Escaping from the Friedman Paradigm

By Dan Kervick

Paul Krugman made a remarkable assertion last week about the dwindling legacy of Milton Friedman:

… Friedman has vanished from the policy scene — so much so that I suspect that a few decades from now, historians of economic thought will regard him as little more than an extended footnote.

Krugman’s efforts to deliver a disparaging judgment on the Friedman legacy in macroeconomics may be appreciated, but I’m not sure his critique digs very deep.   Friedman was not just a macroeconomist; he was also an important figure in the history of American political thought who left a deep conservative impact on the minds and attitudes of people whose intellectual development occurred during the Friedman heyday.  Consequently, Friedman helped define the boundaries of the rigid neoliberalism that still seems to reign supreme among US politicians of both parties, and among elite opinion-makers in the ranks of the professional economists and technocrats. He was possibly more responsible than any other figure for converting a generation of policy makers and pundits to a more conservative, market oriented approach to political economy, an approach that goes beyond the specifics of Friedman’s own macroeconomic theorizing.   So I think Krugman overestimates the damage that has been done to Friedman’s legacy.  Aspects of Friedman’s macroeconomics might be in trouble; but Friedman’s broader paradigm for political economy is still, regrettably, too much with us.  In fact, Krugman himself doesn’t seem to have moved much outside that paradigm, as I will try to show.

Let’s begin with the macroeconomics.  Krugman makes two important central points about the ways in which Friedman’s model of the macroeconomic world has collapsed intellectually.   The first has to do with the ability of the central bank to control the money supply:

First, on monetary policy: Even if you give him a pass on the 3 percent growth in M2 thing, which was abandoned by almost everyone long ago, Friedman was still very much associated with the notion that the Fed can control the money supply, and controlling the money supply is all you need to stabilize the economy. In the wake of the 2008 crisis, this looks wrong from soup to nuts: the Fed can’t even control broad money, because it can add to bank reserves and they just sit there; and money in turn bears little relationship to GDP. And in retrospect the same was true in the 1930s, so that Friedman’s claim that the Fed could easily have prevented the Great Depression now looks highly dubious.

There are three distinct issues to untangle here, which Krugman briefly compresses in his “soup to nuts” condemnation.  First, if we take monetary policy to be the entire collection of government policies that have a significant impact on changes in the broad money supply – that is, the supply of bank deposit balances and physical currency in the hands of households and non-banking businesses – then one thing that has become clearer throughout the current crisis is that monetary policy is not identical to central bank policy.  The central bank is a key participant in setting monetary policy, but does not unilaterally direct it.  Congress and the Treasury play a role as well.

A second issue, though, is whether any realistic combination of government policies can control the money supply.  Bank lending in the aggregate, responding to the demand for credit, continually creates new deposits for willing borrowers.  That in turn means an expansion of broad money.  This growth in bank deposits results in a greater net demand placed upon the payment system for interbank settlements.  The assets banks use to settle those payments are primarily their deposit balances at the Federal Reserve banks.  So realistically, the central bank must accommodate most of this independent private sector activity in order to maintain stable interest rates and facilitate the smooth functioning of the payments system.  As a result, the central bank makes the corresponding changes to the monetary base required to achieve these goals.  It thus looks like the private sector is doing the real driving here: changes in private sector demand for credit and bank issuance of credit come first; changes in the monetary base follow along after.  Government policies can certainly influence the private sector demand for credit, but they can’t control it.  The central bank can regulate or modulate activity in the market for bank credit, but it can’t determine it.

And finally, even if the government could control the money supply, a third issue is whether that would be a particularly important and decisive thing to do.  How many of the major macroeconomic issues concerning growth, employment, income distribution, financial stability and innovation really depend fundamentally on what is happening with the money supply?  What Krugman might have pursued further here is that not only have Friedman’s views about central bank policy been proven wrong, but his broader views on the decisive role of monetary aggregates and monetary policy on economic activity are flawed as well.

Unfortunately, Krugman doesn’t really pursue these broader questions.  What he does is argue that Friedman was wrong to rely on the hypothesis of a natural rate of unemployment in thinking about labor market conditions during severe downturns:

Second, on inflation and unemployment: Friedman’s success, with Phelps, in predicting stagflation was what really pushed his influence over the top; his notion of a natural rate of unemployment, of a vertical Phillips curve in the long run, became part of every textbook exposition. But it’s now very clear that at low rates of inflation the Phillips curve isn’t vertical at all, that there’s an underlying downward nominal rigidity to wages and perhaps many prices too that makes the natural rate hypothesis a very bad guide under depression conditions.

