ago that Schäuble, Germany’s finance minister, has never acknowledge the systemic nature of BoP accounting:

Nirgendwo findet sich in Schäubles Äußerungen ein – und sei es noch so versteckter – Hinweis darauf, dass sich viele andere Länder Deutschland gar nicht als Vorbild nehmen können, selbst wenn sie es denn wollten, ohne ihre Wirtschaft vor die Wand zu fahren.

Nowhere in Schäuble’s utterances – and may it be hidden – can we find a clue, that many other countries cannot take Germany as a model, even if they wanted to, without driving their economy against the wall.

I would side with the pessimistic view, but certainly hope that Kaletksy is right. These are difficult times, and while I do not doubt Kaletsky’s authority, the fundamental uncertainty that surrounds the continent cannot be disputed.

Quo vadis, Europe? (for the gazillionth time)

Posted by: Dirk | July 21, 2015

Lapavitsas on Grexit

I have recently reviewed the book by Flassbeck and Lapavitsas, who is a member of Syriza, for the International Journal of Pluralism and Economics Education. The book review, which can be downloaded for free, was very interesting because it merged political economy with economics. The authors argued that Greece does not hold any ace while Europe would be able to cut access to liquidity to both government and banks. Hence a credible threat of Grexit would be needed. I thought and I still think, after the last”bail-out” of Greece, that this analysis is basically correct. The problem with the euro zone is that it is deflationary. Whenever a crisis comes up, spending is cut. This can only lead to less demand during times of crisis, which is bad. Economists have learned that lesson in the Great Depression, when Germany’s unemployed voted a man to power who promised bread and jobs in 1933. It is sad that German politicians of today do not seem to understand that money buys goods and that there is something like a monetary circuit which is very important. Instead, they believe in morality and think that Germany is a victim. In the following video, Lapavitsas talks about the new “bail-out” and the euro zone.

There is a very nice article on the German economists written by Jacob Soll and published in the NY Times. It describes the disconnect between German economists and basically the rest of the world. Here is one main passage:

Clemens Fuest, of the Center for European Economic Research, who has advised Mr. Schäuble, kept reciting numbers about Greek debt and growth, and said the Greeks had failed at every level over the past several years to manage their debt. He believed they should simply be thrown out of the eurozone. Henrik Enderlein, of the pro-European Jacques Delors Institute, said that Greece should stay in the eurozone, but only if it applied more austerity and better management. Daniel Gros, director of the Center for European Policy Studies, theorized that Greek debt and economic woes could be countered only with better export numbers.

As the author points out, nobody sees Germany as being responsible. Not for creating the euro zone institutions in the first place, not for imposing austerity policies that killed the Greek economy. These policies were not part of the euro zone treaties, they were imposed because some “experts” thought that they would be helpful. When people argue against the “Germany as the victim”-economics put forward by the above mentioned professors, they are seen as left-wing, Keynesian pro-Russia/anti-German idiots. This is a group, which my experience from reading their stuff tells me, is ideological to the core.

Here are the main wrong beliefs of the typical German economist as I see them:

  1. Economics is a morality play
  2. demand does not matter (forgotten lesson: spending creates incomes and not spending destroys income)
  3. the market “works” (full employment independent from macroeconomic policy)

Having successfully erased other schools of economic thought from German universities, “die Herren Professoren” are very self-assured and haven’t taken critique seriously for decades. Without any intellectual competition, the outcome had to be expected. The author of the NYT article writes: “When I mentioned that many saw austerity as a new version of the 1919 Versailles Treaty that would bring in a future “chaotic and unreliable” government in Greece — the very kind that Mr. Enderlein warned about in an essay in The Guardian — they countered that they were furious about being compared to Nazis and terrorists.” Let me just add that this does not surprise me. (With this bunch, it is hyperinflation that scares them.)

It is an unpleasant coincidence that when macroeconomic crisis hits the euro zone the largest country does not have a functioning discipline to rely on. Greece had about 25% unemployment in March 2015, with youth unemployment at 49.5%. What “Europe” will stand for in Greece and other countries will be completely different from the generations before. Europe will have to reinvent itself based on her traditional values or risk a return to the Middle Ages. The NYT article ends with the author pointing out that countries that see themselves as victims – like Germany – make no good leaders. I would like to add that countries are not the actors, but politicians are. Political change could change this assessment very quickly.

Posted by: Dirk | July 10, 2015

The Revolt Against Austerity: 1776 vs 2015

I stay at Bremen these days, spending time with the family, visiting parents and friends. In our street we have an office which belongs to Germany’s conservative party, CDU (Christian Democratic Union). Its windows were smashed in some nights ago, blue paint was spread around. Blue and white are the colors of Greece, and I am sure that the background of this vandalism is the euro zone crisis. Meanwhile, police arrested some right-wing extremist who entered the premises of the chancellor and threw a Molotov cocktail. Heiner Flassbeck, one of the few good German economists, has written a piece called “The Sleepwalkers” earlier this month (in English), which ends with this paragraph:

Later generations will wonder why so few were willing to honestly analyse what happened in Europe during these fateful years. They will ask themselves how it was possible that so few had the courage to speak truth to power. It is easy to close our eyes to the responsibility of the powerful and to the carnage that they created. Everyone should ask himself or herself what their children are going to tell their children when they ask about the era when short-sighted politicians destroyed our hopes for a better life.

