The Slack Wire – Page 2

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.

A Conversation I Don’t Want to Have

UPDATE: Aaron Benanav was sick and tested positive for covid the day of the event. So it didn’t take place. A fitting reminder, perhaps, of the context in which these debates are happening.

This Wednesday, John Jay College is hosting a debate between me and Aaron Benanav on, ostensibly, industrial policy and global overcapacity, whatever that means.

This is an event I agreed to participate in very reluctantly. To be honest, the prospect of it has been causing me considerable stress and anxiety lately. As a way of relieving this, I thought I would try to articulate why this is a conversation I don’t want to have.

1. I don’t like polemics, especially with others on the left. Doug Henwood used to quote a line from Foucault, which unfortunately I cannot locate at the moment, on the dangers of approaching intellectual debates on the model of war. I feel this strongly. We all know how unpleasant social media discussions become when everything gets reduced to which side you are on.

This is not some new development with social media. Alexander Cockburn tells this story about Lenin:

Krupskaya once tried to get him out of Zurich to take the day off, relaxing in the Alps and admiring nature. He tried but stayed fidgety, finally crying out to Krupskaya in exasperation, ‘Those bloody Mensheviks spoil everything.’

It’s very easy, once you’ve picked a side, to let those bloody other-siders spoil everything. I know I am susceptible to that tendency, I’ve given in to it too much in the past. So I’d rather avoid settings that encourage the picking of teams. I don’t like the debate format. I don’t like being on “Team Keynes” against “Team Brenner,” or however this is supposed to line up.

If one is going to have a debate, it should be with someone you respect, with a view that you can imagine holding, or perhaps have held in the past. Better than a debate is a conversation, with people whose ideas may be in tension at various points but who are genuinely interested in learning from each other. A public debate in front of an audience, by contrast, is a sort of combat where the goal is negative critique, tearing down, rather than synthesis.

2. I don’t find the overcapacity argument coherent enough to try to refute it. I’ve read a lot of Brenner’s stuff, it’s all over the map. I’ve read some of Benanav. The affect is clear enough: He really hates Keynesians. But as for a set of substantive claims about observable social reality, I don’t see it. Very smart people like Seth Ackerman and Alex Williams and Tim Barker have tried to engage with them, without much success. Experience suggests that trying to extract a coherent meaning of overcapacity to engage with will just provoke a response of “that’s not what we meant.” Debating this non-argument feels like wrestling with a cloud.

3. I don’t think that the kind of knowledge that both Brenner-Benanav and their critics are aspiring to is even possible. I don’t think the position they are taking can be replaced with a better one; the question is just not a useful one.

What I mean is this. Capitalism, or better, capital, is a game, an activity that people engage in. It has its rules, its values, its categories. Understanding its logic is important. But logic, on the level of logic, only tells us about the parameters, the dimensions, of capitalist space. It tells us nothing about what will actually happen. At best it allows us to identify tendencies, all of which have their counter-tendencies. The logic of capital tells us which ways the system can move, but nothing about how it has moved, or will move. When we turn to explaining concrete historical developments — retrospectively or prospectively — we need to do so in concrete historical terms. If we ask, let us say, why employment growth was slower in most European countries in the 1980s and 1990s compared with the 1960s and 1970s, there are a number of possible factors that might contribute, or point in the other direction. The only possible answer to the question will be a quantitative one, asking how much various factors contributed in this particular period. General tendencies of capitalism tell us nothing at all.

The academic work I feel best about is a couple of papers asking, in a concrete historical way, how we explain the changes in household debt-income ratios over the past 100 years The answers turn out to be different in different periods. The interesting thing, to me, is the key takeaway that the rise in the debt ratio in the 1980-2008 period, versus the stable ratio in the previous 20 years, is entirely explained by higher interest rates plus lower inflation. But the methodology — and this is the critical point — also reveals plenty of exceptions. During the mid 2000s, for instance, it really is true that households were borrowing more. If we want to learn about the world, we need a method of asking questions that gives answers of the form “x percent this, but also y percent that”, or “in this period mostly this, but in that period mostly that,” or “this factor was supporting the overall trend but that factor was retarding it.” These are all quantitative statements, and will be different depending on the place and time we are discussing. If you think you can reason in a purely logical way to concrete historical outcomes, you aren’t talking about the real world.

4. Continuing from 3 — to have a useful discussion, the questions have to be reframed as concrete, operational ones. Public spending on green energy will improve the bargaining power of workers, or it won’t. Chinese investment in renewable energy has reduced, or increased, manufacturing investment in the rest of the world by this much, more or less. Some more or less concretely specified central bank policy to favor green investment could reduce carbon emissions by some amount, or more, or less. Until we frame our questions in this sort of way, with answers that are numbers or clear yes-or-nos, there is nothing useful to talk about. We need to debate principles in such a way that we are learning about concrete reality. I don’t see this debate as a step towards that.

5. I am not convinced that the phenomenon of “stagnation” or “overcapacity” exists. It is true that by most measures growth appears to have been stronger in Europe in the decades after World War II than, to the extent we have comparable measures, in most other times and places. But it is not at all clear that the absence of this outstanding performance should be described as a distinct phenomenon of “stagnation” or “overcapacity”. Maybe we should instead ask what combination of institutional factors created this exceptional case. Nor is it clear that the same pattern exists if we broaden our focus — China, in the decades of so-called stagnation, has seen what is probably the greatest episode of capitalist accumulation in human history. (The problems that China poses for the Brenner argument need more attention than I am in a position to give.)

And even if “stagnation” is valid as a descriptive historical fact, it doesn’t follow that it represents any underlying tendency. Let’s say we are in the US in 1935. Why is business investment so low, why are so many people unemployed? “Because it’s a depression” would be true in a certain descriptive sense. But, obviously, as an explanation it would get us nowhere at all. I’m not convinced that talking about overcapacity today is much different from that.

Admittedly, the question of whether some capitalist economies can be described as experiencing stagnation (and which ones, and over what period) is a concrete, empirically-tractable question, in a way that some inherent tendency toward stagnation is not. But the claim would have to be much more precisely specified before it could be disputed. And clearly neither of us is undertaking the sort of detailed, data-based analysis that would be called for.

6. Benanav’s response to my blog post — it really was just a blog post — was dishonest and insulting. It still pisses me off that I can write, as I did, “leftists should not imagine that we control the state,” and get quoted as saying “we control the state.” It annoys me that I can suggest an analogy between the transition way from carbon and the industrial revolution and get this response: “any such comparison between the 1840s—an era of incipient French industrialization—and contemporary overcapacity, following the onset of the demand shift over a century later, is so ahistorical as to border on the absurd.” I mean, what is this? Ahistorical, absurd? Come on man. Industrialization wasn’t just a random bolt from the blue, it was the result of exactly the kind of positive feedback mechanisms I was talking about.