Here Krugman touches on what seems to be one of his favorite themes: that the conventional conservative frameworks are more-or-less fine until they break down in rare depression conditions.  It seems to me that at this point Krugman’s criticisms of Friedman really peter out, and he has left an awful lot of the Friedman legacy standing.   Much of that monetarist legacy has in fact been incorporated into New Keynesian thinking where it is supplemented with an emphasis on sticky wages and prices.   (This framework doesn’t have all that much to do with Keynes, since Keynes had stressed that even if wages were not sticky, it could be a very bad idea to let them fall during a recession since the result would not be to clear the labor market and put the country back on a growth path, but to suppress aggregate demand further, leading to a vicious downward cycle.)

What I am calling the Friedman paradigm is the view that markets and private enterprise can be left more or less alone to determine the shape and direction of our economy.  The only government role we need under normal conditions is a central banker behind the scenes twiddling the monetary knobs to smooth out the bumps in the business cycle.  This is an enormously appealing approach to those economic conservatives who are suspicious of activist government participation in the economy, who are attracted to laissez faire economics, and who are more or less satisfied with the socioeconomic status quo – but who also recognize that both ordinary business cycles and more extreme financial crises can cause economic hardships that in turn pose populist political threats to the established economic system.

I think it is fair to say that Krugman has gone beyond this paradigm in only very modest ways.  On the whole, his view seems to be that central bank management of macroeconomic affairs is effective except in the unique circumstances of a liquidity trap.   Krugman’s liquidity trap story has been laid out in many places, but representative discussions can be found here:

Monetary Policy in a Liquidity Trap

and here:

Credibility and Monetary Policy in a Liquidity Trap – Wonkish

A liquidity trap, on Krugman’s account, is something that happens at the zero lower bound of nominal interest rates.  One thing that he says happens is that there is no longer any significant difference, from the point of view of earnings, between holding non-interest-bearing money and holding interest-bearing securities.   Another thing that happens is that the central bank is unable to push interest rates down further.  Even if they attempted the very unconventional step of establishing a negative rate of interest on deposit balances, the result would only be that people would convert those deposits into currency.  So long as currency earns a zero nominal rate of interest and people are free to exchange their deposit balances for currency, there is no way to get a nominal rate of interest that is significantly below zero.

But Krugman’s description of how things work when interest rates are above the zero bound puzzles me.  He says the way these operations usually work in those more normal conditions are as follows:

… people are making a tradeoff between yield and liquidity – they hold money, which offers no interest, for the liquidity but limit their holdings because they pay a price in lost earnings. So if the central bank puts more money out there, people are holding more than they want, try to offload it, and drive rates down in the process.

This comment employs a Friedman-style “hot potato” framework that some monetarists employ.  But what in the world can it mean to say the central bank “puts money out there” that people then try to “offload”?   How can that happen? The central bank doesn’t stuff money into people’s pockets, and it doesn’t force them to hand over their financial securities in exchange for money.  It offers money in the open market in exchange for securities.   So if people preferred the securities to the money, they would’t have traded the securities for the money in the first place.  It makes little sense to say that  financial institutions first seek money for their securities on the open market, and then having too much unwanted money hanging around seek to dump it by obtaining securities for their money.

There is a very simple model of the Fed and its operations that is sometimes employed among the punditry – even by economists – but doesn’t seem to make much contact with the actual institutional, functional and legal status of our central bank.  The pundits often ignore the fact that the Fed is fundamentally a bank, the central bank, and that it  interacts with the rest of the economy almost entirely through the banking system and other large financial institutions, and via the mechanisms of credit.  These pundits instead employ a model of the Fed as a kind of disembodied “monetary authority” that has the ability to put money out there in some more generic sense.  The question for them then becomes whether or not putting the money out there will have the desired effects on demand and spending.  But for the most part, the only world that is out there from the standpoint of central bank operations is the world of commercial bank reserve accounts, and the securities accounts of major financial institutions with the government.  The Fed has no helicopters or universal money dispensers.   It is not a supreme monetary authority.   This is the fundamental flaw of monetarist-inclined economists who think macroeconomic aggregates can be managed and stabilized by the central bank.  They are imagining a universal monetary control institution, a kind of People’s Directorate of Money, that doesn’t exist.

So returning to Krugman’s analysis, let’s leave that odd aspect of his liquidity trap story aside.   The more viable point he makes is that if interest rates are already at zero, then the central bank can’t push interest rates down any further.  This is important for Krugman because he is working within a framework that is based on a natural real equilibrium rate of interest.  The natural rate is the rate at which the demand for loanable funds and the supply of  loanable funds reaches an equilibrium, and the credit markets then clear.  Krugman also believes it is possible for that natural rate to be negative, so that if artificial structural factors in credit markets prevent the real rate of interest from falling to the natural rate, credit markets will under-perform, financing for investment will be under-supplied and the economy will struggle and sputter.

