Where, oh where, are the orthodox economists now?

20th September, 2008

In the midst of all this tragedy and chaos, one has to savour the moment.  The sight of all those free-market capitalists, trained by economists at the Chicago School of neo-liberalism,  handing over to ‘big government’ the financial system of the biggest free market economy in the world.

And in the midst of what will prove to be a prolonged period of economic failure, one must be allowed to indulge just one feint sense of satisfaction. For only a couple of weeks ago (see below) Jim O’Neill chief economist at Goldman Sachs, advised me, and a BBC World Service audience that this financial catastrophe was no big deal,  ‘just another periodic crisis’….. like five that he had already lived through. (He was referring, I believe, to crises such as that of the US stock market of 1987, the South East Asian crisis of 1998 and the Dot.com crash of 2001.)

It is now pretty clear that I, without the data, research back-up and infrastructure that supports Jim O’Neill’s analyses – already knew that this was not at all like the previous ‘periodic crises’.  With my background in Keynesian monetary theory, I had a more sophisticated and accurate view of the gravity of this crisis than Goldman Sachs’s neo-liberal economists. Regrettably my foresight and wisdom did not extend to earning Goldman Sachs-like fees. More fool me.

Last year, at a seminar in Cambridge, a prominent economist with a column on one of Britain’s most prestigious newspapers, argued to me that managing the distribution of money was a little like managing the distribution of bread. He gaily recounted the story of Kruschev visiting New York in the 1950s – when he asked to be introduced to the man who so miraculously distributed bread throughout that city. His American hosts replied that bread was distributed not by a man or a company, but by ‘the invisible hand’. In just the same way, argued this orthodox economist, money is distributed effortlessly, and above all efficiently by financial markets. Despite the ‘debtonation’ of 9th August, 2007, he argued, the management of finance could be trusted to Adam Smith’s terminal, prehensile limb.

It now turns out that Adam Smith’s invisible hand was not quite up to the task.

Money is not like bread, or wheat, I argued. Why? Because it is not a commodity that can, like wheat, or oil or gas, become scarce. It is not dug up from the ground like potatoes or oil. Above all, it does not grow on trees. It cannot become scarce, because it is something created by man – it is a social construct.

As such it is a very powerful tool in making economies work, and its abuse and misuse can lead to the kind of catastrophic events of the 1930s and the ones we are now witnessing.

The distribution and management of money and credit, i.e. the regualtion of capital; the price we pay for money and credit (interest rates) and the flows of money across the world – are all so vital to the functioning not just of the economy, but also of society, that it must therefore be governed and managed prudently. Above all, money, this social construct, must be governed and managed in the interests of the whole of society – not just bankers and the finance sector. What has happened under the dominance of orthodox economics and the de-regulation of finance, is that the finance sector now controls the movement of capital, the setting of interest rates and the creation of credit. And they do so in the interests of – you guessed it – Finance.

Society must now transform this way of managing our financial sector. Money, credit and capital flows must in future be governed and managed to serve the interests of all who need it – both those we would broadly define as ‘Labour’ and those we would broadly define as ‘Industry’, which includes agriculture of course.

And orthodox economists must be shunted to the margins of history.

Share on FacebookShare on Google+Tweet about this on TwitterShare on LinkedInEmail this to someonePrint this page

4 comments to Where, oh where, are the orthodox economists now?

  • An Australian “Solution”

    How to fund investment in renewable energy and solve the debt crisis

    Emissions Permits Trading, Carbon Credits, Renewable Energy Targets, Feed In Tariffs and other financial structures are all mechanisms to

    encourage investment in renewable energy infrastructure. These approaches do it by manipulating the market in fossil fuel energy to encourage

    investment in renewable energy.

    That is, we encourage the market in building renewable energy infrastructure by manipulating the market in

    the output from the renewable energy infrastructure investment market. Why do we do this? We do it because the cost of producing energy from the

    sun or from hot rocks or from windmills is more expensive than from burning fossil fuels. However, the running costs of most renewable energy

    plants is less than half the cost of running any fossil fuel energy plant because there is no cost of fuel. The cost of renewable energy

    infrastructure is overwhelmingly a construction capital cost. The interest charge on money needed for investment in renewables dominates the cost

    equation.

    If we had zero interest money available for investment in renewables we could have as much renewable energy as we wanted. It might

    cost a lot of money to build it but it could be done if there is enough renewable energy infrastructure opportunities available and if interest

    charges on investment money was zero.
    Is there enough renewable energy available?

    Australia alone has renewable energy sources either

    from the sun or from the hot underground rocks to provide the whole world’s population with thousands of times their current energy consumption so

    there is enough renewable energy available.
    How much will it cost?

    When we double the capacity of renewable energy infrastructure the

    cost decreases by about 20%. By the time we have replaced all our energy needs with renewable energy the cost per installed megawatt will be less

    than a million dollars. If we assume an average cost of $1.6 million then we will need about $15,000 per person to meet ALL their energy needs. If

    we average this over ten years then it is 30 billion dollars per year for Australia to achieve zero emissions within ten years. At the end of this

    time the cost of producing wholesale electricity will be more than halved.
    Isn’t this a lot of money?

    Each month Australians borrow $20

    Billion dollars to buy houses. $30 billion in the scale of national expenditure it is not a large amount of money and is affordable.
    How could

    we efficiently invest this amount of money?

