Money crises stoke money thought – some of it new, most of it old and recycled. Some of the money thought tends toward the crankish. Money crankery is like gingivitis, after all, ‘bleeding gums.’ It perennially emerges and re-emerges, opportunistically, in times of bodily stress.
But some new old money thought is well worth recycling. It can serve as a corrective for thought-ruts that we’ve fallen into – ruts that work mischief.
Corrective rediscovery and recycling of this kind only helps, however, if we are clear about what can be usefully recovered for what purposes. And here it behooves us to separate strands, tracing them back to their origins. For much that’s recycled originates in circumstances that are importantly different from ours, and must be updated to be useful.
I’d like here to do some of that disentangling and updating. That way we’ll better know what to accept and what to reject from new purveyors of new old money theories.
You can glean what I’m getting at in light of some recent political and monetary controversy – especially apropos the Fed’s many ‘easing’ programs post-2008 and now, in the midst of our Covid pandemic. What are ‘the Austrians’ saying about this, you might ask, ‘and how about MMT?’ ‘And what about Keynes – is Chairman Powell Keynesian, post-Keynesian, neo-Keynesian?’ ‘Is he classical or neo-classical?’ ‘And, by the way, where do liberalism and neoliberalism fit in here?’
As it happens, the most sound tradition of monetary thought is much older than any of these schools, and in fact is itself the shared source of these schools. Let’s call it the ‘endogenous money’ tradition – the family of theories that focus on commerce’s capacity to generate its own credit-based payment media in satisfaction of obligations.
The endogenous money tradition goes back a long way – at least as far back as John Law, the dueling and gambling Scotsman who introduced paper money to France as Finance Minister back in the early 18th century. In America, it goes back to the lawyer-financier-statesmen Robert Morris and his disciple, the Scottish-descended and Scottish Enlightenment-conversant Alexander Hamilton, who understood the need to do a sfer version of what Law had done in France here in then gold-poor and silver-poor early America.
The insights of these observers and practitioners, as well as those of a few others – Cantillon, for example – in turn informed those of people like Henry Thornton and Walter Bagehot in 19th century Britain, not to mention Karl Marx, whose ‘fictitious capital’ was a form of endogenous credit-money commonly used in the London he lived in.
What all of these keen observers had in common, and what most early academic ‘economists’ contemporaneous with them did not, is that they worked in or otherwise closely observed actual trading and financial markets, rather than dreaming up models in towers or pastoral settings. They saw how monetized credit-flows actually worked, then drew out implications that could be systematized in both theory and governing practice. Key to all of their understandings were the roles played by laws, practices, and institutions in both generating and transmitting spendable credit, and the associated role either actually or potentially played by publics – more specifically republics – in making and optimizing those laws and institutions.
These are things pure abstract modelers, especially those with mathematics-envy, tend often to overlook. And this is in turn why many (not all!) academic economists to this day tend to adhere to a false, ‘credit-intermediation’ view of finance, pursuant to which all money is pre-accumulated and hence exogenous, rather than the correct credit-generation view of finance, pursuant to which credit-money is generated or ‘extended,’ and in that sense endogenous.
Probably the first, and certainly the most influential, modern figure to systematize the market knowledge recorded and acted upon by Law, Hamilton, Thornton, Bagehot, and the other figures I mentioned above was also the most important economist you’ve likely never heard of. I refer to Knut Wicksell, who is also the first endogenous money theorist who ‘counts’ not only as a ‘financier’ but also as an academic ‘economist.’ Significantly, however, Wicksell came to economics late, after first having worked for decades as a radical journalist – a sort of leftist Walter Bagehot – and then taught, not in an economics department, but on a law faculty (at Sweden’s Lund University).
Probably key to Wicksell’s subsequent influence as an economist was his having happened to have not only a journalist’s eye for the telling institutional detail, but also a great facility with mathematics, in which he had concentrated back when a student. He was in consequence able to formulate his rich empirical insights into the medium that, by the late 19th and early 20th centuries, was beginning to be that preferred by self-professed ‘social scientists’ wishing to look scientific – again, mathematics. The models that Wicksell constructed were accordingly attractive not only to people who knew how the banking and money markets actually work, but also to some (albeit too few!) practitioners of the new ‘science’ of ‘economics’ then busy displacing ‘pre-scientific’ political economy in universities worldwide.
