Back to article index


THE LOGIC OF 'AUSTERITY'

I have to begin by saying that I am not an economist. That should be obvious by the fact that you won't see any charts, graphs, diagrams, algebraic equations or even numbers in the course of this talk. By the same token I'm not an authoritative spokesman for Modern Monetary Theory. There is a very substantial academic literature that has been built up over the past thirty years, at least since the publication of Warren Mosler's Soft Currency Economics in 1996 and in fact, as I hope to show, there is a much older tradition. My aim is not to give a definitive account but to arouse your interest and encourage you to go further. (1)

(1) A useful starting point is the website of the Gower Institute for Modern Money Studies - https://gimms.org.uk/

The term 'modern money' was I think devised by the American economist Randall Wray as a sort of joke since he was arguing that this is a description of what money is and what it has been for the past 4,000 years. Keynes, when pondering the origins of money, went through a period he called his 'Babylonian madness', seeking those origins in the state issued money (and this is the crucial definition of money. It is a creation of the state) in ancient Mesopotamia. (2)

(2) L.Randall Wray: How I came to MMT and what I include in MMT - remarks for the 2018 MMT Conference September 28-30, NYC, published online at http://neweconomicperspectives.org/, 1 October 2018.

In 1924, the German economist Georg Friedrich Knapp published a book translated into English under the title The State Theory of Money. He called his approach 'chartalism'. (3) The American economist and disciple of J.M.Keynes, Abba Lerner, writing in 1943, used the term 'functional finance'. (4) Much of the work done in developing MMT has been associated with the Levy Economics Institute of Bard College, established in the United States by the hedge fund manager Leon Levy, where the economist Hyman Minsky was established at the end of his life. Minsky developed a theory of economic crashes which rapidly came into favour after the Great Crash of 2008. Names associated with the Levy Institute are L.Randall Wray, Pavlina Tcherneva and Stephanie Kelton, Chief Economist on the U.S. Senate Budget Committee 2015 minority party staff and an Economic Advisor to Bernie Sanders' 2016 Presidential campaign. Elsewhere it is perhaps Bill Mitchell, Professor of Economics in the University of Newcastle, Australia, both in his books (recently the large academic textbook Macroeconomics) and on his very impressive online 'blog' who has contributed most to popularising and developing MMT ideas. In Britain the best known supporter is probably Richard Murphy, author of The Joy of Tax, with his Tax Research UK website.

(3) Georg Friedrich Knapp: The State Theory of Money, London, Macmillan, 1924. See also L. Randall Wray: From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy, Levy Economics Institute of Bard College, Working Paper no 792, March 2014. 

(4) Abba P. Lerner: 'Functional Finance and the Federal Debt', Social Research, Vol. 10, No. 1 (Feb 1943), pp. 38-51. According to Robert Skidelsky (J.M.Keynes: Fighting for Britain, p.276) 'Keynes was always conscious that new ideas had to be "dressed up" in familiar clothes to make them politically acceptable, especially to the business community. He citicised Abba Lerner's concept of "functional finance" - a starkly logical application of the General Theory concepts of aggregate supply and demand to financial policy, shorn of any embellishment, on exactly this ground ...'

My own interest in the question is largely political. I'm one of the many people who joined the Labour Party when Jeremy Corbyn became its leader. My hopes in Corbyn's leadership were (I suppose I should say 'are') twofold: first that Britain would withdraw from its engagement in overseas military adventures; and secondly that a Labour Government would be able to reverse the appalling 'austerity' policy that has been imposed on us ever since the Lib Dems enabled the Conservatives to take power in 2010. It is of course primarily the economic question that interests us here. (5)

(5) My views on Labour's current 'defence' policy (such as it is) can be seen on this website at http://www.labour-values.com/defence/

We all know the argument on which the austerity policy has been based. The Conservatives say that they inherited from Labour a huge deficit, and that this was the major problem that had to be addressed, hence George Osborne's ambition, supported by the Lib Dems, let us never forget, to achieve a 'balanced budget' and hence, of course 'austerity' (meaning a reduction in government spending not of course any restraints placed on the conspicuous enjoyments of the very rich). And we should never forget also that in 2010, when Osborne proposed his austerity programme, the temporary leadership of the Labour Party under Harriet Harman was willing to support it, or at least to permit it by abstaining on the crucial vote. This was seen as the hard-headed realistic option. 

We know of course also that the accusation made against the Labour government of profligate spending during the Blair-Brown years was deeply unjust. Leaving aside the absurd expenditure of equipping the army to fight in parts of the world that had nothing to do with national defence, Gordon Brown's watchword as Chancellor of the Exchequer was 'prudence' ('My first rule – the golden rule – ensures that over the economic cycle the Government will borrow only to invest, and that current spending will be met from taxation.' (6)). The government did, to its credit, engage in a substantial programme of building schools and hospitals. But ingenious schemes were devised to keep expenditure off the government books, as far as possible getting the private sector to put up the necessary finance, with the predictable result we're all experiencing now that these schools and hospitals are saddled with long term debts that have to be repaid with interest, as well as commitments to private sector supply of necessary services. Expenses which often have to be assumed not by central government but by local authorities.

(6) Gordon Brown's first budget speech, Hansard, 2nd July 1997, col 304. Readers will probably recognise Labour's current (June 2019) 'fiscal credibility rule'.

Never mind. A great deal was achieved with minimal government expenditure. But then of course along came 2008 and the financial crash. Gordon Brown had to come up with a solution very quickly and the solution he came up with was 'recapitalisation' - a massive injection of money from the government into the banking system which completely undid all the budgetary benefits (though I shall soon be arguing that those benefits were imaginary) that had been gained over the years of prudence.

What has been curious has been the weakness of the Labour Party's response to the charge of profligacy. The financial crash of 2008 was a direct - and I would suggest quite predictable - consequence of the deregulation of the financial services industry by the Conservative government in 1986. (7) The embarrassment for Labour is that it had come to accept this, indeed to accept it as a triumph of government policy. After 1986 things could be done in London that could not be done in more tightly regulated financial centres elsewhere in the world. As a result business flowed into London. Other financial centres had to follow suit, culminating in the repeal of the Glass-Steagall Act (separation of domestic and investment banking) in the US by the Clinton government in 1999.

(7) I discuss this in my articles on 'Christianity and the Financial Crisis' on the 'British Values' site - See http://www.british-values.com/index-to-articles/griffiths-2/

And it all looked like a great success. Gordon Brown pursued the policy of government withdrawal from the world of finance further with the independence of the Bank of England. He faced very little opposition and when he said in 1999: 'Under this Government, Britain will not return to the boom and bust of the past' or in 2007 'We will not return to the old boom and bust' (8) he was only repeating a view that was generally accepted through the economics profession and also expressed by Alan Greenspan and his successor as Chairman of the US Federal Reserve, Ben Bernanke, that the skills had been developed by which, effectively, minor booms and busts could be shifted from one sector of the economy to another in such a way as to prevent a crash of the whole. This was what Bernanke called 'the great moderation.'

(8) Pre-Budget Report, 9th November 1999 and 11th Budget speech, Hansard, 21 Mar 2007, Col.815.

So Labour, having accepted the logic of deregulation of the financial services industry could not blame the Conservative architects of that deregulation for the crash and was unable to formulate a policy for dealing with it other than providing the banks with the means of going back to what they had been doing before it. And it is also difficult to protest against the politics of austerity when you too have accepted the logic that the government deficit is a problem and the ideal (even if it is recognised as an unattainable ideal) is a balanced budget.

                                                                                                       Next