    We know that the most efficient way to spend money is to spend it through a market where there

    are many buyers and there are many potential sellers. We have sellers in such a market in Australia today and it is called the renewable energy and

    saving energy infrastructure market. There are many sellers of solar energy plants, solar energy photovoltaic panels, windmills, geothermal

    projects, insulating our houses, etc. The problem is that there are not enough people with enough money who want to purchase their goods.
    How

    can we find the money?

    In the year to July 2008 the Australian supply of money increased by $240 billion. Somehow eight times $30 billion of

    Australian dollars was created that did not previously exist. The government could suggest to the Reserve Bank to create $30 billion dollars of the

    new money we need and issue it at zero interest and require it to be spent on renewable energy infrastructure.
    But how we do it?

    Each

    day the Reserve Bank creates money. If necessary it creates several billions of dollars per day. There is no reason for the Reserve Bank not to

    create $30 billion dollars of money with special conditions attached to it. That is, the Reserve Bank can create special dollars on which it

    charges no interest. Those dollars can only be spent on renewable energy infrastructure and on ways of saving energy. The Reserve Bank can

    supervise and control such an organisation and the Reserve Bank can hire private organisations to establish and run the system.
    Who would get

    the money?

    Who gets the money is a political decision and would be determined by the Federal Government as they are the ones who “own” the

    money through the Reserve Bank. It is suggested that the money be given to any resident of Australia who volunteers to take it. It could be given

    once a year in inverse proportion to the amount of mains electricity per head consumed in the previous year. It is suggested that each person on

    their birthday would get on average $1,500 in what we might call Energy Rewards. The exact amount will be calculated from the mains electricity

    consumption from their places of residence and there would be limits where the top 20% of consumers get zero and the people (including new born

    babies) who could prove they consumed no mains electricity in the previous year received $5,000.
    How would the people spend the money?

    Many – possibly most people would sell the money to someone better able to invest it. Others would buy shares in investment vehicles that would

    in turn invest the money. Many would spend the money on household improvements to save energy such as better insulation. Some may spend the money

    converting their vehicles to run on renewable energy sources. The mechanism for establishing what would be eligible would be determined by the

    sellers of infrastructure who would offer goods and services and in their sales contracts would specify how the money used by them would create

    emissions free energy or would save energy. If their claims proved to be false they would be excluded from being able to accept Energy Rewards as

    payment.
    Wouldn’t this be inflationary?

    No it would not be inflationary on the general economy because Energy Rewards attract no

    interest while they are unspent. Energy Rewards are ONLY spent on productive assets and we know that if we invest in new ways to increase our

    income then this is not inflationary. Energy Rewards while they remain Energy Rewards do not increase inflation. When they are spent they produce

    productive assets that have value and can be sold. If too many Energy Rewards were issued then Energy Rewards may become devalued but that is of no

    concern to the rest of the economy. Wholesale Electricity Energy prices are about 5 cents per kwh. The operating cost of most large scale renewable

    energy is 1 cent per kilowatt hour. Rather than being inflationary renewable energy plants will decrease prices because renewable energy will be

    cheaper than fossil fuel energy.
    But wouldn’t it create too much demand for Renewable Energy Infrastructure?

    There are many ways to

    spend Energy Rewards and the market will determine where it is spent. It is thought that initially most money will go towards companies that have

    large plans for renewable energy plants such as solar thermal, geothermal and wind power. That is, people will buy shares in those companies and

    those companies will spend the money efficiently.
    Wouldn’t it require parliamentary legislation?

    The Reserve Bank has power over the

    issuing of the currency and provided it works to maintain and protect the currency it could do whatever it wishes. There is no legislation

    required. The Reserve Bank may well consult with the Federal Government and if the Reserve Bank did not wish to follow this path the Federal

    Government could pass legislation to require the Bank to issue currency via Energy Rewards.
    There must be something wrong with this idea

    otherwise some country would have implemented it?

    This idea has probably been around for a long time in the archives of many governments or

    universities. However, until we get a crisis that demands some action then initiatives such as this tend to be forgetten because the system appears

    to be working well. The recent turmoil in the global financial markets and the worry over climate change bring attention to the way our financial

    system works and to trying to think of different ways of encouraging investment in renewable energy. It turns out that Energy Rewards will solve

    the Emissions problem while helping ease the money supply problem in non inflationary ways. If operated worldwide this approach would give a non

    inflationary method of increasing the money supply and break the current runaway increase in debt and money supply.
    Wouldn’t it be too

    expensive to implement and run such a system?

    The other reason it has not been suggested is that until the Internet was in place it was

    impractical to implement. With today’s information technologies this is a relatively simple system to implement as we have efficient ways to

    identify people and we have many electronic market places that operate with millions of buyers and sellers. The cost of running the system would be

    born by the sellers of infrastructure and they currently have much higher selling fees than the 1% or less fees required of this system.

  • It has taken me a long time to realise that most of the people currently in government and the people they take

    advice from are too stupid for the job. You would have to be really stupid to think that producing more money will generate more wealth forever.

  • Ernest Werner

    Well-done. In America our Bush administration chucks its ideology & goes “pragmatic.” A government take-over that moves from

    “invisibility to inevitability in the blink of an eye” (Sebastian Mallaby in the Washington Post.)
    Ms. Pettifor’s valiant thrust against the

    reigning orthodoxy isn’t likely to become popular — not quite yet. But we may believe in her.

  • Hi. I haven’t studied economics but have become interested in it over the last few years. I heard

    you on the Australian ABC Radio program yesterday.

    I was wondering how you suggest that the money/credit creation be controlled. Are you

    suggesting something like sound money or hard money?

Leave a Reply

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>