This blithe dismissal is simply a refusal to engage with the argument. I was trying to introduce something interesting into the conversation — is anyone else writing about the Green New Deal quoting 19th century French historians? And this guy, who is supposed to be some kind of social scientist, just pisses on it. I won’t pretend it doesn’t annoy me.

7. I have other work to do. I am trying to finish this book. I am trying to teach. (My teaching is bad, but my students are excellent.) I am trying to write opinion pieces for a general public; perhaps people will read them. All of that seems more important than this thing.

8. Finally the biggest one. The debate objectively places me in the position of a defender of the Biden Administration, something that, at this moment, I have no desire to be. Maybe, if I’m honest, this is the real reason why I am so angry about having to do this debate. Thousands of children are dead and dying under the rubble of Gaza. The bombs that killed them are marked “Made in USA.” Will I, under these circumstances, stand up and defend Bidenomics? No, I will not.

As an analytic matter, it’s certainly possible to separate the general case for industrial policy from the murderous regime that is currently its standard bearer. But in the specific context of the United States in November 2023, I don’t know that you can. Maybe my anger at Benanav, and at my colleagues who pushed me to debate him, is really anger at myself for having associated myself with a regime of child-killers. This is a possibility I must take seriously. It calls for resolute self-criticism and introspection.

There is a very complex and difficult problem here. We must sometimes take a clear stand on principle, we must stand against fascism and genocide. We must also, all the time, make an honest assessment of existing conditions, and what we can do in the concrete circumstances we find ourselves in. We must recognize that the path to a better world consists of one step after another, and starts from where we currently are.

Sometimes these two principles are consistent, sometimes they are not. It can be hard to figure out how to reconcile them. We do have to figure it out. I would be very interested in a roundtable on how socialists should relate to the state and established parties in the current moment. But one — or at least I — would have to approach it in a spirit of uncertainty, questioning and an openness to learning from others. Not a debate between opposing sides.

However: John Jay economics is a great program! And we need students! So please do come out for this thing, and, if you’re at a suitable stage of life, please apply to our graduate program. Someday, maybe you will get all this stuff right, where I clearly have not.

URPE Statement on Gaza

I’ve been struggling to find something to say about the unfolding horror in Gaza. What is happening there is not war, but murder on an industrial scale. It is a conscious effort to bring about the deaths of tens or hundreds of thousands of human beings, and to permanently drive millions from their homes. It is the deliberate destruction of a whole society. And it is happening in full view of the world, with the enthusiastic support of the governments of the United States and most of Europe. We can’t look away from this. We have to say something, whether or not our words have any effect.

But I think they can have an effect. Israel depends on support — material and moral — from the US, and from other countries whose governments are more or less vulnerable to public pressure. (Perhaps it’s less dependent than it used to be, but less does not mean not at all.) Right now they have a free hand, but they won’t forever. Public opinion is clearly shifting, and the costs to other governments of their complicity are growing. There is a limited window within which the killing and displacement can continue, a window whose size depends on world opinion. Anyone with a public platform, however small, can try to help close it. The most important thing now is to demand an immediate ceasefire by Israel. If you can say that anywhere where people will hear you, then, in my opinion, that’s what you should say.

So I was very glad to see the Union for Radical Political Economics (URPE) put out a statement on Gaza that begins by expressing solidarity with the Palestinian people, and calls for an immediate ceasefire as its first demand. URPE is as far as you can get from being an important geopolitical player. But it’s my own professional home, so it matters to me, and I’m sure to a number of readers of this. It’s also an organization founded on the principle that economists and social scientists cannot be dispassionate technicians and observers, but have a responsibility to take sides in the struggles of our times. It’s good to see that, after some initial hesitation, they lived up that commitment here.

The statement is below. It’s a good statement. I endorse all of it.

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We stand in unwavering solidarity with the Palestinian people. Since October 7th, 2023, over two million people have faced a brutal onslaught by the Israeli military and state. They have been forced to flee with nowhere to go as homes, shelters, evacuation routes, border crossings, hospitals, places of worship and entire neighborhoods have been bombed.

We mourn civilian deaths in both Israel and Palestine. Israel’s retaliation for the October 7th incursion continues, however, and over 9,000 Palestinians have been killed in the ongoing assault so far. The estimated number of children among the casualties is over 3,000 and UNICEF estimates that about 420 children have been killed or wounded daily. Even reporters have been threatened with violence or killed.

Since the Nakba 75 years ago, the Palestinian people have endured profound suffering, forced displacement, and a brutal 16-year-long inhumane siege and blockade in Gaza. Human rights organizations have characterized Gaza as ‘the largest open-air prison’.

We also condemn the role of the U.S. state in supporting the ongoing siege in Palestine, its support for the horrors inflicted on Gaza, and its refusal to support a humanitarian ceasefire. It is imperative that we do not turn our backs on the devastating impact of this violence on people’s lives. The fight for Palestinian liberation and a fair, enduring peace in the region is intricately linked with the liberation and resistance efforts spearheaded by indigenous, colonized, and oppressed communities historically and worldwide.

We stand in support of efforts by the Palestinian people to sustain themselves economically through control over their land and their labor. We stand in solidarity with the anti-Zionist Jewish communities that have been raising their voices against the carpet bombing of Gaza, for the liberation of the Palestinian people, and who are working for a just, equitable, and durable peace.

We urgently call for:

(1) An immediate ceasefire

(2) Immediate restoration of food, fuel, water, and electricity to the Gaza Strip

(3) Cessation of all settlement activity and disarmament of all settlers

(4) Immediate delivery of humanitarian aid on the scale required

(5) Respect towards the Geneva Conventions by all parties concerned

(6) An end to apartheid and strident moves toward a democratic future for all people regardless of race, religion, gender identity and nationality

In addition, we strongly uphold the principle of academic freedom, especially in light of the current global climate where individuals in educational institutions worldwide face termination, doxing, and harassment for speaking up against the atrocities of the Israeli state and in support of the civilian population in Gaza. Neglecting this commitment would be a betrayal of our scholarly and moral obligations.

In Praise of Profiteering

Of the usefulness of the concept, that is.⁵

In my comments on inflation, I’ve emphasized supply disruptions more than market power. But as I’ll explain in this post, I think the market power or profiteering frame is also a valid and useful one.

Thanks in large part to Lindsay Owens and her team at the Groundwork Collaborative, the idea that corporate profiteering is an important part of today’s inflation is getting a surprising amount of traction, including from the administration. So it’s no surprise that it’s attracted some hostile pushback. This sneering piece by Catherine Rampell in the Washington Post is typical, so let’s start from there.

