The Slack Wire – J. W. Mason

Taking Money Seriously

(Text of a talk I delivered at the Watson Institute for International and Public Affairs at Brown University on June 17, 2024.)

There is an odd dual quality to the world around us.

Consider a building. It has one, two or many stories; it’s made of wood, brick or steel; heated with oil or gas; with doors, windows and so on. If you could disassemble the building you could make a precise quantitative description of it — so many bricks, so much length of wire and pipe, so many tiles and panes of glass.

A building also has a second set of characteristics, that are not visible to the senses. Every building has an owner, who has more or less exclusive rights to the use of it. It has a price, reflected in some past or prospective sale and recorded on a balance sheet. It generates a stream of money payments. To the owner from tenants to whom the owner delegated som of their rights. From the owner to mortgage lenders and tax authorities, and to the people whose labor keeps them operating — or to the businesses that command that labor. Like the bricks in the building’s walls or the water flowing through its pipes, these can be expressed as numbers. But unlike those physical quantities, all of these can be expressed in the same way, as dollars or other units of currency.

What is the relationship between these two sets of characteristics? Do the prices and payments simply describe the or reflect the physical qualities? Or do they have their own independent existence?

My starting point is that this is a problem — that the answer is not obvious.

The relationship between money-world and the concrete social and material world is long-standing, though not always explicit, question in the history of economic thought. A central strand in that history is the search for an answer that unifies these two worlds into one.

From the beginnings of economics down to today’s textbooks, you can find variations on the argument that money quantities and money payments are just shorthand for the characteristics and use of concrete material objects. They are neutral — mere descriptions, which can’t change the underlying things.

In 1752, we find David Hume writing that “Money is nothing but the representation of labour and commodities… Where coin is in greater plenty; as a greater quantity of it is required to represent the same quantity of goods; it can have no effect, either good or bad.”

And at the turn of the 21st century, we hear the same thing from FOMC member Lawrence Meyer: “Monetary policy cannot influence real variables–such as output and employment.” Money, he says, only affects “inflation in the long run. This immediately makes price stability … the direct, unequivocal, and singular long-term objective of monetary policy.”

We could add endless examples in between.

This view profoundly shapes most of our thinking about the economy.

We’ve all heard that money is neutral — that changes in the supply or availability of money only affect the price level while leaving relative prices and real activity unchanged. We’ve probably encountered the Coase Theorem, which says that the way goods are allocated to meet real human needs should be independent of who holds the associated property rights. We are used to talking about “real” output and “real “ interest rates without worrying too much about what they refer to.

There is, of course, also a long history of arguments on the other side — that money is autonomous, that money and credit are active forces shaping the concrete world of production and exchange, that there is no underlying value to which money-prices refer. But for the most part, these counter-perspectives occupy marginal or subterranean positions in economic theory, though they may have been influential in other domains.

The great exception is, of course, Keynes. Indeed, there is an argument that what was revolutionary about the Keynesian revolution was his break with orthodoxy on precisely this point. In the period leading up to the General Theory, he explained that the difference between the economic orthodoxy and the new theory he was seeking to develop was fundamentally the difference between the dominant vision of the economy in terms of what he called “real exchange,” and an alternative he vision he described as “monetary production.”

The orthodox theory (in our day as well as his) started from an economy in which commodities exchanged for other commodities, and then brought money in at a later stage, if at all, without changing the fundamental material tradeoffs on which exchange was based. His theory, by contrast, would describe an economy in which money is not neutral, and in which the organization of production cannot be understood in nonmonetary terms. Or in his words, it is the theory of “an economy in which money plays a part of its own and affects motives and decisions and is … so that the course of events cannot predicted, either in the long period or in the short, without a knowledge of the behavior of money.”

If you are fortunate enough to have been educated in the Keynesian tradition, then it’s easy enough to reject the idea that money is neutral. But figuring out how money world and concrete social reality do connect — that is not so straightforward.

I’m currently in the final stages of writing a book with Arjun Jayadev, Money and Things, that is about exactly this question — the interface of money world with the social and material world outside of it.

Starting from Keynes monetary-production vision, we explore question of how money matters in four settings.

First, the determination of the interest rate. There is, we argue, a basic incompatibility between a theory of the interest rate as price of saving or of time, and of the monetary interest rate we observe in the real world. And once we take seriously the idea of interest as the price of liquidity, we see why money cannot be neutral — why financial conditions invariably influence the composition as well as the level of expenditure.

Second, price indexes and “real” quantities. The ubiquitous “real” quantities constructed by economists are, we suggest, at best phantom images of monetary quantities. Human productive activity is not in itself describable in terms of aggregate quantities. Obviously particular physical quantities, like the materials in this building, do exist. But there is no way to make a quantitative comparison between these heterogeneous things except on the basis of money prices — prices are not measuring any preexisting value. Prices within an exchange community are objective, from the point of view of those within the community. But there is no logically consistent procedure for comparing “real” output once you leave boundaries of a given exchange community, whether across time or between countries

The third area we look at the interface of money world and social reality is corporate finance and governance. We see the corporation as a central site of tension between the distinct social logics of money and production. Corporations are the central institutions of monetary production, but they are not themselves organized on market principles. In effect, the pursuit of profit pushes wealth owners to accept a temporary suspension of the logic of market – but this can only be carried so far.

The fourth area is debt and capital. These two central aggregates of money-world are generally understood to reflect “real,” nonmonetary facts about the world — a mass of means of production in the case of capital, cumulated spending relative to income in the case of debt. But the actual historical evolution of these aggregates cannot, we show, be understood in this way in either case. The evolution of capital as we observe it, in the form of wealth, is driven by changes in the value of existing claims on production, rather than the accumulation of new capital goods. These valuation changes in turn reflect, first, social factors influencing division of income between workers and owners and, second, financial factors influencing valuations of future income streams. Debt is indeed related to borrowing, in a way that capital is not related to accumulation. But changes in indebtedness over time owe as much to interest, income and price-level changes that affect burden of existing debt stock as they do to new borrowing. And in any case borrowing mainly finances asset ownership, as opposed to the dissaving that the real-excahnge vision imagines it as.

Even with the generous time allotted to me, I can’t discuss all four of those areas. So in this talk I will focus on the interest rate.

Some of what I am going to say here may seem familiar, or obvious.

But I think it’s important to start here because it is so central to debates about money and macroeconomics. Axel Leijonhufvud long ago argued that the theory of the interest rate was at the heart of the confusion in modern macroeconomics. “The inconclusive quarrels … that drag on because the contending parties cannot agree what the issue is, largely stem from this source.” I think this is still largely true.

Orthodoxy thinks of the interest rate as the price of savings, or loanable funds, or alternatively, as the tradeoff between consumption in the future and consumption in the present.

Interest in this sense is a fundamentally non-monetary concept. It is a price of two commodities, based on the same balance of scarcity and human needs that are the basis of other prices. The tradeoff between a shirt today and a shirt next year, expressed in the interest rate, is no different between the tradeoff between a cotton shirt and a linen one, or one with short versus long sleeves. The commodities just happen to be distinguished by time, rather than some other quality.

Monetary loans, in this view, are just like a loan of a tangible object. I have a some sugar, let’s say. My neighbor knocks on the door, and asks to borrow it. If I lend it to them, I give up the use of it today. Tomorrow, the neighbor will return the same amount of sugar to me, plus something extra – perhaps one of the cookies they baked with it. Whatever income you receive from ownership of an asset — whether we call it interest, profit or cookies — is a reward for deferring your use of the concrete services that the asset provides.

This way of thinking about interest is ubiquitous in economics. In the early 19th century Nassau Senior described interest as the reward for abstinence, which gives it a nice air of Protestant morality. In a current textbook, in this case Gregory Mankiw’s, you can find the same idea expressed in more neutral language: “Saving and investment can be interpreted in terms of supply and demand … of loanable funds — households lend their savings to investors or deposit their savings in a bank that then loans the funds out.”

It’s a little ambiguous exactly how we are supposed to imagine these funds, but clearly they are something that already exists before the bank comes into the picture. Just as with the sugar, if their owner is not currently using them, they can lend them to someone else, and get a reward for doing so.

If you’ve studied macroeconomics at the graduate level, you probably spent much of the semester thinking about variations on this story of tradeoffs between stuff today and stuff in the future, in the form of an Euler equation equating marginal costs and benefits across time. It’s not much of an exaggeration to say that mathematically elaborated versions of this story are the contemporary macro curriculum.

Money and finance don’t come into this story. As Mankiw says, investors can borrow from the public directly or indirectly via banks – the economic logic is the same either way.

We might challenge this story from a couple of directions.

One criticism — first made by Piero Sraffa, in a famous debate with Friedrich Hayek about 100 years ago — is that in a non monetary world each commodity will have its own distinct rate of interest. Let’s say a pound of flour trades for 1.1 pounds (or kilograms) of flour a year from now. What will a pound or kilo of sugar today trade for? If, over the intervening year, the price of usage rises relative to the price of flour, then a given quantity of sugar today will trade for a smaller amount of sugar a year from now, than the same quantity of flour will. Unless the relative price of flour and sugar are fixed, their interest rates will be different. Flour today will trade at one rate for flour in the future, sugar at a different rate; the use of a car or a house, a kilowatt of electricity, and so on will each trade with the same thing in the future at their own rates, reflecting actual and expected conditions in the markets for each of these commodities. There’s no way to say that any one of these myriad own-rates is “the” rate of interest.

Careful discussions of the natural rate of interest will acknowledge that it is only defined under the assumption that relative prices never change.

Another problem is that the savings story assumes that the thing to be loaned — whether it is a specific commodity or generic funds — already exists. But in the monetary economy we live in, production is carried out for sale. Things that are not purchased, will not be produced. When you decide not to consume something, you don’t make that thing available for someone else. Rather, you reduce the output of it, and the income of the producers of it, by the same amount as you reduce your own consumption.

Saving, remember, is the difference between income and consumption. For you as an individual, you can take my income as given when deciding how much to consume. So consuming less means saving more. But at the level of the economy as a whole, income is not independent of consumption. A decision to consume less does not raise aggregate saving, it lowers aggregate income. This is the fallacy of consumption emphasized by Keynes: individual decisions about consumption and saving have no effect on aggregate saving.

So the question of how the interest rate is determined, is linked directly to the idea of demand constraints.

Alternatively, rather than criticizing the loanable-funds story, we can start from the other direction, from the monetary world we actually live in. Then we’ll see that credit transactions don’t involve the sort of tradeoff between present and future that orthodoxy focuses on.

Let’s say you are buying a home.

On the day that you settle , you visit the bank to finalize your mortgage. The bank manager puts in two ledger entries: One is a credit to your account, and a liability to the bank, which we call the deposit. The other, equal and offsetting entry is a credit to the bank’s own account, and a liability for you. This is what we call the loan. The first is an IOU from the bank to you, payable at any time. The second is an IOU from you to the bank, with specified payments every month, typically, in the US, for the next 30 years. Like ordinary IOUs, these ledger entries are created simply by recording them — in earlier times it was called “fountain pen” money.

The deposit is then immediately transferred to the seller, in return for the title to the house. For the bank, this simply means changing the name on the deposit — in effect, you communicate to the bank that their debt that was payable to you, is now payable to the seller. On your balance sheet, one asset has been swapped for another — the $250,000 deposit, in this case, for a house worth $250,000. The seller makes the opposite swap, of the title to a house for an equal value IOU from the bank.

As we can see, there is no saving or dissaving here. Everyone has just swapped assets of equal value.

This mortgage is not a loan of preexisting funds or of anything else. No one had to first make a deposit at the bank in order to allow them to make this loan. The deposit — the money — was created in the process of making the loan itself. Banking does not channel saving to borrowing as in the loanable-funds view, but allows a swap of promises.

One thing I always emphasize to my students: You should not talk about putting money in the bank. The bank’s record is the money.

On one level this is common knowledge. I am sure almost everyone in this room could explain how banks create money. But the larger implications are seldom thought through.

What did this transaction consist of? A set of promises. The bank made a promise to the borrowers, and the borrowers made a promise to the bank. And then the bank’s promise was transferred to the sellers, who can transfer it to some third party in turn.

The reason that the bank is needed here is because you cannot directly make a promise to the seller.

You are willing to make a promise of future payments whose present value is worth more than the value the seller puts on their house. Accepting that deal will make both sides better off. But you can’t close that deal, because your promise of payments over the next 30 years is not credible. They don’t know if you are good for it. They don’t have the ability to enforce it. And even they trust you, maybe because you’re related or have some other relationship, other people do not. So the seller can’t turn your promise of payment into an immediate claim on other things they might want.

Orthodox theory starts from assumption that everyone can freely contract over income and commodities at any date in the future. That familiar Euler equation is based on the idea that you can allocate your income from any future period to consumption in the present, or vice versa. That is the framework within which the interest rate looks like a tradeoff between present and future. But you can’t understand interest in a framework that abstracts away from precisely the function that money and credit play in real economies.

The fundamental role of a bank, as Hyman Minsky emphasized, is not intermediation but acceptance. Banks function as third parties who broaden the range of transactions that can take place on the basis of promises. You are willing to commit to a flow of money payments to gain legal rights to the house. But that is not enough to acquire the house. The bank, on the other hand, precisely because its own promises are widely trusted, is in a position to accept a promise from you.

Interest is not paid because consumption today is more desirable than consumption in the future. Interest is paid because credible promises about the future are hard to make.

The cost of the mortgage loan is not that anyone had to postpone their spending. The cost is that the balance sheets of both transactors have become less liquid.

We can think of liquidity in terms of flexibility — an asset or a balance sheet position is liquid insofar as it broadens your range of options. Less liquidity, means fewer options.

For you as a homebuyer, the result of the transaction is that you have committed yourself to a set of fixed money payments over the next 30 years, and acquired the legal rights associated with ownership of a home. These rights are presumably worth more to you than the rental housing you could acquire with a similar flow of money payments. But title to the house cannot easily be turned back into money and thereby to claims on other parts of the social product. Home ownership involves — for better or worse — a long-term commitment to live in a particular place. The tradeoff the homebuyer makes by borrowing is not more consumption today in exchange for less consumption tomorrow. It is a higher level of consumption today and tomorrow, in exchange for reduced flexibility in their budget and where they will live. Both the commitment to make the mortgage payments and the non-fungibility of home ownership leave less leeway to adapt to unexpected future developments.

On the other side, the bank has added a deposit liability, which requires payment at any time, and a mortgage asset which in itself promises payment only on a fixed schedule in the future. This likewise reduces the bank’s freedom of maneuver. They are exposed not only to the risk that the borrower will not make payments, but also to the risk of capital loss if interest rates rise during the period they hold the mortgage, and to the risk that the mortgage will not be saleable in an emergency, or only at an unexpectedly low price. As real world examples like, recently, Silicon Valley Bank show, these latter risks may in practice be much more serious than the default risk. The cost to the bank making the loan is that its balance sheet becomes more fragile.

Or as Keynes put it in a 1937 article, “The interest rate … can be regarded as being determined by the interplay of the terms on which the public desires to become more or less liquid and those on which the banking system is ready to become more or less unliquid.”

Of course in the real world things are more complicated. The bank does not need to wait for the mortgage payments to be made at the scheduled time. It can transfer the mortgage to a third party, trading off some of the income it expected for a more liquid position. The buyer might be some other financial institution looking for a position farther toward the income end of the liquidity-income tradeoff, perhaps with multiple layers of balance sheets in between. Or the buyer might be the professional liquidity-providers at the central bank.

Incidentally, this is an answer to a question that people don’t ask often enough: How is it that the central bank is able to set the interest rate at all? The central bank plays no part in the market for loanable funds. But central banks are very much in the liquidity business.

It is monetary policy, after all, not savings policy.

One thing this points to is that there is no fundamental difference between routine monetary policy and the central bank’s role as a lender of last resort and a regulator. All of these activities are about managing the level of liquidity within the financial system. How easy is it to meet your obligations. Too hard, and the web of obligations breaks. Too easy, and the web of money obligations loses its ability to shape our activity, and no longer serves as an effective coordination device.

As the price of money — the price for flexibility in making payments as opposed to fixed commitments — the interest rate is a central parameter of any monetary economy. The metaphor of “tight” or “loose” conditions for high or low interest rates captures an important truth about the connection between interest and the flexibility or rigidity of the financial system. High interest rates correspond to a situation in which promises of future payment are worth less in terms of command over resources today. When it’s harder to gain control over real resources with promises of future payment, the pattern of today’s payments is more tightly linked to yesterday’s income. Conversely, low interest rates mean that a promise of future payments goes a long way in securing resources today. That means that claims on real resources therefore depend less on incomes in the past, and more on beliefs about the future. And because interest rate changes always come in an environment of preexisting money commitments, interest also acts as a scaling variable, reweighting the claims of creditors against the income of debtors.

In addition to credit transactions, the other setting in which interest appears in the real world is in the price of existing assets.

A promise of money payments in the future becomes an object in its own right, distinct from those payments themselves. I started out by saying that all sorts of tangible objects have a shadowy double in money-world. But a flow of money payments can also acquire a phantom double. A promise of future payment creates a new property right, with its owner and market price.

When we focus on that fact, we see an important role for convention in the determination of interest. To some important extent, bond prices – and therefore interest rates – are what they are, because that is what market participants expect them to be.

A corporate bond promises a set of future payments. It’s easy in a theoretical world of certainty, to talk as if the bond just is those future payments. But it is not.

This is not just because it might default, which is easy to incorporate into the model. It’s not just because any real bond was issued in a certain jurisdiction, and conveys rights and obligations beyond payment of interest — though these other characteristics always exist and can sometimes be important. It’s because the bond can be traded, and has a price which can change independent of the stream of future payments.

If interest rates fall, your bond’s price will rise — and that possibility itself is a factor in the price of the bond.

This helps explain a widely acknowledged anomaly in financial markets. The expectation hypothesis says that the interest rate on a longer bond should be the same as the average of shorter rates over the same period, or at least that they should be related by a stable term premium. This seems like a straightforward arbitrage, but it fails completely, even in its weaker form.

The answer to this puzzle is an important part of Keynes’ argument in The General Theory. Market participants are not just interested in the two payment streams. They are interested in the price of the long bond itself.

Remember, the price of an asset always moves inversely with its yield. When rates on a given type of credit instrument go up, the price of that instrument falls. Now let’s say it’s widely believed that a 10 year bond is unlikely to trade below 2 percent for very long. Then you would be foolish to buy it at a yield much below 2 percent, because you are going to face a capital loss when yields return to their normal level. And if most people believe this, then the yield never will fall below 2 percent, no matter what happens with short rates.

In a real world where the future is uncertain and monetary commitments have their own independent existence, there is an important sense in which interest rates, especially longer ones, are what they are because that’s what people expect them to be.

One important implication of this is that we cannot think of various market interest rates as simply “the” interest rate, plus a risk premium. Different interest rates can move independently for reasons that have nothing to do with credit risk.

On the one hand, we have a body of theory built up on the idea of “the” interest rate as a tradeoff between present and future consumption. On the other, we have actual interest rates, set in the financial system in quite different ways.

