Options for Europe – Part 6

The title is my current working title for a book I am finalising over the next few months on the Eurozone. If all goes well (and it should) it will be published in both Italian and English by very well-known publishers. The publication date for the Italian edition is tentatively late April to early May 2014. The book will be about 180 pages long. Given the time constraints I plan to devote most of my blog time over the next 3 months to the production of the book. I will of-course break that pattern when there is a major data release and/or some influential person says something stupid or something sensible. I hope the daily additions will be of interest to you all. A lot has to be done! Because the drafting has to be tighter than the normal stream of consciousness that forms my usual blogs, the daily quotient is likely to be shorter.

You can access the entire sequence of blogs in this series through the – Euro book Category.

I cannot guarantee the sequence of daily additions will make sense overall because at times I will go back and fill in bits (that I needed library access or whatever for). But you should be able to pick up the thread over time although the full edited version will only be available in the final book (obviously).

[PRIOR MATERIAL HERE FOR CHAPTER 1]

[THIS IS REWRITTEN TEXT FROM YESTERDAY]

The meeting, itself, has been described as a farce (see Tonioli, 2005: Capie, 2010). There was the “petty, mischief-making, and garrulous” chair overseeing the meeting who set up conflict between the central bankers and the finance ministers (Capie, 2005: 421). Bi-lateral animosities were the norm. The British claimed the Bank of International Settlements meeting had stipulated that Germany would have to revalue. Conflict ensued and the Germans provided “anti-British” briefings to the press corps (Capie, 2005: 421)). The British proposed blackmail as the way to prevent the pound from being forced to devalue further – it threatened retaliation in the form of unspecified withdrawal of support for NATO (Capie, 2005, 420).

In summary, Forest Capie (2010: 22) said:

The Bonn meeting of 1968 undoubtedly marked a low point in international monetary affairs in the post-war era. And there was little recovery in relationships over the next few years. The unilateral changes in parities in 1969 simply continued the poor feeling that pervaded the atmosphere.

After the meeting, the French and British governments increased taxes and introduced other policies aimed at reducing imports to avoid having to devalue.

[NEW TEXT TODAY STARTS HERE]

The Bank of International Settlements (BIS, 1970: 3) characterised the international atmosphere in 1969 by saying that:

… the focus of attention generally was not on output trends but on the feverish atmosphere that characterised the situation. The state of crisis which prevailed at times in the international monetary situation contributed to this atmosphere, though, happily, calm had been restored by the beginning of this year.

Curiously, the calm was due to the French and German government rejecting major currency realignments, which blighted any speculative fever. But it was to be a short-lived break in hostilities. France continued to run an external deficit, thus placing continued downward pressure on its exchange rate, while Germany’s external surplus remained large. Taken together, it was clear that the trade fundamentals expressed in the balance of payments were at odds with the fixed currency parities of both nations – the Franc was seen to significantly overvalued and the Deutsche Mark undervalued. Britain’s currency devaluation in November 1967 had also done little to correct their external deficit.

French political changes (De Gaulle resigning in April 1969) led to huge currency outflows from France to Germany as speculators bet that the Deutsche Mark would have to revalue, but the German government again denied the inevitable. The French were the first to recognise that the market predictions were realistic given the state of the French economy and on August 8, 1969, the French government finally devalued the franc against the price of gold by 11.1 per cent.

Across the border, Germany was getting set for Federal election and it was considered likely that the new government would not resist revaluation. The Bundesbank, facing massive pressures to keep the currency within the agreed limits was buying US dollars in the foreign exchange markets “on an accelerating scale” (BIS, 1970: 4) They even closed the Frankfurt currency market on the Friday before the election to avoid what was referred to as a “Black Friday”. Often currency realignments are performed over weekends to minimise the disruption that last minute speculation can cause to the economy and financial system. The foreign currency exchanges remained closed the day after the election in recognition of the massive instability that the fixed exchange rate system was generating.

The September election brought a pro-revaluation government of Chancellor Willy Brandt and to manage the transition, in the face of massive currency bets being made on revaluation, the Bundesbank suspended “its intervention in the foreign exchange market at the former uper and lower limits” (Deutsche Bundesbank, 1969: 5). This simply meant in the context that they stopped buying US dollar purchases once currency had reached the upper limit allowed for under the Bretton Woods agreement and effectively floated the Deutsche Mark, which immediately was revalued by around 5 per cent to DM3.84 per US dollar, on the first day they reopened the currency markets.

The Bank of International Settlements (BIS, 1970: 4) called this an “excellent tactical move” because it ensured the speculative inflow of funds to Germany would slow and that it could stop selling Deutsche Marks in the currency markets to defend the indefensible DM4 parity.

The official statement at the time indicated the the German government was intending “to return to a fixed parity for the Deutsche Mark within a short time, even though this is unlikely to be the old parity, still legally in force, of one dollar to four Deutsche Marks” (Deutsche Bundesbank, 1969: 6). Of-course, this suspension of official Bundesbank intervention was contrary to the IMF Articles of Agreement but the Fund tolerated it because it was the only way to restore stability in the international monetary system. A new parity was established on October 27, 1969, some 9.3 per cent above the previous fixed parity and Germany resumed its place in the fixed parity system. But that would not last for much longer.

Interestingly, the revaluation gave the Federal government some headaches from the Bavarian farmers. Under the CAP, all agricultural prices were paid in US dollars and the revaluation meant that German farm output became more expensive to outsiders. The strength of the agricultural lobby and, particularly the political support that the Bavarian farmers gave to the Finance Minister in the conservative CDU/CSU alliance Franz Josef Strauss, had been a principle reason why the German government had refused to revalue prior to the election. The new government was also sensitive to the power of this lobby and sought a special deal with the EEC, whereby the previous domestic price level would be maintained for farm output despite the lower rates for foreign currencies. The EEC agreed, under German pressure, “to sanction the levying of a compensatory surcharge equivalent to the degree of appreciation of the Deutsche Mark on imports of agricultural products” that were part of the EEC common market (Deutsche Bundesbank, 1969: 6).

