Against Economics by David Graeber
Summary
David Graeber presents a scathing critique of mainstream economics, arguing that the discipline is no longer fit for purpose. He reviews Robert Skidelsky’s book ‘Money and Government: The Past and Future of Economics,’ which examines why economics failed before and after the 2008 crisis. Graeber highlights the growing disconnect between economic reality and public debate, particularly in Britain, where austerity policies persist despite evidence of their counterproductivity.
A central theme is the nature of money creation. Graeber explains that most money is created by private banks ‘out of thin air,’ a fact confirmed by a 2014 Bank of England report that mainstream media largely ignored. This revelation undermines foundational monetarist assumptions about government borrowing ‘crowding out’ private investment and the central bank’s control over the money supply. The report’s silence in public discourse exemplifies the ‘Entente Cordiale’ where technocrats and politicians operate in separate theoretical universes.
Graeber traces the historical conflict between commodity and credit theories of money, from John Locke’s hard-money ideology causing deflationary collapse in 1696 to the repeated pattern where hard-money policies fail but their philosophy becomes entrenched as common sense. He discusses the Keynesian era of redistribution and prosperity, followed by the neoclassical counterrevolution that reimposed small-government ideology and micro-founded macroeconomics based on unrealistic assumptions of rational actors.
The critique extends to efficient market hypothesis and rational expectations theory, which made financial bubbles conceptually impossible and prevented regulators from acting. Despite the 2008 crash discrediting these theories, orthodox economists maintained institutional power, further entrenching market ideology in education and media. Graeber concludes that economics is designed for 20th-century problems of growth optimization, not current challenges of automation, care work, and ecological sustainability, requiring a new science drawing on feminism, psychology, and anthropology.
Recommendations
Books
- Money and Government: The Past and Future of Economics — Robert Skidelsky’s book, which Graeber is reviewing. It retells the history of economics through money and government, examining why the discipline failed around the 2008 crisis and revealing the endless war between theoretical perspectives.
- Debt: The First 5,000 Years — Graeber’s own 2011 book is referenced when he notes that the center of gravity between commodity and credit theories of money shifts over time, as he documented in his work on debt.
- The Great Transformation — Karl Polanyi’s 1940s work is mentioned as a precursor Skidelsky extends, mapping how supposedly self-regulating markets were products of social engineering.
Movements
- Post-Autistic Economics — A rebellion by economics students in France mentioned as an attempt to reform the curriculum that largely failed to include heterodox theories.
- Post-Crash Economics — A similar student movement in Britain mentioned alongside the French movement, also failing to change the core curriculum significantly.
Organizations
- Positive Money — A British research group whose survey found 85% of UK MPs did not understand where money comes from, most thinking it was produced by the Royal Mint.
- Mont Pelerin Society — The group founded by Friedrich Hayek that led the neoclassical counterrevolution against Keynesian economics.
People
- Robert Skidelsky — Author of ‘Money and Government,’ Keynes biographer, and cross-bench peer in the House of Lords. Described as a ‘gentle maverick’ who holds seminars on economic reform.
- John Maynard Keynes — Discussed as anti-communist but visionary, wanting full employment to ultimately eliminate work through technology, and viewing macroeconomics as having emergent properties not reducible to micro-foundations.
- Friedrich Hayek — Keynes’s rival, founder of the Mont Pelerin Society, who led the counterrevolution demanding macroeconomics be micro-founded, rooted in hostility to statecraft and collective good.
- John Locke — Philosopher whose hard-money ideology in 1696 caused deflationary collapse, setting a pattern where such policies fail but their philosophy becomes entrenched.
- David Hume — Philosopher who introduced the notion that short-term economic shocks create long-term market benefits, providing an unfalsifiable defense for policies favoring creditors.
- Richard Werner — German economist who worked in a bank in 2014 and discovered loan officers create money ‘out of thin air’ (or ‘fairy dust’), confirming the credit creation theory.
- Eugene Fama — Economist who popularized the Efficient Market Hypothesis, which holds that markets are always correctly priced and bubbles cannot exist.
Reports
- Money Creation in the Modern Economy — A 2014 Bank of England report that stated private banks create money and central banks do not control the money supply, validating heterodox economics. It was ignored by mainstream media.
Topic Timeline
- 00:00:20 — Economics no longer fit for purpose — Graeber introduces the core argument: economics is a science solving problems that no longer exist, exemplified by the outdated obsession with inflation. He notes the discipline’s failure to predict crashes or address climate change, yet its unparalleled success in maintaining intellectual authority. The teaching of economics as universal mathematical truth, rather than a social science with warring perspectives, locks out heterodox approaches.
- 00:04:34 — The myth of the magic money tree — Using Theresa May’s phrase ‘there is no magic money tree,’ Graeber exposes the misconception about money creation. He explains that modern money is credit, and banks create money ‘out of nothing’ when making loans. A survey revealed 85% of UK MPs didn’t understand this, thinking money comes from the Royal Mint. This sets up the conflict between mainstream and heterodox (post-Keynesian, modern money theory) views on banking.
- 00:08:11 — Bank of England’s revolutionary report — Graeber discusses the 2014 Bank of England report ‘Money Creation in the Modern Economy,’ which officially stated that private banks create money and central banks do not control the money supply. This validated heterodox economics but was met with media silence. The report’s implications—that government borrowing creates new money rather than diverting private funds—were ignored in public debate, creating a split between technocratic and political realities.