Since the nominal rate of interest can’t fall below zero, then if the natural real rate of interest is below zero, the only way for the actual real rate of interest to get down to the natural rate is if there is a significant gap between the real rate and the nominal rate.  So the only way for the market to achieve the natural rate is to have significant inflation.  If inflation is 4%, for example, and if the lowest achievable nominal rate of interest is 1/4 of 1%, then the real rate of interest is negative 3.75%.  So if 3.75% is indeed the natural rate of interest, it would be good if the monetary policy makers could set the nominal rate at 1/4 of 1% and then engineer something like a 4% inflation.  Or more accurately, they at least want to engineer an expectation of a 4% inflation, since the rates of interest that are charged will be determined by what lenders expect inflation to be over the course of the loan, not what it has been at the time the loan is made.

So taking stock of the story so far, Krugman’s account seems to be central bank-administered monetary policy is usually effective in most ordinary situations, but its effectiveness is turned off in liquidity trap situations.  And this happens when the natural rate of interest is negative, and so the Fed cannot push interest rates down further.  But there is an escape hatch for this central bank-oriented framework if the Fed can engineer inflation expectations so as to get the real rate of interest down to the natural rate of interest.  Can the Fed do that?  Krugman seems to think that the Fed can control inflation expectations in most ordinary situations.  But problems occur if the natural rate of interest is too far down into negative territory.  The problem then is that the Fed might then need to get the public to expect a sustained rate of inflation that is much higher than the rate that inflation-phobic central banks are usually willing to accept.  So when the Fed announces its plans for a higher rate of inflation, the public might not believe them!

And yet still, all is not lost for the Friedman paradigm on Krugman’s account.  There still might be a central bank policy solution if the bank can achieve a certain kind of credibility:

The trouble is that central bankers have a credibility problem – one that’s the opposite of the traditional concern that they might print too much money. Instead, the concern is that at the first sign of good news they’ll revert to type, snatching away the punch bowl. You can see in the figure above that the Bank of Japan did just that in the 2000s.

The hope now is that things have changed enough at the Bank of Japan that this time it can, as I put it all those years ago, “credibly promise to be irresponsible”.

(Those of us old enough to remember the Cold War nuclear standoff, and the many debates about nuclear deterrence that era engendered, will probably be put in mind here of the doctrine held by some that a state can only succeed in deterring a nuclear first strike if it can make a credible commitment to behave irrationally.)

It is important to see here that according to Krugman’s picture of macroeconomics and macroeconomic policy, it is only when all these central bank maneuvers have failed that the government must turn to fiscal policy solutions.  Krugman has indeed been arguing for a greater reliance on fiscal policy throughout the present crisis.  But he presents fiscal policy as a sort of Red Button marked “for extreme depression circumstances.”

So, in substantial measure, Krugman embraces the Friedman paradigm prescribing central bank direction of macroeconomic policy, but has sought to repair the flaws in that paradigm with the addition of a few epicycles.  It’s a remarkable story built on several questionable empirical hypotheses: that the central bank controls inflation expectations, that there is a natural rate of interest, that credit markets are determined by the supply and demand of loanable funds, etc.  And underlying all of this seems to be the presupposition that if only the central bank could get the actual real rate of interest to fall down to the current natural rate of interest, the challenges of macroeconomic policy would be met: credit markets would clear, labor markets would clear, the appropriate allocations of income among consumption, savings and investment would be met; our economy would return to full capacity; economic health would be restored.

And in fact, if Krugman’s fundamental picture is accurate, the whole central bank-domianted paradigm could be fully reinstated with a few innovations in monetary policy.  If we went to a system with 100% electronic money, for example, so that people could no longer convert deposit balances into non-interest-bearing physical currency, the Fed could push nominal interest rates down into negative territory.  And as far as I can tell, Krugman would have no principled objection at that point to leaving macroeconomic policy in the hands of the central bank once again.  The need for the fiscal policy Red Button would be eliminated.  For my tastes, there is far too much of the ghost of Friedman lingering about in all of this.  Taking in the whole model and its epicycles, the only thing standing between the current system and effective central bank control is that pesky physical currency, which is responsible for the existence of the nominal zero bound.  So Krugman seems to say.

So the Friedman paradigm lives.  But it needs to die completely.