The tolerance of the IMF and the relaxation of the EEC rules for German farm output were all signs that the design of the monetary system in place was at odds with the reality of the situation. One could say the same thing about the way the authorities in Europe today act in relation to the Euro – the rules are continually being relaxed or amended to meet whatever financial emergency arises as a result of the rules being fundamentally unworkable. We will examine these issues in detail in subsequent chapters.

The February 1969 Barre Report was written within this environment of international currency uncertainty although it was published prior to the major realignments in late 1969. It noted that the creation of the customs union and the CAP was not a sufficient basis for a multinational Community to prosper. It also recognised that the ‘de facto’ currency revaluation by Germany and devaluation by France in November 1968 (via the tax changes) showed “clearly that there can be no lasting harmonization of indirect taxation unless economic policies are better co-ordinated to reduce imbalances” (Barre Report, 1969: 6). The Report emphasised that “the Community has a choice of vital importance to make, and it must lose no time in tackling the problem if it is to avail itself of opportunities remaining open before serious instability sets in and forces undesirable solutions on it” (Barre Report, 1969: 6).

The Barre Report also emphasised the need “to increase the co-ordination of current economic and financial policies to forestall short-term imbalances early enough”, which was a direct recognition of the tardiness the German and French response to the growing financial crisis in the late 1960s. However, there is not a sense that at this stage a full monetary union was considered. It was more about setting up a suprnational body that would vet individual nation fiscal positions for consistency with common goals of stability. The Barre Report, however, clearly reaffirmed the European preference for fixed exchange rates and a move to a common monetary policy. The Report stated (Barre, 1969: 3) that the Community needed to take action to coordinate “monetary policy” and establish “a common position with regard to external monetary relations”.

The November 1969 Den Haag summit held in the C13th Ridderzaal (Hall of Knights) was not a response to the currency turmoil but was influenced by it. The main agenda driving the summit was the vexed issue of Community enlargement, which was not able to be accomplished while De Gaulle was in charge in France. The in particular Britain’s inclusion. The Germans and the Dutch, in particular were pushing for

There were three main perspectives. First, that the inclusion of Britain would open markets for Dutch and German exports. Second, that the relative instability of the British pound would require progress to increased monetary cooperation if Britain joined the Community. Third, that a Community which included Britain would give Europe power in world financial markets and redress the growing concern that the US was too dominant. But, of-course, under the logic of the Bretton Woods system the US had to be at the top of the currency system and run continuous external deficits. Remember, the Triffen Paradox!

Politics was always at the core of the enlargement debate. The Dutch Prime Minister Piet de Jong summarised the tension in Europe during a Cabinet meeting on Friday, October 27, 1967. In relation to the inclusion of Britain, the minutes read (MR, 1967: 10-11):

Hij acht het niet verantwoord Nederland te leiden in de richting van een Europese satellietstaat onder Franse, en na de dood van president De Gaulle, onder Duitse hegemonie. De geschiedenis leert dat de democratische principes bij een hegemonie van Frankrijk of Duitsland niet in veilige handen zijn. De toetreding van Groot-Brittannië en de Scandinavische landen is met name voor het behoud van de democratie in Europa van het grootste gewicht.

Which translates to the Prime Minister saying that he does not think it “justified in leading the Netherlands towards a European satellite state under the French, and after the death of President De Gaulle, under German hegemonie. History teaches us that democratic principles under either French or German hegemony are not in safe hands. The accession of the Great Britain and the Scandinavian countries, especially for the preservation of democracy in Europe, is of the greatest importance”.

[TO BE CONTINUED - A SMALL SECTION LINKING THE LAST AND THE NEXT BY WAY OF SETTING THE INTRIGUES FOR THE DEN HAAG SUMMIT WHICH WERE TO SOME EXTENT AMBUSHED BY THE CURRENCY INSTABILITY AND THE IMPENDING DEMISE OF BRETTON WOODS]

[I WILL REWRITE THE 1969 DEN HAAG SUMMIT SECTION NEXT - WHICH THEN LEADS US INTO WHY THE WERNER REPORT WAS NOT IMPLEMENTED AND HOW BY THE TIME THE DELORS REPORT CAME OUT IN 1989 THE DISCUSSIONS WERE DOMINATED STILL BY THESE NATIONAL POLITICAL INTRIGUES BUT ALSO INCREASINGLY INFESTED BY NEO-LIBERALISM.

MY MOTIVATION FOR EMBEDDING THE LATER SPECIFIC DISCUSSION ABOUT MODERN DAY EUROPE IS TO PROVIDE A BROADER CONTEXT TO WHAT HAPPENED IN MAASTRICHT, TO BETTER UNDERSTAND HOW THE DELORS REPORT DIFFERED FROM THE WERNER REPORT, AND TO WEAVE IN THE RAW NATIONAL POLITICAL DIMENSIONS WITH THE IDEOLOGICAL INFESTATION. THE EARLIER MONETARY UNION DISCUSSIONS ETC WERE NOT ABOUT NEO-LIBERALISM. BUT NEO-LIBERALISM ENTERS THE PICTURE IN THE 1990s AND THAT IS WHERE THINGS STARTED TO GO REALLY ASTRAY].

[THERE ENDS THE NEW TEXT TODAY - OLD TEXT YOU HAVE ALREADY READ FOLLOWS TO THE END BUT WILL BE REWRITTEN ON MONDAY IN LIGHT OF CURRENT RESEARCH]

However, the idea of an economic and monetary union (common currency) was seriously advanced for the first time at the December 2, 1969 European summit conference attended by the Heads of State or Government of the Six member states. If the intent of the December 1969 European summit conference in Den Haag had been carried through, there would have been a common European currency in the 1970s, and probably, the chaos that is now leaving millions of Europeans without work or hope would have come two decades earlier.