- 00:12:02 — Introducing Skidelsky’s ‘Money and Government’ — Graeber introduces Robert Skidelsky’s book as a significant attempt to retell economic history through the lens of money and government—topics economists avoid. Skidelsky, a Keynes biographer and cross-bench peer, represents the ‘gentle maverick’ who can speak freely. His book reveals an endless war between theoretical perspectives where victory rarely relates to predictive power, often centering on the nature of money.
- 00:15:18 — The flawed Quantitative Theory of Money — Graeber explains the Quantitative Theory of Money (QTM), tracing it to Jean Bodin’s 16th-century explanation of inflation from American gold and silver. He debunks QTM, noting most bullion went to Asia and inflation involved complex factors like credit and speculation. The core debate is between exogenous (money as external commodity) and endogenous (money as credit from economic activity) theories, with QTM representing the flawed exogenous view that repeatedly wins policy debates despite being wrong.
- 00:18:12 — Historical pattern of hard-money failure — Graeber outlines a recurring historical pattern using John Locke’s 1696 argument against devaluing silver coins, which caused deflation, collapse, and misery. The pattern repeats: 1) government adopts hard-money policies, 2) disaster ensues, 3) policies are quietly abandoned, 4) economy recovers, 5) hard-money philosophy becomes reinforced as common sense. David Hume introduced the notion that short-term shocks yield long-term market benefits, creating an unfalsifiable defense for policies benefiting creditors.
- 00:22:31 — Income tax as political sleight of hand — Graeber discusses Skidelsky’s analysis of income tax as a key innovation of classical liberalism. While inefficient and intrusive, income tax aligned voters (who were taxpayers) with cheap government, creating resentment against state spending. This was an expansion of the bureaucratic state disguised as small-government advocacy, a pattern continuing in neoliberalism. The exception was the mid-20th century Keynesian age, driven by fear of working-class rebellion.
- 00:25:45 — Keynesian vs. neoclassical micro-foundations — Graeber contrasts Keynes’s view of macroeconomics as having emergent properties not reducible to microtransactions with the neoclassical counterrevolution demanding all macroeconomics be ‘micro-founded.’ This microeconomics was based on absurd assumptions of perfectly rational, self-interested actors with complete information—a model that became a general philosophy of human life (rational choice theory) invading other disciplines despite being empirically false.
- 00:30:57 — Efficient Market Hypothesis and bubbles — Graeber critiques the Efficient Market Hypothesis (EMH) and Rational Expectations Hypothesis (REH), which hold that markets are always correctly priced and bubbles cannot exist by definition. This made regulators like Alan Greenspan unwilling to identify or burst bubbles, answering ‘why no one saw the crash coming.’ After 2008, orthodox economists fell back on institutional power rather than reforming their theories.
- 00:33:31 — Ideological entrenchment and British dysfunction — Graeber describes the ideological move to reform UK higher education with tuition and loans, making knowledge an economic good, while failing to reform finance. The BBC became more state-aligned, promoting discredited economic theories. Despite money printing, hunger affected 1 in 12 Britons. The British economy is dysfunctional, and economic theory is a ‘shed full of broken tools’ designed for last century’s growth problems, not current challenges of automation, care, and ecology.
- 00:36:11 — The need for a new economic science — Graeber concludes that a new economic science is needed, drawing on feminism, behavioral economics, psychology, and anthropology to understand how people actually behave. Breaking neoclassical economics’ institutional and ideological lock will be difficult, requiring some shock—another crash, political shift, or youth rebellion. Books like Skidelsky’s (and implicitly this essay) will play a crucial part in this transformation.
Episode Info
- Podcast: Audible Anarchism
- Author: audibleanarchism
- Category: Society & Culture Philosophy Government News Politics
- Published: 2021-01-16T04:05:00Z
- Duration: 00:37:44
References
- URL PocketCasts: https://pocketcasts.com/podcast/aaeb1120-ed8f-0136-324d-08b04944ede4/episode/55a9c504-40da-451b-b2eb-66cad35093f3/
- Episode UUID: 55a9c504-40da-451b-b2eb-66cad35093f3
Podcast Info
- Name: Audible Anarchism
- Type: episodic
- Site: https://audibleanarchism.podbean.com
- UUID: aaeb1120-ed8f-0136-324d-08b04944ede4
Transcript
[00:00:00] This audio production was made in collaboration with Audible Anarchist.
[00:00:11] Against Economics by David Graeber
[00:00:14] A review of Money and Government, the Past and Future of Economics by Robert Skaitelsky
[00:00:20] There is a growing feeling among those who have the responsibility of managing large economies
[00:00:29] that the discipline of economics is no longer fit for purpose.
[00:00:33] It is beginning to look like a science designed to solve problems that no longer exist.
[00:00:39] A good example is the obsession with inflation.
[00:00:42] Economists still teach their students that the primary economic role of government,
[00:00:46] many would insist it’s only a really proper economic role, is to guarantee price stability.
[00:00:53] We must be constantly vigilant over the dangers of inflation
[00:00:56] for governments to simply print money as their for inheritance,
[00:00:59] and that this is inherently sinful.