For critics like Rampell, the profiteering claim isn’t just wrong, but “conspiracy theory”, vacuous and incoherent:

The theory goes something like this: The reason prices are up so much is that companies have gotten “greedy” and are conspiring to “pad their profits,” “profiteer” and “price-gouge.” No one has managed to define “profiteering” and “price-gouging” more specifically than “raising prices more than I’d like.”

The problem with this narrative is that it’s just a pejorative tautology. Yes, prices are going up because companies are raising prices. Okay. This is the economic equivalent of saying “It’s raining because water is falling from the sky.”

The interesting thing about the profiteering story, to me, is precisely that it’s not a tautology. As a matter of logic, one might just as easily say “prices are going up because consumers are paying more.” It is not an axiomatic truth that businesses are who decide on prices. It is not a feature of textbook economics (where firms are price takers) nor is it an empirically true of all markets. As for profiteering, there is a straightforward definition — price increases that don’t reflect any change in the costs of production. Both economically and in the common-sense morality that terms like “price gouging” appeal to, there’s a distinction between price increases that reflect higher costs and ones that do not. And there’s nothing novel or strange about policies to limit the latter.

These two points are related. If prices were set straightforwardly as a markup over marginal costs, it wouldn’t make sense to say that “companies are raising prices.” And there wouldn’t be any question of price-gouging. The starting point here is, that’s not necessarily how prices are set. And once we agree that prices are a decision variable for firms, rather than an automatic market outcome, it’s not obvious why there shouldn’t be a public interest in how that decision gets made.

Think about water. It’s a commonplace that big increases in the price of bottled water in a disaster zone should not be allowed. The marginal cost of selling a bottle of water already on the shelf is no higher than in normal times. Nor are high prices for bottled water serving a function as signals — the premise is precisely that the quantity available is temporarily fixed. And everyone agrees that in these settings, willingness to pay is not a good measure of need.

What about water in normal times? In most of the United States, piped water is provided by local government. But in some places, it is provided by private water companies. And in those cases, invariably, its price is tightly regulated by a public utility commission, with price increases limited to cases where an increase in costs has been established. According to this recent GAO report, states with private water utilities all “rely on the same standard formula … to set private for-profit water rates. The formula relies on the actual costs of the utility …. including capital invested in its facilities, operations and maintenance costs, taxes, and other adjustments.”

The principle in these types of regulations — which, again, are ubiquitous and uncontroversial — is that in the real world prices may or may not track costs of production. Price increases that reflect higher costs are legitimate, and should be permitted; ones that do not are not, and should not.

Rent control is very controversial, both among economists and the general public. But I have never heard “water rate control” brought up as an example of an illegitimate government interference in the market, or seen a study of how much more water would be provided if utilities could charge what the market would bear. (Maybe some enterprising young economist will take that on.)

The same goes for many other public utilities — electricity, gas, and so on. Here in New York, a utility that wants to raise its electricity rates has to submit a filing to the Public Service Commission documenting the its operating and capital costs; if the proposed increase doesn’t reflect the company’s costs, it is not allowed. Obviously this isn’t so simple in practice, and the system certainly has its critics. But the point is, no one thinks that electricity — an industry that combines very high fixed costs, concentration and very inelastic demand, and which is an essential input to all kinds of other activity — is something where prices can be left to the market.

So the the question is not: Should prices be regulated or controlled? Nor is it whether some price increases are unreasonable. The answers to those questions are obviously, uncontroversially Yes. The question is whether the price regulation of utilities, and the economic analysis behind it, should be extended to other areas, or to prices in general.

People like Rampell are not thinking in terms of our world of production by large organizations using specialized tools and techniques. They are imagining an Econ 101 world where there is a fixed stock of stuff, and the market price is the one where people just want to buy that much. There are, to be sure, cases where this is a reasonable first approximation — used car dealers, say. But it is not a good description of most of the economy. Markets are not allocating a given stock of stuff, but guiding production. This production is carried out by large enterprises with substantial market power. They are not price takers. For most goods and services, price is a decision variable for producers, involving tradeoffs on a number of margins.⁶

In the models taught in introductory microeconomics, producers are price takers; they choose a quantity of output which they will sell at the going price. Given rising marginal costs — each additional unit of output costs more to produce than the last one — firms will carry out production just to the point where marginal cost equals the market price. This model is in principle consistent with the existence of fixed as well as marginal costs: Free entry and exit ensures that revenue at the market price just covers fixed costs, plus the normal profit (whatever that is).

The usual situation in a modern economy, however, is flat or declining marginal costs. Non-increasing marginal costs, nonzero fixed costs, and competitive pricing cannot coexist: In the absence of increasing marginal costs, a price equal to marginal cost leaves nothing to cover fixed costs. Modern industries, which invariably involve substantial fixed costs and flat or declining marginal costs at normal levels of output, require some degree of monopoly power in order to survive. This is the economic logic behind patents and copyrights — developing a new idea is costly, but disseminating it is cheap. So if we are relying on private businesses for this, they must be granted some degree of monopoly.⁷

The problem is, once we agree that some degree of market power is necessary in order for industries without declining returns to cover their fixed costs, how do we know how much market power is enough? Too much market power, and firms can make super-normal profits by holding prices above the level required to cover their costs, reducing access to whatever social useful thing they supply. Too little market power, and competing firms will be inefficiently small, drive each other to bankruptcy, or simply decline to enter, depriving society of the useful thing entirely. Returning to the IP example: To the extent that copyrights and patents serve an economic function, it is possible for them to be either too long or too short.

The problem gets worse when we think about what fixed costs men concretely. On the one hand, the decision to pay for a particular long-lived means of production is irreversible and taken in historical time; producers don’t know in advance whether their margins over costs of production will be enough to recoup the outlay. But on the other hand, the form these costs take is financial: A company has, typically, borrowed to pay for its plant, equipment and intellectual property; the concrete ongoing costs it faces are debt service payments. These may change after the fact, by, for example, being discharged in bankruptcy — which does not in general prevent the firm from continuing to operate. So there may be a very wide space between a price high enough to induce new firms to enter and a price low enough to induce existing firms to exit.

In addition, concerns over market share, public opinion, financing constraints, strategic interaction with competitors and other considerations mean that the price chosen within this space will not necessarily be the one that maximizes short-term profits (to the extent that this can even be known.) A lower price might allow a firm to gain market share, but risk retaliation from competitors. A higher price might allow for increased payments to shareholders, but risk a backlash from regulators or bad press. Narrowly economic factors may set some broad limits to pricing, but within them there is a broad range for strategic choices by sellers.