The Final Communiqué of the summit (EC, 1969) spoke of the Community arriving at “a turning point in history” and the “irreversible nature of the work” towards a “united Europe”. It talked about the “completion of the Communities” which as a “final stage” would “lay down a definitive financial arrangement for the common agricultural policy by the end of 1969. As an integral part of this financial arrangement, the Communiqué said that”

.. a plan in stages should be worked out during 1970 with a view to the creation of an economic and monetary union. The development of monetary co-operation should depend on the harmonisation of economic policies.

They agreed to arrange for the investigation of the possibility of setting up a European reserve fund in which a joint economic and monetary policy would have to result.

Interestingly, the summit came at the end of a decade when the European Project had floundered. The tensions were clear and were exemplified by the French proposal for the Fouchet Plan, which would have replaced the emerging supranational European institutions with a system of intergovernmental bodies to run Europe and be dominated by France. The proposed ‘Union of States’ was also motivated by President de Gaulle’s increasing hostility towards US involvement in European affairs under the Atlantic alliance (NATO). The tensions increased as France twice rejected Britain’s applications to join the Community (because they feared Britain would undermine the CAP). The situation worsened in 1965 with the stand-off concerning funding for the CAP among other matters, which became known as the Empty Chair Crisis, where France effectively boycotted the Commission. This Crisis, in turn, led to the Luxembourg Compromise, which entrenched the torturous political processes that still beset speedy progress being made within the EC decision-making machinery. France clearly was positioning itself within the Community to become the most powerful nation and keep Germany and the US in check.

There is the famous private conversation between De Gaulle and the French government minister Alain Peyrefitte on August 22, 1962 about the proposed Fouchet Plan which Georges Soutou (1996: 131) reports De Gaulle saying:

What is the point of a Europe? he confided Alain Peyrefitte on August 22nd 1962. It should serve to prevent us from being dominated by America or Russia … France could be the strongest of the six members. We could control this lever of Archimedes. We could carry away the others. Europe represents the first opportunity France has to regain what she lost at Waterloo: world dominance.

[Note: I still have to check the translation in the original memoir of Alain Peyrefitte, C’était de Gaulle. My notes from when I translated it before were a little different and I am relying in the above quote from on a secondary translation of Soutou's work rather than my own translation of Peyrefitte's original recounting of the conversation.]

The 1969 summit in Den Haag was held at the end of this less than optimistic decade for European integration at the initiation of the Georges Pompidou, who replaced De Gaulle as French President in April 1969. While the Final Final Communiqué is silent, the supporting documents for this summit reveal that the push for the creation of an economic and monetary union, surprising to many, came from the newly-elected German Chancellor Willy Brandt, who in Pompidou had found a much more pragmatic French leader to deal with. The summit also agreed to admit Britain, which signalled a clear ambition for enlargement. But, important to our aim to understand why Europe is where it is now, was the fact that the operationalisation of enlargement would see the Community at the centre of the negotiations with intergovernmental arrangements largely eschewed. Brussels wanted to make it the institutional hub of the integrated Europe (see Ludlow, 2003)

The creation of an Economic and Monetary Union was the main topic for a meeting of the Council of Ministers of the Six Member States in Paris on March 6, 1970. This meeting formalised the Den Haag sentiments by appointing an expert group under the direction of the then Prime Minister of Luxembourg, Pierre Werner to head a working party, which would flesh out the details of how this union would be achieved.

The so-called Werner Plan was submitted to the Commission as an interim report on May 20, 1970 with the Final Report (Werner, 1970) presented on October 13, 1970. The Werner Report outlined a comprehensive timetable for the creation of a full economic and monetary union by the end of the decade. Willy Brandt told the Bundestag on November 6, 1970 that the Werner proposal to develop a European Economic and Monetary Union was the “great common task of the 1970s” (“Die große gemeinsame Aufgabe der 70er Jahre ist die Fortentwicklung der Gemeinschaft zur Wirtschafts- und Währungsunion) and that it represented a “new Magna Carta for the Community” (“Der von den Sechs zusammen mit der Kommission ausgearbeitete Stufenplan stellt in Wirklichkeit eine neue Magna Charta für die Gemineinschaft dar”) (Deutscher Bundestag, 1970: 4269)

The three-stage implementation plan outlined in the Werner Report was formally endorsed by the European Council of Ministers on March 22, 1971.

The main features of the Werner Plan are worth dwelling on. Under the Heading “The Final Objective”, the Report (1970: 9) aims “to determine the elements that are indispensable to the existence of a complete economic and monetary union”. Their outline is the “minimum that must be done”. So what are these indispensable and minimum elements?

They include (Werner, 1970: 10)

… the total and irreversible convertibility of currencies, the elimination of margins of fluctuation in exchange rates, the irrevocable fixing of parity rates and the complete liberation of movements of capital. It may be accompanied by the maintenance of national monetary symbols or the establishment of a sole Community currency.

Significantly, it said (Werner, 1970: 10) that “the global balance of payments of the Community vis-à-vis the outside world is of any importance. Equilibrium within the Cömmunity would be realized at this stage in the same way as within a nation’s frontiers, thanks to the mobility of the factors of production and financial transfers by the public and private sectors.” The conceptualisation of the newly created economic and monetary union as a new ‘nation’ where the member-countries effectively become states of a federation was clearly thought elemental. As we know, that is not the conceptualisation that emerged around two decades later after the Treaty of Maastricht.

The Werner Report considered short-term economic policy would have to be “decided in its broad outlines at a Community level” and that it was essential that the “principal decisions of monetary policy should be centralized” (1970: 10). However, and that the for “influencing the general development of the economy budget policy assumes great importance” (1970: 10). The Report was in keeping with the times where fiscal policy (referred to as budget policy in the Werner Report), involving government decisions regarding spending and taxation were to be given a higher priority than monetary policy operations involving interest rate setting. Any divergences of structure within the Community would be addressed by appropriate levels of “financial … compensation” coordinated at the central level. National budgets would not be responsible for addressing asymmetric development (Werner Report, 1970: 11).