People sometimes try to square the circle with the idea of a natural rate. Yes, they say, we know about liquidity and the term premium and the importance of different kinds of financial intermediaries and regulation and so on. But we still want to use the intertemporal model we were taught in graduate school. We reconcile this by treating the model as an analysis of what the interest rate ought to be. Yes, banks set interest rates in all kinds of ways, but there is only one interest rate consistent with stable prices and, more broadly, appropriate use of society’s resources. We call this the natural rate.

This idea was first formulated around the turn of the 20th century by Swedish economist Knut Wicksell. But the most influential modern statement comes from Milton Friedman. He introduces the natural rate of interest, along with its close cousin the natural rate of unemployment, in his 1968 Presidential Address to the American Economics Association, which has been described as the most influential paper in economics since World War II. The natural rates there correspond to the rates that would be “ground out by the Walrasian system of general equilibrium equations, provided there is imbedded in them the actual structural characteristics of the labor and commodity markets, including market imperfections, stochastic variability in demands and supplies, the cost of gathering information … and so on.”

The appeal of the concept is clear: It provides a bridge between the nonmonetary world of intertemporal exchange of economic theory, and the monetary world of credit contracts in which we actually live. In so doing, it turns the intertemporal story from a descriptive one to a prescriptive one — from an account of how interest rates are determined, to a story about how central banks should conduct monetary policy.

Fed Chair Jerome Powell gave a nice example of how central bankers think of the natural rate in a speech a few years ago. He introduces the natural interest rate R* with the statement that “In conventional models of the economy, major economic quantities … fluctuate around values that are considered ‘normal,’ or ‘natural,’ or ‘desired.’” R* reflects “views on the longer-run normal values for … the federal funds rate” which are based on “ fundamental structural features of the economy.”

Notice the confusion here between the terms normal, natural and desired, three words with quite different meanings. R* is apparently supposed to be the long-term average interest rate, and the interest rate that we would see in a world governed only fundamentals and the interest rate that delvers the best policy outcomes.

This conflation is a ubiquitous and essential feature of discussions of natural rate. Like the controlled slipping between the two disks of a clutch in a car, it allows systems moving in quite different ways to be joined up without either side fracturing from the stress. The ambiguity between these distinct meanings is itself normal, natural and desired.

The ECB gives perhaps an even nicer statement: “At its most basic level, the interest rate is the ‘price of time’ — the remuneration for postponing spending into the future.” R* corresponds to this. It is a rate of interest determined by purely non monetary factors, which should be unaffected by developments in the financial system. Unfortunately, the actual interest rate may depart from this. In that case, the natural rate, says the ECB, “while unobservable … provides a useful guidepost for monetary policy.”

I love the idea of an unobservable guidepost. It perfectly distills the contradiction embodied in the idea of R*.

As a description of what the interest rate is, a loanable-funds model is merely wrong. But when it’s turned into a model of the natural rate, it isn’t even wrong. It has no content at all. There is no way to connect any of the terms in the model with any observable fact in the world.

Go back to Friedman’s formulation, and you’ll see the problem: We don’t possess a model that embeds all the “actual structural characteristics” of the economy. For an economy whose structures evolve in historical time, it doesn’t make sense to even imagine such a thing.

In practice, the short-run natural rate is defined as the one that results in inflation being at target — which is to say, whatever interest rate the central bank prefers.

The long-run natural rate is commonly defined as the real interest rate where “all markets are in equilibrium and there is therefore no pressure for any resources to be redistributed or growth rates for any variables to change.” In this hypothetical steady state, the interest rate depends only on the same structural features that are supposed to determine long-term growth — the rate of technical progress, population growth, and households’ willingness to defer consumption.

But there is no way to get from the short run to the long run. The real world is never in a situation where all markets are in equilibrium. Yes, we can sometimes identify long-run trends. But there is no reason to think that the only variables that matter for those trends are the ones we have chosen to focus on in a particular class of models. All those “actual structural characteristics” continue to exist in the long run.

The most we can say is this: As long as there is some reasonably consistent relationship between the policy interest rate set by the central bank and inflation, or whatever its target is, then there will be some level of the policy rate that gets you to the target. But there’s no way to identify that with “the interest rate” of a theoretical model. The current level of aggregate spending in the economy depends on all sorts of contingent, institutional factors, on sentiment, on choices made in the past, on the whole range of government policies. If you ask, what policy interest rate is most likely to move inflation toward 2 percent, all that stuff matters just as much as the supposed fundamentals.

The best you can do is set the policy rate by whatever rule of thumb or process you prefer, and then after the fact say that there must be some model where that would be the optimal choice.

Michael Woodford is the author of Interest and Prices, one of the most influential efforts to incorporate monetary policy into a modern macroeconomic model. He pretty explicitly acknowledges that’s what he was doing — trying to backfill a theory to explain the choices that central banks were already making.

What are the implications of this?

First, with regard to monetary policy, let’s acknowledge that it involves political choices made to achieve a variety of often conflicting social goals. As Ben Braun and others have written about very insightfully.

Second, recognizing that interest is the price of liquidity, set in financial markets, is important for how we think about sovereign debt.

There’s a widespread story about fiscal crises that goes something like this. First, a government’s fiscal balance (surplus or deficit) over time determines its debt-GDP ratio. If a country has a high debt to GDP, that’s the result of overspending relative to tax revenues. Second, the debt ratio determines to market confidence; private investors do not want to buy the debt of a country that has already issued too much. Third, the state of market confidence determines the interest rate the government faces, or whether it can borrow at all. Fourth, there is a clear line where high debt and high interest rates make debt unsustainable; austerity is the unavoidable requirement once that line is passed. And finally, when austerity restores debt sustainability, that will contribute to economic growth.

Alberto Alesina was among the most vigorous promoters of this story, but it’s a very common one.

If you accept the premises, the conclusions follow logically. Even better, they offer the satisfying spectacle of public-sector hubris meeting its nemesis. But when we look at debt as a monetary phenomenon, we see that its dynamics don’t run along such well-oiled tracks.

First of all, as a historical matter, differences in growth, inflation and interest rates are at least as important as the fiscal position in determining the evolution of the debt ratio over time. Where debt is already high, moderately slower growth or higher interest rates can easily raise the debt ratio faster than even very large surpluses can reduce it – as many countries subject to austerity have discovered. Conversely, rapid economic growth and low interest rates can lead to very large reductions in the debt ratio without the government ever running surpluses, as in the US and UK after World War II. More recently, Ireland reduced its debt-GDP ratio by 20 points in just five years in the mid-1990s while continuing to run substantial deficits, thanks to very fast growth of the “Celtic tiger” period.

At the second step, market demand for government debt clearly is not an “objective” assessment of the fiscal position, but reflects broader liquidity conditions and the self-confirming conventional expectations of speculative markets. The claim that interest rates reflect the soundness or otherwise of public budgets runs up against a glaring problem: The financial markets that recoil from a country’s bonds one day were usually buying them eagerly the day before. The same markets that sent interest rates on Spanish, Portuguese and Greek bonds soaring in 2010 were the ones snapping up their public and private debt at rock-bottom rates in the mid-2000s. And they’re the same markets that returned to buying those countries debt at historically low levels today, even as their debt ratios, in many cases, remained very high.

People like Alesina got hopelessly tangled up on this point. They wanted to insist both that post-crisis interest rates reflected an objective assessment of the state of public finances, and that the low rates before the crisis were the result of a speculative bubble. But you can’t have it both ways.

This is not to say that financial markets are never a constraint on government budgets. For most of the world, which doesn’t enjoy the backstop of a Fed or ECB, they very much are. But we should never imagine that financial conditions are an objective reflection of a country’s fiscal position, or of the balance of savings and investment.

The third big takeaway, maybe the biggest one, is that money is never neutral.

If the interest rate is a price, what it is a price of is not “saving” or the willingness to wait. It is not “remuneration for deferring spending,” as the ECB has it. Rather, it is of the capacity to make and accept promises. And where this capacity really matters, is where finance is used not just to rearrange claims on existing assets and resources, but to organize the creation of new ones. The technical advantages of long lived means of production and specialized organizations can only be realized if people are in a position to make long-term commitments. And in a world where production is organized mainly through money payments, that in turn depends on the degree of liquidity.

There are, at any moment, an endless number of ways some part of society’s resources could be reorganized so as to generate greater incomes, and hopefully use values. You could open a restaurant, or build a house, or get a degree, or write a computer program, or put on a play. The physical resources for these activities are not scarce; the present value of the income they can generate exceeds their costs at any reasonable discount rate. What is scarce is trust. You, starting on a project, must exercise a claim on society’s resources now; society must accept your promise of benefits later. The hierarchy of money allows participants in various collective projects to substitute trust in a third party for trust in each other. But trust is still the scarce resource.

Within the economy, some activities are more trust-intensive, or liquidity-constrained, than others.

Liquidity is more of a problem when there is a larger separation between outlays and rewards, and when rewards are more uncertain.

Liquidity is more of the problem when the scale of the outlay required is larger.

Liquidity and trust are more important when decisions are irreversible.

Trust is more important when something new is being done.

Trust is more scarce when we are talking about coordination between people without any prior relationship.

These are the problems that money and credit help solve. Abundant money does not just lead people to pay more for the same goods. It shifts their spending toward things that require bigger upfront payments and longer-term commitments, and that are riskier.

I was listening to an interview with an executive from wind-power company on the Odd Lots podcast the other day. “We like to say that our fuel is free,” he said. “But really, our fuel is the cost of capital.” The interest rate matters more for wind power than for gas or coal, because the costs must be paid almost entirely up front, as opposed to when the power is produced.

When costs and returns are close together, credit is less important.

In settings where ongoing relationships exist, money is less important as a coordinating mechanism. Markets are for arms-length transactions between strangers.

Minsky’s version of the story emphasizes that we have to think about money in terms of two prices, current production and long-lived assets. Long-lived assets must be financed – acquiring one typically requires committing to a series of future payments . So their price is sensitive to the availability of money. An increase in the money supply — contra Hume, contra Meyer — does not raise all prices in unison. It disproportionately raises the price of long-lived assets, encouraging production of them. And it is long-lived assets that are the basis of modern industrial production.

The relative value of capital goods, and the choice between more and less capital-intensive production techniques, depends on the rate of interest. Capital goods – and the corporations and other long-lived entities that make use of them – are by their nature illiquid. The willingness of wealth owners to commit their wealth to these forms depends, therefore, on the availability of liquidity. We cannot analyze conditions of production in non-monetary terms first and then afterward add money and interest to the story. Conditions of production themselves depend fundamentally on the network of money payments and commitments that structure them, and how flexible that network is.

Taking money seriously requires us to reconceptualize the real economy.

The idea of the interest rate as the price of saving assumes, as I mentioned before, that output already exists to be either consumed or saved. Similarly, the idea of interest as an intertemporal price — the price of time, as the ECB has it — implies that future output is already determined, at least probabilistically. We can’t trade off current consumption against future consumption unless future consumption already exists for us to trade.

Wicksell, who did as much as anyone to create the natural-rate framework of today’s central banks, captured this aspect of it perfectly when he compared economic growth to wine barrels aging in the cellar. The wine is already there. The problem is just deciding when to open the barrels — you would like to have some wine now, but you know the wine will get better if you wait.

In policy contexts, this corresponds to the idea of a level of potential output (or full employment) that is given from the supply side. The productive capacity of the economy is already there; the most that money, or demand, can accomplish is managing aggregate spending so that production stays close to that capacity.

This is the perspective from which someone like Lawrence Meyer, or Paul Krugman for that matter, says that monetary policy can only affect prices in the long run. They assume that potential output is already given.

But one of the big lessons we have learned from the past 15 years of macroeconomic instability is that the economy’s productive potential is much more unstable, and much less certain, than economists used to think. We’ve seen that the labor force grows and shrinks in response to labor market conditions. We’ve seen that investment and productivity growth are highly sensitive to demand. If a lack of spending causes output to fall short of potential today, potential will be lower tomorrow. And if the economy runs hot for a while, potential output will rise.

We can see the same thing at the level of individual industries. One of the most striking, and encouraging developments of recent years has been the rapid fall in costs for renewable energy generation. It is clear that this fall in costs is the result, as much as the cause, of the rapid growth in spending on these technologies. And that in turn is largely due to successful policies to direct credit to those areas.

A perspective that sees money as epiphenomenal to the “real economy” of production would have ruled out that possibility.

This sort of learning by doing is ubiquitous in the real world. Economists prefer to assume decreasing returns only because that’s an easy way to get a unique market equilibrium.

This is one area where formal economics and everyday intuition diverge sharply. Ask someone whether they think that buying more or something, or making more of something, will cause the unit price to go up or down. If you reserve a block of hotel rooms, will the rooms be cheaper or more expensive than if you reserve just one? And then think about what this implies about the slope of the supply curve.

There’s a wonderful story by the great German-Mexican writer B. Traven called “Assembly Line.” The story gets its subversive humor from a confrontation between an American businessman, who takes it for granted that costs should decline with output, and a village artisan who insists on actually behaving like the textbook producer in a world of decreasing returns.

In modern economies, if not in the village, the businessman’s intuition is correct. Increasing returns are very much the normal case. This means that multiple equilibria and path dependence are the rule. And — bringing us back to money — that means that what can be produced, and at what cost, is a function of how spending has been directed in the past.

Taking money seriously, as its own autonomous social domain, means recognizing that social and material reality is not like money. We cannot think of it in terms of a set of existing objects to be allocated, between uses or over time. Production is not a quantity of capital and a quantity of labor being combined in a production function. It is organized human activity, coordinated in a variety of ways, aimed at open-ended transformation of the world whose results are not knowable in advance.

On a negative side, this means we should be skeptical about any economic concept described as “natural” or “real”. These are very often an attempt to smuggle in a vision of a non monetary economy fundamentally different from our own, or to disguise a normative claim as a positive one, or both.

For example, we should be cautious about “real” interest rates. This term is ubiquitous, but it implicitly suggests that the underlying transaction is a swap of goods today for goods tomorrow, which just happens to take monetary form. But in fact it’s a swap of IOUs — one set of money payments for another. There’s no reason that the relative price of money versus commodities would come into it.

And in fact, when we look historically, before the era of inflation-targeting central banks there was no particular relationship between inflation and interest rates.

We should also be skeptical of the idea of real GDP, or the price level. That’s another big theme of the book, but it’s beyond the scope of today’s talk.

On the positive side, this perspective is, I think, essential preparation to explore when and in what contexts finance matters for production. Obviously, in reality, most production coordinated in non-market ways, both within firms — which are planned economies internally — and through various forms of economy-wide planning. But there are also cases where the distribution of monetary claims through the financial system is very important. Understanding which specific activities are credit-constrained, and in what circumstances, seems like an important research area to me, especially in the context of climate change.

Let me mention one more direction in which I think this perspective points us.

As I suggested, the idea of the interest rate as the price of time, and the larger real-exchange vision of which it is part, treats money flows and aggregates as stand-ins for an underlying nonmonetary real economy. People who take this view tend not be especially concerned with exactly how the monetary values are constructed. Which rate, out of the complex of interest rates, is “the” interest rate? Which f the various possible inflation rates, and over what period, do we subtract to get the “real” interest rate? What payments exactly are included in GDP, and what do we do if that changes, or if it’s different in different countries?

If we think of the monetary values as just proxies for some underlying “real” value, the answers to these questions don’t really matter.

I was reading a paper recently that used the intensity of nighttime illumination across the Earth’s surface as an alternative measure of real output. It’s an interesting exercise. But obviously, if that’s the spirit you are approaching GDP in, you don’t worry about how the value of financial services is calculated, or on what basis we are imputing the services of owner-occupied housing. The number produced by the BEA is just another proxy for the true value of real output, that you can approximate in all kinds of other ways.

On the other hand, if you think that the money values are what is actually real — if you don’t think they are proxies for any underlying material quantity — then you have to be very concerned with the way they are calculated. If the interest rate really does mean the payments on a loan contract, and not some hypothetical exchange rate between the past and the future, then you have to be clear about which loan contract you have in mind.

Along the same lines, most economists treat the object of inquiry as the underlying causal relationships in the economy, those “fundamental structural characteristics” that are supposed to be stable over time. Recall that the natural rate of interest is explicitly defined with respect to a long run equilibrium where all macroeconomic variables are constant, or growing at a constant rate. If that’s how you think of what you are doing, then specific historical developments are interesting at most as case studies, or as motivations for the real work, which consists of timeless formal models.

But if we take money seriously, then we don’t need to postulate this kind of underlying deep structure. If we don’t think of interest in terms of a tradeoff between the present and the future, then we don’t need to think of future income and output as being in any sense already determined. And if money matters for the activity of production, both as financing for investment and as demand, then there is no reason to think the actual evolution of the economy can be understood in terms of a long-run trend determined by fundamentals.

The only sensible object of inquiry in this case is particular events that have happened, or might happen.

Approaching our subject this way means working in terms of the variables we actually observe and measure. If we study GDP, it is GDP as the national accountants actually define it and measure it, not “output” in the abstract. These variables are generally monetary.

It means focusing on explanations for specific historical developments, rather than modeling the behavior of “the economy” in the abstract.

It means elevating descriptive work over the kinds of causal questions that economists usually ask. Which means broadening our empirical toolkit away from econometrics.

These methodological suggestions might seem far removed from alternative accounts of the interest rate. But as Arjun and I have worked on this book, we’ve become convinced that the two are closely related. Taking money seriously, and rejecting conventional ideas of the real economy, have far-reaching implications for how we do economics.

Recognizing that money is its own domain allows us to see productive activity as an open-ended historical process, rather than a static problem of allocation. By focusing on money, we can get a clearer view of the non-monetary world — and, hopefully, be in a better position to change it.

China’s Economic Growth Is Good, Actually

(I write a monthlyish opinion piece for Barron’s. This one was published there in June. My previous pieces are here.)

Once upon a time, the promise of globalization seemed clear. In an economically integrated world, poor countries could follow the same path of development that the rich countries had in the past, leading to an equalization of global living standards. For mid-20th century liberals, restoring trade meant bringing the New Deal’s egalitarian model of economic development to a global stage. As Nebraska Senator Kenneth Wherry memorably put it, “With God’s help, we will lift Shanghai up and up, ever up, until it is just like Kansas City.”¹

For better and for worse, globalization has failed in its promise to deliver a planet of Kansas Cities. But Shanghai specifically is one place that it’s come through, and then some. As we debate the Biden administration’s new tariffs, let’s not lose sight of the fact that China’s industrialization is a very good thing for humanity. Indeed, it is the outstanding case of globalization’s promises being fulfilled.

For most of modern history, the gap between the global rich and global poor has only gotten wider. Though there are many tricky issues of measurement, most economic historians would agree with Branko Milanovic — perhaps the world’s foremost authority on the global distribution of income — that global inequality rose steadily for perhaps 200 years until 1980 or so. Since then, and particularly since 2000, there has been a sharp reversal of this trend; according to Milanovic, global income is probably more equally distributed today than at any time since the 19th century.

The reason for this remarkable turn toward equality? China.

According to Milanovic, the rise of China was almost singlehandedly responsible for the reduction in global inequality over the past 30 years. Thanks to its meteoric growth, the gap between the world’s rich and poor has closed substantially for the first time since the beginning of the Industrial Revolution.