[00:01:01] If, however, inflation is kept at bay through the coordinated action of government and central bankers,
[00:01:07] the market should find its natural rate of unemployment,
[00:01:11] and investors, taking advantage of clear price signals, should be able to ensure healthy growth.
[00:01:16] These assumptions came with the monetarism of the 1980s.
[00:01:20] The idea that government should restrict itself to managing the money supply,
[00:01:24] and by the 1990s had come to be accepted as such elementary common sense,
[00:01:28] much all political debate had to set out from a ritual acknowledgement of the perils of government
[00:01:34] spending. This continues to be the case, despite the fact that since the 2008 recession, central
[00:01:42] banks have been printing money frantically in an attempt to create inflation and compel the rich
[00:01:47] to do something useful with their money, and have been largely unsuccessful in both endeavors.
[00:01:53] We now live in a different economic universe than we did before the crash.
[00:01:59] Falling unemployment no longer drives up wages. Printing money does not cause inflation.
[00:02:04] Yet the language of public debate and the wisdom conveyed in economic textbooks
[00:02:09] remain almost entirely unchanged. One expects a certain institutional lag.
[00:02:15] Mainstream economists nowadays might not be particularly good at predicting financial crashes,
[00:02:20] facilitating general prosperity or coming up with models for preventing climate change,
[00:02:24] but when it comes to establishing themselves in positions of intellectual authority,
[00:02:29] unaffected by such failings, their success is unparalleled.
[00:02:33] One would have to look at the history of religion to find anything like it.
[00:02:37] To this day, economics continues to be taught not as a story of arguments,
[00:02:42] not like any other social science, as a welter of often-warring theoretical perspectives,
[00:02:47] but rather as something more like physics, the gradual realization of universal,
[00:02:52] unimpeachable mathematical truths. Heterodox theories of economics do, of course,
[00:02:58] exist – institutionalist, Marxist, feminist, Austrian, post-Keynesian – but their opponents
[00:03:06] have been almost completely locked out of what are considered serious departments,
[00:03:11] and even outright rebellions by economics students, from the post-autistic economics
[00:03:16] movements in France to post-crash economics in Britain, have largely failed to force them
[00:03:22] into the core curriculum. As a result, heterodox economists continue to be treated
[00:03:28] as just a step or two away from crackpots, despite the fact that they often have a much
[00:03:33] better record of predicting real-world economic events. What’s more, the basic psychological
[00:03:40] assumptions on which mainstream neoclassical economics is based, though they have long since
[00:03:45] been disproved by actual psychologists, have colonized the rest of the academy,
[00:03:49] and have had a profound impact on popular understandings of the world.
[00:03:54] Nowhere is this divide between public debate and economic reality more
[00:03:58] dramatic than in Britain, which is perhaps why it appears to be the first country where
[00:04:02] something is beginning to crack. It was centre-left New Labour that presided over the pre-crash bubble,
[00:04:09] and voters’ throw-the-bastards-out reaction brought a series of conservative governments
[00:04:14] that soon discovered that a rhetoric of austerity – their Churchillian evocation
[00:04:18] of common sacrifice for the public good – played well with the British public,
[00:04:23] allowing them to win broad popular acceptance for policies designed to pare down what little remains
[00:04:28] of the British welfare state and redistribute resources upward towards the rich.
[00:04:34] There is no magic money tree, as Theresa May put it during the snap election of 2017.
[00:04:39] Virtually the only memorable line from one of the most lacklustre campaigns in British history.
[00:04:45] The phrase has been repeated endlessly in the media. Whenever someone asks why the UK is the
[00:04:49] only country in Western Europe that charges university tuition, or whether it is really
[00:04:54] necessary to have quite so many people sleeping on the streets.
[00:04:59] The truly extraordinary thing about May’s phrase is that it isn’t true.
[00:05:04] There are plenty of magic money trees in Britain, as there are in any developed economy.
[00:05:08] They are called banks. Since modern money is simply credit, banks can and do create money
[00:05:16] literally out of nothing, simply by making loans. Almost all of the money circulating in Britain
[00:05:22] at the moment is bank-created in this way. Not only is the public largely unaware of this,
[00:05:27] but a recent survey by the British research group Positive Money discovered that an astounding 85%
[00:05:34] of members of parliament had no idea where money really came from. Most appeared to be under the
[00:05:39] impression that it was produced by the Royal Mint. Economists, for obvious reasons, can’t be
[00:05:45] completely oblivious of the role of banks, but they have spent much of the 20th century arguing
[00:05:51] about what actually happens when someone applies for a loan. One school insists that banks’ transfers
[00:05:57] are not only based on the interest and interest of the people, but on the direct effect of the
[00:06:03] money that they are spending on. Another, that they produce new money, but only on the basis
[00:06:08] of a multiplier effect, so that your car loan can still be seen as ultimately rooted in some
[00:06:13] retired grandmother’s pension fund. Only a minority – mostly heterodox economists,
[00:06:18] post-Keynesians and modern money theorists – uphold what is called the credit creation theory of banking.
[00:06:24] The bankers simply wave a magic wand and make the money appear,
[00:06:27] million dollars, ultimately the recipient will put it back in the bank again so that across the
[00:06:33] system as a whole credits and debts will cancel out. Rather than loans being based in deposits
[00:06:39] in this view, deposits themselves were the result of loans. The one thing it never seemed to occur
[00:06:45] to anyone to do was to get a job at a bank and find out what actually happens when someone asks
[00:06:50] to borrow money. In 2014 a German economist named Richard Werner did exactly that and discovered
[00:06:57] that in fact loan officers do not check their existing funds, reserves or anything else.