Importantly, the Report concluded that an effective economic and monetary union would require, among other elements (1970: 12):

- the creation of liquidity throughout the area and monetary and credit policy will be centralized;

- monetary policy in relation to the outside world will be within the jurisdiction of the Community;

- the policies of the Member States” as regards the capital market will be unified;

- the essential features of the whole of the public budgets, and in particular ‘variations in their volume, the size of balances and the methods of financing or utilîzing them, will be decided at the Community level;

Of further importance, the Werner Report (1970: 13) emphasised that while the “transfer to the Community level of the powers exercised hitherto by national authorities will go hand-in-hand with the transfer of a corresponding Parliamentary responsibility from the national plane to that of the Community. The centre of decision of economic policy will be politically responsible to a European Parliament”, which would be elected on the basis of universal suffrage. The recognition that economic policy should be democratically determined and those responsible for the policy should be held accountable to the will of the people was fundamental to the way the Europeans were conceptualising economic and monetary union in 1970. There was no hint that this level of intervention would be the domain of officials centred in Brussels who would do deals with unaccountable bodies such as the International Monetary Fund (IMF) that would result in millions of Europeans being made unemployed, which is the norm in Europe in 2014.

To take our discussion further, we can conclude that that the intent of the Werner Report was that:

1. There should be a Community-wide central bank which acts as the lender of last resort and is responsible for regulation and oversight.

2. That monetary policy will be centralised.

3. That there should be centralised capital market access.

4. That the ‘federal’ fiscal operations – size of deficits, debt-issuance etc will dominate national and regional budgets, which will be retained to ensure localised initiatives are effective.

In other words, the type of structure that exists in a number of functioning federations such as Australia, Canada, the United States of America.

[TO BE CONTINUED]

THIS DISCUSSION IS LEADING US TO THE WAY IN WHICH EUROPE REACTED TO THE COLLAPSE OF THE BRETTON WOODS SYSTEM AND PARTICULARLY THE WAY IN WHICH GERMANY AND FRANCE REACTED IN THE EARLY 1970s WHERE GERMANY WANTED A JOINT FLOAT BUT FRANCE (AND THE EC) WANTED TO MAINTAIN FIXED PARITIES WITH CAPITAL CONTROLS.

[MORE HERE ON THE 1970s DEBATES, DELORS REPORT etc NEXT TIME]

Additional references

This list will be progressively compiled.

Bank of International Settlements (1970) Fortieth Annual Report, Basel, June 8, 1969. http://www.bis.org/publ/arpdf/archive/ar1970_en.pdf

Deutsche Bundesbank (1969) Monthly Report October 1969, http://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Monthly_Report/1969/1969_10_monthly_report.pdf?__blob=publicationFile

Deutsche Bundesbank (1969) Monthly Report November 1969,

http://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Monthly_Report/1969/1969_11_monthly_report.pdf?__blob=publicationFile

Notulen Ministerraad (MR), 27 October 1967 – www.historici.nl/pdf/europa/C00103.pdf

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    30 Responses to Options for Europe – Part 6

    1. Larry Kazdan says:

      Fascinating history, thanks!

      Small correction:

      “History teaches us that democratic principles under either French or German hegemony are in safe hands.”

      While I don’t speak Dutch, the original seems to have a “niet” in it:

      niet in veilige handen zijnl

    2. bill says:

      Dear Larry Kazdan (at 2014/01/10 at 18:24)

      Thanks. Typo – a rather crucial one at that.

      best wishes
      bill

    3. MK10 says:

      @bill
      Here is another ‘not’ so crucial typo.
      It’s should be : “en na de dood” .
      Just remove the “r” it’s not “nar”, it’s “na”.
      and Groot-Bnttannie = Groot-Brittannië

      btw Great Job your doing here. thx!
      Someone from Belgium.
      In the Flemish part of our country we speak Dutch witch is the language of the Netherlands ;-)

    4. bill says:

      Dear MK10 (at 2014/01/10 at 19:31)

      dank je wel!

      Thanks for the typo correction.

      My Dutch friends tease me by saying I speak Flemish when I am over there! Which is not surprising given I learned the language while racing bikes in kermiskoersen in Belgium, although I extended my vocabularly a bit after that. You can imagine the limited sentences I might have had early on avoiding collisions and trying to get position!

      best wishes
      bill

    5. MK10 says:

      Just discovered you are the Eddy Merckx of Australia!

    6. Benson Njonjo Ndehi says:

      Bill, any plans for an affordable online degree in economics? MMT of course.

    7. MK10 says:

      Bill,

      I see you also have een mooie guitaar!

      That’s why MMT sounds like blues in the ears.

    8. William Allen says:

      Just minor typos here I am sure you would get to in a bit:
      “The in particular Britain’s inclusion. The Germans and the Dutch, in particular were pushing for ”
      I am really enjoying reading this! I was just a young FX bankster in early 1970s, but your narrative is putting so much I experienced into perspective.

    9. Bill,

      There are, as I understand it, two reasons given for taxation in MMT theory. The first is to impose an taxation obligation on the community to create a demand for the currency. The second is to prevent us from spending that money and therefore allowing the space for governments to spend instead.

      That’s all fine. But maybe there should be third reason for taxation which would apply to taxes on the wealthy – say a substantial wealth tax itself. Some MMTers would argue that a wealth tax was unnecessary as the very wealthy would be unlikely to spend this money into the economy anyway. But is that really a good enough argument? Shouldn’t there be a substantial wealth tax to prevent even the possibility of it being spent? To prevent even the possibility of there being future inflationary problems?

      In the European context, the imposition of taxes on the wealthy, including a wealth tax, would seem to be the only way for countries like Greece and Spain to be able stay within EU rules and at the same time stimulate their economies.

    10. Bill,

      Just as a continuation of my comment above, I’d just like to ask if the motivation of MMT is Keynsian or Marxist? ie Is it to explain how capitalism can be managed to successfully minimise the adverse effects of its internal contradictions, or is it to explain how capitalism will necessarily have to be replaced by something else? Were Marx and Engels right to say “what the Bourgeoisie therefore produces, above all, are its own grave diggers”?