These issues were central to economic debates around the turn of the last century, particularly in the context of railroads. In the second half of the 19th century, railroads were the overwhelmingly dominant industrial businesses. And they clearly did not fit the models of competitive producers pricing according to marginal cost that the economics profession was then developing.

Railroads provided an essential function, for which there were no good alternatives. A single line on a given route had an effective monopoly, while two lines in parallel were almost perfect substitutes. The largest part of costs were fixed. But on the other hand, a firm that failed to meet its fixed costs would see its debt discharged in bankruptcy and then continue operating under new ownership. The result was cycles of price gouging and ruinous competition, in which farmers and small businesses could (much of the time) reasonably complain that they were being crushed by rapacious railroad owners, and railroads could (some of the time) reasonably complain they were being driven to the wall by cutthroat competition. Or as Alfred Chandler puts it,

Railroad competition presented an entirely new business phenomenon. Never before had a very small number of very large enterprises competed for the same business. And never before had competitors been saddled with such high fixed costs. In the 1880s fixed costs…averaged two-thirds of total cost. The relentless pressure of such costs quickly convinced railroad managers that uncontrolled competition of through traffic would be “ruinous”. As long as a road had cars available to carry freight, the temptation to attract traffic by reducing rates was always there. … To both the railroad managers and investors, the logic of such competition would be bankruptcy for all.⁸

As Michael Perelman explains in his excellent books The End of Economics and Railroading Economics (from which the following quotes are drawn), the problem of the railroads was the problem for the first generation of American professional economists. As these economists were developing models in which prices set in competitive markets would guarantee both a rational allocation of society’s resources and a normatively fair distribution of incomes, it was clear that in the era’s dominant industry, market prices did not work at all.

Already in the 1870s, Charles Francis Adams could observe:

The traditions of political economy,…notwithstanding, there are functions of modern life, the number of which is also continually increasing, which necessarily partake in their essence of the character of monopolies…. Now it is found that, whenever this characteristic exists, the effect of competition is not to regulate cost or equalize production, but under a greater or less degree of friction to bring about combination and a closer monopoly. This law is invariable. It knows no exceptions.

Arthur Hadley, an early president of the American Economic Association, made a similar argument. Where railroads competed, prices fell to a level that was too low to recover fixed costs, eventually sending one or both lines into bankruptcy. In the absence of competition, railroads could charge monopoly prices, which might be much higher than fixed costs. Equating prices to marginal costs made sense in an economy of small farmers or artisans. But in industries where most costs took the form of large, irreversible investments in fixed capital, there was no automatic process that would bring prices in line with costs. In Perelman’s summary:

In order to attract new capital into the business, rates must be high enough to pay not merely operating expenses, but fixed charges on both old and new capital. But, when capital is once invested, it can afford to make rates hardly above the level of operating expenses rather than lose a given piece of business. This “fighting rate” may be only one-half or one-third of a rate which would pay fixed charges. Based on his knowledge of the railroads, [Hadley] concluded that “survival of the fittest is only possible when the unfittest can be physically removed—a thing which is impossible in the case of an unfit trunk line.”

Perelman continues:

The root of the problem, for Hadley, was that to build a new line, owners had to expect rates high enough to cover not only the costs of operating it but the costs of constructing it, the financing charges, and a premium for risk; while to continue running an existing line, rates only had to cover operating costs. And these costs were essentially invariant to the volume of traffic on the line.

Or as John Bates Clark put it in 1901: “There is often a considerable range within which trusts can control prices without calling potential competition into positive activity.”

These were some of the leading figures in the economics profession around the turn of the century, so it’s striking how unambiguously they rejected the Marshallian orthodoxy of equilibrium prices. When the American Economics Association met for the first time, its proposed statement of principles included the line: “While we recognize the necessity of individual initiative in industrial life, we hold that the doctrine of laissez-faire is unsafe in politics and unsound in morals.” Politically, they were not socialists or radicals. They rejected competitive markets, but not private ownership. That however left the question, how should prices be regulated?

For a conservative economist like Hadley, the answer was social norms:

This power [of the trusts] is so great that it can only be controlled by public opinion—not by statute…. There are means enough. Don’t let him come to your house. Disqualify him socially. You may say that it is not an operative remedy. This is a mistake. Whenever it is understood that certain practices are so clearly against public need and public necessity that the man who perpetrates them is not allowed to associate on even terms with his fellow men, you have in your hands an all-powerful remedy.

Unfortunately, in practice, the withholding of dinner party invitations is not always an operative remedy.

In principle, there are many other ways to solve the problem. Intellectually, one can assume it away by simply insisting on declining returns to scale; or one can allow constant returns but have firms rent the services of undifferentiated capital, so there are no fixed costs. If the problem is not assumed away — a more practical option for theorists than for policymakers — it could in principle be solved by somehow ensuring that producers enjoy just the right degree of monopoly. This is what patents and copyrights are presumably supposed to do. Another possible answer is to say that where competition is not possible, that is an activity that should be carried out by the public. That was, of course, where urban rail systems ended up. For someone like Oskar Lange, it was a decisive argument for socializing production more broadly.⁹

Alternatively, one can accept cartels or monopolies (perhaps under the tutelage of dominant banks) in the hopes that social pressure or norms will limit prices, or on the grounds that a useful service provided at monopoly prices is still better than it not being provided at all. This was, broadly, the view of figures like Hadley, Ely and Clark, and arguably a big part of how things worked out.

But the main resolution to the problem, at least in the case of railroads, came from the increasing public pressure to regulate prices. The Interstate Commerce Commission was established to regulate railroad rates in 1887; its authority was initially limited, and it faced challenges from hostile Gilded-Age courts. But it was strengthened over the ensuing decades. The guiding principle was that rates should be high enough to cover a railroad’s full costs and a reasonable return, but no higher. This required railroads, among other things, to adopt more systematic and consistent accounting for capital costs.

Indeed, there’s a sense in which the logic of Langean socialism describes much of the evolution of private markets over the 20th century. The spread of cost-based price regulation forced firms to systematically measure and account for marginal costs in a way they might not have done otherwise. Mark Wilson, in his fascinating Destructive Creation, describes how the use of cost-plus contracts during World War II rationalized accounting in a broad range of industries. Systems of railroad-like rate regulation were applied to a number of more or less utility-like businesses both before and after the war, imposing from above the rational relationship between costs and prices that the market could not. Many of these regulations have been rolled back since the 1970s, but as noted earlier, many others remain in place.