[00:07:02] They simply create money out of thin air, or as he preferred to put it, fairy dust.
[00:07:09] That year also appears to have been when elements in Britain’s notoriously independent civil service
[00:07:15] decided that enough was enough. The question of money creation became a critical bone of contention.
[00:07:21] The overwhelming majority of even mainstream economists in the UK had long since rejected
[00:07:27] austerity as counterproductive, which predictably had almost no impact on public debate.
[00:07:33] But at a certain point demanding that the technocrats charged with running the system
[00:07:37] base all policy decisions on false assumptions about something as elementary as the nature of
[00:07:43] money becomes a little like demanding that architects proceed on the understanding that
[00:07:47] the square root of 47 is actually pi. Architects are aware that buildings would start falling down,
[00:07:54] people would die.
[00:07:57] Before long, the Bank of England, the British equivalent of the Federal Reserve,
[00:08:00] whose economists are most free to speak their minds since they are not formally part of the
[00:08:05] government, rolled out an elaborate official report called Money Creation in the Modern Economy,
[00:08:11] replete with videos and animations making the same point. Existing economics textbooks, and
[00:08:17] particularly the reigning monetarist orthodoxy, are wrong. The heterodox economists are right.
[00:08:24] Private banks create money.
[00:08:25] Central banks like the Bank of England create money as well,
[00:08:29] but monetarists are entirely wrong to insist that their proper function is to control the money
[00:08:33] supply. In fact, central banks do not in any sense control the money supply. Their main function is
[00:08:40] to set the interest rate, to determine how much private banks can charge for the money they create.
[00:08:47] Almost all public debate on these subjects is therefore based on false premises.
[00:08:51] For example, if what the Bank of England was saying were true,
[00:08:55] government borrowing didn’t divert funds from the private sector.
[00:08:59] It created entirely new money that had not existed before.
[00:09:05] One might have imagined that such an admission would create something of a splash.
[00:09:09] In certain restricted circles, it did. Central banks in Norway,
[00:09:13] Switzerland, and Germany quickly put out similar papers.
[00:09:17] Back in the UK, the immediate media response was simply silence.
[00:09:21] The Bank of England report has never, to my knowledge, been so much as mentioned on the BBC’s
[00:09:25] or any other TV news outlet. Newspaper columnists
[00:09:29] continued to write as if monetarism was self-evidently correct.
[00:09:34] Politicians continued to be grilled about where they could find the
[00:09:37] cash for social programmes. It was as if a kind of Entente Crudiale had been established,
[00:09:43] in which the technocrats would be allowed to live in one theoretical universe,
[00:09:47] while politicians and news commentators would continue to exist in an entirely different one.
[00:09:53] Still, there are signs and
[00:09:55] disarrangements that are temporary. England, and the Bank of England in particular,
[00:10:00] prides itself on being a bellwether for global economic trends.
[00:10:05] Monetarism itself got its launch into intellectual respectability in the 1970s
[00:10:10] after having been embraced by Bank of England economists.
[00:10:13] From there it was ultimately adopted by the insurgent Thatcher regime, and only after that
[00:10:17] by Ronald Reagan in the United States, and was subsequently exported almost everywhere else.
[00:10:23] It is possible that a similar pattern
[00:10:25] is reproducing itself today. In 2015, a year after the appearance of the Bank of England report,
[00:10:31] the Labour Party for the first time allowed open elections for its leadership,
[00:10:35] and the Left wing of the party, under Jeremy Corbyn and now-Shadowed Chancellor
[00:10:39] of the Exchequer, John McDonnell, took hold of the reins of power. At the time, the Labour Left were
[00:10:47] considered even more marginal extremists than were Thatcher’s wing of the Conservative party in 1975.
[00:10:53] It also, despite the media’s constant efforts to paint them as unreconstructed 1970s socialists,
[00:11:00] the only political group in the UK that has been open to new economic ideas.
[00:11:05] While pretty much the entire political establishment has been spending most of its time these last few years
[00:11:10] screaming at one another about Brexit,
[00:11:13] McDonald’s office and labour youth support groups have been holding workshops
[00:11:17] and floating policy initiatives on everything from a four-day workweek and universal basic income
[00:11:23] to a green industrial revolution and fully automated luxury communism.
[00:11:28] And inviting heterodox economists to take part in popular education initiatives
[00:11:32] aimed at transforming conceptions of how the economy really works.
[00:11:38] Corbynism has faced near histrionic opposition from virtually all sectors of the political establishment,
[00:11:43] but it would be unwise to ignore the possibility that something historic is afoot.
[00:11:49] One sign that something historically new has indeed appeared
[00:11:53] is if scholars begin reading the past in a new light.
[00:11:57] Accordingly, one of the most significant books to come out of the UK in recent years
[00:12:02] would have to be Robert Skidelsky’s Money and Government, the Past and Future of Economics.
[00:12:08] Ostensibly an attempt to answer the question of why mainstream economics
[00:12:11] rendered itself so useless in the years immediately before and after the crisis of 2008.
