Keynes, James Bartholomew, and The Bocconi Boys

After a chain of links (that will show up in the next article…) I ended up on a page about Keynesian Economics here:

http://www.spectator.co.uk/2016/01/the-one-thing-most-people-think-they-know-about-economics-is-wrong/

I wanted to leave my usual short comment per Keynes that “Keynes wasn’t wrong, the present interpretation of Keynes is wrong. Keynes himself said government stimulus would only work for about 2 years, after which it would fail, and that during times of economic growth the government must run a budget surplus to repay the debt. Both conditions violated by modern interpretations.”

But they require a Disqus sign in or use of a social media account login to comment. I will not do either. Disqus is broken (I posted about it once some time back) and Social Media is entirely a security breach posing as service (IMHO, as a security guy who must fight off data leakage from companies…) So I could not post my comment there.

The article, other than that one omission, is well written. The author, James Bartholomew, does a very good job. It was one of his other article, where I clicked on his name, that landed me on a page of all his articles, and the one above caught my attention.

http://www.spectator.co.uk/author/james-bartholomew/ gives the list of articles.

In the above first article, the primary thesis is “it just hasn’t worked when repeatedly tried”

The one thing most people think they know about economics is wrong

Keynesian deficit spending makes sense – but over and over again it has not worked
[…]
In fact, during the past 50 years, there have been a number of times when the validity of this central part of Keynesianism has been put in doubt. But the idea has been like Tom, the cat in Tom and Jerry. However many times it is squashed under a ten-ton weight or falls from a great height on to rocks, it comes up smiling and unrepentant.

My addendum is simply that real Keynesian Policy has NOT been tried. How many of those “trials” ran a government surplus during good times? How many cut off “stimulus” and deficit spending after at most 2 years? Zero you say? Then it was not in accord with what Keynes himself said were the limits of utility.

Then there is this interesting paragraph:

Gradually, however, reasons to think it is not true have grown in number and received a heavier weight of support from academics. The most significant work has come from a group of Italian economists. A landmark paper was written by Francesco Giavazzi and Marco Pagano in 1990. This has been followed up by more work by Alberto Alesina, Silvia Ardagna and others. They have been dubbed ‘the Bocconi boys’, which makes them sound like a mafia gang but is in fact a reference to the university in Milan where many of them have been professors or students.

The 1990 paper looked at the performance of Ireland and Denmark in the 1980s. It noted how these countries had reduced their government budget deficits, which according to Keynesian theory should have depressed the economy. But on the contrary, the economies did particularly well. From that beginning, the Bocconi boys have gained territory and influence, spreading representatives into the Bank of England, the European Union and Harvard.

I’d not heard of The Bocconi Boys. Looks like I have a bit of catching up to do ;-)

Somehow it seems appropriate that they would be from Italy. One of the places that tried hardest and longest to “make it work” with massive deficit spending and inflation of the currency. Now pining for the good old days pre-€ and pre-deficit limits.

One hopes they have reviewed the history of Keynes and Keynes comments on Keynes… I remember his comments from back about 1973? or so. A bit of film with him commenting on the limits in time and need for positive budgets in good years. Part of when I was in University learning Economics, and Keynesian Theory. My professors were remarkably good, and assured we knew the limits Keynes had on his “money printing”… In later years, a school of thought took over that the limits didn’t matter. This is called “Modern Monetary Theory” and, INHO, is “exactly wrong”

https://en.wikipedia.org/wiki/Modern_Monetary_Theory

Modern Monetary Theory (MMT or Modern Money Theory), also known as neochartalism, is an economic theory that details the procedures and consequences of using government-issued tokens as the unit of money, i.e., fiat money. According to modern monetary theory, “monetarily sovereign government is the monopoly supplier of its currency and can issue currency of any denomination in physical or non-physical forms. As such the government has an unlimited capacity to pay for the things it wishes to purchase and to fulfill promised future payments, and has an unlimited ability to provide funds to the other sectors. Thus, insolvency and bankruptcy of this government is not possible. It can always pay”.

MMT aims to describe and analyze modern economies in which the national currency is fiat money, established and created by the government. In sovereign financial systems, banks can create money but these horizontal transactions do not increase net financial assets as assets are offset by liabilities. “The balance sheet of the government does not include any domestic monetary instrument on its asset side; it owns no money. All monetary instruments issued by the government are on its liability side and are created and destroyed with spending and taxing/bond offerings, respectively.” In addition to deficit spending, valuation effects e.g. growth in stock price can increase net financial assets. In MMT, vertical money (see below) enters circulation through government spending. Taxation and its legal tender power to discharge debt establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that must be met. In addition, fines, fees and licenses create demand for the currency. This can be a currency issued by the government, or a foreign currency such as the euro. An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value. Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government’s deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government’s activities per se.

What this ignores is simply that ongoing deficit spending causes inflation; and failure to repay Real Value, in using future inflated currency to repay, results in lenders unwilling to lend and rampant inflation. See the current state of the economy in Venezuela as the most recent example of dozens (hundreds?). Inflation having ramped up from very low to about 800% / year over the last couple of decades in sync with deficit spending. The current exchange rate of the Bolivar about 10,000 / $ on the black market (and much less, about 10/$ ‘officially’). Airlines cutting off service due to monetary and fuel issues. Imports of essentials like drugs and machinery halted. The spiral decent into monetary collapse in full throated roar. THAT is the inevitable end game of MMT writ large…

As noted in that quote above “in concert with private confidence and acceptance of the currency, maintains its value.”, but adding that as soon as that “private confidence and acceptance” evaporate, as it always does, the house currency implodes.

So, in short, do not confound unlimited MMT with Original Limited Keynes. They are vastly different beasts.

Now I need to go digging in the work of the Bocconi Boys to see iof they have the same historical perspective on Keynes, or are really calling MMT “Keynesian Economics” and attacking it by proxy.

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