As the post-2008 crisis has progressed, I have come to feel that there is something bizarrely, uncannily inadequate about the response of the economics profession to the crisis.  Note that Krugman’s rather conservative framework is regarded in most places where economics is discussed among serious policy makers and established media figures as defining the left end of the spectrum.  As far as Washington and Wall Street are concerned, Krugman is a dangerous radical.  And most of the economics profession and blogosphere does not seem to recognize the existence of any viable alternatives to the left of Krugman.  Our current President seems to stand among this crew of stolid conservatives.

I have been following economic discussions fairly closely now for about four years, and the intense, single-minded, nearly inescapable fixation on monetary policy and the Fed among economists and pundits has astonishing.  There seems to be a palpable desperation among professional economists to uphold the independence, power, authority and policy-making self-sufficiency of the central bank.  It is an extraordinarily anti-democratic and conservative paradigm, but adherence to it seems to be de riguer in the profession, universally adopted by any US economist considered mainstream.  We will need some future sociologist or anthropologist to diagnose fully the causes of the early 21st century economic profession’s deep hatred of activist government, and the social stagnation and failure this hatred is engendering.  But it appears to me that the cold, dead hand of an oppressive ideology, an ideology which took decisive hold in the hyper-capitalist triumphalism and extremism accompanying the end of the Cold War, is pressed down over everything and is smothering progress.

And whether they are defenders of single-minded central bank-driven policy, or see some role for the Red Button of fiscal policy, almost all of the thinking of mainstream macroeconomists is underpinned by the idea that the role of government in our economy should consist only in something called “stabilization”, which essentially means preserving some kind of supposedly normal conditions, and taking remedial steps to return to those normal conditions in the event of a crisis or shock.  The idea that an empowered democratic government might drive progress and social transformation, and disrupt the status quo rather than stabilize it,  seems utterly alien to these mainstream thinkers.

In my view, these mainstream views represent a fossilized dinosaur economics born out of an historically transient, late 20th century western temperament: a complacent, satisfied social lassitude indulging the fantasy of an “end of history”.  These attitudes are being perpetuated past their shelf life by an affluent and secure technocratic policy class committed to preserving the status quo, and their own secure positions in that status quo, for as long as possible.   The economic and professional security of this privileged class is underwritten by a destructive plutocracy that is rotten to the core and is cannibalizing our society, and in return for the underwriting they get safe and non-threatening conservatism, a conservatism that devises complex intellectual tools to fight off democratic challenges to entrenched wealth and political power, and is committed to the self-sufficiency of private enterprise, and the established structures of ownership and wealth that command it, to determine our future.

I believe this ossified consensus ideology is dead wrong, and that its continued hegemony is toxic to our future.  It’s alread laying waste to a rising young generation across the United States and Europe.  Private enterprise alone, aided only by the fine-tuning of a central bank, will never achieve full employment; such a system will never achieve a just distribution of the nation’s economic product; it will never achieve the strategic purpose and coherence of effort that enables a society to advance beyond the massive waste of an aimless, decadent consumerism; and the mainstream techniques of status quo stabilization will never thwart the inherent predatory drives and tendencies toward inequality and serfdom built into financial capitalism.

The Friedman paradigm must be displaced entirely, and not just modified with tweaks and epicycles and exemptions for special occasions.  We need a Copernican Revolution in our economic thinking, which reverses the polarity in the dominant economic framework, puts an engaged democratic citizenry and activist government at the center of things, and leaves to central banks the important but subordinate tasks of regulating and managing the banking system while accommodating the economic policies and strategic direction set by the public through their government.   It’s not just that we need to rely more on “fiscal policy” for the task of stabilization.  We need to rely more on engaged public activism and invigorated government to move beyond stabilization into transformation, and toward real social progress.

We are also facing a long, vital battle between the democratic mode of organization and the corporate mode of organization. The ideal of government by equals in the pursuit of social justice and shared prosperity stands on one side if the struggle, and the forces of hierarchical command and control in the service of concentrated private wealth and power stand on the other.  I’m convinced this struggle will define the coming century.  History hasn’t ended.  It’s just getting started.

Cross-posted from Rugged Egalitarianism

Follow @DanMKervick

21 responses to “Escaping from the Friedman Paradigm

  1. Mike Riddell

    These discussions are largely academic in the sense that Wall Street and Main Street are two different places where the latter are shouldering most of the burden for the policy decisions taken by government in the wake of Wall Street’s post-financial crash lobbying.
    It seems to me that the game is up for money itself. It’s served it’s purpose (return to lender, with interest) and a lack of liquidity, equality and fairness will drive innovative new solutions around digital currencies that are issued into existence for reasons other than to add to our servitude.
    Keep an eye on what’s happening around ‘community currencies’.