    11. Neil Wilson says:

      “Shouldn’t there be a substantial wealth tax to prevent even the possibility of it being spent? ”

      No. The whole point of the system is to make people feel comfortable so they will spend – by reducing the feeling of risk. Switching the system around so that it is a ‘bubble up’ economy – with the demand coming from the less well off and the rich having to serve them if they want to earn anything – stops the wealth build up and inequality in the first place. That’s the best way to deal with the issue – everybody wins.

      Saving is voluntary taxation, and wealthy people like having huge hoards of the stuff so they can show off to their peers. If it’s frozen it causes no harm. Leave it where it is.

      The only reason for ‘soaking the rich’ is because you have an ideological problem with huge wealth.

      “In the European context, the imposition of taxes on the wealthy, including a wealth tax, would seem to be the only way for countries like Greece and Spain to be able stay within EU rules and at the same time stimulate their economies.”

      Why not just change the rules?

      As they say, in the context of sovereign nations they are not so much rules as guidelines.

    12. An ideological problem? I suppose you call it that if you want to. It’s not one that I’m alone in having though. The way we, the ones with the ideological problem, see it is that having huge wealth isn’t just about having a huge lump of money which sits doing nothing in the bank, or whatever, and allows the possessors of that wealth to feel good about themselves by making it on to some rich list.

      That wealth essentially provides the financial muscle of the entire ruling class. The mere existence of it is enough. It doesn’t have to be spent. The amounts are so large that it really isn’t possible to spend it anyway. What is spent is replaced many times over by the tendency of the wealth to multiply itself. MMT, is to mind, head and shoulders above any other in explaining the workings of the capitalist system, but if the ruling class decide it is not quite to their liking then there aren’t going to be many invitations for Bill and his colleagues to write articles for the Economist, the WSJ etc or appear on TV as economic pundits. A Nobel prize for a MMTer ? I wouldn’t hold my breath.

      The ruling class prefer their “economists” to tell us that Governments are like a household. That they have to balance their budgets. That they can’t spend more than they earn etc etc!

    13. Neil Wilson says:

      “That wealth essentially provides the financial muscle of the entire ruling class. ”

      As I said – an ideological problem.

    14. Keith Wresch says:

      “The only reason for ‘soaking the rich’ is because you have an ideological problem with huge wealth.”

      Not true, Neil, as accumulation of huge amounts of wealth can cause imblances in the economy — particularly when that wealth looks for more and more creative ways to make more money, and can become a positive feedback loop in the allocation of resources — ie great wealth begats more wealth. So you have, as many of the industrialized countries have recently, where there is has been GDP growth, but that growth has been almost entirely confined to the already richest segments of society, then one of the ways to redirect where the results of that growth end up is through tax policy. You can do it other ways as well, such as increasing minimum wages and or the bargaining power of labor, and or government spending targeted to certain segments of society, or through regulation of industries such as the financial sector, so that it can’t accumulate so with such ease, while often doing so little. These are all different means of allocating money and resources across society, and making sure that they get balanced out across society and accumulated in only certain pockets benefitting from them without the rest of society benefitting as well.

    15. Tom Hickey says:

      Peter, in addition to the two functions of taxation you mention, there is a consequence of taxation that can be used functionally. Taxation discourages the behavior that is taxed, so taxation can be used functionally to reduce negative externality, or limit the use where deemed necessary for public purpose. Tax credits are also used functionally to encourage behavior regarded as positive.

      As far as your question about capitalism goes. Randy often cites Minsky on the many flavors of capitalism. I would say that one aspect of MMT is to move policy from a flavor of capitalism whose taste is chiefly preferred by the upper echelon of society to a from of capitalism of widest appeal across class and power structure.

      It seems to me that thinking in terms of Marx or Keynes is looking backward. The socio-economic system is increasing in complexity and there are challenges that emerge owing to the increased complexity. Therefore political economy needs to be adaptive.

      Of course, we must also learn from the past but not slavishly. Keynes advanced the debate wrt to macro analysis and Marx wrt to the interdependence of economics and sociology. A lot has been learned since the times of Marx and Keynes about these crucial fields, but little has been incorporated in policy owing to the class and power structure.

    16. Neil Wilson says:

      “Not true, Neil,”

      Very true. Accumulation is the whole point of capitalism. Trying to stop it is like trying to stop Cheetahs eating Gazelles.

      “particularly when that wealth looks for more and more creative ways to make more money,”

      Control that then. Stop things getting too big via anti-trust. Have extensive anti-corruption laws. Euthanise rentiers. Use the state to buy people off before corporations do.

      Capitalism is a nuclear reaction. It has to be contained and controlled properly using the latest techniques to get the most forward momentum for society out of it.

      Use 40 year old containment, or weaken the control rods and you get a big mess. But you can’t blame that on the nuclear reaction. It is just doing what it does.

      You either try and contain and control capitalism properly, or need to come up with something completely different. But you can’t change the fundamental reaction.

      Voluntary taxation via liquid savings makes more room in the economy for everybody else, and allows taxes to be lower than they otherwise would have been. I don’t see a good argument for changing that as long as the distribution mechanism is changed to a ‘bubble up’ system to address the inequality issue.

      Then what gets to the top is reasonable.

    17. I would accept that MMT isn’t just a theory of the left. So it would be natural for there to be ideological disagreements over the disparity of wealth in society. I’d just make the point that this disparity should be recognised rather than ignored. The only problem that I have with MMT is that the advocacy of issuing ever larger quantities of government currency, and the running of large government deficits is something of a ‘work around’ rather than a real solution.

      As far as my own ideology goes, I’ve no problem anyone earning enough money ( like a few $million) to enjoy life and taking early retirement maybe. But I’ve never quite figured out what’s the point of accumulating $billions. That accumulated wealth causes so many problems for the rest of the economy and makes it very difficult for any democratic government to control the economy sensibly. We can see the worst of that happening in the USA when sensible and modest proposals, such as those for universal health care, and which are well able to be afforded , in both dollar and resource terms, are hindered at every turn by those with a vested interest in the maintenance of the Status quo, and have the huge financial strength to be able to do so.