Almost all the fall in global inequality in recent decades is attributable to China. Source.

Convergence to rich-country living standards is extremely rare historically. Prior to China, the only major examples in modern times were Taiwan and South Korea. Much more typical are countries like the Philippines or Brazil. Sixty years ago, according to the World Bank, their per-capita incomes were 6 and 14 percent that of the USA, respectively. Today, they are … 6 and 14 percent of the USA. There were ups and downs along the way, but overall no convergence at all. Other poor countries have actually lost ground.

Or as Paul Johnson summarizes the empirical growth literature: “Poor countries, unless something changes, are destined to remain poor.”

China is not just an outlier for how rapidly it has grown, but for how widely the benefits of growth have been shared. One recent study of Chinese income distribution over 1988-2018 found that while growth was fastest for the top, even the bottom 5 percent of wage earners saw real income grow by almost 5 percent annually. This is faster than any group in the US over that period. Milanovic comes to an even stronger conclusion: The bottom half of the Chinese income distribution saw faster growth than those at the top.

Even studies that find rising inequality in China, find that even the lowest income groups there had faster income growth than any group in the US.

Thomas Piketty finds a similar pattern. “The key difference between China and the United States,” he writes, “is that in China the bottom 50 percent also benefited enormously from growth: the average income of the bottom 50 percent [increased] by more than five times in real terms between 1978 and 2015… In contrast, bottom 50 percent income growth in the US has been negative.”²

It’s clear, too, that Chinese growth has translated into rising living standards in more tangible ways. In 1970, Chinese life expectancy was lower than Brazil or the Philippines; today it is almost ten years longer. As the sociologist Wang Feng observes in his new book China’s Age of Abundance, Chinese children entering school in 2002 were 5-6 centimeters taller than they had been just a decade earlier – testimony to vast improvements in diet and living conditions. These improvements were greatest in poor rural areas.

How has China delivered on the promises of globalization, where so many other countries have failed? One possible answer is that it has simply followed the path blazed by earlier industrializers, starting with the United States. Alexander Hamilton’s Report on Manufacturers laid out the playbook: protection for infant industries, public investment in infrastructure, adoption of foreign technology, cheap but strategically directed credit. The Hamiltonian formula was largely forgotten in the United States once it had done its work, but it was picked up in turn by Germany, Japan, Korea and now by China. As the Korean development economist Ha-Joon Chang puts it, insistence that developing countries immediately embrace free trade and financial openness amounts to “kicking away the ladder” that the rich countries previously climbed.

Today, of course, the US is rediscovering these old ideas about industrial policy. There’s nothing wrong with that. But there is something odd and unseemly about describing the same policies as devious manipulation when China uses them.

When John Podesta announced the formation of the administration’s White House Climate and Trade Task Force last month, he tried to draw a sharp line between industrial policy in the United States and industrial policy in China. We use “transparent, well-structured, targeted incentives,” he said, while they have “non-market policies … that have distorted the market.” Unlike us, they are trying to “dominate the global market,” and “creating an oversupply of green energy products.” Yet at the same time, the administration boasts that the incentives in the Inflation Reduction Act will double the growth of clean energy investment so that “US manufacturers can lead the global market in clean energy.”

No doubt if you squint hard enough, you can make out a distinction between changing market outcomes and distorting them, or between leading the global market and dominating it. But it certainly seems like the difference is when we do it versus when they do.

The claim that China is creating a global “overcapacity” in green energy markets — often trotted out by tariff supporters — is particularly puzzling. Obviously, to the extent that there is global overcapacity in these markets, US investment contributes exactly as much as Chinese does — that is what the word “global” means.

More importantly, as many critics have pointed out, the world needs vastly more investment in all kinds of green technologies. It’s hard to imagine any context outside of the US-China trade war where Biden supporters would argue that the world is building too many solar panels and wind turbines, or converting too quickly to electric vehicles.

Not so long ago, the dominant view on the economics of climate change was that the problem was the “free rider” dynamic — the whole world benefits from reduced emissions, while the costs are borne only by the countries that reduce them. In the absence of a global government that can impose decarbonization on the whole world, the pursuit of national advantage through green investment may be the only way the free rider problem gets solved.

As development economist Dani Rodrik puts it: “Green industrial policies are doubly beneficial – both to stimulate the necessary technological learning and to substitute for carbon pricing. Western commentators who trot out scare words like ‘excess capacity,’ ‘subsidy wars,’ and ‘China trade shock 2.0’ have gotten things exactly backwards. A glut in renewables and green products is precisely what the climate doctor ordered.”³

The Biden administration is not wrong to want to support US manufacturers. The best answer to subsidies for green industries in China is subsidies for green industries in the US (and in Europe and elsewhere). In a world that is desperately struggling to head off catastrophic climate change, a subsidy race could harness international rivalry as a part of the solution. But that requires that competition be channeled in a positive-sum way.

Unfortunately, the Biden Administration seems to be choosing the path of confrontation instead. In the 1980s, the Reagan administration dealt with the wave of imported cars that threatened US automakers through a voluntary agreement with Japan to moderately reduce auto exports to the US, while encouraging investment here by Japanese automakers. Unlike the pragmatists around Reagan, the Biden team seems more inclined to belligerence. There’s no sign they even tried to negotiate an agreement, instead choosing unilateral action and framing China as an enemy rather than a potential partner.

Tellingly, National Security Advisor Jake Sullivan is described (in Alexander Ward’s new book The Internationalists) as arguing that the US can make serious climate deals with other countries while “boxing China out,” a view that seems to have won out over the more conciliatory position of advisors like John Kerry. If Sullivan’s position is being described accurately, it’s hard to exaggerate how unrealistic and irresponsible it is. The US and China are by far the world’s two largest economies, not to mention its preeminent military powers. If their governments cannot find a way to cooperate, there is no hope of a serious solution to climate change, or to other urgent global problems.

To be clear, there’s nothing wrong with an American administration putting the needs of the United States first. And if it’s a mistake to treat China as an enemy, it would also be wrong to set them up as an ideal. One could make a long list of ways in which the current government of China falls short of liberal and democratic ideals. Still, it’s clear that China is being punished for its economic success rather than its political failures. Tellingly, the same month that the tariffs on China were announced, the Biden administration indicated that it would resume sales of offensive weapons to Saudi Arabia, whose government has nothing to learn from China about political repression or violence against dissidents.

The policy issues around tariffs are complicated. But let’s not lose sight of the big picture. The fundamental premises of globalization remain compelling today, even if attempts to realize them have often failed. First, no country is an island – today, especially, our most urgent problems can only be solved with cooperation across borders. Second, economic growth is not a zero sum game – there is not some fixed quantity of resources, or markets, available, so that one country’s gain must be another’s loss. And third, democracy spreads best via example and the free movement of ideas and people, not through conquest or coercion. We don’t have to endorse the whole classical case for free trade to agree that its proponents were right in some important ways.

China’s growth has been the clearest case yet of globalization’s promise that international trade can speed the convergence of poor countries with rich ones. The opportunity is still there for its broader promises to be fulfilled as well. But for that to happen, we in the United States must first accept that if the rest of the world catches up with us, that is something to be welcomed rather than feared.

Did It Matter?

Manufacturing #10A & 10B, Cankun Factory, Xiamen City, 2005. Edward Burtynsky

Classes finished up last week. One of the things I was teaching this semester was undergraduate economic history, which I hadn’t done in some years. (Perhaps I’ll have more to post on the class later.)

Our main books this time were Beckert’s Empire of Cotton, which I’ve used several times in this class; and Jonathan Levy’s Ages of American Capitalism and Joshua Freeman’s Behemoth, neither of which I had read before.

Behemoth is a history of the factory; the final chapter is on present-day factories in Vietnam and China, which are probably the largest factories that have ever existed. It’s a fascinating account, with a lot of details I hadn’t heard before. I was astonished to learn, for example, that all the iPads are made at a single facility in Chengdu.

A more interesting question is why these factories are so big. The answer, Freeman stresses, is not any sort of technical advantage. These giant factories in general are organized with small groups of workers doing the same tasks in parallel, independently of each other; there’s nothing like the division of labor that you have on an auto assembly line. Rather than economies of scale, he argues, the main reason production is concentrated in a few giant factories is to allow them to be more responsive to the changing demands of their clients, the Western companies whose subcontractors they are. As with giant factories through history, the impetus for concentrating workers in one facility is about centralizing authority and not just technical efficience, as people like Stephen Marglin and David Noble (or Levy in his chapter on River Rouge) have emphasized.

A question I posed to the class is: Is there any connection between China’s industrial success today and their earlier revolution? Is the fact that China had one of the 20th century’s greatest political revolutions connected to the fact that it is one of the 21st century’s greatest industrial-policy success stories? There was a bit of debate on this – some people pointed to the uniquely egalitarian organization of earlier Chinese factories, where workers discussed how to organize production, and even managers were required to spend time doing routine manual work. But others noted, correctly, that Foxconn isn’t anything like that – there are bosses who give orders just like everywhere else.

The picture you get from Behemoth and other careful accounts of modern Chinese factories is, in many ways, of a country that is following the same path that was blazed in Manchester andLowell and Detroit, albeit on a larger scale. This is, of course, a useful corrective to hysterical claims about industrialization based on slave labor and market manipulation, from people who ought to know better. But it’s a bit distressing if you would have hoped that the titanic struggles of the Chinese Revolution might have opened up a different road.

One way to think about whether, or how, the revolution mattered, I suggested, is to think about the counterfactual. We could look back at China 100 years ago – backward, riven by civil war, subjugated by Europe and Japan, desperately poor – and think that only some kind of radical political project could have rebuilt the country. Or in a longer view, we could say that for most of recorded history China has been one of the most advanced, prosperous and politically stable regions on Earth, so it’s hardly surprising that it would be returning to something like that position. Which of those seems more reasonable?

After they’d gone back and forth on that for a while, I asked them if they knew what major battle we’d just passed the 70^th anniversary of. No one knew; I wouldn’t have expected them to. It’s Dien Bien Phu, I said. The decisive defeat of the French by the Viet Minh, the moment when Europeans were shocked to discover that they could be defeated by a backward, non-Western people in open battle. It was a major step in Vietnam’s road to full independence, and to the end of colonial empires all over the world – one of the most important battles of the 20^th century. One of the biggest victories, one might say, for the liberation of humanity. And yet now Vietnam is manufacturing shoes for Nike just like everyone else.

So, did it matter? In the long run, do these titanic struggles between classes and nations make any difference? Do they really change how production is organized, and for what, and by whom?

I ended the class there. But one might add that how you feel about whether Dien Bien Phu is worth commemorating is probably as good a marker as any of the boundaries of radical politics. Does progress come through struggle — sometimes violent, always disruptive against the established order? (And in these struggles, has America and “the West” been on the side of human liberation, or the other side?) Or does progress, if it happens, happen incrementally, on its own, regardless of who wins the battles?

ETA: I should have mentioned this essay by the Chilean socialist Manuel Riesco, which struggle with this same question. His answer is in the transition to capitalist modernity requires a popular revolutionary movement, especially in the periphery.

It may be useful to start from the hypothesis that the epoch of the twentieth century has been no different in character from that of the nineteenth century: that is, that right up to today we have been living through the period of transition from the old agrarian, aristocratic society to capitalist modernity. In this view of things, the revolutions of the twentieth century have not been anti-capitalist (despite the wishes or programmes of their protagonists and the fears of some of their enemies) but rather the same as the revolutions of the last century.

This hypothesis makes it possible … to claim that those revolutionary processes were progressive and ultimately successful, even though they culminated not as they said they would but, curiously enough, in the opposite way…

… the mass of people…, when called upon to act in each of these transitions to modernity, burst onto the stage and generally cut down what was rotten to its very roots. It was this which cleared the way for the new to be born. …

The leading role of the people does not define only one moment in the transition to modernity. … It may be that a much more complex analysis of the world-wide transition to capitalist modernity will regard that heroic moment as an irruption of the people necessary for the process to advance from one to another of its discrete phases. …

Perhaps we could say today that Jacobinism, in the broad sense given to it here, was a characteristic and appropriate political form in certain popular phases of the transition to capitalist modernity. In this sense, its progressive role has been gigantic. … It is to Salvador Allende, Jacobin president of Chile, more than to anyone else, that the modern nation it is coming to be owes its existence. The monument he deserves will be built sooner rather than later, ‘más temprano que tarde’, in the cities and hearts of his people.

It reminds me a bit, on rereading, of some of Rubashov’s musings towards the end of Darkness at Noon. But then Koestler, in that book, was more than a little “of the devil’s party without knowing it.”

Keynes and Socialism

(Text of a talk I delivered at the Neubauer Institute in Chicago on April 5, 2024.)

My goal in this talk is to convince you that there is a Keynesian vision that is much more radical and far-reaching then our familiar idea of Keynesian economics.

I say “a” Keynesian vision. Keynes was an outstanding example of his rival Hayek’s dictum that no one can be a great economist who is only an economist. He was a great economist, and he was many other things as well. He was always engaged with the urgent problems of his day; his arguments were intended to address specific problems and persuade specific audiences, and they are not always easy to reconcile. So I can’t claim to speak for the authentic Keynes. But I think I speak for an authentic Keynes. In particular, the argument I want to make here is strongly influenced by the work of Jim Crotty, whose efforts to synthesize the visions of Keynes and of Marx were formative for me, as for many people who have passed through the economics department at the University of Massachusetts.

Where should we begin? Why not at the beginning of the Keynesian revolution? According to Luigi Passinetti, this has a very specific date: October 1932. That is when Keynes returned to King’s College in Cambridge for the Michaelmas term to deliver, not his old lectures on “The Pure Theory of Money,” but a new set of lectures on “The Monetary Theory of Production”. In an article of the same title written around the same time, he explained that the difference between the economic orthodoxy of the “the theory which I desiderate” was fundamentally the difference between a vision of the economy in terms of what he called “real exchange” and of monetary production. The lack of such a theory, he argued, was “the main reason why the problem of crises remains unsolved.”

The obvious distinction between these two visions is whether money can be regarded as neutral; and more particularly whether the interest rate can be thought of — as the textbook of economics of our times as well as his insist — as the price of goods today versus goods tomorrow, or whether we must think of it as, in some sense, the price of money.

But there is a deeper distinction between these two visions that I think Keynes also had in mind. On the ones side, we may think of economic life fundamentally in terms of objects — material things that can be owned and exchanged, which exist prior to their entry into economic life, and which have a value — reflecting the difficulty of acquiring them and their capacity to meet human needs. This value merely happens to be represented in terms of money. On the other side, we may think of economic life fundamentally in terms of collective human activity, an organized, open-ended process of transforming the world, a process in which the pursuit of money plays a central organizing role.

Lionel Robbins, also writing in 1932, gave perhaps the most influential summary of the orthodox view when he wrote that economics is the study of the allocation of scarce means among alternative uses. For Keynes, by contrast, the central problem is not scarcity, but coordination. And what distinguishes the sphere of the economy from other areas of life is that coordination here happens largely through money payments and commitments.

From Robbins’ real-exchange perspective, the “means” available to us at any time are given, it is only a question of what is the best use for them. For Keynes, the starting point is coordinated human activity. In a world where coordination failures are ubiquitous, there is no reason to think — as there would be if the problem were scarcity — that satisfying some human need requires withdrawing resources from meeting some other equally urgent need. (In 1932, obviously, this question was of more than academic interest.) What kinds of productive activity are possible depends, in particular, on the terms on which money is available to finance it and the ease with which its results can be converted back into money. It is for this reason, as Keynes great American successor Hyman Minsky emphasized, that money can never be neutral.

If the monetary production view rejects the idea that what is scarce is material means, it also rejects the idea that economic life is organized around the meeting of human needs. The pursuit of money for its own sake is the organizing principle of private production. On this point, Keynes recognized his affinity with Karl Marx. Marx, he wrote, “pointed out that the nature of production in the actual world is not, as economists seem often to suppose, a case of C-M-C’, i. e., of exchanging commodity (or effort). That may be the standpoint of the private consumer. But it is not the attitude of business, which is the case of M-C-M’, i. e., of parting with money for commodity (or effort) in order to obtain more money.”

Ignoring or downplaying money, as economic theory has historically done, requires imagining the “real” world is money-like. Conversely, recognizing money as a distinct social institution requires a reconception of the social world outside of money. We must ask both how monetary claims and values evolve independently of the real activity of production, and how money builds on, reinforces or undermines other forms of authority and coordination. And we must ask how the institutions of money and credit both enable and constrain our collective decision making. All these questions are unavoidably political.

For Keynes, modern capitalism is best understood through the tension between the distinct logics of money and of production. For the orthodox economics both of Keynes’s day and our own, there is no such tension. The model is one of “real exchange” in which a given endowment of goods and a given set of preferences yielded a vector of relative prices. Money prices represent the value that goods already have, and money itself merely facilitates the process of exchange without altering it in any important way.

Keynes of course was not the first to insist on a deeper role for money. Along with Marx, there is a long counter tradition that approaches economic problems as an open ended process of transformation rather than the allocation of existing goods, and that recognizes the critical role of money in organizing this process. These include the “Army of brave heretics and cranks” Keynes acknowledges as his predecessors.

One of the pioneers in this army was John Law. Law is remembered today mainly for the failure of his fiat currency proposals (and their contribution to the fiscal troubles of French monarchy), an object lesson for over-ambitious monetary reformers. But this is unfair. Unlike most other early monetary reformer, Law had a clearly articulated theory behind his proposals. Schumpeter goes so far as to put him “in the front rank of monetary theorists of all times.”

Law’s great insight was that money is not simply a commodity whose value comes from its non-monetary uses. Facilitating exchange is itself a very important function, which makes whatever is used for that purpose valuable even if it has no other use.

“Money,” he wrote, “is not the Value for which goods are exchanged, but the Value by which goods are exchanged.” The fact that money’s value comes from its use in facilitating exchange, and not merely from the labor and other real resources embodied in it, means that a scarcity of money need not reflect any physical scarcity. In fact, the scarcity of money itself may be what limits the availability of labor: “’tis with little success Laws are made, for Employing the Poor or Idle in Countries where Money is scarce.”

Law here is imagining money as a way of organizing and mobilizing production.

If the capacity to pay for things — and make commitments to future payments — is valuable, then the community could be made better off by providing more of it. Law’s schemes to set up credit-money issuing banks – in Scotland before the more famous efforts in France – were explicitly presented as programs for economic development.

Underlying this project is a recognition that is central to the monetary production view; the organization of production through exchange is not a timeless fact of human existence, but something that requires specific institutional underpinning — which someone has to provide. Like Alexander Hamilton’s similar but more successful interventions a half century later, Law envisioned the provision of abundant liquidity as part of a broader project of promoting commerce and industry.

This vision was taken up a bit later by Thornton and the anti-bullionists during the debates over suspension of gold convertibility during and after the Napoleonic Wars. A subsequent version was put forward by the mid-19th century Banking School and its outstanding figure, Thomas Tooke — who was incidentally the only contemporary bourgeois economist who Karl Marx seems to have admired — and by thinkers like Walter Bagehot, who built their theory on first hand experience of business and finance.