    • I really don’t think the problem is money or the monetary system, or that community currencies will have any significant role to play in recovery and progress. To me they seem to be an escapist fad at best, and a seductive lure into new sources of insecurity and insolvency at worst. See my “Getting to the Bottom of Things” piece.

      • Dan….while I see challenges with community currencies, as even its supporters (e.g., Bernard Lietaer) would concede exist, I think you are far too quick to dismiss their potential significance and the evidence that, in some situations (mostly in other countries), they’ve been pretty successful and helpful (and in a few cases, like the Swiss WIR, at significant scale and for decades).

        While I’m totally onboard with the MMT perspective and generally love your posts, something you don’t seem to acknowledge much are the HUGE challenges we face in achieving the healthy-functioning democracy and relatively “economically enlightened” political leadership that strikes me as fundamentally necessary for a sound MMT-based policy to be developed and sustainably implemented.

        While it’s great to call for ongoing national progressive political mobilization (and I’m 100% in favor of it), can you really say with confidence that the chances of this succeeding are much greater than the prospects for non-governmental (or local government-backed) complementary currencies to begin succeeding and proliferating, and helping to alleviate imbalances and suffering at some at least moderate scale?

        Though I try to be optimistic, I’m not at all confident that any such national political/economic policy reform will occur prior to another major financial collapse, nor that such a collapse would lead to that kind of reform rather than to even more repressive steps by a government and military/police/surveillance machine controlled by elites.

        So, as I see it, both approaches need to be pursued and, to the extent possible, with some degree of coordination. One small scale but significant example that comes to mind is the UMKC Buckaroo program, which serves as both an MMT educational tool and a community currency that encourages public service by UMKC econ students. I’d like to see the program–and it’s dual purposes–expand in scope and influence.

        And, BTW, best of luck with your “Rugged Egalitarianism” blog. A great name!

        • Hi Mitch,

          I don’t think I am unrealistic about the kind of social change I am talking about. If it can succeed at all, it will be very difficult, and will take decades of slow, grinding progress and struggle. What I am trying to get people to realize is that if they are serious about progressive social change, they need to set to work in developing an actual long-term strategic political plan. They need to know what kind of world they actually want to create – something that is pretty dubious when you look at the left these days – and they need to develop an ambitious action plan to achieve it. If progressives are serious about global political transformation, then they have to realize that they are playing a grand, dangerous chess game with the big boys. They are talking about achieving political control over financial, communication and political institutions that are currently controlled by the forces of reaction and concentrated wealth. Are they up to this challenge?

          I find things like local currencies, bitcoins, etc. to be a frankly puny and irrelevant response, and a continuation of the tragic kneejerk libertarianism and escapism of Americans. I’m getting pretty old now, and this kind of thing reminds me of a lot of 60’s and post-60’s experiments in local countercultural activity aimed primarily at the achievement of personal liberation within the context of small groups. For the individuals directly concerned, they might achieve something valuable or they might not. But from the standpoint of large-scale social and political changes on behalf of a more just, democratic and equal world, they are a distraction and a kind of toy – something for people to play with in lieu of organized and really meaningful action.

          I see my whole life (54 now) as having witnessed a scene of utter and complete left-wing failure. So I don’t care much for the approach of a lot of the heroes of the left old guard who have been around a long time – Chomsky for example. I see them as wandering in what I call the Desert of Dissent: a cultural style based on the cultivation of a mentality of permanent quasi-bohemian alienation, and a revulsion toward political power that is so deep that there is no chance that the people sharing this revulsion will ever achieve any of it.

          Also during my lifetime, on the other hand, the conservatives have succeeded wildly. They didn’t just create separatist communities of conservatives. They didn’t wander off to the woods to create Godcoins. They didn’t beat tomtoms and chant slogans. They were up to serious business. They set the goal of taking over the political culture of the US. They organized, developed their networks, developed electoral and communication strategies, and developed the economic and corporate networks needed to finance the effort. And they succeeded.

          • Mike Riddell

            And your response is what? To complain about it? Do us a favor and suggest a working alternative.

          • A few initial responses and maybe more later (perhaps on your new blog, since some of it may extend too far beyond the focus of NEP)…

            I agree with most or all of your first paragraph, but think your second one addresses only a caricature of what I’m talking about. Though your critique may apply to some currency efforts, I’d argue that the same can be said of examples from virtually every general category of human endeavor.