Late 19th-century debates over railroad regulation might not be the most obvious place to look for guidance to today’s inflation debates. But as Axel Leijonhufvud points out in a beautiful essay on “The Uses of the Past,” economics is not progressive in the way that physical sciences are — we can’t assume that the useful contributions of the past are all incorporated into today’s thought. Economists’ thinking often changes for reasons of politics or fashion, while the questions posed by reality are changing as well as well, often in quite different ways. Older ideas may be more relevant to new problems than the current state of the art. History of economic thought becomes useful, Leijonhufvud writes,

when the road that took you to the ‘frontier of the field’ ends in a swamp or blind alley. A lot of them do. … Back there, in the past, there were forks in the road and it is possible, even plausible, that some roads were more passable than the one that looked most promising at the time.

The road I want to take from those earlier debates is that in a setting of high fixed costs and pervasive market power, how businesses set prices is a legitimate question, both as an object of inquiry and target for policy. One of the central insights of the railroad economists is that in modern capital-intensive industries, there is a wide range over which prices are, in an economic sense, indeterminate. Depending on competitive conditions and the strategic choices of firms, prices can be persistently too high or too low relative to costs. This indeterminacy means that pricing decisions are, at least potentially, a political question.

It’s worth emphasizing here that in empirical studies of how firms actually set prices — which admittedly are rather rare in the economics literature — an important factor in these decisions often seems to be norms around price-setting. In a classic paper on sticky prices, Alan Blinder surveyed business decision-makers on why they don’t change prices more frequently. The most common answer was, “it would antagonize customers.” In a recent ECB survey, one of the top two answers to the same question from businesses selling to the public was, similarly, that “customers expect prices to remain roughly the same.” (The other one was fear that competitors would not follow suit.)

This kind of survey data supports the idea, relied on by the Groundwork team, that businesses with substantial market power might be reluctant to use it in normal times. Those inhibitions would be lifted in an environment like that of the pandemic recovery, where individual price hikes are less likely to be seen as norm violations, or to be noticed at all. (And are more likely to be matched by competitors.)

Even more: It suggests that the moralizing language that critics like Rampell object to can, itself, be a form of inflation control. If fear of antagonizing customers is normally an important restraint on price increases then maybe we need to stoke up that antagonism! The language of “greedflation,” which I admit I didn’t originally care for, can be seen as an updated version of Arthur Hadley’s proposal to “disqualify socially” any business owner who raised prices too much. It is also, of course, useful in the fight for more direct price regulation, which is unlikely to get far on the basis of dispassionate analysis alone.

And this, I think, is a big source of the hostility toward Groundwork and toward others making the greedflation argument, like Isabella Weber.¹⁰ They are taking something that has been understood as a neutral, objective market outcome and reframing it as a moral and political question. This is, in Keynes’ terms, a question about the line between the Agenda and the Non-Agenda of political debates; and these are often more acrimonious than disputes where the legitimacy of the question itself is accepted by everyone, however much they may disagree on the answer.

By the same token, I think this line-shifting is a central contribution of the profiteering work. The 2022-23 inflation seems on its way to coming to an end on its own as supply disruptions gradually revolve themselves, just as (albeit more slowly than) Team Transitory always predicted. But even if the aggregate price level is behaving itself, rising prices can remain burdensome and economically costly in all kinds of areas (as can ruinous competition and underinvestment in others). Prices will remain an important political question, even if inflation is not.

My neighbor Stephanie Luce, who spent many years working in the Living Wage movement, often points out that the direct impact of those measures was in general quite small. But that does not mean that all the hard work and organizing that went into them was wasted. A more important contribution, she argues, is that they establish a moral vision and language around wages. Beyond their direct effects, living wage campaigns help shift discussions of wage-setting from economic criteria to questions of fairness and justice. In the same way, establishing price setting as a legitimate part of the political agenda is a step forward that will have lasting value even after the current bout of inflation is long over.

Remembering Jim Crotty

Last weekend I went up to Amherst, for an event — half conference, half memorial — in honor of Jim Crotty.

Jim was a very important presence for me when I was at a graduate student at the University of Massachusetts, as he was for many people who passed through the economics program there in the 1980s, 1990s and 2000s. His approach to economics, drawing on the traditions of Marx and Keynes, was for us almost the definition of heterodox macroeconomics. He was also a model for us as a human being. He never wavered from his political commitments, and he was — as many speakers at the event testified — a wonderful person, down to earth, warm and outgoing.

Some years ago, Arjun Jayadev and I recorded a long interview with Jim. INET has put video of the interview online. (The videos are somewhat abridged; you can read the full transcript here. ) I think the interview managed to capture Jim’s broader outlook as well as his economics interests. (Well, some of them — his interests were very broad!) He also has some very interesting things to say about the origins of radical economics as a distinct body of thought in the 1970s. I think the videos are well worth watching, if you want to get a sense (or a reminder) of what Jim Crotty was all about.

I wrote a piece on his work in 2016, to go along with the interviews. That piece focuses on his argument for taking Keynes seriously as a socialist, the argument which later became his last published work, Keynes against Capitalism. (There is an earlier draft that circulated within the UMass economics department, which I think makes the argument more clearly than the published book does.)

For this event, Arjun and I wrote an article on Jim, talking more about what his teaching meant for us and how one might carry his vision forward. It will be published in an upcoming special issue of the Review of Radical Political Economics, along with a number of other pieces on Jim’ thought and work. Here are some excerpts from our contribution. You can read the whole thing here, if you’re interested.

“If Keynes were Alive Today…”: Reflections on Jim Crotty

by Arjun Jayadev and J. W. Mason

Jim Crotty’s ECO 710 was for us, as for hundreds of UMass grad students over the past 40 years, the starting point for systematic thought about the economy as a whole. In this he was, like all the great teachers, presenting not so much any particular technique or ideas as himself as a model – a touchstone to go back to when you hit a dead end, and a living example of how to be a serious economist-in-the-world. The content of the class varied over the years, but it usually involved a close reading of The General Theory, with a focus on its three great advances— fundamental uncertainty, liquidity preference and effective demand.

Perhaps the most distinctive aspect of Jim’s pedagogy and scholarship, almost alone among economists we have known, was his ability to synthesise these two thinkers in ways that gave equal weight to both, that placed them in conversation rather than in tension. Crotty’s Marx anticipates Minsky, while his Keynes is a political radical – a socialist – in ways that few others have recognized.

Perhaps his most profound contribution to both traditions was the brilliant 1985 article “The Centrality of Money, Credit, and Financial Intermediation in Marx’s Crisis Theory” (Crotty 1985). There, he developed the idea that the Marxian vision of capitalist crises could only be understood in terms of the development of the credit and the financial system – that it was only via financial commitments that a fall in the profit rate could lead to an abrupt crisis rather than just a slower pace of accumulation. His reconstruction of a vision of the credit system that may either dampen or amplify disruptions to the underlying process of production suggests that Marx anticipated the ideas about financial fragility later developed in the Post Keynesian tradition. With a critical difference: While Minsky has finance calling the tune, in the Marx-Crotty version the ultimate source of instability is in the real world of labor and capital.

