Tonight with Vincent Browne 18.04.12
Apr25
on April 25, 2012
at 12:42 pm
Steve took part in a discussion on the state of the Eurpean Union economy on Tonight with Vincent Browne on the 18 April while in Ireland. The conversation explores the flaw of the Maastricht Treaty and potential economic solutions for the European Union. A short 10 minute feature of Steve is available from the below YouTube clip or you may click here from to view the full length show.
The Punt or the Lira, the Paseta, the whatever is preferable to whatever the currency would be when the world is safe for international banking, right? National sovereignty may have its problems, but international sovereignty is a truly scary prospect. What we need is subsidiarity, subsidiarity, subsidiarity.
Derek R,
Or say a National Credit Office which is mandated both to compile and regulate the various flows of money AND to distribute credit to individuals in the form of a dividend and to retailers who discount their prices to consumers in order to avoid inflation or deflation.
Private banks and central banks have way too much coziness. A true breaking up of that duopoly is required.
“So money may not flow like water but it does seem to flow like electricity.”
Including a sort of induction process between the fiat money circuit and the credit money circuit.
Its interesting because the very first ‘circuitist’ economists precisely viewed the economy as like stocks and flows of electricity and not water.
Simon Newcomb 1885 – http://www.archive.org/details/principlesofpoli00newcuoft (who invented the modern view of monetary stocks and flows and the quantity identity – note not quantity theory of money – and who greatly influenced Fisher) especially indeed he even had a big picture of the monetary circuit, production and consumption in one of his books. Another writer of the period had a similar picture with electrical switchgear showing banks etc. (ill need to check my notes I emailed the drawing at some point to steve) Of course Newcomb was a physicist (and a bit a social darwinist bastard sadly) and being a physicist gave him an extra insight. Positive charge and negative charge are a bit like credit and liability. The argument being that you flick a switch and not turn on a tap. And of course charge can dissipate. Indeed many of steves equations have similarity to things like Amepre’s circuital law – and having a similar basis is the maths of hydrodyanimcs you would expect that. You can even think of depreciation as being like dissipation of charge.
Not to push it too far but its interesting. There are unexplored frontiers in terms of thinking about equilibrium and disequilibrium as being like movement of price across a manifold of all possible prices with the speed of movement (slope) influenced by profit potential. Arbitrage is like tapping a charge differential between two points and making a new circuit. If we could get the maths right it would be exciting as it makes the whole micro-macro issue seem somewhat dark ages.
There is one key area however where the electrical analogy either breaks down or becomes rather spooky depending on your point of view. Credit which makes a return is created out of future profits. That has no easy physical analogy, unless you consider the loan making power of a bank (using Neils accounting) as being like a capacitor which get recharged as banks make profit on interest and increase their equity value.
While we’re speculating about qualities and pushing analogies let me assert that right along with the maths, which are excellent and necessary modeling tools, we also consider and actually emphasize including human mental/emotional/spiritual qualities in our economic philosophy and hence policy making. By this I of course do not mean any particular dogma derived from such. I mean incorporating certain human potential states of mind that are universally considered good into the value system of economics and into economic policy. A new Scholasticism assisted by math and science which tends to co-temper each other in other words.
For instance, the human experience of grace or at least a sense of grace, i.e. the free gift, and an ethos of graciousness would make the present and any future crises much easier to correct and resolve. This is not to say that we should just do away with facts, but rather to utilize this sense of graciousness as a counter to an overly emphasized and hence imbalanced attitude that “there is no free lunch.”
The fairness and facility of grace and graciousness is exactly what is needed in times of crisis. And, in the normal operation of the system, a sense of grace as reality and as policy, if coupled with mechanisms to create balance, would indeed make the system more stable and equitable.
An inheritance is a gracious thing. Its policy equivalent would be a dividend. A discount is also a gracious thing, and if that discount is reciprocated to the giver of the discount it is equally gracious, and an ethos of balance and graciousness is created and re-inforced.
One big difference between money flow and water/electron flow which I think is worth further consideration is that money flow is balanced by a goods/services flow in the opposite direction as a result of exchange. This is where modelling using quadruple entry book keeping might come in useful. Particularly if you want to take Minsky’s insights into account I suspect that you need to be able to differentiate between monetary flows where the goods exchanged are productive assets and where they are non-productive or consumables.
Steve Keen,
idea about 1:1 convertability between new pound and euro is a bad one. It is nothing more than a currency board arrangement. How are you going to spend more pounds when you have to worry about convertability that you have promised? How could you use euro proceed of these pound sales to retire your debts when you need them in case someone wants to convert pounds back to euros? Irish government could issue pounds but it could not issue euros, yet the promise to convert at fixed exchange rate would put limits to total amount of pounds in circulation.
