My argument is that this is yet another example of why money as a concept needs to be abolished from economic theory (as argued in my tome "Abolish Money (From Economics)!"). As far as I can tell, if everyone involved read my book, this debate would not have happened.
The Hale piece starts picking apart an earlier David Graeber article, which contained some generalisations about "mainstream" economists that said economists dislike. Although I am a definite critic of neoclassical economics, I do not see much value in mis-characterising it. The pre-Financial Crisis neoclassical theoretical consensus embraced a lot of dodgy stuff (which various segments of the profession disagreed with, for varying reasons), but a lot of that was abandoned post-crisis. My concern right now with neoclassical macro is not so much that it is wrong, rather it is a haphazard, internally inconsistent mess. Given that the various post-Keynesians do not spend a whole amount of time agreeing with each other, that just means that the neoclassicals and post-Keynesians have converged in at least one sense.
The DebateIf we want to look at the big picture debate, Hale summarises it as:
Graeber, reviewing a new book from Robert Skidelsky, goes on to cite a Positive Money poll showing most politicians "don't know" where money comes from. The think-tank, which has generally spearheaded a view of the economy predicated on the above observation about money creation, also drew on this precise reference to the May speech in 2017, here.I agree that the Positive Money view is the wrong way to go about things, as I discuss in my book. So in a certain sense, I would have to agree with Hale. Where I disagree is how well the "mainstream" comported itself, as well as some his arguments about the limits of bank lending.
We’re not saying May is right on government spending. But is the magic money tree meme, which has circulated widely, a useful or insightful way to think about banks? The answer is straightforwardly no, irrespective of your politics.
How Well Did the Mainstream Understand Money?Hale refers to the heavily cited BoE paper on money creation, and argues:
The seemingly radical and counterintuitive points contained in the paper, regarding commercial bank money creation, are by no means new (nor are they the thing wrong on the internet here). Economist Joseph Schumpeter, in his 1954 tome the History of Economic Analysis, stated that by 1930, the “large majority” of economists had been converted to the view that bank lending creates deposits, though he does add that it had proved hard for them to come round.One point that David Andolfatto keeps making on Twitter is that we need to cite what individuals actually, and not impute views to vague "schools of thought." So yes, members of the "mainstream" probably believed a lot of things about money, and the majority obviously understood that deposits are part of the broad money numbers. That said, we can point to influential people who really messed things up.
- Milton Friedman and his "k% money growth target," which is nonsense on stilts from the endogenous money perspective. Friedman's views picked up a lot of followers within the mainstream.
- Neoclassical "Econ 101" textbooks with "money multipliers" (I don't cite any, since I have zero desire to buy a copy of said textbooks.)
- The Krugman/Keen online debate which literally started over that topic (before I started my website). (My feeling is that Krugman wrote something he realised was wrong, but refused to back down.)
All of these episodes happened after 1930. Furthermore, one can point to the various "workhorse" DSGE models in which "money" was important, but was purely "government money."
Limits on Lending
I objected (slightly) to the following passage.
[...] To be as fair as possible to the Magic Money Tree school of thought, the BoE paper thereafter points out that, despite this constraint on individual banks, the banking system as a whole can still create money in a manner effectively unconstrained by reserves if they all increase lending together. Is there perhaps a magic money forest, if not one single tree?None of the factors that Hale lists as constraining growth of bank lending are novel from the perspective of endogenous money. Although I disagree with the sensationalist claims about the banking system, Hale's article does not draw a clear enough distinction from serious endogenous money theories and the Positive Money crowd.
The answer is still no. Many other factors constrain bank money creation, and they are also mentioned in the same Bank of England paper. [...]
The issue is straightforward: there are tons of limits on bank lending in the short term. But if we lengthen the horizon, there is no magic numerical limit on lending growth. Loan volumes will move in line with growth in nominal incomes, and if they speed up, so will lending.
The interesting argument is the following: what about the central bank? Can the central bank determine the inflation rate, and hence act as a barrier on bank lending growth? (Working from memory, that was Krugman's argument in the Keen/Krugman Kerfuffle, which I have seen echoed elsewhere.) I would argue that this is only true if the central government decides it wants to play along. A sufficiently loose fiscal policy along with policy framework changes to ensure that central bank has to play along, will blow through any alleged limits on inflation. Right now, the political consensus is in favour of tight inflation control. However, there are no laws of nature preventing that consensus from changing.
Concluding Remark"Abolish Money (From Economics)!"
Post-script: Go Bombers!
(c) Brian Romanchuk 2019