For us, Jim’s most important work came in four areas. The first was the interplay of real and financial instability in capitalist crises, as in the 1985 article and his work after 2008. Second was the shifting relationship between shareholders and managers in the governance of corporations. Third was his insistence on the importance of fundamental uncertainty for macroeconomic theory – if we imagine one phrase in Jim’s voice, it is “we simply do not know.” Last, chronologically, but certainly not least, was his rehabilitation of Keynes’ socialist politics – a socialist Keynes to go with his Minskyan Marx.

Most of Crotty’s published work fits within the broad post-Keynesian tradition. But his earlier and stronger commitment was to Marx. In a series of papers in the 1970s with Raford Boddy he put class conflict and imperialism front and centre in the analysis of contemporary capitalism, exploring Marxian crisis theory and what it could illuminate about contemporary macroeconomic problems. From the mid-1980s onward, his published work no longer used an explicitly Marxist framework, and the name Keynes appears much more often than that of Marx. But this was a matter of shifting focus and circumstances rather than any more fundamental re-evaluation. In a conversation with us in 2016, he described Marx as: “clearly the more brilliant social scientist and thinker and philosopher” of the two, “with a much more ambitious project, with clearer and deeper political roots.” And yet, he added: “I am writing a book about Keynes.”

Inflation Came Down, and Team Transitory Was Right

Line goes down, and up. Last week, I wrote out a post arguing that the inflation problem is largely over, and the Fed had little to do with it. Yesterday, the new CPI numbers were released and they showed a sharp rise in inflation — a 4 percent rate over the past three months, compared with 2 percent when I wrote the piece.

Obviously, I’m not thrilled about this. It would be easier to make the arguments I would like to make if inflation were still coming down. But it doesn’t really change the story. Given that the spike last month is entirely energy, with growth in other prices continuing to slow, almost everyone seems to agree that it has nothing to do with demand conditions in the US, or anything the Fed has been doing or ought to do.

Here is an updated version of the main figure from the piece. You can see the spike at the far right – that’s the numbers released yesterday. You can also see that it is all energy costs (the pink bar). Everything else is still coming down.

Here is a table presenting the same data, but now comparing the high inflation of June 2021-June2022 with the lower inflation of the past yer. The last column shows how much each category has contributed to the change in inflation between the two periods. As you can see, the fall in inflation is all about goods, especially energy and cars. Services, which is where you’d expect to see any effects of a softening labor market, have not so far contributed to disinflation.

One thing the figure brings out is that we have not simply had a rise and then fall in inflation over the past couple of years. We’ve had several distinct episodes of rising prices. The first, in the second half of 2020, was clearly driven by reopening and pandemic-related shifts in spending. (One point Arjun and I make in our supply-constraints article is that big shifts in the composition of spending lead to higher prices on average.) The next episode, in the second half of 2021, was all about motor vehicles. The third episode, in the first half of 2022, was energy and food prices, presumably connected to the war in Ukraine. Finally, in later 2022 and early this year, measured inflation was all driven by rising housing costs.

Even though they may all show up as increases in the CPI, these are really four distinct phenomena. And none of them looks like the kind of inflation the Fed claims to be fighting. Energy prices may continue to rise, or they may not — I really have no idea. But either way, that’s not a sign of an overheated economy.

It’s the supply side. Of course I am not the only one making this point. Andrew Elrod had a nice piece in Jacobin recently, making many of the same arguments. I especially like his conclusion, which emphasizes that this is not just a debate about inflation and monetary policy. If you accept the premise that spending in the economy has been too high, and workers have too much bargaining power, that rules out vast swathes of the progressive political program. This is something I also have written about.

Mike Konczal makes a similar argument in a new issue brief, “Inflation is Down. It’s a Supply-Side Story.” He looks at two pieces of evidence on this: different regression estimates of the Phillips curve relationship between unemployment and inflation, and second, expenditure and price changes across various categories of spending. I admit I don’t find the regression analysis very compelling. What it says is that a model that used past inflation to predict future inflation fit the data pretty well for 2020-2022, but over predicted inflation this year. I’m not sure this tells us much except that inflation was rising in the first period and falling in the second.

The more interesting part, to me, is the figure below. This shows quantities and prices for a bunch of different categories of spending. What’s striking about this is the negative relationship for goods (which, remember, is where the disinflation has come from.)

It is literally economics 101 that when prices and quantities move together, that implies a shift in demand; when they move in opposite directions, that implies a shift in supply. To put it more simply, if auto prices are falling even while people are buying more automobiles, as they have been, then reduced demand cannot be the reason for the price fall.

Larry Summers, in a different time, called this an “elementary signal identification point”: the sign the price increases are driven by demand is that “output and inflation together are above” their trend or previous levels. (My emphasis.) Summers’ point in that 2012 article (coauthored with Brad DeLong) was that lower output could not, in itself, be taken as a sign of a fall in potential. But the exact same logic says that a rise in prices cannot, by itself, be attributed to faster demand growth. The demand story requires that rising prices be accompanied by rising spending. As Mike shows, the opposite is the case.

In principle, one might think that the effect of monetary policy on inflation would come through the exchange rate. In this story, higher interest rates make a country’s assets more attractive to foreign investors, who bid up the price of its currency. A stronger currency makes import prices cheaper in terms of the domestic currency, and this will lower measured inflation. This is not a crazy story in principle, and it does fit a pattern of disinflation concentrated in traded goods rather than services. As Rémi Darfeuil points out in comments, some people have been crediting the Fed with US disinflation via this channel. The problem for this story is that the dollar is up only about 4 percent since the Fed started hiking — hardly enough to explain the scale of disinflation. The deceleration in import prices is clearly a matter of global supply conditions — it is also seen in countries whose currencies have gotten weaker (as the linked figure itself shows).

Roaring out of recession. I’ve given a couple video presentations on these questions recently. One, last Friday, was for Senate staffers. Amusingly —to me anyway — the person they had to speak on this topic last year was Jason Furman. Who I imagine had a rather different take. The on Monday I was on a panel organized by the Groundwork Collaborative, comparing the economic response to the pandemic to the response to the financial crisis a decade ago. That one is available on zoom, if you are interested. The first part is a presenation by Heather Boushey of the Council of Economic Advisors (and an old acquaintance of mine from grad school). The panel itself begins about half an hour in, though Heather’s presentation is of course also worth listening to.

[Thanks to Caleb Crain for pointing out a mistake in an earlier version of this post.]