Historically, fixed exchange rate arrangements have periodically failed. Bretton Woods was a fixed exchange rate arrangement and it blew up. Countries have a real trouble getting their hands on foreign currency which they do not issue. Please do not recommend it to the europeans!
Better idea for exchange rate policy is a manged float regime where central bank intervenes in the currency markets just to smooth out most extreme fluctuations in the exchange rate, but does not promise to convert it at fixed exchange rate to a foreign currency. This would not limit the amount of pounds that Irish government could spend in to existence, without having to worry about promised convertability at fixed exchange rate to a foreign currency.
Great stuff, as usual, Steve! Loved your pronunciation of “poont” morphing back into “punt” when you realised you’d been copying his Irish accent.
As to the question would the new currency have any value if it is not promised to convert at fixed exchange rate to some other valuable item, such as gold (gold standard) or foreign currency (foreign currency standard), I think the tax-drives-money literature answers this question convincingly.
Let’s imagine Irish government were to levy a new tax, payable only in pounds (in practise could include also payable at high penalty rate at euros) to every business corporation (or some other entity). Now they would have to get their hands on pounds to extingquish this tax liability. Irish government could spend pound into existence, it could offer jobs that pay salary in pounds for example, and employ people that way, and those who are tax liable in pound would like to purchase these pounds to extinquish their tax liabilities. So they would go tho the currency markets and offer euros for pounds that they need. As long as there would be tax liability in pounds, there would be demand for pounds in the FX markets and hence foreign exchange value for poinds, they could not go to zero, and hence pound themselfs would be valuable items they could not be worthless! Value of the pound could be controlled by how much government would want to impose tax burden in pounds and on the other hand how much it would want to spend in to existence on other. In the currency markets those who have euros but need pounds for tax purposes could meet those who have pounds but need euros for whatever-purposes! There is no need to imagine new pound would be automatically weak currency, it all depends on the pound denominated tax burden, taxes-drive-money as they say.
LyndonB wrote:
How could you use euro proceed of these pound sales to retire your debts when you need them in case someone wants to convert pounds back to euros?
That’s easy. As far as the Irish government would be concerned it would not sell euros to buy punts. It would only use them to retire its debts. If someone had punts and wanted to buy euros they would have to buy them from a private citizen who wanted to sell punts. Good luck with that.
Nicely spotted Bryan!
Oops! I meant buy them from a private citizen who wanted to sell euros to buy punts
Derek R
Well said it is often issues with goods flowing in the other directions which causes problems, such as the time needed to complete production, demand on raw resources etc.
Just took a look at the Newcomb book and your blog posting about it, Andrew. Is there nothing new under the sun? I am constantly amazed at the amount of interesting economic work which was done in the 19th and early 20th century which is all but ignored today. Newcomb definitely had something. It may not have been perfect but it definitely deserved to have more attention paid to it than seems to have been the case.
Derek R
Flows like electricity. Probably at some atomic level the flow is transactional. The atoms exchange electrons with each other.
It’s something I am considering now. If in Steve’s models the Godley Tables are adequate for converting transactional account movements into differential equations in continuous time (because they are aggregated), shouldn’t we be looking for equivalent transactional tables that underlie the equations that model the physical world too?
It would probably be possible to do so, Frank. Whenever we have a conserved quantity a transactional analysis is possible. Mechanics of ideal fluids is modelled that way by dividing the fluid volume into a lot of very small cubes and I remember developing the fundamental flow equations by letting the size of those cubes drop to zero as part of my engineering education.
In fact physicists like Edward Fredkin have looked at fundamental physics models based on cellular automata (including quantum cellular automata) which are very transactional in nature. I don’t know if they’ve looked at tieing that back to the differential equations though.
It’s probably a bit simplistic, but when I hear of things like econophysics and grand unified theories, it does make me wonder if the double entry book keeping isn’t sufficient to described everything! Wish I had more time to work on these ideas.
There are more people in Spain writing about electronic-only parallel “closed” currency.
It would have the same value as euro, but it would only be valid in Spain and could not be swapped for euros. Only electronic: all transactions with notes and coins would be in euros, as well as external transactions.
Public staff and pensioners would receive part of their salary in new europesetas, reducing pressure on public debt. Spain could buy toxic assets in banks with new europesetas, which banks would use to pay part of their expenditures like salaries and lend credits to the enormous amount of ailing bussinesses in europesetas (they’re dying right now without credit). Taxes would be partially paid in europesetas. Proposal in Spanish:
http://www.rebelion.org/noticia.php?id=140527
http://www.farodevigo.es/opinion/2012/03/11/moneda-paralela-senor-vigo-tres-madrid-polemica-lecciones/631387.html
That’s why I don’t understand those comments showing fears about fixed or floating exchange rates. The new currency cannot be exchanged.