      Europe is probably not far behind. As the ruling class have become wealthier there the same problems are emerging.

    18. Keith Wresch says:

      ‘Capitalism is a nuclear reaction.’
      Neil, please do provide the proof of this! I don’t disagree with what you say about controlling capitalism, but that is merely the other coin of taxing it. You can cut if off at the root via regulation and how the richest accumulate wealth or you can ‘soak the rich’ via taxation. But does it really make that much difference? Either way it cuts into the accumulation of wealth and directs it elsewhere. The best example of this is probably post WWII US where there was very high tax rates, close to 90% up until the Kennedy years, and then a steady decline since then — accelerated under the Reagan presidency, but those earlier years were associated with some of the highest growth rates ever in the US, but they were also associated with high amounts of government spending on education, infrastructure, and other activities as well — which is what supported the private sector spending and investment in a number industries, and once the government support or purchase of products ended many of those industries never recovered — the aerospace industry is a prime in Southern California is a prime example — nuclear reaction you say? It didn’t survive the end of the cold war in the ’90′s when the Clinton administration scaled back on military spending. There was no to replace that government spending, there was no ‘crowding out’ from what the government was spending on keeping those companies in business — what was a reality was that there wasn’t enough private venture and investment to keep those companies going. They made products for the private market, but there was never enough of that to sustain them. That is not to say that the government support was the best use of government spending, but that these were industries that in large part depended on government support, and there was never going to be any chain reaction that would save them — much could be said for much of the Soviet industrial base that had a lot of state investment, and had been well supported by research and development, and that subsequently collapsed without state support, and which really says nothing about what sort of research and design went into them, but more what your nuclear reaction could do with the capital, both financial and human that had been invested in them. Needless to say the end of the cold war left a number of government supported enterprises both private and state owned that needed to look for new means of existence for which the private market gave no support — unlike what you seem to support that capitalism should provide a nuclear reaction these companies never experienced it, and that goes for those that were private companies that had large government contracts which when they expired were never replaced by nearly as much demand from the private sector. The same could be argued for the NASA which has undergone large cuts to its budget and is now looking for private funding for what the government used to provide. Where’s the nuclear reaction? Where’s the private funding just waiting for government funding to decrease so it can rush in to fill the void? And what proof do you have Neil that private capitalism will ever rush in create some sort of ‘nuclear reaction’ that will outpace what was produce under a largely government funded NASA?

    19. Neil Wilson says:

      “Neil, please do provide the proof of this!”

      Why bother? You didn’t get the analogy because you’re looking through belief tinted glasses.

    20. Neil Wilson says:

      “so taxation can be used functionally to reduce negative externality, or limit the use where deemed necessary for public purpose.”

      You avoid that duality of taxation by using the different words available for that purpose.

      Behaviour altering impositions are (or should be) called ‘levies’ and ‘duties’.

      That saves the word ‘tax’ for impositions that act as a drain function.

      Words matter.

    21. Neil,

      Analogies are Ok up to a point to explain ideas but they can’t be used to settle arguments. Capitalism and nuclear reactors ? OK so you mean the power in the reactor has to be controlled ? The power of capitalism has to be controlled too? Yes OK we can agree on the desirability of that – except I would make the point that the ruling class do take it on themselves to, er, rule ie control in their own interests. There is a class struggle in progress too so they don’t have it all their own way, but the problem is obvious.

      Bill has quoted Marx with some approval. I’m not sure with how much approval though. Marx was of the opinion that Capitalism necessarily had to give way to Socialism. The power output from the reactor should fall away over time I think he was arguing, rather than go into meltdown , but enough of analogies for now.

      I would be interested to know if Marx was right and if Capitalism does really contain the seeds of its own destruction. Will it therefore need replacing? Or will the class struggle have to be perpetual? Does MMT provide any insights into these questions?

    22. Keith Wresch says:

      ‘Why bother? You didn’t get the analogy because you’re looking through belief tinted glasses.’

      Really, that’s the best you can do? And when talking about tinted glasses you might want to look in the mirror first.

    23. Tom Hickey says:

      Neil: “The only reason for ‘soaking the rich’ is because you have an ideological problem with huge wealth.”

      Neil, I agree with you almost always, but this is not simply an economic issue but also a sociological one that also includes poli sci. There is good evidence that wealth is highly correlated to social, political and economic power in a capitalist society, and that government is more responsive to the interests of the wealthy than people at large. So distributivism is only ideological in a plutocratic oligarchy, which is the reality of the modern capitalist state. The problem arises when the state represents itself as a liberal democracy instead of as a plutocratic oligarchy. So the US, UK, and other “bastions of democracy” need to shut up about being the lighthouses of liberty and advertise themselves as plutocratic oligarchies to be consistent, which they have no intention of doing. So this is one of those pesky “internal contradictions” that he who is not to be mentioned wrote about.

      Without distributivism the narrative is false. Moreover, because the neoclassical model at the basis of conventional economics assumes way both money and power as relevant to economics, the narratives spun by conventional economists are also baseless.

      If we add the effects of money and power into the economics equation, everything changes. It’s a scientific matter to include them, since they are highly relevant information. Excluding them is ideological.

    24. Neil Wilson says:

      “If we add the effects of money and power into the economics equation, everything changes.”

      I’ve never suggested anything else. But if you attempt to ‘soak the rich’, then you will find that power deployed against you and you will never get anywhere.

      Power comes from support, and like it or not that means money. And it means making your supporters better off than those that oppose you.

      That’s political science.

    25. Tom Hickey says:

      Neil asks: “I would be interested to know if Marx was right and if Capitalism does really contain the seeds of its own destruction. Will it therefore need replacing? Or will the class struggle have to be perpetual? Does MMT provide any insights into these questions?”