At Barron’s: Inflation Is Falling. Don’t Thank the Fed

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

You wouldn’t necessarily guess it from the headlines, but we may soon be talking about inflation in the past tense. After peaking at close to 10% in the summer of 2022, inflation has fallen even faster than it rose. Over the past three months inflation, as measured by the CPI, has been slightly below the Federal Reserve’s 2% target. Nearly every other measure tells a similar story.

Predicting the future is always risky. But right now, it seems like the conversation about how to fix the inflation problem is nearing its end. Soon, we’ll be having a new debate: Who, or what, should get credit for solving it?

The Fed is the most obvious candidate. Plenty of commentators are already giving it at least tentative credit for delivering that elusive soft landing. And why not? Inflation goes up. The central bank raises interest rates. Inflation goes back down. Isn’t that how it’s supposed to work?

The problem is, monetary policy does not work through magic. The Fed doesn’t simply tell private businesses how much to charge. Higher interest rates lead to lower prices only by reducing demand. And so far, that doesn’t seem to have happened – certainly not on a scale that could explain how much inflation has come down.

In the textbook story, interest rates affect prices via labor costs. The idea is that businesses normally set prices as a markup over production costs, which consist primarily of wages. When the Fed raises rates, it discourages investment spending — home construction and business spending on plant and equipment — which is normally financed with credit. Less investment means less demand for labor, which means higher unemployment and more labor market slack generally. As unemployment rises, workers, with less bargaining power vis-a-vis employers, must accept lower wages. And those lower wages get passed on to prices.

Of course this is not the only possible story. Another point of view is that tighter credit affects prices through the demand side. In this story, rather than businesses producing as much as they can sell at given costs, there is a maximum amount they can produce, often described as potential output. When demand rises above this ceiling, that’s when prices rise.

Either way, the key point — which should be obvious, but somehow gets lost in macro debates — is that prices are determined by real conditions in individual markets. The only way for higher rates to slow down rising prices, is if they curtail someone’s spending, and thereby production and employment. No business — whether it’s selling semiconductors or hamburgers — says “interest rates are going up, so I guess I’ll charge less.” If interest rates change their pricing decisions, it has to be through some combination of fall in demand for their product, or in the wages they pay.

Over the past 18 months, the Fed has overseen one of the fast increases in short-term interest rates on record. We might expect that to lead to much weaker demand and labor markets, which would explain the fall in inflation. But has it?

The Fed’s rate increases have likely had some effect. In a world where the Federal Funds rate was still at zero, employment and output might well be somewhat higher than they are in reality. Believers in monetary-policy orthodoxy can certainly find signs of a gently slowing economy to credit the Fed with. The moderately weaker employment and wage growth of recent months is, from this point of view, evidence that the Fed is succeeding.

One problem with pointing to weaker labor markets as a success story, is that workers’ bargaining power matters for more than wages and prices. As I’ve noted before, when workers have relatively more freedom to pick and choose between jobs, that affects everything from employment discrimination to productivity growth. The same tight labor markets that have delivered rapid wage growth, have also, for example, encouraged employers to offer flexible hours and other accommodations to working parents — which has in turn contributed to women’s rapid post-pandemic return to the workplace.

A more basic problem is that, whether or not you think a weaker labor market would be a good thing on balance, the labor market has not, in fact, gotten much weaker.

At 3.8%, the unemployment rate is essentially unchanged from where it was when at the peak of the inflation in June 2022. It’s well below where it was when inflation started to rise in late 2020. It’s true that quits and job vacancy rates, which many people look to as alternative measures of labor-market conditions, have come down a bit over the past year. But they still are extremely high by historical standards. The prime-age employment-population ratio, another popular measure of labor-market conditions, has continued to rise over the past year, and is now at its highest level in more than 20 years.

Overall, if the labor market looks a bit softer compared with a year ago, it remains extremely tight by any other comparison. Certainly there is nothing in these indicators to explain why prices were rising at an annual rate of over 10% in mid-2022, compared with just 2% today.

On the demand side, the case is, if anything, even weaker. As Employ America notes in its excellent overview, real gross domestic product growth has accelerated during the same period that inflation has come down. The Bureau of Economic Analysis’s measure of the output gap similarly shows that spending has risen relative to potential output over the past year. For the demand story to work, it should have fallen. It’s hard to see how rate hikes could be responsible for lower inflation during a period in which people’s spending has actually picked up.

It is true that higher rates do seem to have discouraged new housing construction. But even here, the pace of new housing starts today remains higher than at any time between 2007 and the pandemic.

Business investment, meanwhile, is surging. Growth in nonresidential investment has accelerated steadily over the past year and a half, even as inflation has fallen. The U.S. is currently seeing a historic factory boom — spending on new manufacturing construction has nearly doubled over the past year, with electric vehicles, solar panels and semiconductors leading the way. That this is happening while interest rates are rising sharply should raise doubts, again, about how important rates really are for business investment. In any case, no story about interest rates that depends on their effects on investment spending can explain the recent fall in inflation.

A more disaggregated look at inflation confirms this impression. If we look at price increases over the past three months compared with the period of high inflation in 2021-2022, we see that inflation has slowed across most of the economy, but much more so in some areas than others.

Of the seven-point fall in inflation, nearly half is accounted for by energy, which makes up less than a tenth of the consumption basket. Most of the rest of the fall is from manufactured goods. Non-energy services, meanwhile, saw only a very modest slowing of prices; while they account for about 60% of the consumption basket, they contributed only about a tenth of the fall in inflation. Housing costs are notoriously tricky; but as measured by the shelter component of the Bureau of Labor Statistics, they are rising as fast now as when inflation was at its peak.

Most services are not traded, and are relatively labor-intensive; those should be the prices most sensitive to conditions in U.S. product and labor markets. Manufactured goods and especially energy, on the other hand, trade in very internationalized markets and have been subject to well-publicized supply disruptions. These are exactly the prices we might expect to fall for reasons having nothing to do with the Fed. The distribution of price changes, in other words, suggests that slowing inflation has little to do with macroeconomic conditions within the US, whether due to Fed action or otherwise.

If the Fed didn’t bring down inflation, what did? The biggest factor may be the fall in energy prices. It’s presumably not a coincidence that global oil prices peaked simultaneously with U.S. inflation. Durable-goods prices have also fallen, probably reflecting the gradual healing of pandemic-disrupted supply chains. A harder question is whether the supply-side measures of the past few years played a role. The IRA and CHIPS Act have certainly contributed to the boom in manufacturing investment, which will raise productive capacity in the future. It’s less clear, at least to me, how much policy contributed to the recovery in supply that has brought inflation down.

But that’s a topic for another time. For now it’s enough to say: Don’t thank the Fed.