[00:12:18] It is really an attempt to retell the history of the economic discipline
[00:12:22] that has been a part of the history of the economy since the early 20th century.
[00:12:23] Through a consideration of the two things, money and government,
[00:12:26] that most economists least like to talk about.
[00:12:30] Skidelsky is well positioned to tell this story.
[00:12:34] He embodies a uniquely English type, the gentle maverick,
[00:12:38] so firmly ensconced in the establishment that it never occurs to him
[00:12:41] that he might not be able to say exactly what he thinks,
[00:12:44] and whose views are tolerated by the rest of the establishment precisely for that reason.
[00:12:49] Born in Manchuria, trained at Oxford, professor of political economics,
[00:12:53] Skidelsky is best known as the author of the definitive three-volume biography
[00:12:58] of John Maynard Keynes, and has for the last three decades
[00:13:01] sat in the House of Lords as Baron of Tilton,
[00:13:04] affiliated at different times with a variety of political parties,
[00:13:08] and sometimes none at all.
[00:13:10] During the early Blair years, he was a conservative,
[00:13:12] and even served as opposition spokesman on economic matters in the upper chamber.
[00:13:16] Currently, he is a cross-bench independent, broadly aligned with left labour.
[00:13:21] In other words, he follows his own course,
[00:13:23] and is a political flag.
[00:13:23] Usually, it’s an interesting flag.
[00:13:26] Over the last several years, Skidelsky has been taking advantage of his position
[00:13:29] in the world’s most elite legislative body
[00:13:31] to hold a series of high-level seminars on the reformation of the economic discipline.
[00:13:37] This book is, in a sense, the first major product of these endeavours.
[00:13:43] What it reveals is an endless war between two broad theoretical perspectives,
[00:13:48] in which the same side always seems to win.
[00:13:51] For reasons that rarely have any relevance,
[00:13:53] it has nothing to do with either theoretical sophistication or greater predictive power.
[00:13:57] The crux of the argument always seems to turn on the nature of money.
[00:14:02] Is money best conceived of as a fiscal commodity,
[00:14:05] a precious substance used to facilitate exchange,
[00:14:07] or is it better to see money primarily as a credit,
[00:14:11] a bookkeeping method or circulating IOU,
[00:14:14] in any case, a social arrangement?
[00:14:17] This is an argument that has been going on in some form for thousands of years.
[00:14:22] What we call money is a social arrangement,
[00:14:23] and money is always a mixture of both.
[00:14:25] And, as I myself noted in Debt, 2011,
[00:14:28] the centre of gravity between the two tends to shift back and forth over time.
[00:14:33] In the Middle Ages, everyday transactions across Eurasia
[00:14:36] were typically conducted by means of credit,
[00:14:39] and money was assumed to be an abstraction.
[00:14:41] It was the rise of global European empires in the 16th and 17th centuries
[00:14:45] and the corresponding flood of gold and silver
[00:14:48] looted from the Americas that really shifted perceptions.
[00:14:52] Historically,
[00:14:53] the feeling that bullion actually is money
[00:14:55] tends to mark periods of generalised violence,
[00:14:57] mass slavery and predatory standing armies,
[00:15:00] which for most of the world was precisely how the Spanish,
[00:15:03] Portuguese, Dutch, French and British empires were experienced.
[00:15:07] One important theoretical innovation
[00:15:09] that these new bullion-based theories of money allowed
[00:15:12] was, as Skidalsky notes,
[00:15:14] what has come to be called the quantitative theory of money,
[00:15:18] usually referred to in textbooks
[00:15:19] since economists take endless light in abbreviations,
[00:15:22] as Skidalsky notes,
[00:15:23] as QTM.
[00:15:26] The QTM argument was first put forward by a French lawyer named Jean Boudin
[00:15:31] during a debate over the cause of the sharp destabilising price inflation
[00:15:35] that immediately followed the Iberian conquest of the Americas.
[00:15:39] Boudin argued that the inflation was a simple matter of supply and demand.
[00:15:43] The enormous influx of gold and silver from the Spanish colonies
[00:15:46] was cheapening the value of money in Europe.
[00:15:49] The basic principle would no doubt have seemed a matter of common sense,
[00:15:53] to anyone with experience of commerce at the time.
[00:15:56] But it turns out to have been based on a series of false assumptions.
[00:16:00] For one thing,
[00:16:01] most of the gold and silver extracted from Mexico and Peru
[00:16:04] did not end up in Europe at all,
[00:16:06] and certainly wasn’t coined into money.
[00:16:08] Most of it was transported directly to China and India
[00:16:11] to buy spices, silks, calicos and other oriental luxuries.
[00:16:17] And insofar as it had inflationary effects back home,
[00:16:19] it was on the basis of speculative bonds of one sort or another.
[00:16:23] This almost always turns out to be true when QTM is applied.
[00:16:26] It seems self-evident, but only if you leave most of the critical factors out.
[00:16:34] In the case of the 16th century price inflation, for instance,
[00:16:37] once one takes account of credit, hoarding and speculation,
[00:16:41] not to mention increased rates of economic activity,
[00:16:44] investment in new technology and wage levels,
[00:16:47] which, in turn, have a lot to do with the relative power of workers and employers,
[00:16:51] creditors and debtors,
[00:16:52] it becomes impossible to say for certain which is the deciding factor,
[00:16:57] whether the money supply drives prices or prices drive the money supply.