A number of lines divide these proto-Keynesian writers from the real-exchange orthodoxy.

To begin with, there is a basic difference in how they think of money – rather than a commodity or token that exists in a definite quantity, they see it as a form of record-keeping, whose material form is irrelevant. In other words credit, the recording of promises, is fundamental; currency as just one particular form of it.

Second, is the question of whether there is some simple or “natural” rule that governs the behavior of monetary or credit, or whether they require active management. In the early debates, these rules were supposed to be gold convertibility or the real bills doctrine; a similar intellectual function was performed by Milton Friedman’s proposed money-supply growth rule in the 20th century or the Taylor Rule that is supposed to govern monetary policy today. On the other side, for these thinkers, “money cannot manage itself,” in Bagehot’s famous phrase.

Third, there is the basic question of whether money is a passive reflection of an already existing real economy, or whether production itself depends on and is organized by money and credit. In other words, the conception of money is inseparable from how the non-monetary economy is imagined. In the real-exchange vision, there is a definite quantity of commodities already existing or potentially producible, which money at best helps to allocate. In the monetary production view, goods only come into existence as they are financed and paid for, and the productive capacity of the economy comes into being through an open-ended process of active development.

It’s worth quoting Bagehot’s Lombard Street for an example:

The ready availability of credit for English businesses, he writes,

gives us an enormous advantage in competition with less advanced countries — less advanced, that is, in this particular respect of credit. In a new trade English capital is instantly at the disposal of persons capable of understanding the new opportunities… In countries where there is little money to lend, … enterprising traders are long kept back, because they cannot borrow the capital without which skill and knowledge are useless. … The Suez Canal is a curious case of this … That London and Liverpool should be centres of East India commerce is a geographic anomaly … The main use of the Canal has been by the English not because England has rich people … but because she possesses an unequalled fund of floating money.

The capacity for reorganization is what matters, in other words. The economic problem is not a scarcity of material wealth, but of institutions that can rapidly redirect it to new opportunities. For Bagehot as for Keynes, the binding constraint is coordination.

It is worth highlighting that there is something quietly radical in Bagehot’s argument here. The textbooks tell us that international trade is basically a problem of the optimal allocation of labor, land and other material resources, according to countries’ inherent capacities for production. But here it’s being claimed is not any preexisting comparative advantage in production, but rather the development of productive capacities via money; financial power allows a country to reorganize the international division of labor to its own advantage.

Thinkers like Bagehot, Thornton or Hamilton certainly had some success on policy level. For the development of central banking, in particular, these early expressions of of monetary production view played an important role. But it was Keynes who developed these insights into a systematic theory of monetary production.

Let’s talk first about the monetary side of this dyad.

The nature and management of money were central to Keynes’ interventions, as a list of his major works suggests – from Indian Currency Questions to the General Theory of Employment, Interest and Money. The title of the latter expresses not just a list of topics but a logical sequence: employment is determined by the interest rate, which is determined by the availability of money.

One important element Keynes adds to the earlier tradition is the framing of the services provided by money as liquidity. This reflects the ability to make payments and satisfy obligations of all kinds, not just the exchange of goods focused on by Law and his successors. It also foregrounds the need for flexibility in the face of an unknown future.

The flip side of liquidity — less emphasized in his own writings but very much by post Keynesians like Hyman Minsky — is money’s capacity to facilitate trust and promises. Money as a social technology provides offers flexibility and commitment.

The fact that bank deposit — an IOU — will be accepted by anyone is very desirable for wealth owner who wants to keep their options open. But also makes bank very useful to people who want to make lasting commitments to each other, but who don’t have a direct relationship that would allow them to trust each other. Banks’ fundamental role is “acceptance,” as Minsky put it – standing in as a trusted third party to make all kinds of promises possible.

Drawing on his experience as a practitioner, Keynes also developed the idea of self-confirming expectations in financial markets. Someone buying an asset to sell in the near term is not interested in its “fundamental” value – the long-run flow of income it will generate – but in what other market participants will think is its value tomorrow. Where such short-term speculation dominates, asset prices take on an arbitrary, self-referential character. This idea is important for our purposes not just because it underpins Keynes’ critique of the “insane gambling casinos” of modern financial markets, but because it helps explain the autonomy of financial values. Prices set in asset markets — including, importantly, the interest rate — are not guide to any real tradeoffs or long term possibilities.

Both liquidity and self-confirming conventions are tied to a distinctive epistemology , which emphasizes the fundamental unknowability of the future. In Keynes’ famous statement in chapter 12 of the General Theory,

By ‘uncertain’ knowledge … I do not mean merely to distinguish what is known for certain from what is only probable. The sense in which I am using the term is that in which the prospect of a European war is uncertain, … About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know!

Turning to the production side, taking the he monetary-production view means that neither the routine operation of capitalist economies nor the choices facing us in response to challenges like climate change should be seen in terms of scarcity and allocation.

The real-exchange paradigm sees production as non-monetary process of transforming inputs into outputs through a physical process we can represent as a production function. We know if we add this much labor and this much “capital” at one end, we’ll get this many consumption goods at the other end; the job of market price is to tell us if it is worth it. Thinking instead in terms of monetary production does not just mean adding money as another input. It means reconceiving the production process. The fundamental problem is now coordination — capacity for organized cooperation.

I’ve said that before. Let me now spell out a little more what I mean by it.

To say that production is an open ended collective activity of transforming the world, means that its possibilities are not knowable in advance. We don’t know how much labor and machinery and raw materials it will take to produce something new — or something old on an increased scale — until we actually do it. Nor do we know how much labor is potentially available until there’s demand for it.

We see this clearly in a phenomenon that has gotten increasing attention in macroeconomic discussions lately — what economists call hysteresis. In textbook theories, how much the economy is capable of producing — potential output — does not depend on how much we actually do produce There are only so many resources available, whether we are using them or not. But in reality, it’s clear that both the labor force and measured productivity growth are highly sensitive to current demand. Rather than a fixed number of people available to work, so that employing more in one area requires fewer working somewhere else, there is an immense, in practice effectively unlimited fringe of people who can be drawn into the labor force when demand for labor is strong. Technology, similarly, is not given from outside the economy, but develops in response to demand and wage growth and via investment.

All this is of course true when we are asking questions like, how much of our energy needs could in principle be met by renewable sources in 20 years? In that case, it is abundantly clear that the steep fall in the cost of wind and solar power we’ve already seen is the result of increased demand for them. It’s not something that would have happened on its own. But increasing returns and learning by doing are ubiquitous in real economies. In large buildings, for instance, the cost of constructing later floors is typically lower than the cost of constructing earlier ones.

In a world where hysteresis and increasing returns are important, it makes no sense to think in terms of a fixed amount of capacity, where producing more of one thing requires producing correspondingly less of something else. What is scarce, is the capacity to rapidly redirect resources from one use to a different one.

A second important dimension of the Keynesian perspective on production is that it is not simply a matter of combining material inputs, but happens within discrete social organisms. We have to take the firm seriously as ongoing community embodying multiple social logics. Firms combine the structured cooperation needed for production; a nexus of payments and incomes; an internal hierarchy of command and obedience; and a polis or imagined community for those employed by or otherwise associated with it.

While firms do engage in market transactions and exist — in principle at least — in order to generate profits, this is not how they operate internally. Within the firm, the organization of production is consciously planned and hierarchical. Wealth owners, meanwhile, do not normally own capital goods as such, but rather financial claims against these social organisms.

When we combine this understanding of production with Keynesian insights into money and finance , we are likely to conclude, as Keynes himself did, that an economy that depends on long-lived capital goods (and long-lived business enterprises, and scientific knowledge) cannot be effectively organized through the pursuit of private profit.

First, because the profits from these kinds of activities depend on developments well off in the future that cannot cannot be known with any confidence.

Second, because these choices are irreversible — capital goods specialized and embedded in particular production processes and enterprises. (Another aspect of this, not emphasized by Keynes, but one which wealth owners are very conscious of, is that wealth embodied in long-lived means of production can lose its character as wealth. It may effectively belong to the managers of the firm, or even the workers, rather than to its notional owners.) Finally, uncertainty about the future amplifies and exacerbates the problems of coordination.

The reason that many potentially valuable activities are not undertaken is not that they would require real resources that people would prefer to use otherwise. It is that people don’t feel they can risk the irreversible commitment those activities would entail. Many long-lived projects that would easily pay for themselves in both private and social terms are not carried out, because an insufficient capacity for trustworthy promises means that large-scale cooperation appears too risky to those in control of the required resources, who prefer to keep their their options open.

Or as Keynes put it: “That the world after several millennia of steady individual saving, is so poor as it is in accumulated capital-assets, is to be explained neither by the improvident propensities of mankind, nor even by the destruction of war, but by the high liquidity- premiums formerly attaching to the ownership of land and now attaching to money.”

The problem, Keynes is saying, is that wealth owners prefer land and money to claims on concrete productive processes. Monetary production means production organized by money and in pursuit of money. But also identifies conflict between production and money.

We see this clearly in a development context, where — as Joe Studwell has recently emphasized — the essential first step is to break the power of landlords and close off the option of capital flight so that private wealth owners have no option but to hold their wealth as claims on society in the form of productive enterprises.

The whole history of the corporation is filled with conflicts between the enterprise’s commitment to its own ongoing production process, and the desire of shareholders and other financial claimants to hold their wealth in more liquid, monetary form. The expansion or even continued existence of the corporation as an enterprise requires constantly fending off the demands of the rentiers to get “their” money back, now. The “complaining participants” of the Dutch East India Company in the 1620s, sound, in this respect, strikingly similar to shareholder activists of the 1980s.

Where privately-owned capital has worked tolerably well — as Keynes thought it had in the period before WWI, at least in the UK — it was because private owners were not exclusively or even mainly focused on monetary profit.

“Enterprise,” he writes, “only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.”

(It’s a curious thing that this iconic Keynesian term is almost always used today to describe financial markets, even though it occurs in a discussion of real investment. This is perhaps symptomatic of the loss of the production term of the monetary production theory from most later interpretations of Keynes.)

The idea that investment in prewar capitalism had depended as much on historically specific social and cultural factors rather than simply opportunities for profit was one that Keynes often returned to. “If the steam locomotive were to be discovered today,” he wrote elsewhere, “I much doubt if unaided private enterprise would build railways in England.”

We can find examples of the same thing in the US. The Boston Associates who pioneered textile factories in New England seem to have been more preserving the dominant social position of their interlinked families as in maximizing monetary returns. Schumpeter suggested that the possibility of establishing such “industrial dynasties” was essential to the growth of capitalism. Historians like Jonathan Levy give us vivid portraits of early American industrialists Carnegie and Ford as outstanding examples of animal spirits — both sought to increase the scale and efficiency of production as a goal in itself, as opposed to profit maximization.

In Keynes’ view, this was the only basis on which sustained private investment could work. A systematic application of financial criteria to private enterprise resulted in level of investment that was dangerously unstable and almost always too low. On the other hand — as emphasized by Kalecki but recognized by Keynes as well — a dependence on wealth owners pursuit of investment for its own sake required a particular social and political climate — one that might be quite inimical to other important social goals, if it could be maintained at all.

The solution therefore was to separate investment decisions from the pursuit of private wealth. The call for the “more or less comprehensive socialization of investment” at the end of The General Theory, is not the throwaway line that it appears as in that book, but reflects a program that Keynes had struggled with and developed since the 1920s. The Keynesian political program was not one of countercyclical fiscal policy, which he was always skeptical of. Rather it envisioned a number of more or less autonomous quasi-public bodies – housing authorities, hospitals, universities and so on – providing for the production of their own specific social goods, in an institutional environment that allowed them to ignore considerations of profitability.

The idea that large scale investment must be taken out of private hands was at the heart of Keynes’ positive program.

At this point, some of you may be thinking that that I have said two contradictory things. First, I said that a central insight of the Keynesian vision is that money and credit are essential tools for the organization of production. And then, I said that there is irreconcilable conflict between the logic of money and the needs of production. If you are thinking that, you are right. I am saying both of these things.

The way to reconcile this contradiction is to see these as two distinct moments in a single historical process.

We can think of money as a social solvent. It breaks up earlier forms of coordination, erases any connection between people.As the Bank of International Settlements economist Claudio Borio puts it: “a well functioning monetary system …is a highly efficient means of ‘erasing’ any relationship between transacting parties.” A lawyers’ term for this feature of money is privity, which “cuts off adverse claims, and abolishes the .. history of the account. If my bank balance is $100 … there is nothing else to know about the balance.”

In his book Debt, David Graeber illustrates this same social-solvent quality of money with the striking story of naturalist Ernest Thompson Seton, who was sent a bill by his father for all the costs of raising him. He paid the bill — and never spoke to his father again. Or as Marx and Engels famously put it, the extension of markets and money into new domains of social life has “pitilessly torn asunder the motley feudal ties that bound man to his “natural superiors”, and has left remaining no other nexus between man and man than naked self-interest, than callous “cash payment”.

But what they neglected to add is that social ties don’t stay torn asunder forever. The older social relations that organized production may be replaced by the cash nexus, but that is not the last step, even under capitalism. In the Keynesian vision, at least, this is a temporary step toward the re-embedding of productive activity in new social relationships. I described money a moment ago as a social solvent. But one could also call it a social catalyst. By breaking up the social ties that formerly organized productive activity, it allows them to be reorganized in new and more complex forms.

Money, in the Keynesian vision, is a tool that allows promises between strangers. But people who work together do not remain strangers. Early corporations were sometimes organized internally as markets, with “inside contractors” negotiating with each other. But reliance on the callous cash payment seldom lasted for long. Large-scale production today depends on coordination through formal authority. Property rights become a kind of badge or regalia of the person who has coordination rights, rather than the organizing principle in its own right.

Money and credit are critical for re-allocating resources and activity, when big changes are needed. But big changes are inherently a transition from one state to another. Money is necessary to establish new production communities but not to maintain them once they exist. Money as a social solvent frees up the raw material — organized human activity — from which larger structures, more extensive divisions of labor, are built. But once larger-scale coordination established, the continued presence of this social solvent eating away at it, becomes destructive.

This brings us to the political vision. Keynes, as Jim Crotty emphasizes, consistently described himself as a socialist. Unlike some of his American followers, he saw the transformation of productive activity via money and private investment as being a distinct historical process with a definite endpoint.

There is, I think, a deep affinity between the Keynes vision of the economy as a system of monetary production, and the idea that this system can be transcended.

If money is merely a veil, as orthodox economics imagines, that implies that social reality must resemble money. It is composed of measurable quantities with well-defined ownership rights, which can be swapped and combined to yield discrete increments of human wellbeing. That’s just the way the world is. But if we see money as a distinct institution, that frees us to imagine the rest of life in terms of concrete human activities, with their own logics and structures. It opens space for a vision of the good life as something quite different from an endless accumulation of commodities – a central strand of Keynes’ thinking since his early study of the philosopher G. E. Moore.

In contemporary debates – over climate change in particular – a “Keynesian” position is often opposed to a degrowth one. But as Victoria Chick observes in a perceptive essay, there are important affinities between Keynes and anti-growth writers like E. F. Schumacher. He looked forward to a world in which accumulation and economic growth had come to an end, daily life was organized around “friendship and the contemplation of beautiful objects,” and the pursuit of wealth would be regarded as “one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.”

This vision of productive activity as devoted to its own particular ends, and of the good life as something distinct from the rewards offered by the purchase and use of commodities, suggests a deeper affinity with Marx and the socialist tradition.

Keynes was quite critical of what he called “doctrinaire State Socialism.” But his objections, he insisted, had nothing to do with its aims, which he shared. Rather, he said, “I criticize it because it misses the significance of what is actually happening.” In his view, “The battle of Socialism against unlimited private profit is being won in detail hour by hour … We must take full advantage of the natural tendencies of the day.”

From Keynes’ point of view, the tension between the logic of money and the needs of production was already being resolved in favor of the latter. In his 1926 essay “The End of Laissez Faire,” he observed that “one of the most interesting and unnoticed developments of recent decades has been the tendency of big enterprise to socialize itself.” As shareholders’ role in the enterprise diminishes, “the general stability and reputation of the institution are more considered by the management than the maximum of pro

A shift from production for profit to production for use — to borrow Marx’s language — did not necessarily require a change in formal ownership. The question is not ownership as such, but the source of authority of those managing the production process, and the ends to which they are oriented. Market competition creates pressure to organize production so as to maximize monetary profits over some, often quite short, time horizon. But this pressure is not constant or absolute, and it is offset by other pressures. Keynes pointed to the example of the Bank of England, still in his day a private corporation owned by its shareholders, but in practice a fully public institution.

Marx himself had imagined something similar:

As he writes in Volume III of Capital,

Stock companies in general — developed with the credit system — have an increasing tendency to separate … management as a function from the ownership of capital… the mere manager who has no title whatever to the capital, … performs all the real functions pertaining to the functioning capitalist as such, … and the capitalist disappears as superfluous from the production process.

The separation of ownership from direction or oversight of production in the corporation is, Marx argues, an important step away from ownership as the organizing principle of production. “The stock company,” he continues, “is a transition toward the conversion of all functions… which still remain linked with capitalist property, into mere functions of associated producers.”

In short, he writes, the joint stock company represents as much as the worker-owned cooperative “the abolition of the capitalist mode of production within the capitalist mode of production itself.”

It might seem strange to imagine the tendency toward self-socialization of the corporation when examples of its subordination to finance are all around us. Sears, Toys R Us, the ice-cream-and-diner chain Friendly’s – there’s a seemingly endless list of functioning businesses purchased by private equity funds and then hollowed out or liquidated while generating big payouts for capital owners. Surely this is as far as one could get from Keynes’ vision of an inexorable victory of corporate socialism over private profit?

But I think this is a one-sided view. I think it’s a mistake — a big mistake — to identify the world around us as one straightforwardly organized by markets, the pursuit of profit and the logic of money.

As David Graeber emphasized, there is no such thing as a capitalist economy, or even a capitalist enterprise. In any real human activity, we find distinct social logics, sometimes reinforcing each other, sometimes in contradiction.

We should never imagine world around us — even in the most thoroughly “capitalist” moments — is simply the working out of a logic pdf property, prices and profit. Contradictory logics at work in every firm — even the most rapacious profit hungry enterprise depends for its operations on norms, rules, relationships of trust between the people who constitute it. The genuine material progress we have enjoyed under capitalism is not just due to the profit motive but perhaps even more so in spite of it.

One benefit of this perspective is it helps us see broader possibilities for opposition to the rule of money. The fundamental political conflict under capitalism is not just between workers and owners, but between logic of production process and of private ownership and markets. Thorstein Veblen provocatively imagined this latter conflict taking the form of a “soviet of engineers” rebelling against “sabotage” by financial claimants. A Soviet of engineers may sound fanciful today, but conflicts between the interests of finance and the needs of productive enterprise — and those who identify with them — are ongoing.

Teaching and nursing, for example, are the two largest occupations that require professional credentials.But teachers and nurses are also certainly workers, who organize as workers — teachers have one of the highest unionization rates of any occupation. In recent years, this organizing can be quite adversarial, even militant. We all recall waves of teacher strikes in recent years — not only in California but in states with deeply anti-union politics like West Virginia, Oklahoma, Arizona and Kentucky. The demands in these strikes have been workers’ demands for better pay and working conditions. But they have also been professionals’ demands for autonomy and respect and the integrity of their particular production process. From what I can tell, these two kinds of demands are intertwined and reinforcing.