While Wicksell made many contributions for which he is still celebrated today – earning him that rare economists’ accolade of ‘economists’ economist’ – the contribution for which he is relevant here is his having recognized from the get-go the central importance of what he dubbed ‘bank money.’ Wicksellian bank money is simply the institution-generated credit-money that I noted above in connection with endogenously generated credit-money. It is immediately spendable, bank-extended credit, made spendable by public authorization and recognition through chartering requirements, public payment system administration, and legal tender laws.
Most so-called ‘heterodox’ schools of monetary thought whose names you hear nowadays, from so-called ‘Post-Keynesians’ to that one Post-Keynesian offshoot called ‘MMT,’ are Wicksellians whether they know it or not. (Many do know it.) So are the so-called ‘Austrians,’ from Mises and Hayek through Schumpeter and all their contemporary American disciples, as they all readily admitted when they wrote. This is ironic, to say the least, given how self-styled Austrians and MMTers are often taken by outside observers to be existential enemies, not to mention how ‘Keynesians’ and ‘Post-Keynesians’ – to the latter which school Keynes himself adhered – are all the time at each other’s throats. It is also ironic in light of how many heterodox economists believe Wicksell to have been a ‘classicist,’ owing to misunderstandings that I soon will dispel just below.
But it is true nonetheless. Wicksell is parent to them all. While this isn’t the place for a lengthy geneaeology or intellectual history, the broad lines of influence are easily drawn.
Wicksell begat at least three schools of thought – the Swedish, the Austrian, and the Post-Keynesian. The first school, which included Myrdal, Ohlin, and Hammarskjold, among others, drew all the right lessons from their countryman. They understood that the appropriate response to endogenous credit-money made possible by the public is public guidance of that money’s generation and allocation. This is one reason the Scandinavian economies have done so much better than Eastern and Western bloc economies over the past century where sustainable and equitable growth are concerned. It is also why I, who with Wicksell admire Walras, call myself ‘Left-Wicksellian’ rather than ‘Austrian,’ an ‘MMTer,’ or even ‘Post-Keynesian.’ (You might say that I’m an American synthesis of the the Swede Wicksell and the Austrian Hilferding, which is a little bit eerie in light of my literal Swedish and Austrian family backgrounds.)
The Austrian school – Mises, Hayek, and to a lesser extent Schumpeter – also ‘got’ bank money once Wicksell exposed and then modeled it. But most of them drew the wrong lessons. Perhaps because they hailed as they did from the home of Oedipal rebellion – Freud’s Vienna – they balked more at ‘parental supervision,’ so to speak, even than they did at endogenous money and the boom-to-bust cycles it generates when not supervised. Hence they became vocal ‘metalists’ or the ‘rules rather than discretion’ advocates in central banking circles that they remain to this day. When you hear Ron or Rand Paul cry ‘end the Fed,’ you are hearing the Oedipal Austrians, especially Mises and Hayek, whom they still read. Ditto, albeit with somewhat greater sophistication and fainter echoes, John Taylor of ‘Taylor Rule’ fame.
The third, Post-Keynesian school is of course the one that’s best known in the Anglophone world, mainly through the Englishman Keynes himself, who famously had to declare himself no ‘Keynesian’ nearly as quickly as he began to attract (uncomprehending, or what Joan Robinson dubbed ‘bastard Keynesian’) followers. Thanks to its linguistic provincialism, the Anglophone world had not heard of Wicksell, who wrote in Swedish and German, while he was active. But J.M. Keynes learned from him in the 1920s and after, partly through his own Swedish student Bertil Ohlin, and channeled him in his 1930 Treatise on Money.
The Treatise, which ‘money wonks’ to this day esteem rather more highly than Keynes’s better-known General Theory, is a thoroughly, if somewhat confusedly, Wicksellian document. It limns the workings of bank money in English common-law jurisdictions and traces the role that it plays in generating boom-and-bust cycles through time. Most who today call themselves ‘Post-Keynesians’ channel the Treatise more than they do the General Theory. That includes some self-styled MMTers, who descend partly from the Keynes of the Treatise; partly from the Austrians through Minsky, who studied with Schumpeter; and partly from what might be called ‘German Legalism’ in the person of Friedrich Knapp, whose State Theory of Money Keynes and some Austrians also admired.