I must say that this analysis is not outlandish at all. The German anti-euro (the currency) party has now turned to extreme right-wing by getting rid of the founder, an economist from Hamburg. The media provides one embarrassing piece on Greece after the other, and dissent is not welcome. This is very sad, especially given that there are enough historical precedence from which lessons could be learned: the Brüning deflation with austerity policies in the early 1930s that led to the rise of Hitler, the debt that Germany was forgiven at the London conference in 1953, and now there is a piece at the NY Review of Books putting 1776 in context with 2015:

By 1763, however, Britain’s national debt had risen to £122 million, or over 150 percent of the Gross Domestic Product, and in the face of growing resistance to high taxes in Britain itself, the British government abruptly changed course. George III’s new ministers blamed the escalating debt and the punishing level of British taxation on Pitt’s aggressive global foreign policy and his unwillingness to have the colonies pay directly for the war effort. George III’s ministers were determined to end what they perceived as economic redistribution to the colonies at the expense of wealthy English landowners and the government itself. Instead of subsidizing immigrants, George III’s Prime Minister George Grenville announced the Proclamation Line of 1763, designed to limit the demographic expansion of the North American colonies. Instead of encouraging the colonies to trade with Spanish America, the ministry instructed the Royal Navy to prohibit any intercolonial trade. Rather than lowering customs duties in order to encourage commercial activity, the ministry passed the 1763 Hovering Act, which made it easier to enforce existing customs regulations. Instead of allowing the colonies to bet on future growth by printing paper money, Grenville passed the Currency Act of 1764, which forbade the colonies to emit any new currency. Finally, in 1765, Grenville ushered the American Stamp Act through the House of Commons, a measure that was designed in part to restrict the colonial land market.

The economic policies of Europe are not justifiable in terms of logic, history, economics or common sense. One wonders why they are executed at all. Time for my political economy course, I’d say.


Due to vacation I have been lying low, basically missing out on commenting on the Greek drama. There is not much to say anyway, except that this is about democracy (sovereignty) versus (neoliberal) Europe. The euro basically is build on the idea that government cannot borrow from the central bank and hence faces a hard budget constraint. This means that sovereignty, defined by a government that can do policy-wise what it wants (after all, it was elected by popular vote) by accessing liquidity whenever it needs do (from the central bank if nothing else is available), went out of the window. Now Tsipras, the Greek prime minister, has no economic instruments to fight unemployment (no access to more money) but his voters first priority is lower unemployment. With their own currency, the Greek government would be able to deliver that. With the troika, the Greeks depend on the good will of the other side, which is non-existent. So much for that.

Now the IMF has published a timely IMF survey the stub of which reads:

Strong and Equitable Growth: Fiscal Policy Can Make a Difference

Jeff Danforth, Eva Jenkner, and Rossen Rozenov
IMF Fiscal Affairs Department

June 30, 2015

  • Fiscal policies can help boost countries’ long-term growth prospects
  • Complementary structural reforms magnify growth dividends
  • Social dialogue and attention to equity key to building public support for reform

Amid a recovery from the financial crisis that continues to disappoint and growing fear that the global economy is entering a prolonged period of mediocre growth, a new IMF study says that fiscal policy can actually lift potential growth.

Sadly, the text continues with the usual neoliberal “reform” ideas:

How fiscal reforms are designed and implemented is an important determinant of their success in generating strong and sustained growth. First, inclusion of fiscal measures in a package with other complementary reforms increases the likelihood of success. In the majority of the countries studied, successful fiscal reforms were implemented together with other structural reforms and macroeconomic policies. For example, to boost employment, countries combined strengthened work incentives with labor market reforms aimed at facilitating job creation, such as streamlined hiring and firing procedures, changes in wage bargaining, and minimum wage cuts. In other cases, reducing government debt and deficits to create room for corporate tax decreases was pursued simultaneously with economic deregulation and privatization.

What I find especially puzzling here is the last sentence: “reducing government debt and deficits to create room for corporate tax decreases”. I remember two instances when this was tried. The US with Bush (“W”) in the early 2000s, which led to a period of job-less growth, and the German government in the early 2000s, with the result of a period of below-par growth (“sick man of Europe”). I also find it hard to believe that there is no mention of a fallacy of composition argument. If all countries decrease their corporate taxes simultaneously, then nobody would be gaining any competitiveness, right? I still find that the IMF is not delivering a balanced view on economic policy but clings to its neoliberal agenda. Its writings should perhaps be treated as opinion, not free of conflict of interest.

Zoltan Jakab and Michael Kumhof have published a short article at VoxEU with the above title. This is the abstract:

… and here is the rest of the article.

I have published a review of Adair Turner’s “Economics After the Crisis: Objectives and Means” from 2012 at the Review of Political Economy (Volume 27, Issue 2, pages 247-250, 2015). The article is available online (for a fee, if you are not a member). A video in which Adair Turner explains the consequences of money-manager capitalism follows below.

This is one of the videos created by Eric Tymoigne’s students at L&C. Enjoy!

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