This struggle for the right to do one’s job properly is sometimes described as “militant professionalism.” Veblen may have talked about engineers rather than teachers, but this kind of politics is, I think, precisely what he had in mind.

More broadly, we know that public sector unions are only effective when they present themselves as advocates for the public and for the users of the service they provide, and not only for their members as workers. Radical social service workers have fought for the rights of welfare recipients. Powerful health care workers unions, like SEIU 1199 in New York, are successful because they present themselves as advocates for the health care system as a whole.

On the other side, I think most of us would agree that the decline or disappearance of local news outlets is a real loss for society. Of course, the replacement of newspapers with social media and search engines isn’t commodification in the straightforward sense. This is a question of one set of for-profit businesses being displaced by another. But on the other hand, newspapers are not only for-profit businesses. There is a distinct professional ethos of journalism, that developed alongside journalism as a business. Obviously the “professional conscience” (the phrase is Michelet’s) of journalists was compatible with the interests of media businesses. But it was not reducible to them. And often enough, it was in tension with them.

I am very much in favor of new models of employee-owned, public and non-profit journalism. Certainly there is an important role for government ownership, and for models like Wikipedia. But I also think — and this is the distinct contribution of the Keynesian socialist — that we should not be thinking only in terms of payments and ownership. The development of a distinct professional norms for today’s information sector is independently valuable and necessary, regardless of who owns new media companies. It may be that creating space for those norms is the most important contribution that alternative ownership models can make

For a final example of this political possibilities of the monetary-production view, we can look closer by, to higher education, where most of us in this room make our institutional home. We have all heard warnings about how universities are under attack, they’re being politicized or corporatized, they’re coming to be run more like businesses. Probably some of us have given such warnings.

I don’t want to dismiss the real concerns behind them. But what’s striking to me is how much less often one hears about the positive values that are being threatened. Think about how often you hear people talk about how the university is under attack, is in decline, is being undermined. Now think about how often you hear people talk about the positive values of intellectual inquiry for its own sake that the university embodies. How often do you hear people talk about the positive value of academic freedom and self-government, either as specific values of the university or as models for the broader society? If your social media feed is like mine, you may have a hard time finding examples of that second category at all.

Obviously, one can’t defend something from attack without at some point making the positive case that there is something there worth defending. But the point is broader than that. The self-governing university dedicated to education and scholarship and as ends in themselves, is not, despite its patina of medieval ritual, a holdover from the distant past. It’s an institution that has grown up alongside modern capitalism. It’s an institution that, in the US especially, has greatly expanded within our own lifetimes.

If we want to think seriously about the political economy of the university, we can’t just talk about how it is under attack. We must also be able to talk about how it has grown, how it has displaced social organization on the basis of profit. (We should note here the failure of the for-profit model in higher education.) We should of course acknowledge the ways in which higher education serves the needs of capital, how it contributes to the reproduction of labor power. But we also should acknowledge all the ways that is more than this.

When we talk about the value of higher education, we often talk about the products — scholarship, education. But we don’t often talk about the process, the degree to which academics, unlike most other workers, manage our own classrooms according to our own judgements about what should be taught and how to effectively teach it. We don’t talk about how, almost uniquely in modern workplaces, we the faculty employees make decisions about hiring and promotion collectively and more or less democratically. People from all over the world come to study in American universities. It’s remarkable — and remarkably little discussed — how this successful export industry is, in effect, run by worker co-ops.

At this moment in particular, it is vitally important that we make the case for academic freedom as a positive principle.

Let me spell out, since it may not be obvious, how this political vision connects to the monetary production vision of the economy that I was discussing earlier.

The dominant paradigm in economics — which shapes all of our thinking, whether we have ever studied economics in the classroom — is what Keynes called, I distinction to his own approach, the real exchange vision. From the real-exchange perspective, money prices and payments are a superficial express of pre-existing qualities of things — that they are owned by someone, that they take a certain amount of labor to produce and have a definite capacity to satisfy human needs. From this point of view, production is just a special case of exchange.

It’s only once we see money as an institution in itself, a particular way of organizing human life, that we can see production as something distinct and separate from it. That’s what allows us to see the production process itself, and the relationships and norms that constitute it, as a site of social power and a market on a path toward a better world. The use values we socialists oppose to exchange value exist in the sphere of production as well as consumption. The political demands that teachers make as teachers are not legible unless we see the activity they’re engaged in in terms other than equivalents of money paid and received.

I want to end by sketching out a second political application of this vision, in the domain of climate policy.

First, decarbonization will be experienced as an economic boom. Money payments, I’ve emphasized, are an essential tool for rearranging productive activity, and decarbonizing will require a great deal of our activity to be rearranged. There will be major changes in our patterns of production and consumption, which in turn will require substantial changes to our means of production and built environment. These changes are brought about by flows money.

Concretely: creating new means of production, new tools and machinery and knowledge, requires spending money. Abandoning old ones does not. Replacing existing structures and tools and techniques faster than they would be in the normal course of capitalist development, implies an increase in aggregate money expenditure. Similarly, when a new or expanding business wants to bid workers away from other employment, they have to offer a higher wage than an established business needs to in order to retain its current workers. So a rapid reallocation of workers implies a faster rise in money wages.

So although decarbonization will substantively involve a mix of expansions of activity in some areas and reduction of activity in others, it will increase the aggregate volume of money flows. A boom in this sense is not just a period of faster measured growth, but a period in which demand is persistently high relative to the economy’s productive potential and tight labor markets strengthen the bargaining position of workers relative to employers – what is sometimes called a “high-pressure economy.”

Second. There is no tradeoff between decarbonization and current living standards. Decarbonization is not mainly a matter of diverting productive activity away from other needs, but mobilizing new production, with positive spillovers toward production for other purposes.

Here again, there is a critical difference between the monetary-production and the real-exchange views of the economy. In the real-exchange paradigm, we possess a certain quantity of “means.” If we choose to use some of them to reduce our carbon emissions, there will be less available for everything else. But when we think in terms of social coordination organized in large part through money flows, there is no reason to think this. There is no reason to believe that everyone who is willing and able to work is actually working, or people’s labor is being used in anything like its best possible way for the satisfaction of real human needs. Nor are relative prices today a good guide to long-run social tradeoffs.

Third. If we face a political conflict involving climate and growth, this will come not because decarbonization requires accepting a lower level of growth, but because it will entail faster economic growth than existing institutions can handle. Today’s neoliberal macroeconomic model depends on limiting economic growth as a way of managing distributional conflicts. Rapid growth under decarbonization will be accompanied by disproportionate rise in wages and the power of workers. Most of us in this room will probably see that as a desirable outcome. But it will inevitably create sharp conflicts and resistance from wealth owners, which need to be planned for and managed. Complaints about current “labor shortages” should be a warning call on this front.

Fourth. There is no international coordination problem — the countries that move fastest on climate will reap direct benefits.

An influential view of the international dimension of climate policy is that “free riding … lies at the heart of the failure to deal with climate change.” (That is William Nordhaus, who won the Nobel for his work on the economics of climate change.) Individual countries, in this view, bear the full cost of decarbonization measures but only get a fraction of the global benefits, and countries that do not engage in decarbonization can free-ride on the efforts of those that do.

A glance at the news should be enough to show you how backward this view is. Do Europeans look at US support for the wind, solar and battery industries, or the US at China’s support for them, and say, “oh, what wonderfully public-spirited shouldering of the costs of the climate crisis”? Obviously not. Rather, they are seen as strategic investments which other countries, in their own national interest, must seek to match.

Fifth. Price based measures cannot be the main tools for decarbonization.

There is a widely held view that the central tool for addressing climate should be an increase in the relative price of carbon-intensive commodities, through a carbon tax or equivalent. I was at a meeting a few years ago where a senior member of the Obama economics team was also present. “The only question I have about climate policy,” he said, “is whether a carbon tax is 80 percent of the solution, or 100 percent of the solution.” If you’ve received a proper economics education, this is a very reasonable viewpoint. You’ve been trained to see the economy as essentially an allocation problem where existing resources need to be directed to their highest-value use, and prices are the preferred tool for that.

From a Keynesian perspective the problem looks different. The challenge is coordination — bottlenecks and the need for simultaneous advances in multiple areas. Markets can, in the long run, be very powerful tools for this, but they can’t do it quickly. For rapid, large-scale reorganization of activity, they have to be combined with conscious planning — and that is the problem. The fundamental constraint on decarbonization should not be viewed as the potential output of the economy, but of planning capacity for large-scale non-market coordination.

If there is a fundamental conflict between capitalism and sustainability, I suggest, it is not because the drive for endless accumulation in money terms implies or requires an endless increase in material throughputs. Nor is it the need for production to generate a profit. There’s no reason why a decarbonized production process cannot be profitable. It’s true that renewable energy, with its high proportion of fixed costs, is not viable in a fully competitive market — but that’s a characteristic it shares with many other existing industries.

The fundamental problem, rather, is that capitalism treats the collective processes of social production as the private property of individuals. It is because the fiction of a market economy prevents us from developing the forms of non-market coordination that actually organize production, and that we will need on a much larger scale. Rapid decarbonization will require considerably more centralized coordination than is usual in today’s advanced economies. Treatment of our collective activity to transform the world as if it belonged exclusively to whoever holds the relevant property rights, is a fundamental obstacle to redirecting that activity in a rational way.

At Barron’s: Thank Full Employment, Not AI, for Rising Productivity

(I write a monthly opinion piece for Barron’s. This one was published there in September. My previous pieces are here.)

New data about productivity are some of the best on record in recent years. That’s good news for economic growth. But just as important, it offers support for the unorthodox idea that demand shapes the economy’s productive potential. Taking this idea seriously would require us to rethink much conventional wisdom on macroeconomic policy.

Real output per hour grew 2.6% in 2023, according to the Bureau of Labor Statistics, exceeding the highest rates seen between 2010 and the eve of the pandemic. That said, productivity is one of the most challenging macroeconomic outcomes to measure. It is constructed from three distinct series—nominal output, prices, and employment. Short-term movements often turn out to be noise. It’s an open question whether that high rate will be sustained. But if it is, that will tell us something important about economic growth.

Discussions of productivity growth tend to treat it as the result of unpredictable scientific breakthroughs and new technologies, whose appearance has nothing to do with current economic conditions. This view of technological change as “exogenous,” in the jargon, is entrenched in economics textbooks. And it’s reinforced by the self-mythologizing barons of Silicon Valley, who are only too happy to take credit for economic good news.

The economic conditions that lead companies to actually adopt new technologies get much less attention, as does the fact that much productivity growth comes from people shifting from lower-value to higher-value activities without the need for any new technology at all.

A recent New York Times article is typical. It discusses faster productivity growth almost entirely in terms of the new technologies — AI, Zoom, internet shopping — that might, or might not, be contributing. Not until 40 paragraphs in is there a brief mention of the strong labor market, and the incentives that rising wages create to squeeze more out of each hour of labor.

What if we didn’t treat this as an afterthought? There’s a case to be made that demand is, in fact, a central factor in productivity growth.

The economic historian Gavin Wright has made this case for both the 1990s — our modern benchmarks for productivity success stories — and the 1920s, an earlier period of rapid productivity growth and technological change. Wright considers the adoption of general-purpose technologies: electricity in the ‘20s and computers in the ‘90s. Both had existed for some time but weren’t widely adopted until rising labor costs provided the right incentives. He observes that in both periods strong wage growth started before productivity accelerated.

In the retail sector, for instance, it was in the 1990s that IT applications like electronic monitoring of shelf levels, barcode scanning and electronic payments came into general use. None of these technologies were new at the time; what had changed was the tight market for retail employment that made automation worthwhile.

The idea that demand can have lasting effects on the economy’s productive potential – what economists call hysteresis — has gotten attention in recent years. Discussions of hysteresis tend to focus on labor supply — people dropping out of the labor market when jobs are scarce, and re-entering when conditions improve. The effect of demand on productivity is less often discussed. But it may be even more important.

After the 2007-2009 recession, gross domestic product in the U.S. (and most other rich countries) failed to return to its pre-recession trend. By 2017, a decade after the recession began, real GDP was a full 10% below what prerecession forecasters had expected. There is wide agreement that much, if not all, of this shortfall was the result of the collapse of demand in the recession. Former Treasury Secretary Larry Summers at the time called the decisive role of demand in the slow growth of the 2010s a matter of “elementary signal identification.”

Why did growth fall short? If you look at the CBO’s last economic forecasts before the recession, the agency was predicting 6% growth in employment between 2007 and 2017. And as it turned out, over those ten years, employment grew by exactly 6%. The entire gap between actual GDP and the CBO’s pre-recession forecasts was from slower growth in output per worker. In other words, this shortfall was entirely due to lower productivity.

If you believe that slow growth in the 2010s was largely due to the lingering effects of the recession — and I agree with Summers that the evidence is overwhelming on this point — then what we saw in that decade was weak demand holding back productivity. And if depressed demand can slow down productivity growth, then, logically, we would expect strong demand to speed it up.

A few economists have consistently made the case for this link. Followers of John Maynard Keynes often emphasize this link under the name “Verdoorn’s law.” The law, as Keynesian economist Matias Vernengo puts it in a new article, holds that “technical change is the result, and not the fundamental cause of economic growth.” Steve Fazzari, another Keynesian economist, has explored this idea in several recent papers. But for the most part, mainstream economists have yet to embrace it.

This perspective does occasionally make it into the world of policy debates. In a 2017 report, Josh Bivens of the Economic Policy Institute argued that “low rates of unemployment and rapid wage growth would likely induce faster productivity growth.” Skanda Amarnath and his colleagues at Employ America have made similar arguments. In a 2017 report for the Roosevelt Institute, I discussed a long list of mechanisms linking demand to productivity growth, as well as evidence that this was what explained slower growth since the recession.

If you take these sorts of arguments seriously, the recent acceleration in productivity should not be a surprise. And we don’t need to go looking for some tech startup to thank for it. It’s the natural result of a sustained period of tight labor markets and rising wages.

There are many good reasons for productivity growth to be faster in a tight labor market, as I discussed in the Roosevelt report. Businesses have a stronger incentive to adopt less labor-intensive techniques, and they are more likely to invest when they are running at full capacity. Higher-productivity firms can outbid lower-productivity ones for scarce workers. New firms are easier to start in a boom than in a slump.

When you think about it, it’s strange that concepts like Verdoorn’s law are not part of the economics mainstream. Shouldn’t they be common sense?

Nonetheless, the opposite view underlies much of policymaking, particularly at the Federal Reserve. At his most recent press conference, Fed Chair Jay Powell was asked whether he still thought that wage growth was too high for price stability. Powell confirmed that, indeed, he thought that wage gains were still excessively strong. But, he said, they were gradually moving back to levels “associated — given assumptions about productivity growth — with 2% inflation.”

The Fed’s view that price stability requires limiting workers’ bargaining power is a long-standing problem. But focus now on those assumptions. Taking productivity growth as given, unaffected by policy, risks making the Fed’s pessimism self-confirming. (This is something that Fed economists have worried about in the past.) If the Fed succeeds in getting wages down to the level consistent with the relatively slow productivity growth it expects, that itself may be what stops us from getting the faster productivity growth that the economy is capable of.

The good news is that, as I’ve written here before, the Fed is not all-powerful. The current round of rate hikes has not, so far, done much to cool off the labor market. If that continues to be the case, then we may be in for a period of sustained productivity growth and rising income.

The Future of Health Care Reform

This is a guest post by Michael Kinnucan.

The Collapsing Center and Solidifying Periphery of the US Healthcare System

Contrary to what most people on the US left might tell you, there’s nothing intrinsically impossible about building a healthcare system that provides universal coverage on the foundation of employer-sponsored insurance. Germany and France and several other countries have done it, and we could do it too. The way you do it is to start with core-economy full-time workers and their families, and then steadily patch and regulate your way to universal coverage (“what about retirees? The unemployed? Freelancers? What happens when people change jobs? What about employers too small to offer coverage?” and so forth) until you’ve covered everyone. This kind of system will never be quite as seamless and efficient as single-payer, but it is workable.

What has made this effort uniquely difficult in the US case, however, has been the spiraling overall cost of US healthcare. Virtually all healthcare systems in the developed world–including multi-payer systems like Germany’s–are built on a firm foundation of medical price control. US observers are acutely aware of this in the case of pharmaceuticals, but the situation is similar across the healthcare industry; Germany, for instance, sets the price of physicians’ services and hospital care through regional sectoral bargaining.

The US, for political reasons, has proven incapable of imposing similar discipline on the healthcare market. Prices are negotiated in a medical marketplace where the sellers of healthcare hold significant market power, and this process is intrinsically inflationary. This inflation has been far more intense in the employer-insurance market than in the public sector, particularly since the mid-1980s; Medicare and private-insurance prices have diverged to the point where commercial insurers pay on average 254% of Medicare for the same procedures.

This inflationary dynamic has put continuous pressure on the employer-sponsored insurance market, with large, high-margin businesses complaining about the ever-growing cost of healthcare while smaller and lower-wage businesses simply restrict or cancel coverage. Thus would-be US healthcare reformers have found themselves in the strange position of trying to “patch” marginal populations into a system centered on employer-based coverage even as the center of the system constantly threatens to collapse.

Thus, while the US public tends to equate employer-based coverage with quality and stability and to imagine healthcare reform as the process of granting new populations access to that quality and stability, in fact employer-sponsored insurance has continuously declined in quality and occasionally been faced with a death spiral in the face of constantly increasing costs. And while proponents of universal healthcare tend to be motivated by the plight of those locked out of the employer-based healthcare system (the poor, the unemployed), major efforts at healthcare reform have often been driven not by the problems of these groups but by problems within the employer market.

The Cost Control Deadlock

This dynamic has shaped mainstream US healthcare reform efforts since the Carter administration. The ambition of reformers has been to simultaneously expand coverage and control costs. This double aim is frequently given a superficial fiscal gloss (coverage expansion is “paid for” through cost control), but its real logic is political. Proponents of this strategy hope to (1) use the promise of cost control (in the employer market) to guarantee business support for coverage expansion (generally through public programs), while simultaneously (2) using coverage expansion (providing more paying customers for the healthcare industry) to mitigate healthcare industry opposition to cost control (reducing aggregate payments to the healthcare industry).

The logic of this interlocking set of political bargains has proven more compelling in theory than successful in practice. More specifically, the US political system has revealed a systematic preference for simply spending more money to expand coverage without doing much to achieve cost control–particularly employer-market cost control. The healthcare lobby has shown itself to be very focused on opposing cost control and highly effective in doing so, to the point where even obviously egregious abuses that provoke nominally bipartisan opposition have taken decades to address (so-called “surprise billing,” for instance, or the blank check to pharmaceutical companies incorporated in Medicare Part D). The central political lesson of US healthcare reform efforts going all the way back to Truman is that it’s virtually impossible to pass major reform without buying off the provider lobbies.

