Another weekend of musing.
Ideology revisit
Back in April I wrote a piece on economic ideologies and how they can effect the decisions of policy makers and economists alike. Over the last week on MacroBusiness I have also noticed a number of threads that seemed to have swerved into discussions between holders of differing ideologies, so I thought it was a good time to revisit the topic.
I was going to produce a part two of my ideology piece to discuss the various schools of economic thinking, however last week I noticed an article from early May over at credit writedowns that has done all of the hard work for me. I recommend you read the full article as it is a good overview and would be especially interesting for anyone relatively new to economics.
The author , Edward Harrison, concludes that he is somewhat of an Austrian-Chartalist hybrid which is how I see myself. It is a somewhat conflicted position to be in because the two schools of thought are often in conflict about economic issues. Any of my long term readers will know that I have chartalist roots and spent quite a bit of time on my previous blog discussing Modern Monetary Theory in the context of CentralBankopia. There are caveats to those discussions as the name suggests. “CentralBankopia” was a mix of the words “Central Bank” and “Utopia”, meaning that it the potential of FIAT money in a perfect world where central bankers and government officials make decisions based on purely economic and socio-economic outcomes. This obviously ignores the fetish of humans for greed and self-interest which is why I am accommodative of Austrian views around government and credit dynamics. ( Two topics I discuss regularly )
A comment left by a reader (Steve Roberts ) on my initial ideology piece stated my views on this quite well ( although Chartalism is a more than just Keynesian stimulus )
The problem I have is when as people we recognise our faults yet continue down a path willingly ignoring those faults. Keynesian economics in simple terms means step 1) stimulate when the economy is struggling and step 2) pay back the fuel we used when the economy is strong. Our human fault is that we never actually do step 2. Like an alcoholic, every time we take a drink we promise this will be our last time and we’ll fix the problem the next morning but the next morning we just need one more shot to get us going. As long as we ignore the fact we are stimuholics, we’ll continue down the path we are on.
Interestingly in Australia right now we are seeing the first steps of stimuholic cold-turkey as we attempt to get over the Post-GFC stimulus binge and decade of private sector debt accumulation. There is a long way to go, but the current interest rates seem to be slowly steering the public away from debt driven consumption while the real economy attempts to catch up. There is however a very long way to go, private sector debt to GDP is still extremely high and there is certainly the ever present risk that the slow down in debt issuance will have a “shock” effect on the economy. ( Something Dr Steve Keen calls a “Credit Accelerator Shock” ).
That point aside I do wonder what sort of ideologies are in play within the Eco-elite of Australia and how they have changed in the last few years. The RBA and the Treasury saw the household indebtedness rise from under 50% in 1990 to over 150% in 2011 , yet it wasn’t until late 2010 that I noted a change in position on debt and that Australia should actually be trying to “save for a rainy day”. Here is an example from late 2010.
Glenn Stevens says Australia needs to put some of the prosperity from the mining boom away for a rainy day, through the creation of a prosperity or stabilisation fund. Mr Stevens says such a fund could be used to lessen the shock of an eventual downturn.
“So a prudent approach might be to use the current period of exceptionally favourable international prices to raise our saving while maintaining a disciplined approach to ensuring that there are no impediments to lifting productivity,” he said.
“Consumption deferred, whether it’s public or private, can easily be endured in future if our incomes stay high. Consumption we get used to today is harder to unwind in the future if our circumstances change.”
One has to ask why these statements weren’t being made much earlier than 2010 given the rate of growth in household indebtedness over the previous decade. Was this a change in ideology caused by the GFC that demonstrated clearly that large build ups in private sector indebtedness actually matter? or simply a response to the obviously growing issue of the “two-speed economy”?
I am hopeful it was ideological because that would mean that private sector debt was now on their radar as something that needs managing. That would not be the case if classic economic ideologies are still in play.
Tag Crowding
I have been doing the morning links recently as H&H has been unwell and is still recovering. It is actually quite a difficult task mainly due to the fact that you have to get up ridiculously early to do it, but secondly because you have to leap out of bed and instantly start analysing wads of articles from all around the world to see if they are relevant and worthy of passing on to others. Trying to get your brain into 5th gear 2 minutes after getting out of bed is very unnatural ( at least for me ) and I have been searching for a few tools to help me out. One of the tools I have started using lately is TagCrowd.
It is quite a simple tool that you give a body of text or a URL and it will quickly build you a diagram presenting the most commonly used words by rank . This basically gives you the “theme” of the document. For instance here is the diagram for the latest RBA speech by Guy Debelle.
The tool works best on long articles and isn’t always useful, but it is a bit of fun to play with. I also found a children’s version which produces some more visually interesting output and would probably be useful for school projects as well. It however only works with pasted text.
Enjoy playing and have a good weekend.
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Hi DE, very interesting stuff. I can’t imagine what is in the minds of the RBA for example, but Steve Keen told me he has some good contacts there, and he didn’t have a lot of confidence in what was going on.
However, Reserve Bank director Professor McKibbin in the link/s below was pretty honest, and I can’t see much he’s got wrong, and note his comments on the NBN in the first link. I expect he’ll have a visit fro Swan, and Stevens and a few large men in black suites to discuss this outburst of honesty.
http://www.businessday.com.au/business/global-train-wreck-coming-20110630-1gszi.html
and
http://www.petermartin.com.au/2011/07/that-was-blip-this-is-slow-motion-train.html
On which days are you a Chartalist?