[00:17:02] Technically, this comes down to a choice between what are called
[00:17:05] exogenous and endogenous theories of money.
[00:17:08] Should money be treated as an outside factor,
[00:17:11] like all those Spanish doubloons supposedly sweeping into Antwerp, Dublin and Genoa
[00:17:15] in the days of Philip II?
[00:17:17] Or should it be imagined primarily as a product of economic activity itself,
[00:17:21] mined, minted and put into circulation,
[00:17:24] or more often created as credit instruments, such as loans,
[00:17:27] in order to meet a demand?
[00:17:29] Which would of course mean that the roots of inflation lie elsewhere.
[00:17:34] To put it bluntly, QTM is obviously wrong.
[00:17:38] Doubling the amount of gold in a country will have no effect on the price of cheese
[00:17:42] if you give all the gold to rich people and they just bury it in their yards,
[00:17:46] or use it to make gold-plated submarines.
[00:17:49] This is incidentally why quantitative easing,
[00:17:51] the strategy of buying long-term government bonds to put money into circulation,
[00:17:55] did not work either.
[00:17:57] What actually matters is spending.
[00:18:00] Nonetheless, from Baudin’s time to the present,
[00:18:03] almost every time there was a major policy debate,
[00:18:06] the QTM advocates won.
[00:18:08] In England, the pattern was set in 1696,
[00:18:12] just after the creation of the Bank of England,
[00:18:14] with an argument over wartime inflation between
[00:18:17] Tertiary Secretary William Lowndes
[00:18:19] Sir Isaac Newton, then Warden of the Mint,
[00:18:22] and the philosopher John Locke.
[00:18:24] Newton had argued with the Treasury that silver coins
[00:18:27] had to be officially devalued to prevent the deflationary collapse.
[00:18:31] Locke took an extreme monetarist position,
[00:18:34] arguing that the government should be limited to guaranteeing the value of property,
[00:18:38] including coins,
[00:18:39] and that tinkering would confuse investors and defraud creditors.
[00:18:43] Locke won.
[00:18:45] The result was a deflationary collapse,
[00:18:47] a sharp tightening of the monetary system,
[00:18:49] an abrupt economic contraction that threw hundreds of thousands out of work,
[00:18:55] and created mass penury, riots, and hunger.
[00:18:58] The government quickly moved to moderate the policy,
[00:19:01] first by allowing banks to monetize government war debts
[00:19:04] in the form of banknotes,
[00:19:06] and eventually by moving off the silver standard entirely.
[00:19:09] But in its official rhetoric,
[00:19:11] Locke’s small-government, pro-creditor, hard-money ideology
[00:19:15] became the grounds of all further political debate.
[00:19:19] According to Skydalsky,
[00:19:20] the pattern was to repeat itself again and again.
[00:19:23] In 1797, the 1840s, the 1890s,
[00:19:28] and ultimately the late 1970s and early 1980s,
[00:19:31] with Thatcher and Reagan’s, in each case, brief, adoption of monetarism,
[00:19:36] always we see the same sequence of events.
[00:19:39] 1. The government adopts hard-money policies as a matter of principle.
[00:19:43] 2. Disaster ensues.
[00:19:46] 3. The government quietly abandons hard-money policies,
[00:19:49] 4. The economy recovers.
[00:19:52] 5. Hard-money philosophy nonetheless becomes
[00:19:56] or is reinforced as simple universal common sense.
[00:20:00] How was it possible to justify such a remarkable string of failures?
[00:20:04] Here, a lot of the blame, according to Skydalsky,
[00:20:07] can be laid at the feet of the Scottish philosopher David Hume.
[00:20:10] An early advocate of QTM,
[00:20:12] Hume was also the first to introduce the notion that short-term shocks,
[00:20:16] such as Locke produced,
[00:20:17] would create long-term benefits
[00:20:19] if they had the effect of unleashing the self-regulating powers of the market.
[00:20:24] Ever since Hume, economists have distinguished between the short-run
[00:20:28] and the long-run effects of economic change,
[00:20:30] including the effects of policy interventions.
[00:20:33] The distinction has served to protect the theory of equilibrium
[00:20:36] by enabling it to be stated in a form which took some account of reality.
[00:20:40] In economics, the short-run now typically stands for the period
[00:20:44] during which a market, or an economy of markets,
[00:20:47] temporarily deviates from its long-term equilibrium position
[00:20:50] under the impact of some shock,
[00:20:52] like a pendulum temporarily dislodged from a position of rest.
[00:20:56] This way of thinking suggests that governments should leave it to markets
[00:21:00] to discover their natural equilibrium positions.
[00:21:03] Government interventions to correct deviations
[00:21:05] will only add extra layers of dilution to the original one.
[00:21:09] There is a logical flaw to any such theory.
[00:21:12] There is no possible way to disprove it.
[00:21:14] The premise that markets will always right themselves,
[00:21:17] in the end, can only be tested if one has a commonly agreed definition
[00:21:20] of when the end is.
[00:21:23] But for economists, that definition turns out to be
[00:21:26] however long it takes to reach a point where I can say
[00:21:29] the economy has returned to equilibrium.