For this reason reformers have tended to want to hide the ball on cost control, avoiding obvious and internationally well-known methods like price control and national budgeting in favor of Rube Goldberg “managed competition” and “value-based payment” schemes that are unpopular with patients, difficult for the public to understand and of questionable efficacy in any case.

The business lobby, in turn–which reformers have for decades seen as the natural constituency for cost control–has tended to take the clear downsides of reform (higher taxes and more regulation) more seriously than the alleged upside of long-term cost control, and to put more faith in the tried-and-true method of shifting costs onto employees than on regulatory schemes to achieve savings. Business (at least big business) tends to like the idea of cost-control-oriented healthcare reform in theory, but in practice has proven a fickle ally for reformers.

Abandoning Cost Control and Achieving Coverage: The Legacy of the ACA

This situation represents a deadlock for what used to be called “comprehensive” healthcare reform, but no such deadlock applies to the far simpler project of simply using tax dollars to pay for expanded healthcare coverage. Such a strategy may face opposition from fiscal conservatives, but it is enduringly popular with the US public (who have long been committed to the idea of universal healthcare) and under the right conditions can easily win support from the healthcare lobbies (who stand to attract those public dollars). The political project of “comprehensive” healthcare reform died a famous death in 1993, but the political project of “spending public money to buy people healthcare” scored notable successes, including a steady expansion of Medicaid eligibility and the passage of CHIP during the Clinton administration and the passage of Medicare Part D under George W. Bush.

The situation, in other words, was the very opposite of how progressives have sometimes described it–it’s not that the US political system wants universal health coverage but is too stingy to pay for it, but rather that the US political system is perfectly prepared to do universal coverage as long as no significant savings are attached.

The ACA was the culmination of this tradition. That likely wasn’t what its architects intended–healthcare wonks still dreamed of “bending the cost curve”–but it was what the law did. While the ACA is best remembered for creating the “individual market” with its famous three-legged stool, the real story is simpler: The ACA spent roughly a trillion dollars over 10 years to cover roughly 30 million people through a combination of free Medicaid and very heavily subsidized private insurance, with the funding coming not from comprehensive cost control but from from tax revenue and suppression of Medicare cost increases.¹

*From McDonough, Inside National Health Reform, p. 282.*

One wrinkle to this reform strategy was the risk of employer “dumping”: if the government was prepared to heavily subsidize working-class insurance coverage, why wouldn’t employers–and workers, for that matter–simply go where the subsidies were? This was a particularly significant risk for low-wage workers; such workers were eligible for very significant subsidies on the exchange, their employers would be eager to control costs, and their employer-sponsored coverage was often nothing to write home about. They might well have been better off on the exchanges or Medicaid.

One can imagine a version of the ACA that simply embraced this dynamic, moving millions of low-wage workers into heavily subsidized individual coverage–and that version would likely have been more progressive. It would also have been significantly more disruptive and costly. Instead, the ACA dealt with this problem primarily through the “employer mandate,” which required employers with over 50 employees to offer coverage or pay a significant penalty. Smaller employers were exempt, but the law also reformed the “small group” insurance market in which these firms purchased insurance, requiring community rating for these plans, which succeeded–for a time, at least–in preventing a looming death spiral in that market.

On its own terms, this general strategy was a success. The ACA insured millions of people (by buying them insurance) while avoiding “dumping.” The share of non-elderly Americans in employer coverage, which fell nearly 10 percentage points between 1999 and 2011, rose slightly as the economy recovered from the Great Recession and has remained quite steady ever since. While over 8% of Americans remain uninsured, progressives should not mistake this for a fundamental limitation in the ACA framework: many of the uninsured are in states that haven’t expanded Medicaid, or are eligible for coverage but not enrolled, or fall into various immigrant groups not covered by the law. Aggressive state action on enrollment and uptake within the ACA framework and a commitment to covering immigrants out of state funds could reduce uninsured rates to the disappearing point.

The Unfinished Business of Cost Control

What of cost control? There was one radical cost-control proposal on the table: the much-misunderstood “public option,” which in its original form would have introduced into the marketplace a public plan paying Medicare prices. This would effectively have imported public cost control into the private market, forcing private insurers to either slash their own payments to providers to Medicare levels or get out. The consequences of such a move would have upset the entire structure of the ACA; exchange insurance would have become far cheaper than employer insurance, drawing tens of millions of people out of employer insurance into the market and radically reshaping the US health insurance system. Clearly no such move was in the cards, and the public option was first modified to pay market prices (which would have defeated its purpose), then dropped entirely.

To the extent that the ACA did anything on cost control in the individual or employer market, it addressed the issue by inviting employers to make their insurance offerings worse. Employers were required to offer some form of insurance, but the standard for that insurance was very low indeed; employees could be charged up to nearly 10% of their income in premiums for coverage with high deductibles and extensive cost-sharing. More ambitiously, the ACA attempted to fulfill a longstanding bipartisan dream of healthcare policy wonks by rolling back the tax subsidy for employer-based insurance; the so-called “Cadillac tax” would have revoked the subsidy initially only for the most generous employer insurance, but would over time have come to apply to most insurance. This effort corresponded to a long-held belief in the healthcare policy community that the tax subsidy encouraged employers to offer excessively generous coverage, and that this coverage in turn drove US healthcare costs.

Charitably, these design choices represented an effort at cost control through the “skin in the game” strategy: when required to pay a larger portion of their healthcare costs, Americans would be less likely to go to the doctor just for fun. Less charitably, they were an invitation for employers to at any rate control employers’ healthcare costs, by shifting a growing share of those costs onto employees. This safety valve was crucial, since employers would no longer be able to limit their costs as they had in the past, by dropping coverage.

The Unfinished Business of the ACA and the Coming Crisis in Employer Insurance

As I said above, the ACA worked on its own terms: the law actually passed, it greatly expanded coverage by providing government subsidies for those locked out of the employer market, and it did so without causing massive outflows or disruptions in employer insurance. The strategy of expanding coverage without controlling costs was effective.

But that was over a decade ago, and costs have continued to rise. The ACA left employer-based insurance untouched at the heart of the US healthcare system, without resolving the inflationary pressure in the employer market. This pressure continues to grow. The average premium for employer-sponsored individual coverage has nearly doubled, from $4824 in 2009 to $8435 in 2023; for family coverage the number is $23,968.

How have employers responded? First and foremost by shifting a growing share of medical costs onto their employees. Worker contributions to premium payment, although capped at around 9% of worker income by the ACA, have grown in tandem with total premiums. At the same time, so-called “cost sharing” in US health insurance takes many forms and is difficult to measure, but the simplest proxy–the annual deductible–has nearly tripled in nominal terms since the advent of the ACA, from $533 in 2009 to $1568 in 2023, with workers at small firms paying $2138.² As recently as 2006, 45% of workers faced no deductible for their coverage; that figure is now less than 10%. Many workers face significant cost-sharing in the form of “coinsurance” even after they hit their deductibles; it is common for a worker to owe 20% of hospital costs up to an out-of-pocket max that can be well north of $10,000. The growth of cost-sharing is the major contributor to a growing medical debt crisis, as hospitals attempt to collect from patients who can’t pay despite having insurance.

It is important to note that cost-sharing has restrained premium increases; if employers had had to hold cost-sharing constant, premiums would have grown even faster. This strategy is quickly approaching its limits, however; for actuarial reasons, further increases in deductible will face diminishing returns in premium savings, and at some point employers will run up against even the ACA’s fairly low bar on coverage quality. These limits are already being reached in the low-wage labor market.

Where will employers turn next? One possibility is to skirt the limits of the ACA’s employer mandate–for example by offering plans that cover “minimum essential benefits” under the ACA but do not meet the ACA’s “minimum value” requirements because they leave employers with enormous out-of-pocket expenses. An employee misinformed enough to enroll in such coverage is effectively uninsured, but the employer pays only part of the penalty for not offering insurance. Another option is so-called “reference-based pricing” schemes, which do not have networks and do not negotiate prices with providers, instead paying a low standard rate for care. Employees with this kind of coverage may find most providers unwilling to treat them and may be “balance billed” for enormous amounts of money when they do receive care.

As a last resort–particularly if the loopholes I just described are closed by regulators, which they should be and which provider lobbies will demand that they are–some employers may choose to simply drop coverage and pay the penalty. The ACA’s employer mandate penalties are significant, but they’re not prohibitive; if premiums continue rising there will come a point when they’re cheaper than offering insurance. If this happens, employees will have no choice but to seek insurance on the individual market or (if they’re poor enough) enroll in Medicaid.

A tight labor market has limited these dynamics so far, but the next recession may prove a turning point. At that point, the dam the ACA set up to prevent employers from “dumping” employees into publicly subsidized coverage will have broken.

Progressive Strategy for the Next Healthcare Crisis

As employer insurance begins to unravel around the edges, progressives will be tempted to step in and save it. They should think twice before doing so. There’s a lot to be said for a situation in which a growing share of Americans receive health insurance through Medicaid and through public subsidy on the ACA exchanges.

Medicaid and (especially) the ACA exchange have their problems, but they already offer better and more affordable insurance than low-end employer plans, and more importantly their problems are far easier to fix than the problems of the employer market. If Medicaid pays too little to providers and has too few providers, its reimbursement rates can be raised. If ACA exchange insurance is too expensive, that insurance can be subsidized, at both the state and federal level. If exchange insurance has high cost-sharing and inadequate networks, states and the federal government have full power to set standards in these markets. Perhaps most importantly, states have proven quite effective at controlling costs for the non-elderly Medicaid population, and could do the same for the exchange population, as recent state experiments with so-called “public options” in Washington, New Mexico and elsewhere demonstrate. States can even find ways to expand Medicaid-like coverage for working-class people, as New York and Minnesota already do through Basic Health Plan programs.

All these policy aims are far more easily achieved in a single, centralized individual market than in the fragmented and opaque employer market–and they free policymakers from a sharp tradeoff where raising standards for working-class insurance coverage imposes costs on businesses or causes them to drop coverage. Non-employer insurance also offers far better opportunities for state-level policymaking than does the employer marketplace, since states are virtually banned from regulating employer insurance under ERISA. If ambitious healthcare reform is blocked at the federal level for the foreseeable future, progressives have ample opportunity to experiment with such reform in the states.

What would such an agenda look like? At the federal level, the Biden administration can likely raise the bar on employer insurance through regulatory action, taking a closer look at whether employer insurance meets “minimum essential coverage” and especially “minimum value” standards and whether employers are appropriately informing employees of their rights. Setting clearer minimum standards on employer insurance will cause some employers to stop offering it–and instead of fighting that dynamic, progressives should focus on ensuring that their employees have good options elsewhere, by instituting or expanding Basic Health Plan and Medicaid buy-in options, increasing subsidies and standards on state and federal exchanges, and implementing robust public options wherever possible.

Even if successful, this strategy wouldn’t spell the end of employer insurance overnight. 59% of non-elderly Americans receive insurance through their or their family’s employer; that’s a lot of people, and it would still be a lot of people even if employers began to drop coverage. But it’s easy to imagine a virtuous cycle where, as Medicaid and individual market populations grow, a large and diverse constituency grows for improving them. In the long run, the prospects for truly universal healthcare might be far better than they are today.

Thoughts on International Finance, with Application to the US and China

(I wrote this back in 2020, and never posted it. The context is different now, but the substance still seems valid.)

Here is my mental model, for whatever it’s worth:

(1) The US-China trade balance is determined in the short to medium run by relative income growth in the two countries. In the medium to long run relative prices do play a role. But at least past the early stages of industrialization, the impact of exchange rates is thru producer entry/exit than thru expenditure switching. The impact of the overvalued dollar of the early 80s came mainly through e.g. the bankruptcy of US steel producers selling at world prices, rather than a loss of market share from selling at US prices.

(2) Chinese capital controls limit cross-border financial flows. This especially limits the acquisition of foreign assets (including real estate, consequentially for New York) by Chinese firms and households. This implies greater net inward financial flows than there would be in absence of controls. This is probably the most important Chinese policy with respect to cross-border flows — a broad liberalization would be more likely to push the renminbi down than up.

(3) The Chinese central bank passively accumulates/decumulates whatever level of reserves are implied by the combination of 1 and 2.

(4) The exchange rate is either chosen by one or both governments or determined in speculative markets. (In practice this means the Chinese government, but there’s no in-principle reason why this has to be so.) There is no meaningful link from the trade balance to the exchange rate, and at most a weak link from the exchange rate to the trade balance. Exchange rate interventions are not an independent factor in reserve changes.

(5) The interest rate on US Treasury debt is determined by some mix of Fed policy and self-confirming market expectations (convention). Chinese reserve purchases play zero role.

(6) US deficit spending is not constrained, required, or influenced in any way by foreign reserve accumulation. When desired foreign reserve accumulation departs from new Treasury issues, the gap is accommodated by net sales between foreign central banks and the private sector.

(7) If a mismatch between the supply of Treasury issues and the demand for reserve accumulation creates pressure anywhere, it will be on private assets that are close substitutes for Treasuries. In particular, it is plausible that insufficient federal borrowing in 1990s-2000s helped create the mortgage securitization market.

(8) Returning to exchange rates. The fact that import price elasticities are low, and that most trade is priced in dollars, means that exchange rates affect trade mainly via exporters’ profit margins. An appreciation can undermine exports, but this is a slow process of failure/exit by exporters, and thus strongly depends on financial capacity of exporters to operate with diminished margins. So for instance the large, roughly symmetrical movements in the dollar-yen exchange rate in the first and second halves of the 1980s affected the US tradable sector more than the Japanese, because Japan’s bank-based financial system plus the lack of shareholder pressure made it easier to sustain losses for extended period there than in the US.

In the textbooks, we get a picture of a tightly articulated system where a change in behavior in one place must lead to an exactly offsetting change somewhere else, mediated by price changes. Given a set of fundamental parameters, there is only one possible equilibrium. The considerations above suggest a different vision.

In the orthodox vision, international trade and financial flows are like a pool of water. If you drop a rock in, the whole surface of the pool rises by the same amount. Of course there are passing ripples. But knowing what level this part of the pool was at a while go doesn’t tell you anything about what level it is at now. One could, though, just as easily imagine a pile of rocks. When you move one rock, it normally affects only the rocks in the immediate vicinity. And the same rocks can be piled up in many different ways; where they are now depends on where they were before.

From where I’m sitting, there are three major sources of flexibility in the international system, all of which undermine any claim that shift in one flow must lead to equivalent shift in some other flow.

First is the existence of passive, accommodating positions that act as buffers. Central bank reserves can function this way; this is accepted in mainstream theory. But so can bank loans and deposits, and positions taken by fx specialists. In the short run, bank deposits are always accommodating buffers for any other flow.

Second is speculative price dynamics that make asset demand endogenous to current price. Concretely: If an asset is held largely in hope of capital gains, as opposed to yield or use in production, and if there are anchored expectations of normal or long-run price x, then any position that produces a price move away x implies capital gains for anyone who takes the other side of the position. In markets where these kinds of speculative dynamics operate – and I think they operate very widely – then even large changes in flows don’t have to lead to significant price adjustments. (Conversely, shifting expectations can lead to large price changes without any shift in flows.)

Third is the fact that trade adjustment happens mainly thru entry/exit rather than expenditure switching in product markets. This means in effect that the balance sheets of exporting firms act as shock absorbers. Let’s say that a country’s financial assets become more desirable to global wealth owners, causing a financial inflow and (plausibly though not necessarily) an appreciation of its currency. In the textbook story, this leads to an equal and immediate fall in net exports. But in reality, with exports priced in global markets, the immediate effect is a fall in the profitability of exporters. Only over time, as those firms go bankrupt or give up on export markets, will trade volumes change.

Thirteen Ways of Looking at Money

I taught a class last semester on alternative theories of money, drawing heavily on Money and Things, the book I am working on with Arjun Jayadev. It was one of the best classes I’ve ever taught in terms of the quality of the discussions. John Jay MA students are always great, but this group was really exceptional. It was a a privilege to have such thoughtful and wide-ranging conversations, with such an enthusiastic and engaged group of (mostly) young people.

The class syllabus is here. A number of the readings were draft chapters from the book. I am not posting these publicly, but if you are interested you can contact me and I’ll be happy to share.

In this post, I want to sketch out some of the puzzles and questions around money — my own version of what makes money difficult. Many of these were explicit topics during the semester, others were in the background. I wouldn’t claim this is a comprehensive list, but I think most debates around money fall somewhere on here.

The first problem is defining the topic. When we talk about “money” as a distinct set of questions in economics, what are we distinguishing from what? In particular, are finance, credit and interest on the money side of the line? Given that aggregate demand is, presumably, defined in terms of desired monetary expenditure, are demand and its effects a subset of questions around money? The main classification codes for economics articles include a category for “Macroeconomics and Monetary Economics”; this suggests an affirmative answer, at least in the mainstream imagination. Do we agree?

Put another way, a focus on money in economic analysis means something quite different if the implied alternative is an imagined world of barter, versus if it’s a a broader range of financial arrangements. In the first case, talking about money involves a broadening of perspective, in the second case a narrowing of it. If someone says, “we have to think about the business cycle in terms of money” are they rejecting Real Business Cycle approaches (a good thing, in my book) or are they telling us to focus on M2 (not so good)?

In principle one would like to delineate the field designated by “money” before asking questions within it. But in practice what concepts we group with money depends on our views about it. So let’s move on to some more substantive questions.

1. First, is money better imagined as a (physical) token, or as a unit of measurement? Or perhaps better, does our analysis of money start with exchange, or with accounting? Do we start by asking what is the thing that is exchanged with commodities, and then build an account of its use as a standard of value and in debt contracts on top of that? Or do we start with he idea of money as a unit like the meter or second, which is used to denominate obligations? In which case the debts incurred in the circulation of commodities appear as one particular case of the more general category, and the question of what exactly is accepted in settlement of an obligation is secondary.

I think of this as the difference between an exchange-first and and an accounting-first approach; Schumpeter makes a similar distinction between money theories of credit and credit theories of money. You’ll find most economists from Adam Smith to modern textbook writers on the first side, along with Marx (arguably) and most Marxists (definitely). On the second side you’ll find Keynes (in the Treatise if not the General Theory) along with Schumpeter, various chartalists, and sociologists like Geoffrey Ingham.

This is a question about logical priority, about where we should start analytically. But the same question can be, and often is, posed as a historical one. Did money originate out of barter, or out of a system of public record-keeping? In principle, the origin of money is separate from the question of how we should best think go if it today. But in practice, almost everyone writing about the origin of money is interested in it because they think it is informative about, or a parable for, how money works in the present.

Another dimension of this question is how we think of the central bank. Do we think of it as — in some more or less metaphorical sense — issuing the nation’s currency? Or do we think of it as the peak institution of the banking system?

2. A second question, related to the first one, is, where do we draw the line between money and credit? Is there a sharp divide, or a continuum? Or does money just describe particular kinds of credit, or credit as it is used in certain settings? To the extent there is a distinction, which is primary and which is derivative? Is money any promise, or any promise that can be transferred to a third party, or anything that can be used to settle an obligation? Almost any statement about money can have a different meaning depending on what parts of credit and finance are implicitly being included with it.