            And, as I read it, your critique seems to ignore the power of digital technology and particularly Internet connectivity to effectively scale, customize, integrate and evolve successful community currency models and efficiently adapt or replace those that are poorly designed or executed. And this doesn’t just apply to complementary currencies, but also to any effort to effectively scale and integrate local efforts to develop, refine and diffuse new institutional models and mobilize and coordinate resources and strategies. And I think it’s fair to say that this is a relatively new and unique development in human history, at least at the level of scale and potency I’m talking about. To me, this is an important factor when considering progressive change strategies in light of past history.

            This belief is why much of my personal effort has focused on supporting efforts to ensure that the Internet does not get turned into a “digital cable TV” service controlled by the dominant access network owners (e.g., Comcast, AT&T, Verizon)…or by a government not truly accountable to the people with appropriate checks on its power to control and gather information about them. Though I certainly couldn’t foresee the Internet back in 1980, when I decided to go back to grad school to focus on the telecom/media sector (I’m 63, btw, so share some of your generational history), I did recognize the importance of changing the media-power equation…and still believe that this change is essential–and occurring, though with much still to be done, both offensively and defensively. (As a side historical note, I was a member of the Citizens Party in 1980, and helped organize a debate between our presidential candidate Barry Commoner and the Libertarian Party candidate in Ann Arbor, MI, which still ranks as one of the most interesting and honest political debates I’ve ever seen–one which Barry won by a landslide in my view, though not without his opponent raising at least a few good points).

            To the extent I understand you, I may agree with the gist of your comments about the Desert of Dissent, etc., but I don’t see how this is especially relevant to the value of complementary currencies as a tool for empowerment for those without access to surplus (or even “enough”) dollars.

            Which leads me to a response to your comment about the political success of the right. While I agree they’ve had pretty consistent and intense focus and commitment, I’d also point out that they have access to A LOT more money than the left, since their core constituencies include large portions of the very wealthy and large corporations and their leadership (the sector I call the “financial extractors”). I don’t see this as an insurmountable advantage for them, but certainly a big and important one.

            What I see as necessary to achieve fundamental change is a well planned and executed strategy that pushes for change on multiple fronts in a well coordinated manner. Off the top of my head I’d prioritize mobilization and fundamental reform in the electoral, media/Internet and financial spheres (i.e., the core institutional structures of power), which could then enable a wide variety of needed changes in other spheres, including environmental, energy, healthcare, education, agricultural arenas.

            If your comment about tomtoms and slogans was directed at Occupy, I share some of that concern. But I see the early iteration of Occupy as a generally healthy step, but one that must be followed by other, more focused steps. And though I haven’t followed it closely for some time, I recall being impressed by some of the actions and proposals taken by an Occupy offshoot (that included folks with an impressive mix of relevant expertise and courage) that focused on financial reform.

            Getting back to the specific issue in question here…as I said in my prior comment, I see community currency efforts as quite compatible and even synergistic with efforts to educate the public and its representatives (if, in fact, Congress can still can be characterized as representing those who vote in their election) regarding the validity and significance of MMT. And, as I said in that comment, UMKC’s Buckaroo program is a good example of this, one whose value and potential for expansion is, I think, worthy of serious consideration/discussion.

            • I just don’t see the issue with the currency. The dollar and other national currencies are effectively digital now too, so the fact that some alternative currencies might be digital doesn’t seem all that important to me. All one does by accepting a community currency in exchange for the goods or services one is selling is artificially limit the region and population within which one can then use that currency to purchase something else. I see no benefit in that.

              The national currency we have is, as they say, “elastic”. There is thus no problem with a shortage of the currency, since the quantity of the currency grows and shrinks automatically to cover the demand for the currency for the purpose of exchange. If people don’t have as much of it as they would like, that is a problem with the broader system of the exchange and distribution of wealth, and with the weakness of the bargaining power and status of some people in our society. If your boss is giving you only so many dollars in exchange for 40 hours of work as are sufficient to scrape buy, that is due to the power relationship between you and your boss. The particular form of currency is insignificant.

              The point of the Buckaroo program was to teach people the underlying nature of the currencies that already exist, right? It wasn’t to present some model of an alternative currency.

              The right does have more money than the left. Part of the reason for that is that we deregulated our economy in several ways that allowed for the much more effective accumulation of concentrated private wealth and generated radically growing inequality. The impulse behind these deregulatory moves was the resurgent laissez faire spirit of American culture that took hold in the late 70’s, 80’s and 90’s, and the belief that a culture of unregulated plurality and competition in all spheres of life allows for the best options to thrive and drive out the worst options. The fact that privatization + competition results in vast private wealth accumulation and tendencies toward oligopoly, monopoly and private political power was ignored. I see the alternative currency movement as an extension of that error, not resistance to it.