[00:21:32] In the same way, statements like
[00:21:34] the barbarians always win in the end
[00:21:36] or truth always prevails cannot be proved wrong,
[00:21:39] since in practice they just mean
[00:21:41] whenever barbarians win or truth prevails,
[00:21:43] I shall declare the story over.
[00:21:47] At this point, all the pieces were in place.
[00:21:50] Tight money policies, which benefited creditors and the wealthy,
[00:21:53] could be justified as harsh medicine to clear up price signals
[00:21:56] so the market could return to a healthy state of long-run balance.
[00:22:00] In describing how all this came about,
[00:22:03] Seidelsky is providing us with a worthy extension of a history
[00:22:07] Karl Polanyi first began to map out in the 1940s.
[00:22:10] The story of how supposedly self-regulating national markets
[00:22:14] were the product of careful social engineering.
[00:22:17] Part of that involved creating government policies
[00:22:22] self-consciously designed to inspire resentment of big government.
[00:22:26] Seidelsky writes,
[00:22:28] A crucial innovation was income tax,
[00:22:31] first levied in 1814 and renewed by Prime Minister Robert Peel in 1842.
[00:22:37] By 1911-1914 this had become the principal source of government revenue.
[00:22:43] Income tax had the double benefit of giving the British state
[00:22:47] a secure revenue base and aligning voters’ interest with cheap government
[00:22:51] since only direct taxpayers had the vote.
[00:22:54] Fiscal property under Gladstone became the new morality.
[00:22:59] In fact, there is absolutely no reason a modern state should fund itself
[00:23:04] primarily by appropriating a proportion of each citizen’s earnings.
[00:23:08] There are plenty of other ways to go about it.
[00:23:11] Many, such as land, wealth, commercial or consumer taxes,
[00:23:15] any of which can be made more or less progressive,
[00:23:17] are considerably more efficient since creating a bureaucratic apparatus
[00:23:21] capable of monitoring citizens’ personal affairs
[00:23:24] to the degree required by an income tax system is itself enormously expensive.
[00:23:29] But this misses the real point.
[00:23:31] Income tax is supposed to be intrusive and exasperating.
[00:23:35] It is meant to feel at least a little bit unfair.
[00:23:38] Like so much of classical liberalism and contemporary neoliberalism,
[00:23:42] it is an ingenious political sleight of hand,
[00:23:45] an expansion of the bureaucratic state
[00:23:47] that also allows its leaders to pretend to advocate for small government.
[00:23:52] The one major exception to this pattern was the mid-20th century,
[00:23:57] what has come to be remembered as the Keynesian Age.
[00:24:00] It was a period in which those running capitalist democracies,
[00:24:03] spooked by the Russian Revolution
[00:24:05] and the prospect of the mass rebellion of their own working classes,
[00:24:09] allowed unprecedented levels of redistribution,
[00:24:12] which in turn led to the most generalized material prosperity in human history.
[00:24:17] The story of the Keynesian Revolution of the 1930s
[00:24:20] and the neoclassical counterrevolution of the 1970s
[00:24:24] has been told innumerable times,
[00:24:26] but Skidelsky gives the reader a fresh sense of the underlying conflict.
[00:24:32] Keynes himself was staunchly anti-communist,
[00:24:35] but largely because he felt that capitalism was more likely
[00:24:38] to drive rapid technological advance
[00:24:40] that would largely eliminate the need for material labor.
[00:24:43] He wished for full employment not because he thought work was good,
[00:24:46] but because he ultimately wished to do away with work,
[00:24:49] envisioning a society in which technology would render human labor obsolete.
[00:24:54] In other words, he assumed that the ground was always shifting under the analyst’s feet.
[00:25:00] The object of many social sciences was inherently unstable.
[00:25:04] Max Weber, for similar reasons, argued that it would never be possible
[00:25:08] for social scientists to come up with anything remotely like the laws of physics,
[00:25:13] because by the time they had come up anywhere near the laws of physics,
[00:25:15] or anywhere near to gathering enough information,
[00:25:18] society itself, and what analysts felt was important to know about it,
[00:25:22] would have changed so much that the information would be irrelevant.
[00:25:26] Keynes’s opponents, on the other hand,
[00:25:28] were determined to root their arguments in just such universal principles.
[00:25:33] It’s difficult for outsiders to see what was really at stake here,
[00:25:37] because the argument has come to be recounted as a technical dispute
[00:25:40] between the roles of micro- and macroeconomics.
[00:25:43] Keynesians insisted that,
[00:25:45] the former is appropriate to studying the behavior of individual households or firms,
[00:25:49] trying to optimize their advantage in the marketplace,
[00:25:52] but that as soon as one begins to look at national economics,
[00:25:55] one is moving to an entirely different level of complexity,
[00:25:58] where different sorts of laws apply.
[00:26:01] Just as it is impossible to understand the mating habits of an artwork
[00:26:05] by analyzing all the chemical reactions in their cells,
[00:26:08] so patterns of trade, investment,
[00:26:11] or the fluctuations of interest or employment rates,
[00:26:14] were not simply the aggregate of all the microtransactions that seemed to make them up.
[00:26:19] The patterns had, as philosophers of science would put it,
[00:26:22] emergent properties.
[00:26:24] Obviously, it was necessary to understand the micro level,
[00:26:28] just as it was necessary to understand the chemicals that made up the artwork,
[00:26:32] to have any chance of understanding the macro,
[00:26:36] but that was not, in itself, enough.