Similarly, is there a sharp line between money and other assets, or does money describe some function(s) that can be performed to different degrees by many assets? An important corollary of this is, is there a meaningful quantity of money? If there is a sharp line between money and other assets then at any moment there should be a definite quantity of money in existence. If “moneyness” is a property which all kinds of assets possess in different degrees, then there isn’t. This is a more important question than it might seem, because many older debates about money are were framed in terms of the quantity of it, and it’s not always obvious how to translate them for a world where liquidity exists across the balance sheet, on both the asset and liability sides.

This is a question where the conventional wisdom has shifted quite sharply over the past generation. Into the 1990s, both mainstream and heterodox writers used the money stock M as a basic part of the theoretical toolkit. But now it has almost entirely disappeared from the conversation in both academic and policy worlds.¹

3. Third: To the extent that it is meaningful to talk about a quantity of money, is the quantity fixed independently of demand for it, or does it vary endogenously with demand? (And if so, does this happen within the banking system, or through the actions of the monetary authority? — the old horizontalists versus verticalists debate.) When I was first studying economics, this question was a central line of conflict between (Post) Keynesians and the mainstream, but its valence has shifted since then. “Banks create money” used to be a touchstone for heterodox views; now it’s something that everyone knows. There is still the question of how much this matters, i.e. how much bank lending is constrained by the supply of reserves or monetary policy more broadly. Victoria Chick has a fascinating piece on shifting views on this question over the 20th century.

In general, talking about how M varies with demand for it now feels a bit conservative and old-fashioned, since it assumes that the money stock is an economically meaningful quantity. After teaching some of the same articles on these questions that I read in graduate school, I feel like the question is now: How can the debate over endogenous money be reformulated for a world without a distinct money stock? Another possible reframing: Is endogeneity inherent in the nature of money, or is it a contingent, institutional fact that evolves over time? At one point, bitcoin looked like an effort to re-exogenize the money supply; but I don’t think anybody talks about it that way anymore.

The flip side of the question of endogenous money — or maybe an alternative formulation of it — is, is the supply of money ever a constraint (on credit creation, and/or on real activity)? A negative answer is stronger than simply saying that the money supply is endogenous, since it further implies it can be expanded costlessly.

4. This leads to the fourth question: What role does money play in the determination of the interest rate? Is interest, as Bagehot got put it, the price of money? Or is it the price of savings, or of future relative to present consumption, which just happens to be expressed (like other prices) in terms of money? This is another long-standing frontline between orthodox economics and its Keynesian challengers, which remains an active site of conflict.

In the General Theory, Keynes developed his claims about money and interest in terms of demand for an exogenously fixed stock of money. This was a serious wrong turn, in my view; chapter 17 (“The Essential Properties of Interest and Money”) is in my opinion the worst chapter of the book, the one most likely to confuse and mislead modern readers.² But unlike endogeneity, this is a Keynesian theme that is easily transposed to an accounting-first key. We simply have to think of interest as the price of liquidity, rather than of one particular asset. This view of interest — as opposed to one that starts from savings — remains arguably the most important dividing line between orthodoxy and followers of Keynes. In general, if you want to work within Keynes’ system, you shouldn’t be talking about saving at all.

5. The role of money in the determination of the interest rate leads to a fifth, broader question: Is money neutral? If so, with respect to what? And over what time horizon? In other words, do changes in the supply (or availability) of money affect “real” variables such as employment, or do they affect the price level? Or do they affect both, or neither?

From a political-policy perspective, neutrality is the question. Can increasing the availability of money (in general, or to some people in particular) solve coordination problems, mobilize unutilized resources, or otherwise increase the real wealth of the community? Or will it only bid up the price of the stuff that already exists? When, let’s say, late-19th century Populists demanded a more elastic currency, were they expressing the real interests of their farmer and artisan constituency, or were they victims (or peddlers) of economic snake oil? And if the former, what were the specific conditions that made more abundant money a meaningful political demand?

Another way of looking at this: Does money just facilitate trades that would have happened anyway? (What does it mean to facilitate, in that case?) On the other hand, if we think of money as a technology for making promises, for substituting a general obligation for a particular one, then it may do so to a greater or lesser extent. Increasing the availability of money, or broadening the range of ways it can be used, should make new forms of cooperation possible. If money is useful, shouldn’t it follow that more money is more useful?

Turning to the present, is the availability of money an important constraint on decarbonization? The content of this question is contingent on some of the earlier ones; is the terms no which credit is available to green projects a question of money? But even if you say yes, it’s not clear how important this dimension of the problem is. There’s a plausible case, to me at least, that there is a vast universe of decarbonization projects with positive private returns at any reasonable discount rate, which nonetheless aren’t undertaken because of a lack of financing. But it’s also possible that credit constraints are not all that important, at least not directly; that what’s scarce is the relevant skilled labor and organizational capacity, not financing.³

Though it lies a bit downstream from some of the more fundamental theoretical issues, money’s neutrality is probably the highest-stake question in these debates.

To what extent, and under what conditions, can increasing access to money and credit develop the real productive capacities of a community? To what extent are shorter-term fluctuations and crises the result of interruptions in the supply of money and credit? One reason, it seems to me, that debates on these questions can be so murky and acrimonious is that while economic orthodoxy makes a strong claim that money is neutral, there is no well-defined pole on the other side. Rejecting the textbook view, in itself, doesn’t tell us much about when and how money does matter.

6. The other side of this is the sixth question: What is the relationship between money and inflation? If money is neutral with respect to the “real” economy (bracketing what exactly this means) then what it does affect must be the price level. If you pick up, let’s say, Paul Krugman’s international economics textbook, you will find the thoroughly Friedmanesque claim that the central banks its the supply of money (M), that in the short run an increase in the supply of money may raise output and employment, but over periods beyond a few years, changes in the money supply simply translate one for one into changes the price level, with output and other “real” variables following the same path regardless of what the central bank does.

The claim that the price level varies directly with an exogenously fixed money supply is the quantity theory of money, arguably the oldest theory in economics. This can be derived on first principles only under a set of stringent assumptions that clearly done’t describe real economies. So is there some broader metaphorical sense in which it is sort of true, at least in some times and places? Inflation is only defined with respect a unit of account, but it’s not clear that there is any necessary link with money in its concrete existence.

Here, unlike the previous question, there are (at least) two well-defined poles. Anyone who has read anything on these issues has encountered Friedman’s koan that inflation is everywhere and always a monetary phenomenon. Against this there is a vocal group of economists (both Post Keynesian and more mainstream) who counter that “inflation is always and everywhere a conflict phenomenon.” Personally, I am not convinced that inflation is always and everywhere any one particular thing. But that is a topic for another time.

7. More broadly, whether reimagine “the money supply” as a fixed quantity or in terms of more or less elastic credit, we can ask, are changes in money supply linked to changes in prices, in incomes, in the interest rate, or some combination of them? This leads to the seventh question: Is the money supply, or the terms on which money is provided or created, an appropriate object of policy? This is partly question about what social objectives can be advanced by changes in the availability of money. But it is also a question about whether there is something inherently public about money as a social ledger, which means that it should be (or in some sense always is) the responsibility of the state.

8. Which brings us to question eight: Is there a fundamental relationship between money and the state, and with the authority to collect taxes? Georg Simmel famously described money as “a claim against society”. Who represents society, in this case? Is it — necessarily or in practice — the government? If we think of money as a ledger recording all kinds of obligations as commensurable quantities and allowing them to be netted out, is the use of such a shared ledger necessarily imposed by a sovereign authority, or can we think of it as arising organically? A bit more concretely: Is the value of money backed, in some sense, by the authority to tax? This view is strongly associated with chartalism. But you can also get a version of it from someone like Duncan Foley, working within the Marxist tradition.

9. Turning to money as a unit of measurement, our ninth question is: Do money values refer to some objective underlying quantity? And if so, what is it? What does it mean to speak of “real” values underlying the monetary ones? Obviously money values have objective content within a given pay community. For an individual within the community, the fact that two objects – or more precisely, two distinct property rights – have an equal price, implies the possibility of a choice between them. Ownership of this stuff and ownership of that stuff are equivalent in the sense that one can have one more of one by giving up an equal value of the other. For the community as a whole, we can, on some not too unreasonable assumptions, interpret price as reflecting the possibilities of producing more of one thing as opposed to something else.

But what about when comparisons are made outside of an exchange community? If there is no possibility of substitution either in the purchase or production of things – where there is no market in which they exchange – is there a sense in which we can nonetheless compare their value? Do the quantities of money describe some underlying “real” quantity? When we compare “real income” ver time or between different countries, what is it exactly that we are comparing?

The textbook answer is that we are thinking of the economy in terms of a single representative consumer whose preferences are the same in all times and places (and at all levels of income), and asking how much income in one setting it would take to buy a basket of goods that this representative consumer would willingly swap for the average basket of goods consumed somewhere else. When stated like this, it sounds absurd. Yet this is literally the basis for widely used price level measures like Purchasing Power Parity indexes used to compare real incomes across countries. The problem is actually even worse than this, since even on the most heroic assumptions there is no way to consistently measure price levels both across countries and over time.⁴ But it’s very hard for people — certainly for economists — to give up the idea that there exists something called “real GDP” or “real income” that behaves like a physical quantity.

If the neutrality of money is the question with the most immediate real-world implications, this one, I think, is where there is the biggest gap between what people assume or think they know, and what holds up on closer examination.

10. Related to this, question ten: Are relative prices prior to, or independent of, money prices? In his review of David Graeber’s Debt, Mike Beggs insisted that “States print the money, but not the price lists.” This is the orthodox view — if one of commodity A trades for two of commodity B, that is an intrinsic fact about the commodities themselves, reflecting their costs of production and/or their ability to satisfy human needs.It doesn’t depend on the fact that the prices are expressed in terms of money, or that the commodities are bought and sold for money rather than directly exchanged for each other.

But as I pointed out in my reply to Mike, not all economists agree with this. Hyman Minsky’s two-price model (much more interesting, in my mind, than the financial fragility hypothesis) is precisely an argument that money matters for the price of long-lived assets in a way that it does not for current output. The price of a building, say, cannot be derived from just the cost of producing it and the rent people will pay for it; it depend fundamentally on the terms on which it can be financed.

More broadly, we can think of some activities — those that lock in payment commitments while promising distant or uncertain income — as being more demanding of liquidity. Changes in the availability of money will change the price of these activities relative to those that are less liquidity-demanding. From a Minskyan perspective, money is not neutral; the price lists depend fundamentally on how much (and on what terms) money is being printed.

11. Finally, some questions about the international dimension of money. First, various questions related to exchange rates — how they are, and should be, determined, and what effects they have on real activity. This is one area— perhaps the only one on the whole list — where, it seems to me, there is a very clear difference between today’s textbook views and pre-Keynesian orthodoxy. Today, floating exchange rates are treated as normal, and government interventions in the foreign exchange market are viewed with suspicion. Whereas the older orthodoxy assumed that currencies should, and apart from exceptional cases would, be permanently fixed in terms of gold.

12. Twelfth: If we think of money as a ledger, does it matter where the ledger is kept? That the dollar is the global currency is true in obvious, observable ways — its unrivaled dominance in reserve holdings, foreign-exchange transactions, and trade pricing. (And despite constant predictions to the contrary, this shows no signs of changing.) But what constraints does this fact impose on the rest of the world, both in terms of international positions and domestic finance? And what, advantages (or disadvantages) does it have for the United States?

One argument (made powerfully by Jörg Bibow, and also in this old working paper by me) is that in a world of unmanaged cross-border trade and financial flows, the United States current account deficit plays an essential role as a source of dollar liquidity for the rest of the world — that efforts to balance US trade will only lead to slower growth elsewhere. The assumption here, which may or may not be reasonable, is that there is something like of an exogenous stock of global money, even if not at the national level.

A related issue is how the financial and current account sides of the balance of payments balance. If we think of money as a token or substance, then any given transaction involves a certain amount of it either flowing into or out of a country, and the need for these flows to equal out evidently calls for some kind of market mechanism. On the other hand, if we think of money as a ledger entry, then the mere fact that a transaction takes place automatically creates an offsetting entry on the financial account. There may well be ways in which, say, foreign demand for a country’s assets causes its trade balance to shift toward deficit. But the argument has to be made in behavioral terms, it is not necessarily true.

13. Finally, thirteen: What does it mean to possess monetary sovereignty? Is having control over your own money a binary, yes or no question, or does it exist on a continuum? A more concrete aspect of this question is under what conditions countries can set their own interest rates. The older view was that a floating exchange rate was sufficient; the newer view — among established as well as heterodox economists — is that autonomous monetary policy is only possible with limits on financial flows, i.e. capital controls. Otherwise, what happens to your interest rate depends on the Fed’s choices, not yours.

I have my own opinions about what are more and less convincing answers to these questions. But my goal is not to convince you, or my students, of the answers. My goal is to convince you that these are real questions.

One reason that arguments about money-related questions are so often so painful an inconclusive, it seems to me, is that people start out from strong commitments to particular answers to various of these questions, or questions like these, without even realizing that they are questions — that it is possible to take a view on the other side. Almost nobody who talks about “real GDP” pauses to ask what exactly this number refers to. That the interest rate is the price of liquidity — of money — is the pivot of Keynes’ whole argument in The General Theory. But it’s constantly ignored or forgotten by people who think of themselves as Keynesians. In general, it seems to me, debates connected with money are less often about disagreements on substantive issues than about different premises, which are seldom recognized or acknowledged. Before denouncing each other, before accusing people of some basic error of fact, let’s at least try to map out the intellectual terrain we are fighting over.

A second purpose of this list is to show how these are not just academic questions, but have important implications for our efforts to, in Haavelmo’s phrase, become masters the happenings of real life. To be sure, this post doesn’t do this. But it was a goal of the class. And it is very much a goal of the book.

2023 Books

Books I read in 2023. I’m probably forgetting some.

Geoffrey Ingham, The Nature of Money. One of the fundamental divides in thinking about money is whether we start from the commodity or the unit of account. Do we begin, logically and historically, with the idea of exchange and then bring in money, or do we start from an abstract unit of measurement which then, among other things, is used to value commodities? The latter view defines what’s known as chartalism; Ingham offers the most persuasive statement of the chartalist position that I know. The most visible (though, it seems to me, fading) contemporary version of chartalism is the one offered by Modern Mone(tar)y Theory. There’s a clear affinity between Ingham and MMT but also some important differences; taking Mitchell Innes rather than Knapp as its starting point, Ingham’s version emphasizes money as a measure of obligations in general, rather than taxes specifically.

Like the next five books on the list, I read this one in as I worked on Money and Things, and in conjunction with the “Alternative Perspectives on Money” course I taught this fall.

Lev Menand, The Fed Unbound: Central Banking in a Time of Crisis. I am a big admirer of Menand’s writing on monetary policy and the Fed. He’s a good example of how many of the most interesting conversations around economics these days are happening in law schools. I am constantly pointing people to his short piece on the “The Fed’s Sole Mandate,” which does a brilliant job reframing debates around monetary policy. I would love to see that argument developed at book length. Unfortunately, this is not really that. The book falls a bit awkwardly between two sets of stools — between a general history of the Fed and a comment on pandemic-era interventions, on the one hand, and between a popularization and original argument on the other. I’m sympathetic – these are both tensions I also struggle with. (Despite some encouragement from me, Lev also has not been quite able to give up the idea of a definite quantity of money.) I will certainly continue to draw on and assign his work in the future, but I think I’ll look more to his law review articles rather than this book.

David McNally, Blood and Money: War, Slavery, Finance, and Empire. I would also put this in the broad category of chartalism, again emphasizing the role of money as an abstract unit of measurement rather than as a specific commodity. This is a more eclectic and Marx-influenced version, focusing on money as quantification as such rather than of obligations. The most importnat things being reduced to commensurable quantities, in McNally’s telling, are human bodies — for him, money is the obverse of slavery, and of coercive violence more broadly. The book’s title should be taken literally.

The historical material here makes an interesting complement to Ingham. Most chartalist writing, in my experience, draws from a relatively short list of historical parables — ancient Babylon, colonial Madagascar. Ingham mostly sticks to the canon, but McNally ranges more widely. As with many books of this kind (Graeber’s Debt is the notorious example) the analysis starts glitching a bit when the story reaches the modern world. It’s not surprising. When you are writing about a general topic like money or debt, there is nothing wrong with picking whatever particular examples from the vast palette of the past that work best for the picture you’re trying to paint. But when you are writing about recent history, you are stuck with the specific things that actually happened.

Stefan Eich, The Currency of Politics: The Political Theory of Money from Aristotle to Keynes. The subject of this book is the question — one which motivates so many debates about money — of how, and to what extent, the form and management of money shapes broader social relations. It’s the question of whether money is, in the broadest sense, neutral, or whether changes in the terms on which money is created can transform politics and relations of production. The book, to be clear, is not framed this way; it’s set up, rather as six distinct essays, on particular thinkers and milieus, from classical Athens through Locke, Fichte, Marx and Keynes to the “political theory of money after Bretton Woods.” As Colin Drumm suggests, the book is best understood (and perhaps read) backward. To make sense of current debates about money, we need to go back to the early 20th century Years of High Theory, and then back to the thinkers that influenced them, and on back to Aristotle. Personally, I learned the most from the Athens and Marx chapters; but the whole thing is very worth reading

Merijn Knibbe, Macroeconomic Measurement Versus Macroeconomic Theory. This is a book-length struggle with a question dear to my heart, the disconnect between the categories of economic theory and measurement. Concepts like output, employment, the price level or the capital stock can be defined unambiguously within a formal economic model. But when we use them to describe developments in the real world, their meaning depends on a whole host of specific decisions about what exactly to count, what to impute and where to draw various more or less arbitrary lines. The data we look at is highly sensitive to these choices — a full third of US consumption, for instance, consists of non cash items like the notional rent paid by homeowners to themselves, services provided gratis by nonprofits and government, and the notional value of financial services provided by low-interest bank accounts. Mainstream economists — and, I’m afraid to say, many heterodox ones — are blissfully unconcerned with these choices. But it is impossible to make any meaningful statements about real economies except in the terms that they are actually observed.

Many economists will acknowledge this problem in principle but Knibbe’s book is a rare attempt to address it head on. It is brilliant, perceptive and original, but also digressive, a bit of a ramble. One of its strengths is the author’s less academic background — he has a deep knowledge of topics, like exactly how milk prices are set in the Netherlands, that are not taught in any economics program. A challenge for any book like this is how much work it takes to explain the intricate fantasies of orthodox theory as a prelude to dismantling them; I don’t know what the solution to this problem is, if one is going to write critically about economics at all.

I provided comments on early chapters of the book, and at one point we discussed coauthoring it. That didn’t happen, obviously, but he did just fine on his own.

Anitra Nelson, Marx on Money: The God of Commodities. The most thorough and convincing account of Marx’s (incomplete and sometimes contradictory) writing on money that I have read. I won’t attempt to summarize Nelson’s arguments here; perhaps I’ll do so in a future post.