              • I agree, per the basics of MMT, that the national currency is “elastic” and that there need be no shortage of it. But simply asserting this ignores the issue of who currently controls monetary and fiscal currency flows and most of the “discretionary” and “investment” dollars available in the private sector.

                While reclaiming democratic control over all levels of government, including the federal level (and including the Fed) is an extremely worthy goal, to the extent it is not achieved and combined with public education regarding MMT principles, then the power of these principles remains theoretical, and unable to be exercised. What community/complementary currencies provide are alternative channels for these principles to be exercised by those lacking access to political power and surplus dollars or even enough dollars to pay their subsistence bills.

                Personally, I’m not inclined to ask all those folks to wait until our democracy, federal government and its management of currency, power relationships, etc. has been adequately reformed before they can start taking care of their needs. Rather, I’d encourage them to join forces to push for this kind of macro-level reform, while also using community currencies to take care of themselves, their families and each other until that much more daunting national goal can be adequately achieved.

                The beauty and power of these currencies (and I’m not really including Bitcoin, which I see as mainly a techie-libertarian attempt to recreate the gold standard and avoid government oversight) is that they allow folks at or near the bottom of economic and political power relationships to create “enterprises” and “systems” that don’t need the dollars they don’t have…i.e., to link unmet needs with underutilized resources without the need for the dollars that are currently being vacuumed upward with extreme velocity in most sectors of our existing economic and political system (with vastly insufficient and misdirected amounts being rechanneled into the economy by our federal government).

                And I also think that complementary currency advocates like Bernard Lietaer (whose various books I’d recommend, including a report done for the Club or Rome and available to read online) make some good points about the value of a more diverse monetary ecosystem, including some forms of currency/exchange that aren’t interest bearing. I don’t have time nor expertise to lay them out here, but anyone interested might check out these links:

                • Well, knock yourself out. As they say “it’s a free country”. Personally, I have no interest. I have read several pieces by Lietaer and they didn’t offer anything that appealed to me personally. I doubt these alternative currencies will do any serious harm, although a certain number of enthusiasts for them will be left holding the bag with worthless home-made community scrips that few people accept.

  2. Pingback: Escaping from the Friedman Paradigm | The Money...

  3. Gerry Spaulding

    I see the Krugman’s posit as an attempt to occupy a pivot in economic thought – the ‘Nobelist’ of the liberal brand today declares an end to the economic thinking of one key ‘Nobelist’ of the conservative brand. Success would be truly notable.

    It’s ‘currency’ in the claim to victory over conservative economic ideas is in putting an end to the ‘monetarist’ thinking of Friedman – there being no more easily identifiable persona of conservative, and supposed global neo-liberal, economic thought.

    The stark reality for Krugman is that, in personal parlance, the reports of the death of true ‘monetarism’ as advocated by Friedman’s thinking and writings are premature, and actually ill-timed. The horse is again out of the barn. Declaring the barn-door closed will be wholly ineffective.

    Friedman’s monetarism has nothing to do with central bank policy of using interest rates to control the supply of money so as to maintain general price stability in a growing economic environment. He pained to explain to observers that the only real policy tool available to this version of a central bank was in determining the total amount of its own assets. The rest was a public policy of ‘hope this works’.

    Friedman often posited that the essential reform necessary to achieve stability in ‘money’, and therefrom economic stability, was to directly control the supply of money based upon legislative or otherwise fixed ‘rule’, as advocated by his progressive mentor at U-Chicago Professor Henry Simons, principal author of the Chicago Plan for Monetary Reform.

    Friedman vehemently objected to the present view of ‘monetarism’, where the control of the supply of money is theoretically contained in the several-step removed reactionary train that results from OM operations – the buying and selling of central bank assets as to determine movements in the direction of the cost of money so as to determine the amount of money lent and borrowed (in circulation) so as to achieve the general price level goal that was missed by the last purchase or sale.

    Friedman’s ‘money-by-rule’ construct was designed to REQUIRE the existence of a supply of money (however defined though he favored M-2 at the time) adequate to achieve the growth of the national economy to the potential of its resources (yes, full employment), resulting in a lack of any need to manage the cost of money or any attempt to influence the amount of borrowing and lending, which would all be determined by his beloved free-market.

    That the horse is clearly outside the barn is evidenced by none other than Lord Adair Turner, former chairman of the UK’s Financial Services Authority and keynote speaker at INET’s most recent global conference, by the grasping the real monetary-economic truths of not only Friedman and his mentor Simons, but also of Irving Fisher, the author of ‘100 Percent Money’ and the ‘Debt-deflation Theory of Great Depressions’.