Again, not to get too musty or convoluted here, but the principal ‘godparent’ of MMT, Hyman Minsky, was both a student of Schumpeter’s and a follower of Keynes’s. (So, to a degree, were MMT’s secondary godparents, Michal Kalecki and Abba Lerner.) This in effect gave Wicksellian bank money two routes into Minsky’s thinking – the Post-Keynesian and the Austrian.
The founders of contemporary MMT imbibed this in Minsky, and added an extra dose of state authority picked up from reading Knapp’s 1906 State Theory of Money, which Keynes in the Treatise also had highlighted. Et voila, ‘Modern Money Theory,’ which took its name from Keynes’s coinage in the Treatise – ‘Modern Money.’ (I think the more recent renaming, ‘Modern Monetary Theory,’ somewhat unfortunate against this backdrop. By obscuring the genaeology, it makes it less likely that later proponents will know to what ‘source’ to return when the time to clean house – that is, now – comes along.)
In my view, all of these schools of thought and more, indeed all schools descended from Wicksell, include important elements of truth in their accounts of money and finance precisely because they include elements of Wicksell – and, through him, elements of Law, Hamilton, Morris, Thornton and Bagehot. The problem is that many adherents of these schools, now including some self-styled MMTers and other Post-Keynsians, have lost sight of their own Wicksellian, and hence Bagehotian, Thorntonian, and even Hamiltonian origins. That needn’t have been a problem in itself, but it seems to have enabled certain oversights and mistaken beliefs about what needs attending to.
Some (again, not all!) self-styled MMTers and other Post-Keynesians, for example, seem to be fixated on public sector fiscal operations above everything else, paying little heed to central bank potential and even less to the role played by what I call private sector ‘franchisee’ institutions in the endogenous money transmission belt. That leads some (again, not all!) to fixate on tax cuts and tax hikes as primary policy instruments, which is unnecessarily self-limiting. Austrians, for their part, would limit us yet further, insisting as they do that we effectively make money effectively exogenous, rather than guiding it endogenously in its very generation by our publicly chartered financial institutions – institutions that we publicly establish and authorize, hence can readily guide or direct as coditions of both licensure and payment system access.
Many of these errors appear to stem either from forgetting Wicksell, or from not reading him, depending on secondary sources that mischaracterize him instead. Some ‘Classicals’ and ‘Neo-Classicals,’ for example, use Wicksell’s term ‘loanable funds,’ but then treat the named ‘funds’ as exogenously given and hence pre-accumulated. That of course discards precisely what is unique – and uniquely helpful – in Wicksell where contemporary economics is concerned. (We see a touch of this in Woodford’s magisterial and forthrightly Wicksellian-named Interest and Prices, footnote 16 of which disavows starting with credit.)
Many new MMTers and other Post-Keynsians, in turn, take aim at Wicksell’s ‘natural rate’ idea where borrowing costs are concerned, assuming he meant by this something determined in part by the Classicals’ mischaracterized-as-exogenous ‘loanable funds.’ But in fact Wicksell meant no more than what the Post-Keynesians mean by ‘the resource constraint’ upon non-inflationary money issuance. Meanwhile, ‘Austrians’ warp Wicksell’s ‘cumulative process’ into a somehow unmodulatable ‘business cycle’ which, pace Wicksell, they treat as unguidable without ‘distortion.’
None of these ‘unforced errors’ is made inevitable by losing touch with the hybridity of what I call ‘mixed,’ ‘hybrid,’ or ‘franchise’ finance that Wicksell effectively first systematically incorporated into monetary economics. But they are certainly made all the more possible by it. Nor would the problem be cured by now simply re-reading Wicksell – who was, after all, writing about Swedish banking as practiced in the late 19th and early 20th centuries, first under the gold standard and then under fiat arrangements. What is requisite is the old Wicksellian sense for the institutional interactions that matter in driving finance and production, which Wicksell rightly portrayed as two sides of one coin. In early 21st century America, these are the institutions that I examine in detail elsewhere, en route to reform and redesign proposals that I am linking to.
So where does this leave us? Milton Friedman and Richard Nixon are both said to have claimed that ‘we’re all Keynesians now.’ That sure beat Classicism, as that term was used in the ‘70s. But we can do better – in a way that recovers what’s true, but not false, in both ‘Austrian’ and ‘Post-Keynesian’ economics. What’s true in them all is endogeneity – money’s endogeneity. And this in turn means that, insofar as we’re right and not merely cranks, we’re all Wicksellians now.