Posted by: Dirk | March 8, 2019

Knapp (1905) never wrote that government spends first and taxes later – did he not “get it”?

My new working paper Knapp’s State Theory of Money and its reception in German academic discourse makes a couple of interesting points. Here is the short version with three key takeaways (apart from the fact that Knapp’s book was discussed by many other economists, and at some length – 20 pages was normal, even more than 40 was possible!):

  1. In The State Theory of Money, Knapp never says: government spends first and taxes later. The word “spending” does not appear even once, and the word “spend” appears twice – once in the context of a commodity and once in the context of time. That has led many to wonder whether Knapp understood that government spending comes first and taxation follows rather than the other way around. On page 14/15, I write about a book review from Voigt from 1906: “Voigt recognises the importance of the issue at hand: if the idea that the state is above the economic laws and can hence manipulate, change (abändern) or modify (modifizieren) them is correct, then it would have opened the door wide for any sort of radical economic policy. The state then should be able to push down the price of real estate, regulate the price of bread and meat and also the worker’s wage. Thus the question of the organisation of the economy is one of legislation, and problems would only exist because of the “good will” of the ruler.28 The “good defense“ that some things are impossible for economic reasons, which the state has to protect itself from radical claims, would be lost.” This means that surely academics (economists, mostly) understood that was Knapp was saying is: government can just spend. Note that today we have all the radical policies in place that Voigt feared: subsidies and tax breaks for house purchases, state controlled prices in agriculture, minimum wages and wages set by unions or the state because it is the employer. Funny how in 1906 all that happened only 30 years later with the New Deal was “radical policy”!
  2. Knut Wicksell, author if Interest and Prices, read Knapp and was positive: Wicksell (1999, 219) agrees with Knapp and closes his account with the comment that “in terms both of its content and its form [..] it is to be counted among the pearls of economics literature”. He missed an explanation for the value of money (which Knapp treated in the Appendix under “Value of Money” and Prices. Knapp’s point was that since there are many things you can buy with money – goods, labor, assets, capital goods – it is not at all clear what “value” would be. Apparently Wicksell thought that the discussion was not satisfying.
  3. Schumpeter was not a friend of Knapp’s work. “Schumpeter (1970, 82-86) discusses Knapp’s book at some lengths. He disagrees with Knapp’s theory and writes that it is not even a “fruitful error”. Schumpeter argues thatKnapp’s theory was a “Theorie des Geldwesens”, a theory of finance – however, it was no such thing. As Knapp wrote again and again, he was interested in what money “is”.Schumpeter is wrong then to think about Knapp’s ideas as a theory of finance, and he is also wrong when he bemoans that Knapp’s theory had nothing to do with the level of prices. In the English translation, the table of contents lists §20 “Value of Money” and Prices in the Appendices and Additions section, which has not been translated. The little chapter summary, however, has been translated and reads like this:

    ‘Value’ always implies a comparison, and in the particular object compared with it we have an expression for the value of money. These different forms of expression are mutually independent, cannot be interchanged, and still less be regarded as one. Money can also be compared with groups of commodities, but the composition of the group must be agreed upon. Index-numbers are a welcome indication of the alterations in price of the goods contained in the group. Other groups would give other index-numbers. There are always alterations in price, due to the condition of the market. They should not be explained as showing that the value of money has altered in the opposite direction, for that would be merely tautology. As to the value of money, price statistics a help, but need an interpreter. In the case of income,‘producers’ or ‘consumers’ differently affected by price alterations. Alterations in price not alterations of the ‘validity’ of a piece. The State Theory of Money to be kept separate from economic reflections on Money.

    Schumpeter (1970, 85) wrongly states that Bendixen discovered his “Anweisungstheorie”(claim theory) independently from Knapp and that Bendixen would not be building on Knapp and expanding his theory towards the economic dimension. The exchange of letters between Knapp and Bendixen, in which Bendixen writes that he would be the first Chartalist, say otherwise. Schumpeter’s pages on Knapp are full of scorn. No further economic arguments can be extracted from these passages.”

     

That’s all. If you have any questions or comments you can email me at dirk@ehnts.de.

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