On which days are you an Austrian?
Is there a difference between a “Chartalist-Austrian” hybrid and an “Austrian-Chartalist” hybrid?
Is bigamy a hybrid between monogamy and polygamy?
Those who claim to be both are neither.
A pro freemarket statist is a contradiction in terms.
Evading responsibilty is usually a trait of the statists.
Menu picking. I’ll try the half pregnant duck, thank you.
Why can’t some people just admit they don’t know? I know I don’t know. I’m a traditionalist-I prefer to marry women, not ideologies.
Free money for free people with morals
Vs
Coercive instruments for amoral slave traders.
As Von Mises said: It’s either the freemarkets or the government, there is no third way. Got it? No hybrids.
And definetly no gulagmeisters. We think, you sweat. My mistake, you pay. Central Banking Mafiosi.
Sounds like Fiat-fed Exploitive Economic Chimeras.
Well it is fairly obvious you are not a hybrid then.:)
But I actually do agree/believe with quite a bit of the Austrian economic theory. Certainly the business cycle theory is spot on , and there is much policy makers can learn from it.
http://en.wikipedia.org/wiki/Austrian_business_cycle_theory
But no matter how much I believe in it, does not change the fact that this is not the system we have today and outside a massive revolution not going to see again.
So we now live in a world of fractional reserve banking with central banks and governments controlling fiat money.
So, in my opinion, the best approach is to try to steer policy to get the best out of the system we have using evidence from the past about problems that arose. So to me that means understanding how fiat money works ( chartalism ) while understanding why it fails ( Austrian ).
I think that makes me a Austrian-Chartalist hybrid. However maybe, as you state, that isn’t quite possible so it just makes me a pragmatic chartalist?
Nice. I would like to See Keynes and the other statists burried once and for all. It is the economics of socialism. I have a feeling such a time is coming too. It would be so nice if we Could do away with the reserve bank an then amend the constitution to provide protection from the governments continual repression.
You can’t even have a bloody sausage sizzle without a permit these days.
If the alternative to government repression is social oppression by individuals/corporations, then I’d rather go with the former; at least you have the option of voting them out.
Why is the word “fiat” often in capital letters?
Not sure, I have just always written it that way…
Technically it should be in lower case (as its just a latin word) as in upper case, its a tradename for FIAT Motors (i.e the owners of Ferrari and the makers of the FIAT 500)…..
😀
Maybe the RBA now understands the debt problem but is trying to jawbone it away slowly, rather than causing panic amongst the debt-laden home owners. How would the public take it if the RBA governor (who probably has more cred than all the elected officials in all the parliaments in the land) came out and said “We have dangerously high debt levels and house prices are in a bubble”? I don’t think it’d be pretty.
They seem like smart guys and gals – surely they’ve broadened there theoretical reading since the GFC and are now looking at debt in a different fashion.
Nice piece, DE. I’m personally close to your views – I think MMT is a good description of how the monetary system actually works, and has some valuable insights into how it can be used (as you say, in an ideal world) for the benefit of all. But I’m also aware that representative democracy is essentially a tragedy of the commons, with the benefits flowing to the backers of the mob in power and the downside distributed to the whole population.
Of course, as noted by Winston Churchill, democracy is the worst system of government except for all the others. The challenge is how to minimize the downsides and maximize the benefits. I tend to think a libertarian perspective can be helpful here!
I agree Alex.
Great piece DE – really loving these weekend musings. Not able to participate as much as others (moving and packing house) and there’s been some great conversation.
MMT to me is a great descriptor of events, but not a prescription for how to fix it.
The Austrian theories are also very interesting, and I agree somewhat with them eschewing the mathematical approach to human action, but they do ignore the Chartalism and the way Steve Keen has modelled the current financial economy – at their peril.
As ideologies go, I’m like QC – a libertarian idealist, with an empirical realist.
To the extent that MMT is a description of the operational and accounting realities it is not an ideology any more than me saying my car is white is an ideology [unless it is not white :)]. If we get a budget surplus in this country we will have a private sector deficit (we run a current account deficit). That is just a statement of accounting e.g. when I asked Saul Estlake about this when he wrote a column a couple of months ago he produced treasury estimates that showed a decline in the private sector (in the event of a government surplus).
Some MMT commentators attach an ideological perspective to that operational understanding but people need to distinguish between editorial and fact. MMT is independent of ideology. As Harrison himself says MMT is not incompatible with libertarian views (because it is a description of the monetary system).
Most, if not all, economic ideologies seem to derive from gold standard days and apply gold standard thinking which is why they don’t get it and why they keep frakking up the economy, and why they can’t distinguish Greek debt from Japanese debt.
Austrians are spot on about moral hazard — how can you call a system “capitalist” when the framework is to privatize profits and socialize losses?
But because the Austrians are so wedded to a gold standard they don’t have much to offer for the current monetary debate. In other words they need to offer up some frameworks for working within the fiat system rather than ranting about switching back to a gold standard all the time (its not gonna happen people — deal with it).
I agree with MMT as the way in which things operate, I believe the Singaporeans and the Chinese are probally the best exponents of a hybrid system from an economic perspective.