      I am no expert in Marx and Marxism, but the way I understand it is that Marx was a philosopher (his doctorate was in ancient Greek phil), a scientist (he is recognized as founder of sociology) and a political activist (with a price on his head). So his thought is complex and is not easily categorized.

      The “internal contradiction” stuff comes from Hegel’s dialectic, which Marx incorporated by “standing it on its head,” i.e., replacing Hegel’s idealism with historical materialism. Contradiction is the the driver of Hegel’s dialectic. I think it is a useful model, but the contradiction stuff is a methodological assumption.

      As sociologist, Marx recognized that change comes slowly. As philosopher, he agreed with Hegel (and Spencer) that progress is the basis of historical development and that history has a liberal bias, i.e., toward an increase in freedom. Marx realized that Darwin’s theory does not suggest this. Marx was not a Darwinian.

      Marx also held that capitalism was a forward iteration in the march from absolute despotism (monarchy) to oligarchy based on land (aristocracy) to oligarchy based on capital (haute bourgeoisie). He held that the next iteration would be to rule by the people, led by workers, who are the majority.

      However, Marx the sociologist acknowledged that change was iterative and as a dialectical thinker he held that one moment of history (now the present) have to be completed before being replaced by the next moment (now the future). That is to say, capitalism would have to crest globally before it would fall, and the next wave would replace it. This is yet to be tested. I think it is cogent in the sense that a big reason that workers have not been able to hold onto power after gaining it in the past is that they lacked the chops to govern. With a rising level of collective consciousness that would change. Capitalists are caught in the contradiction that they need knowledge workers but they also need workers that are in the dark enough to control. We’ll see how they attempt to manage that.

      Marx as political activist was too impatient to wait, however, and he took the decision to push the river of time. As it turned out, he was completely wrong about the dynamic. It was not capitalism that was replaced by communism, but rather the Russian and Chinese agrarian empires based on serfdom rather than labors in capitalist societies. The 19th century revolts in capitalist societies were all a bust.

    26. Tom Hickey says:

      Neil: “I’ve never suggested anything else. But if you attempt to ‘soak the rich’, then you will find that power deployed against you and you will never get anywhere. Power comes from support, and like it or not that means money. And it means making your supporters better off than those that oppose you. That’s political science.”

      I agree with that but it’s doesn’t show that tax policies that recommend taxing capital gains, inheritance taxes, etc, that primarily fall on the rich in the same way as income or taxing away economic rent are “ideological.” Moreover, in a liberal democracy which is based on equality in the sense of absence of political privilege, progressive taxation and reduction of rent seeking, and other factors that address privilege are requirements of the ideology of liberal democracy.

      A scientific approach to economics would show that this follows from the relevant data in formulating economic policy in a society that purports itself as a liberal democracy and denies it is organized as a plutocratic oligarchy in which wealth buys privilege, and that privilege is used to increase wealth and therefore power. The prevailing ideology is represented as liberal democracy, and this ideology is used to justify the present system through misrepresentation.

      Ideological approaches to economics are designed to mask this scientific outcome that becomes evident when all the relevant data is considered and weighted appropriately wrt to influence on outcomes. The present configuration of capitalism as a political system — neoliberalism — is antithetical to liberal democracy, a defining characteristic of which is absence of political privilege.

      So saying that the call for higher taxation of wealth is ideologically driven is only true in the sense that liberal democracy is ideological and absence of privilege created by the legal structure is part of that ideology. Conventional economists like to pretend that economics is “natural,” hence independent of law and institutional effects. That is nonsense. “The free market” doesn’t even exist, let alone as a natural condition. Law is a prerequisite of the modern market, as custom was of primitive exchange. Markets are social institutions that are embedded in a network of institutions. The idea that market participants are atoms operating freely in a field that doesn’t influence them doesn’t even have a parallel in science.

    27. Some Guy says:

      Petermartin: Shouldn’t there be a substantial wealth tax to prevent even the possibility of it being spent? This is not something for Neil, or me or Bill or any one person to say. It is a decision of the society as a whole whether it has “an ideological problem with huge wealth” and different societies will and should decide differently. Personally, I think soaking the rich is an excellent idea.

      The only problem that I have with MMT is that the advocacy of issuing ever larger quantities of government currency, and the running of large government deficits is something of a ‘work around’ rather than a real solution. MMT doesn’t advocate this. Advocating accommodation of savings desires is not proposing ever larger deficits and spending. MMT or Keynes or Lerner recognized that “functional finance” tends to be sounder than “sound finance.” Good deficits for full employment tend to be smaller than bad deficits, the outcome of austerity.

      On the issue of wealth taxation, it is unclear, at least to me, what the tax is being proposed on. If financial wealth – basically NFA, then Neil’s, “Saving is voluntary taxation, and wealthy people like having huge hoards of the stuff so they can show off to their peers. If it’s frozen it causes no harm. Leave it where it is.” or “Voluntary taxation via liquid savings makes more room in the economy for everybody else, and allows taxes to be lower than they otherwise would have been.” is a strong argument.

      But since most rich people don’t keep their wealth in Scrooge McDuck piles of cash and bonds, it does not apply to a broader wealth tax. In an MMT, permanent full employment environment, a property tax on non-financial wealth would have the benefit of increasing equality and the demand for currency and I find it very hard to see any rational argument against high estate taxes.

      Given MMT JG wage proposals it is quite true that “predistribution not redistribution” (as Wray puts it, as Neil argues) is the most important way to go, the first way to go. But that is no argument against returning to redistributive, progressive taxation. There is also a “game theoretic” argument counter to Neil’s “you will find that power deployed against you and you will never get anywhere” – do it to show who’s boss – roughly Tom’s argument.

      Neil: Behaviour altering impositions are (or should be) called ‘levies’ and ‘duties’. That saves the word ‘tax’ for impositions that act as a drain function. IMHO, a bad idea, the opposite of what should be done, especially educationally. For people to understand how things work, it is much more important to conflate them than distinguish them. All taxes, levies and duties and purchases always do both: alter behavior and drain.