Enzo Traverso, Fire and Blood: The European Civil War 1914-1945. This book presents itself as a history of Europe’s second thirty years war. It is organized not chronologically but thematically, around various concepts that structured what Traverso presents as fundamentally an intra-European rather than international conflict — dual power, the partisan, the trauma of industrial violence, the new legal concept of war crimes, and so on. At its heart is an effort to reclaim anti-fascism as positive political project. Resistance to fascism required, and called forth, a creative fusion of socialist and Enlightenment values. Antifascism, in Traverso’s telling, was not merely a negative reaction to right-wing authoritarianism. It was a “civil religion of humanity, democracy and socialism”; it was “a “shared ethos that, in a historical context that was exceptional and necessarily transitory, made it possible to hold together Christians and atheist Communists, liberals and collectivists.” Traverso amasses a great range of historical, artistic and literary material to flesh out this view of antifascism as a positive political program. Anti-fascism is not just resistance to movement in the fascist direction; it is pressure for movement away from the status quo in the other direction. It’s a timely reminder that one cannot effectively defend democratic values and practices where they already exist without also fighting to extend them where they currently do not.

This is very much an intellectual history — personally, I wouldn’t have minded if Traverso had included a few less reproductions of paintings and introduced some quantitative material. Its antagonists are liberal historians — Francois Furet in particular — who see “the West” following a steady path toward liberal democracy as a kind of technical progress, with the violent conflicts between Left and Right as a friction or distraction. Traverso’s argument – not stated in so many words, but the overarching theme of the book — is that there was no technological inevitability to universal suffrage, civil liberties or the rest of it. Human progress, such as it is, is the result of active struggle. The battle against fascism yielded something quite different from a straight line projection from the years before 1914.

Luciano Canfora, Democracy in Europe. Another book by an Italian historian, developing many of the same themes as Traverso, though on a broader canvass. The central argument is that if democracy means “rule by the people,” then we should think of this not as an institution but an event, as the rare episodes in which the propertyless majority are able to collectively exercise power against the interests of the rich. Democracy, in his words, means “the temporary ascendancy of the poorer classes in the course of an endless struggle for equality”. Elections with broad suffrage are at best an enabling condition of democracy, not a definition of it. They create an arena in which the mass of people may sometimes be mobilized if the conditions are right. As Friedrich Engels put it, elections are important because they offer “a means to make contact with the masses where they are still distant from us,” not so much as a direct route to power.

By the late 19th century, Engels believed, democratic politics offered an open road toward socialism. In Canfora’s view, however, he underestimated the ability of elites to mobilize mass support for their own programs. The development of mass political participation in the early 20th century owed as much, he argues, to efforts by conservative government to inoculate the population against socialism, as to any advance of democratic values. Conservatives were nonetheless hostile to universal suffrage right down to World War One. The book quotes the British writer George Cornwall Lewis urging that “the attempt to attain perfect equality in … the powers of government seems … as absurd as the attempt to attain perfect equality in the distribution of property.” Canfora accepts this equivalence but turns it around — sustained equality in government has never been compatible with concentrated property ownership. Historically, expansion of formal democracy was either a step toward broader social equality, or a defense against it.

Like Traverso, Canfora emphasizes how “antifascism was widened from a negative concept — rejection — to a positive one. … the forces that had fought fascism … could by definition transform society in a progressive direction.” He sees a fundamental parallel between developments in eastern and western Europe after war. On both sides, the upheavals of war and and popular mobilizations created new opening for demands from the masses. In the immediate postwar period, governments gave ground to pressure from below both substantively and in terms of public participation; but as they became more established, genuine popular involvement was displaced by self-confirming legality. The relationship of the US to Italy was not fundamentally different from that of the USSR to Poland or Hungary, even if military intervention was only prepared and not carried out. To drive this point home, he notes that it was Churchill, not Stalin, who proposed the division of Europe into spheres of influence; while the latter, for his part, urged an acceptance of liberal norms by communists in Western Europe.

Moving to the present, Canfora firmly rejects the idea that the countries of “the West” are democratic simply by virtue of their electoral arrangements. At the same time he insists that changes to electoral systems are important for either narrowing or widening the possibilities for substantive democracy. In particular, he sees the shift from proportional representation to single-member districts or hybrid systems (as occurred in both France and Italy in recent decades) as a way of closing off space for democracy. In his view, steps away from proportional representation are no different from outright restrictions of the franchise. They “combine the electoral principle … with the reality of the protected ascendancy of the … upper classes.”

Rebecca Karl, Mao Zedong and China in the Twentieth-Century World: A Concise History. This is a sympathetic but not uncritical account of Mao’s life and the surrounding history. One of the book’s big virtues — besides providing the basic narrative of events that I knew much less about than I should — is that its perspective is always the situation and context in which Mao himself operated. It tries to understand why he made the choices he did in the circumstances that he faced. This is partly a matter of how the book is written, but it also requires the writer (and reader) to be able to imagine themselves as part of the revolutionary project Mao was engaged in.

I learned a great deal from this book. Here are a few general points that stand out. First, Mao’s formative political experiences involved China’s political disintegration and subordination to outside powers and, interestingly, the subordination of women in the traditional Chinese family (the subject of his first significant political writings.) His embrace of class politics and Marxism came afterwards, as a response to the practical problems of national independence and revival. (And to the savage repression by the nationalists.) Second, despite being an early leader of the Communist Party, he was, in Karl’s telling, almost constantly in conflict with it. He never had the unquestioned authority of a Stalin, and for much of the period after 1960 or so he was effectively excluded from day to day leadership. The cult of personality — the Little Red Book and so on — were real enough, but they reflected relative marginalization rather than dominance; they arose from, on the one side, his efforts to pressure from the outside a government he no longer dominated, and from the other, the Party’s efforts to claim his legacy even while rejecting his positions substantively. Conversely, the “reforms” after his death don’t represent a repudiation of the Revolution so much as a reassertion of tendencies that were there all along. Third, Mao’s worst mistakes were in large part overreactions to correctly perceived problems with the Soviet model. The Great Leap Forward — disastrous as it was — is in no way comparable to the great famines under Stalin. It was the result rather of a search for a form of industrialization that would not favor the cities at the expense of the peasants. The problem was a breakdown in the systems of coordination, communication and transport rather than — as under Stalin — a systematic extraction of grain from the countryside. The Cultural Revolution, meanwhile, came from the conflicts between Mao and the party leadership mentioned earlier — it was intended by Mao as a revolution against the party, as an effort to prevent the consolidation of a new ruling class or stratum as he believed had happened in the USSR.

These broad brush summaries don’t do justice to the book, which is much more concrete and historically grounded. One question that it does not answer, however — that it does not even pose, given its choice to write largely from Mao’s own perspective — is, how and to what extent did the Chinese revolution lay the groundwork for China’s astonishing success — maybe the greatest in history — as a late industrializer. (Isabella Weber’s book, while also very good, only addresses a small part of this question.) But I still found it extremely informative and worth reading. One other virtue: it is very short. I would love to see more books in this format. There are a lot of big topics on which I would be happy to read 150 pages, but probably would not manage 700.

Fintan O’Toole, We Don’t Know Ourselves: A Personal History of Modern Ireland. A charming and very readable first-person account of Ireland since 1960, seamlessly interweaving historical and autobiographic material. When I picked this book up (at The Lofty Pigeon, a lovely new bookstore in my corner of Brooklyn) I knew a bit about the Irish war of independence and of course about the euro-era financial bubble and crisis, but but not much about the period in between. It’s a fascinating story — 20th century Ireland has to be one of the outstanding cases of cultural transformation in just a generation or two, from a closed semi-theocracy to a fully “modern” country, for better or worse. O’Toole has an appealing ambivalence about this transformation. He is unflinching in his descriptions of the stifling cruelty of mid-century Irish schools and the treatment of women who violated sexual norms; it’s interesting how, in his telling even features of this society that might seem appealing — big multi-generational families with neighbors constantly present — could seem oppressive to those living in it. But neither does he whitewash the Irish modernization project or the politicians who led it.

Edward Burrows and Mike Wallace, Gotham. A massive, comprehensive history of New York from the first European arrival to consolidation in 1898. I consumed this as an audiobook intermittently over the past year or so. Its episodic structure works well in that format, though not so much its profusion of names, dates, and places. (Someone should make a geographic concordance from it, if there isn’t one.) What is there to say about it? If you want to learn about the history of New York City, this is the book.

Adam Hochschild, American Midnight: The Great War, a Violent Peace, and Democracy’s Forgotten Crisis. A history of US politics and political repression in the period around and immediately after World War One. As Hochschild makes clear, nothing in Donald Trump’s dreams comes close to the institutionalized racism, nativism and criminalization of dissent under Woodrow Wilson. If you’ve read some labor history, you won’t be shocked at the stories of the violent suppression of the IWW. But what about the movie director sentenced to four years in prison for making a film about the American Revolution that depicted the British in too negative a light? Or the Swiss-born orchestra conductor whose lynching on suspicion of German sympathies was hailed by The Washington Post as a “healthful and wholesome awakening” of patriotic sentiment? Or the mass roundups of young men suspected of evading the draft by vigilante squads? It’s an important reminder that fascism is a long-established and central strand in American politics, not something introduced by Trump or Newt Gingrich.

Johannes Krause and Thomas Trappe, A Short History of Humanity: A New History of Old Europe. I enjoy books about ancient history and paleantology, especially ones that, like this one, are as much about how we know what we know, as about what we do know. The specific focus here is the new information from the reconstruction of genomes from ancient human remains, something that has only recently become possible; one of the authors is a pioneer in the technique. There is a rather serious problem, which is visible in the juxtaposition of the title and subtitle: Europe and humanity are quite different things. (The authors are hardly the only ones to have trouble remembering this.) Still, it’s fascinating how much detail is now known about ancient population movements.

Thomas Lin, ed., Alice and Bob Meet the Wall of Fire. Essays from online science magazine Quanta. I enjoy their podcasts, but this collection was underwhelming. This is the one book on this list that I do not recommend.

Abdelrahman Munif, The Trench and Variations of Night and Day. These are the second and third novels in the Cities of Salt trilogy telling the story of a fictional gulf monarchy over the first half of the 20th century. (At least, it’s a trilogy in English; I believe there are further volumes that haven’t been translated.) I wrote a bit about these books at the end of this post.

Annie Ernaux, A Man’s Place. A short, beautiful book about the author’s father, about class, education and the the distance between the center and the periphery, and about the irreversible passage of time. It’s one of those in-between-genres books that gets shelved with the novels in France and with memoirs in the United States.

Roberto Bolaño, By Night in Chile. An allegory of the position of intellectuals under right-wing dictatorships, how you simultaneously know and don’t know what is going on — metaphorically, but in the allegory literally — beneath the floors of your literary get-togethers. It’s the story of a well-meaning priest, “the most liberal member of Opus Dei in Chile,” who, improbably … well, I won’t spoil it.

Natalie Ginsburg, The Dry Heart; Happiness, as Such; and Voices in the Evening. Sad, occasionally political, and very occasionally violent family conflicts in small-town Italy from the 1940s through the 1960s. They are good.

Previous editions:

Eich on Marx on Money

I’ve been using some of Stefan Eich’s The Currency of Politics in the graduate class I’m teaching this semester. (I read it last year, after seeing a glowing mention of it by Adam Tooze.) This week, we talked about his chapter on Marx, which reminded me that I wrote some notes on it when I first read it. I thought it might be worthwhile turning them into a blogpost, incorporating some points that came out in the discussion in today’s class.

Eich begins with one commonly held idea of Marx’s views of money: that he was “a more or less closeted adherent of metallism who essentially accepted … gold-standard presumptions” — specifically, that the relative value of commodities is prior to whatever we happen to use for units of account and payments, that the value of gold (or whatever is used for money) is determined just like that of any other commodity, and that changes to the monetary system can’t have any effects on real activity (or at least, only disruptive ones). Eich’s argument is that while Marx’s theoretical views on money were more subtle and complex than this, he did share the operational conclusion that monetary reform was a dead end for political action. In Eich’s summary, while at the time of the Manifesto Marx still believed in a public takeover of the banking system as part of a socialist program, by the the 1860s he had come to believe that “any activist monetary policy to alter the level of investment, let alone … shake off exploitation, was futile.”

Marx’s arguments on money of course developed in response to the arguments of Proudhon and similar socialists like Robert Owen. For these socialists (in Eich’s telling; but it seems right to me) scarcity of gold and limits on credit were “obstacles to reciprocal exchange,” preventing people from undertaking all kinds of productive activity on a cooperative basis and creating conditions of material scarcity and dependence on employers. “A People’s Bank,” as Eich writes channeling Proudhon, “was the only way to guarantee the meaningfulness of the right to work.” Ordinary people are capable of doing much more socially useful (and remunerative) work than whatever jobs they were offered. But under the prevailing monopoly of credit, we have no way to convert our capacity to work into access to the means of production we would need to realize it.

Why, we can imagine Proudhon asking, do you need to work for a boss? Because he owns the factory. And why does he own the factory? Is it because only he had the necessary skills, dedication, and ambition to establish it? No, of course not. It’s because only he had the money to pay for it. Democratize money, and you can democratize production.

Marx turned this around. Rather than money being the reason why a small group of employers control the means of production, it is, under capitalism, simply an expression of that fact. And if we are going to attribute this control to a prior monopoly, it should be to land and the productive forces of nature, not money. The capitalist class inherits its coercive power from the landlord side of its family tree, not the banker side.

In Marx’s view, Proudhon had turned the fundamental reality of life under capitalism — that people are free to exchange their labor power for any other commodity — into an ideal. He attributed the negative consequences of organizing society around market exchange to monopolies and other deviations from it. (This is a criticism that might also be leveled against many subsequent reformers, including the ”market socialists” of our own time.)

That labor time is the center of gravity for prices is not a universal fact about commodities. It is a tendency — only a tendency — under capitalism specifically, as a result of several concrete social developments. First, again, production is carried out by wage labor. Second, wage labor is deskilled, homogenized, proletarianized. The equivalence of one hour of anyone’s labor for one hour of anyone else’s is a sociological fact reflecting that fact that workers really are interchangeable. Just as important, production must be carried out for profit, because capitalists compete both in the markets for their product and for the means of production. It is the objective need for them to produce at the lowest possible cost, or else cease being capitalists, that ensures that production is carried out with the socially necessary labor time and no more.

The equivalence of commodities produced by the same amount of labor is the result of proletarianization on the one side and the hard budget constraint on the other. The compulsion of the market, enforced by the “artificial” scarcity of money, is not an illegitimate deviation from the logic of equal exchange but its precondition. The need for money plays an essential coordinating function. This doesn’t mean that no other form of coordination is possible. But if you want to dethrone money-owners from control of the production process, you have to first create another way to organize it.

So one version of Marx’s response to Proudhon might go like this. In a world where production was not organized on capitalist lines, we could still have market exchange of various things. But the prices would be more or less conventional. Productive activity, on the other side, would be embedded in all kinds of other social relationships. We would not have commodities produced for sale by abstract labor, but particular use values produced by particular forms of activity carried out by particular people. Given the integration of production with the rest of life, there would be no way to quantitatively compare the amount of labor time embodied in different objects of exchange; and even if there were, the immobility of embedded labor means there would be no tendency for prices to adjust in line with those quantities. The situation that Proudhon is setting up as the ideal — prices corresponding to labor time, which can be freely exchanged for commodities of equal value — reflects a situation where labor is already proletarianized. Only when workers have lost any social ties to their work, and labor has been separated from the rest of life, does labor time become commensurable.

In the real world, the owners of the means of production have harnessed all our collective efforts into the production of commodities by wage labor for sale in the market, in order to accumulate more means of production – that is to say, capital. In this world, and only in this world, quantitative comparisons in terms of money must reflect the amount of labor required for production. Changes to the money system cannot change these relative values. At the same time, it’s only the requirement to produce for the market that ensures that one hour of labor really is equivalent to any other. Proudhon’s system of labor chits, in which anyone who spent an hour doing something could get a claim on the product of an hour of anyone else’s labor, would destroy the equivalence that the chits are supposed to represent. (A similar criticism might be made of job guarantee proposals today.)

For the mature Marx, money is merely “the form of appearance of the measure of value which is immanent in commodities, namely labor time.” There is a great deal to unpack in a statement like this. But the conclusion that changes in the quantity or form of money can have no effect on relative prices does indeed seem to be shared with the gold-standard orthodoxy of his time (and of ours).

The difference is that for Marx, that quantifiable labor time was not a fact of nature. People’s productive activities become uniform and homogeneous only as work is proletarianized, deskilled, and organized in pursuit of profit. It is not a general fact about exchange. Money might be neutral in the sense of not entering into the determination of relative prices, which are determined by labor time. But the existence of money is essential for there to be relative prices at all. The possibility of transforming authority over particular production processes into claims on the social product in general is a precondition for generalized wage labor to exist.

While Marx does look like commodity money theorist in some important ways, he shared with the credit-money theorists, and greatly developed, the idea — mostly implicit until then — that the productive capacities of a society are not something that exist prior to exchange, but develop only through the generalization of monetary exchange. Much more than earlier writers, or than Keynes and later Keynesians, he foregrounded the qualitative transformation of society that comes with the organization of production around the pursuit of money.

You could get much of this from any number of writers on Marx. What is a bit more distinctive in the Eich chapter is the links he makes between the theory and Marx’s political engagement. When Marx was writing his critique of Proudhon’s monetary-reform proposals in the 1840s, Eich observes, he and Engels still believed that public ownership of the banks was an important plank in the socialist program. Democratically-controlled banks would “make it possible to regulate the credit system in the interest of the people as a whole, and … undermine the dominion of the great money men. Further, by gradually substituting paper money for gold and silver coin, the universal means of exchange … will be cheapened.” At this point they still held out the idea that public credit could both alleviate monetary bottlenecks on production and be a move toward the regulation of production “according to the general interest of society as represented in the state.”

By the 1850s, however, Marx had grown skeptical of the relevance of money and banking for a socialist program. In a letter to Engels, he wrote that the only way forward was to “cut himself loose from all this ‘money shit’”; a few years later, he said, in an address to the First International, that “the currency question has nothing at all to do with the subject before us.” In the Grundrisse he asked rhetorically, “Can the existing relations of production and the relations of distribution which correspond to them be revolutionized by a change in the instrument of circulation…? Can such a transformation be undertaken without touching the existing relations of production and social relations which rest on them?” The answer, obviously, is No.

The reader of Marx’s published work might reasonably come away with something like this understanding of money: Generalized use of money is a precondition of wage labor, and leads to qualitative transformations of human life. But control over money is not the source of capitalists’ power, and the logic of capitalism doesn’t depend on the specific workings of the financial system. To understand the sources of conflict and crises under capitalism, and its transformative power and development over time, one should focus on the organization of production and the hierarchical relationships within the workplace. Capitalism is essentially a system of hierarchical control over labor. Money and finance are at best second order.

Eich doesn’t dispute this, as a description of what Marx actually he wrote.. But he argues that this rejection of finance as a site of political action was based on the specific conditions of the times. Today, though, the power and salience of organized labor has diminished. Meanwhile, central banks are more visible as sites of power, and the allocation of credit is a major political issue. A Marx writing now, he suggests, might take a different view on the value of monetary reform to a socialist program. I’m not sure, though, if this is a judgment that many people inspired by Marx would share.