Randall Wray gives a hint of the same idea applied to a Job Guarantee scheme for Ireland in the penultimate page of this paper:
http://www.levyinstitute.org/pubs/wp_707.pdf
“The first would be to develop a new currency—let’s call it the punt—to be used for government payments of wages in the JG. All levels of government would agree to accept the punt in payment of taxes, fees, and fines. Assume that at government pay offices the punt is accepted at par for euro tax debts. Let us further presume that punts would be supplied only through government payment of wages to JG workers. Since JG workers as well as anyone with a tax due could use the punts to pay taxes, they would soon circulate widely. The government would not make the punt convertible to euros—it would not supply euros when punts are presented—but in private transactions they would trade at close to par because in payment of taxes they are equivalent.”
the maastricht treaty and eu is only part about economics, holding one part up and advocating breaking the treaty is throwing the baby out with the bathwater.
it’s maybe not obvious to non europeans, but there have been massive social gains and solidarity brought about through european integration and solutions that put that at risk should not be trivially advocated. economics doesnt exist in a vacuum, whatever we do to solve this medium term crisis should not damage long term social coherence. breaking up the euro would be a loss socially, the euro is not simply an economic proposition.
regards the specific idea to me it appears that Steve has maybe not considered if all his assumptions are realistic. apart from anything else (and there are many things jumping out such as how can the private sector finance imports payed in euro when it sells to customers for unexchangeable punts), human nature alone means it cant work
so at least one of the unrealistic assumptions is that everybody would act in the best interest of the greater good even when it doesnt align with their own interest. in practice everybody would be in favour of everybody else exchanging their euro for punt while keeping their own euro for the flexibility, enhanced guarantee of value
We clearly need help to find some solution to employment, endebtment and anyone who’s taken the time to understand Steve’s side of the argument will want his ideas to be part of an eventual solution. However, advocating ripping up maastricht as if that’s something predictable, manageable and desirable is simply throwing away credibility
“it’s maybe not obvious to non europeans, but there have been massive social gains and solidarity brought about through european integration and solutions that put that at risk should not be trivially advocated”
There may very well have been, but there are very few Europeans who want a United States of Europe.
Therefore the single currency and the straitjacket surrounding that cannot work.
The common market is a decent enough idea, but it doesn’t need ever greater centralisation and removal of local democracy to function. We can sell stuff to each other cleanly without all that.
Suggesting that it will all disappear if we change direction is a Slippery Slope logical fallacy.
Great stuff, Professor Keens. What is amazing is that this analysis and these charts fit closely to the narrative historical evidence on the current crisis presented in a variety of recent works ranging from Dean Baker’s recent works to a number of works by economic journalists like Gretchen Morgenson, Michael W. Hudson, Kevin Phillips, Nomi Prins, and others. I am busy plowing through the latest edition of Debunking Economics, an excellent review of where most of the flawed or fallacious economic notions came from and how they were developed over the years, decades and centuries. One additional thing that I believe needs to be built into our economic thinking in order for us to achieve a cooperative and positive sum world order is an account of globalization, trade, and zero sum forms of globalization that have led to the massive transfer of productive capacity and jobs in some advanced countries to rapidly developing giants of manufacturing like China. I believe there now needs to be a formula for accelerated development of countries like China and India that is based on much higher wages and orientation towards internal markets plus policies to discourage the transfer of productive capacity by multinational corporations. Also the nature of corporate organization or governance needs to be addressed at the micro level. I can’t go into all of these issues here, but I think that they need to be worked into our theoretical models as well as policies and institutions. I think that the de-industrialization problem is more acute in the United States than in some other smaller countries that rely more on mining and agricultural exports than the US. I believe that globalization in one major factor which in addition to regressive fiscal and monetary policy that has contributed to long run imbalances in the US economy and increasing disparity in income distribution. The concentration of income and wealth that results from trade policies of the US and China feeds the pool of speculative capital and to imbalances between supply and effective purchasing power. I believe there is substantial statistical end empirical evidence that a combination of “mercantilism” and free trade fallacy has contributed to the current crisis. Here is a link to a select bibliography, I have compiled on United States and global economic disorders.
http://globalgeopolitics.net/wordpress/bibliography/
Any comments on how to work globalization, automation, technology institutions and organizationa forms into a multidimensional economic analysis that includes geographic distribution would be most welcome.
Thanks for your great blog and your valuable book.
Thanks Alan,
I’ve tweeted your bibliography. Hopefully that will help it’s exposure.
Cheers, Steve