      Tom: As above, I agree with most of what you say. But saying that dialectic or contradiction is a methodological assumption is like saying hanging out in the agora talking about philosophy, maybe writing things down on papyrus or hard disks is a methodological assumption. I’m not the only one who thinks Kant, Fichte, Hegel, Marx etc were on the right road, in a way that so much of what was called philosophy in the 20th century was not, was essentially regression, not progress. A lot has been learned, but a lot forgotten. And this is doubly true of worldly philosophy = economics, especially in the last half-century, and especially in its disconnection from other fields – Bill has pointed out statistical studies on this. I would say – from philosophy on the right road, and even from mathematics, rather than pseudomathematical pretense.

    28. Tom Hickey says:

      Some Guy: “Tom: As above, I agree with most of what you say. But saying that dialectic or contradiction is a methodological assumption is like saying hanging out in the agora talking about philosophy, maybe writing things down on papyrus or hard disks is a methodological assumption. I’m not the only one who thinks Kant, Fichte, Hegel, Marx etc were on the right road, in a way that so much of what was called philosophy in the 20th century was not, was essentially regression, not progress. A lot has been learned, but a lot forgotten. And this is doubly true of worldly philosophy = economics, especially in the last half-century, and especially in its disconnection from other fields – Bill has pointed out statistical studies on this. I would say – from philosophy on the right road, and even from mathematics, rather than pseudomathematical pretense.”

      Humans think in terms of conceptual models whether they realize it or not, and all conceptual models are embedded in an overarching model (worldview) embedded in ordinary language through its use in context (cf. Wittgenstein, Philosophical Investigations). There are a huge number of assumptions involved in this construction. Different models are characterized by their methodological assumptions. There is no proving assumptions other than by testing the model against what it purports to model. A model from which everything follows is untestable, as it one from which nothing follows. The test of the model is the difference it makes. In science this is through rigorous testing of hypotheses. It does not follow that models that are not scientific are not useful. In my experience the dialectical method is very useful even though it may not be scientific in the sense of testable through hypothesis and experiment. Twentieth century analytic philosophy was actually a huge advance in our understanding of logic, but many of the most significant advances in what has traditionally been considered philosophy occurred outside of academic philosophy, such as general systems theory.

    29. Tom Hickey says:

      Neil: “Behaviour altering impositions are (or should be) called ‘levies’ and ‘duties’.

      I don’t know about the UK, but here in the US we use “tax,” as in “sin tax” as in “tobacco tax,” “alcohol tax,” and now “marijuana tax.”

      There is actually a kerfuffle over this going on here as we speak. The conservatives want to call all duties, levies, fines, fees, etc. “taxes” since they increase government revenue, which they aspire to cut.

      However, all added costs reduce those behaviors, so there is no around it economically. This is why there is a push among some (Michael Hudson) not to tax income from work but rather economic rent, i.e., revenue that doesn’t accrue from production. So the tax would have the functional purpose of controlling inflation but at the same time encourage productive contribution by un-taxing and discouraging parasitism by taxing it.

      So I don’t think it is always possible to disentangle the various purposes that taxation serves in specific instances. A good tax policy would combine these purposes for efficiency and effectiveness.

    30. sam walters says:

      “particularly when that wealth looks for more and more creative ways to make more money, and can become a positive feedback loop in the allocation of resources — ie great wealth begats more wealth”

      Good discussion people. I have a few points to make:
      Is this correct? Or is there an upper limit to the nuclear reaction before melt down? It certainly isnt for the technology sector.

      Coming from my computer science background it would seem that a company has an initial set of ideas which revolutionise the industry then it becomes incredibly risk averse and anti-competitive. It just buys ‘off the shelf’ via aquisition of other ideas. (often out of universities)
      Then they sue the s**t out of each other over who has invented the wheel (touch screen or whatever). ;)

      Probably easiest example people would relate to:
      Look at smart phones for example: thats all heralded as ‘revolutionary’ technology but in reality its just commodotized sensors, touch screens, graphic user interfaces written running a multi user kernel (like linux/unix). Thats all. You would have had none of that if it was’nt for ‘blue sky’ research a lot of this was government funded. DARPA/Xerox, IBM, Google (started with combination of search algorithms/heuristics and a bunch of spare computers in a university).
      It was just a finely distilled progression (moores ‘law’) whereby transistor density doubles every 3 years (will reach limits) that allowed miniaturisation of actuators and logic which already existed.

      ” The same could be argued for the NASA which has undergone large cuts to its budget and is now looking for private funding for what the government used to provide. Where’s the nuclear reaction?”

      That is an great example for the ineptitude of private enterprise to take on risk. This is exactly where you will see blue sky research will not see the market for heavy lifter rockets/re-usable launch vehicles. (all well outside the curve for private sector to take on).

      Only government will finance these risks. *This is the large scale stuff. Compare the gulf in the specifications between the space shuttle and the one of the x-prise winners (bransons private virgin galactic spaceship for example).

      Want to launch a satellite? How? Well you go to a comodotized partner (soyuz/esa for example). But none of that stuff is pushing the limits of technological innovation like having a government funding long term research. (Another good example is look at lack of funding for a 30 day trip to mars/ion propulsion systems)*too risk averse for greedy capitalists.

      Reminds me of a friend (chemist/research) complaining about how private drug companies are not interested ‘enough’ in antibiotic research. (i dont know enough about this but im told reug research is rubbish at the moment because its profit driven)

      In conclusion i think that Keith and Neil making valid points you’re just lumping in two different issues. I think that while private enterprise is certainly nuclear as a metaphor there are certain things that it wont reach for. (a controlled nuclear reaction perhaps) The really important stuff needs funding because its way beyond private enterprises problem domain/ where short term profatibility is guaranteed.

      I think this is a nice corollary: As Bill says with all these currency issuing economies around the place talking up neo-liberal rubbish that we shouldnt also tax the top 0.1% at 90% *whatever is appropriate* / create a level playing field.
      (after all these big companies measurably/repeatedly fail to innovate dollar for dollar as well as kids in a lab) ;)

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