(Note: Barron’s, like most publications I’ve worked with, prefers to use graphics produced by their own team. For this post, I’ve swapped out theirs for my original versions.)

At Barron’s: Who Is Winning the Inflation Debate?

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

Is inflation fundamentally a macroeconomic problem – a sign of an overheated economy, an excess of aggregate demand over supply? Or is it – at least sometimes – better understood in microeconomic terms, as the result of producers in various markets setting higher prices for their own reasons?

Not long ago, almost all economists would have picked door No. 1. But in the postpandemic world the choice isn’t so clear.

The answer matters for policy. If the problem is too much spending, then the solution is to bring spending down — and it doesn’t matter which spending. This is what interest rate hikes are intended to do. And since wages are both the largest source of demand and the biggest single component of costs, bringing down spending entails higher unemployment and slower wage growth. Larry Summers – perhaps the most prominent spokesman for macroeconomic orthodoxy – predicted that it would take five years of above-5% unemployment to get inflation under control. He was widely criticized for it. But he was just giving the textbook view.

If inflation is driven by dynamics in particular markets, on the other hand, then an across-the-board reduction in demand isn’t necessary, and may not even be helpful. Better to address the specific factors driving price increases in those markets – ideally through relieving supply constraints, otherwise through targeted subsidies or administrative limits on price increases. The last option, though much maligned as “price controls,” can make sense in cases where supply or demand are particularly inelastic. If producers simply cannot increase output (think, automakers facing a critical chip shortage) then prices have little value as a signal, so there’s not much cost to controlling them.

The debate between these perspectives has been simmering for some time. But it’s reached a boil around Isabella Weber, a leading exponent of the microeconomic perspective. Her recent work explores the disproportionate importance of a few strategic sectors for inflation. Weber has probably done more than any other economist to bring price controls into the inflation-policy conversation.

A recent profile of Weber in the New Yorker describes how she has become a lightning rod for arguments about unconventional inflation policy, with some of her critics going well beyond the norms of scholarly debate.

This backlash probably owes something to the fact that Weber is, biographically, a sort of anti-Summers. While he is a former Treasury secretary and Harvard president who comes from academic royalty (two of his uncles won economics Nobels), she is young, female, and teaches at the University of Massachusetts, Amherst, a department best-known for harboring heterodox, even radical, thinkers. (Full disclosure: I got my own economics doctorate there, though well before Weber was hired.) Some prominent economists embarrassed themselves in their rather obvious professional jealousy, as the New Yorker recounts.

But even more than jealousy, what may explain the ferocity of the response is the not unjustified sense that the heterodox side is winning.

Yes, central banks around the world are hiking interest rates – the textbook response to rising prices. But the debate about inflation policy is much broader than it used to be, in both the U.S. and Europe.

Weber herself served on the committee in Germany that devised the country’s “price brake” for natural gas, which is intended to shield consumers and the broader economy from rising energy prices while preserving incentives to reduce consumption. In the wake of the New Yorker piece, there was a furious but inconclusive debate about whether a “brake” is the same as a “control.” But this misses the point. The key thing is that policy is targeted at prices in a particular market rather than at demand in general.

Such targeted anti-inflation measures have been adopted throughout Europe. In France, after President Emmanuel Macron pledged to do “whatever it takes” to bring down inflation, the country effectively froze the energy prices facing households and businesses through a mix of direct controls and subsidies. Admittedly, such an approach is easier in France because a very large share of the energy sector is publicly owned. In effect, the French measures shifted the burden of higher energy costs from households and businesses to the government. The critical point, though, is that measures like this don’t make sense as inflation control unless you see rising prices as coming specifically from a specific sector (energy in this case), as opposed to an economy-wide excess of demand over supply.

Even economists at the International Monetary Fund – historically the world’s biggest cheerleader for high rates and austerity in response to inflation – acknowledge that these unconventional policies appear to have significantly reduced inflation in Europe. This is so even though they have boosted fiscal deficits and GDP, which by orthodox logic should have had the opposite effect.

The poster child for the “whatever it takes” approach to inflation is probably Spain, which over the past two years has adopted a whole raft of unconventional measures to limit price increases. Since June 2022, there has been a hard cap on prices in the wholesale electricity market; this “Iberian exception” effectively decouples electricity prices in Spain from the international gas market. Spain has also adopted limits on energy price increases to retail customers, increased electricity subsidies for low-income households, reduced the value-added tax for energy, and instituted a windfall profits tax on energy producers. While the focus has been on energy prices (not surprisingly, given the central role of energy in European inflation) they have also sought to protect households from broader price increases with measures like rent control and reduced transit fares. Free rail tickets aren’t the first thing that comes to mind when you think of anti-inflation policy, but it makes sense if the goal is to shift demand away from scarce fossil fuels.

This everything-plus-the-kitchen-sink approach to inflation is a vivid illustration of why it’s so unhelpful to frame the debate in terms of conventional policy versus price controls. While some of the Spanish measures clearly fit that description, many others do not. A more accurate, if clunkier, term might be “targeted price policy,” covering all kinds of measures that seek to influence prices in particular markets rather than the economy-wide balance of supply and demand.

More important than what we call it is the fact that it seems to be working. Through most of the postpandemic recovery, inflation in Spain was running somewhat above the euro-area average. But since summer 2022 – when the most stringent energy-price measures went into effect – it has been significantly below it. Last month, Spain saw inflation fall below 2%, the first major European country to do so.

Here in the U.S., direct limits on price rises are less common. But it’s not hard to find examples of targeted price policy. The more active use of the Strategic Petroleum Reserve, for example, is a step toward managing energy prices more directly, rather than via economy-wide spending. The Russian sanctions regime — though adopted, obviously, for other reasons — also has a significant element of price regulation.

The Inflation Reduction Act is often lampooned as having nothing to do with its name, but that’s not quite right. Instead, it reflects a very different vision of inflation control than what you’d get from the textbooks. Rather than seeking to reduce aggregate demand through fiscal contraction, it envisions massive new public outlays to address problems on the supply side. It’s a sign of the times that a closely divided Congress could pass a vast expansion in federal spending as an anti-inflation measure.

Meanwhile, there’s growing skepticism about how much rate hikes have actually achieved. Inflation has declined steeply without Summers’ prescribed three years of over-5% unemployment, or indeed any noticeable rise in unemployment at all. By connventional measures, demand is no weaker than it was a year ago. If it’s interest rates that brought down inflation, how exactly did they do so?

To be sure, hardly anyone in either camp correctly predicted the 2021 surge in inflation, or its equally dramatic decline over the past year. So it’s too soon to declare victory yet. But for the moment, it’s Team Weber and not Team Summers that seems to be gaining ground.