    While all should google up Turner’s speech for a visual presentation of how the “new” economic thinking must go back and revisit the long-standing taboo of direct money creation BY the government – as Friedman advocated, but also here is a link to Turner’s paper recently posted by Volcker’s Group of Thirty.

    Bad timing, Paul.
    As usual.

  4. Thanks for this useful critique of Krugman’s apparent mea culpa. You put things into context.

    “We will need some future sociologist or anthropologist to diagnose fully the causes of the early 21st century economic profession’s deep hatred of activist government, and the social stagnation and failure this hatred is engendering.”

    It seems pretty clear that the economics profession was actively infiltrated by conservatives and ideologues who feared the social changes happening in the late 1950s early 1960s. The attitude outlined in the Lewis Powell Memo (1971) seems to be representative of the times and to have been precisely what conservatives did. Then in the late 1970s they politicised the previously apolitical Christian Right, made common cause with them, and consolidated their hold on power. No doubt there is more to say, but it’s no surprise that it happened – it was a quiet, but reasonably well thought out, Right Wing revolution which happened under the very noses of the Left.

    • Mike Riddell

      This is a plea to get away from the past. It’s irrelevant. All we know that whilst have worked then, it isn’t working now. What i believe we need to do as a species, is find room for each other on this planet in order to survive. the only alternative is to decide who gets it. And i’m no nazi.

  5. The Just Gatekeeper

    Fantastic post Dan. Really sums up all the MMT points and norms in a powerful way. I’m glad you elaborated on Krugman’s Dead End Economics, where he has for years been repeating that phrase “if only central banks could promise to be irresponsible and cause some inflation to get real rates below zero”. The reason I eventually departed from being a 100% Krugmanite was that became less than evident to me that central banks can even cause inflation on their own. I find it odd that Krugman, as the Nobel winning scholar of Japan, fails to note that the Japanese Central bank has been trying like crazy to create inflation for decades and has utterly failed. Not sure when, if ever Krugman will stop pretending that the Fed can achieve negative real rates on its own. Its been 5 years now Dr. K, I’m still waiting….

    • Thanks. I think economists are really strongly drawn to technocratic paint by number approaches that turn the economy into an orderly system that can be managed according to a few rules and policy knobs.

      Take a look at Krugman’s latest posts. Now he’s ready to give up on all of it – monetary and fiscal stabilization – because monetary doesn’t work and the politics is too hard for fiscal. Now he seems to want to focus only on macroprudential financial regulation make sure the same kind of crisis doesn’t happen again. Fine in itself, but a bit petulant.

      Aren’t there any economists who are actual intellectuals with a sense of history, and a taste for social struggle and moral critique of society? Academic economics just seems to want to be a bunch privy counselors to advise the bureaucracy.

      • Mike Riddell

        Sorry, but just getting into any debate about money or monetary reform or MMT is not enough.
        Change the debate. Change the paradigm. Connect with the energy of the people. Money creates greed, pollution, despoliation, inequality, POVERTY.
        Money = debt. Why over-complicate it?

      • Trouble is that Krugman believes recovery will happen on it’s own, no need for fiscal stimulus or even monetary, relative prices will adjust and restore full employment and output.

        Trouble with his theory is that relative prices have never adjusted for developing countries and produced full employment. Most of the people there live outside monetary economy in subsistance agriculture. And decades of high unemployment rates in europe have never adjusted away, so called eurosclerosis.

        I think that if state refuses to restore wealth of the population to the levels consistant with full employment it is never going to happen. Historically agriculture has been the freat hiding place for unemployment, people there do not get counted as unemployed even though they lack wage paying jobs. So it has been only a short period and only select number of countries where agriculture has not played it’s hiding game anymore.

        So he thinks full employment is a norm, while the reality is that any examples of anything resembling full employment are temporally and spatially limited. The difficulty of ensuring enough wealth to generate mass consumption required looks real.

  6. Krugman’s position is that fiscal policy should only be used once monetary policy has succeeded in completely destroying the economy by progressively drowning the masses in debt. The end point of this cycle of monetarist destruction is the ‘zero lower bound’, which serves as a signal that monetary policy has succeeded in its aim of impoverishing the masses, and that fiscal policy must now be used to put them on life support. The parasite doesn’t want to kill the host completely, after all. Once fiscal policy has done the trick, a new cycle of ruthless monetarist destruction and wealth extraction can begin.

  7. Fascism is alive and well, so Friedman’s legacy can’t be that diminished.

  8. Pingback: Links 8/16/13 « naked capitalism

  9. “We will need some future sociologist or anthropologist to diagnose fully the causes of the early 21st century economic profession’s deep hatred of activist government, and the social stagnation and failure this hatred is engendering.”

    Actually a sociobiologist will do:-