[00:26:39] The counter-revolutionaries,
[00:26:41] starting with Keynes’s old rival Frederick Hayek,
[00:26:43] at the LSE,
[00:26:45] and the various luminaries who joined him in the Mont Pelerin society,
[00:26:49] took aim directly at this notion that national economies
[00:26:52] are anything more than the sum of their parts.
[00:26:55] Politically, Skidelsky notes,
[00:26:57] this was due to a hostility to the very idea of statecraft,
[00:27:01] in the broader sense of any collective good.
[00:27:04] National economies could indeed be reduced to the aggregate effect
[00:27:08] of millions of individual decisions,
[00:27:11] and therefore,
[00:27:12] every element of macroeconomics had to be systematically micro-founded.
[00:27:18] One reason this was such a radical position
[00:27:21] was that it was taken at exactly the same moment
[00:27:24] that microeconomics itself was completing a profound transformation,
[00:27:28] one that had begun with the marginal revolution of the late 19th century,
[00:27:32] from a technique of understanding how those operating on the market
[00:27:36] make decisions to a general philosophy of human life.
[00:27:40] It was able to do so remarkably enough
[00:27:43] by proposing a series of assumptions that even economists themselves
[00:27:47] were happy to admit were not really true.
[00:27:50] Let us posit, they said,
[00:27:52] purely rational actors,
[00:27:53] motivated exclusively by self-interest,
[00:27:56] who know exactly what they want and never change their minds,
[00:27:59] and have complete access to all relevant pricing information.
[00:28:03] This allowed them to make precise, predictive equations
[00:28:07] of exactly how individuals should be expected
[00:28:10] to act.
[00:28:11] Surely, there is nothing wrong with creating simplified models.
[00:28:14] Arguably, this is how any science of human affairs has to proceed.
[00:28:18] But an empirical science, then,
[00:28:20] goes on to test those models against what people actually do
[00:28:23] and adjust them accordingly.
[00:28:25] This is precisely what economists did not do.
[00:28:28] Instead, they discovered that if one encased those models
[00:28:32] in mathematical formulae completely impenetrable to the non-initiate,
[00:28:37] it would be possible to create a universe
[00:28:39] in which those premises could never be refuted.
[00:28:43] All actors are engaged in the maximization of utility.
[00:28:46] What is utility?
[00:28:47] Whatever it is that an actor appears to be maximizing.
[00:28:51] The mathematical equations allowed economists
[00:28:54] to plausibly claim theirs was the only branch of social theory
[00:28:57] that had advanced to anything like a predictive science,
[00:29:00] even if most of their successful predictions
[00:29:03] were of the behavior of people who had themselves been trained in economic theory.
[00:29:08] This allowed homo economicus to invade the rest of the academy,
[00:29:12] so that by the 1950s and 1960s,
[00:29:14] almost every scholarly discipline in the business
[00:29:17] of preparing young people for positions of power
[00:29:20] had adopted some variant of rational choice theory,
[00:29:26] culled ultimately from microeconomics.
[00:29:29] By the 1980s and 1990s,
[00:29:32] it had reached a point where even the heads of art foundations
[00:29:35] or charitable organizations
[00:29:37] would not be considered fully qualified
[00:29:39] if they were not at least broadly familiar
[00:29:41] with the science of human affairs
[00:29:43] that started from the assumption
[00:29:45] that humans were fundamentally selfish and greedy.
[00:29:49] These then were the micro foundations
[00:29:52] to which the neoclassical reformers
[00:29:54] demanded macroeconomics be returned.
[00:29:57] Here they were able to take advantage
[00:29:59] of certain undeniable weaknesses in Keynesian formulations,
[00:30:03] above all its inability to explain 1970s
[00:30:06] stagflation,
[00:30:08] to brush away the remaining Keynesian superstructure
[00:30:11] and return to the same hard money,
[00:30:13] small government policies
[00:30:15] that had been dominant in the 19th century.
[00:30:18] A familiar pattern ensued.
[00:30:20] Monitorism didn’t work.
[00:30:22] In the UK and then the US,
[00:30:24] such policies were quickly abandoned.
[00:30:26] But ideologically,
[00:30:28] the intervention was so affected
[00:30:30] that even when new Keynesians
[00:30:32] like Joseph Stiglitz or Paul Krugman
[00:30:34] returned to dominate the argument,
[00:30:36] about macroeconomics,
[00:30:38] they still felt obliged to maintain
[00:30:40] the new micro foundations.
[00:30:42] The problem, as Skaidelsky emphasizes,
[00:30:44] is that if your initial assumptions are absurd,
[00:30:47] multiplying them a thousandfold
[00:30:49] will hardly make them less so.
[00:30:51] Or as he puts it, rather less gently,
[00:30:54] lunatic premises lead to mad conclusions.
[00:30:57] The efficient market hypothesis, EMH,
[00:31:00] made popular by Eugene Feynman,
[00:31:02] is the application of rational expectations
[00:31:04] to financial markets.
[00:31:06] The rational expectations hypothesis, REH,
[00:31:09] says that agents optimally utilize
[00:31:12] all available information about the economy
[00:31:15] and policy instantly to adjust their expectations.
[00:31:18] Thus, in the words of Fama,
[00:31:20] in an efficient market,
[00:31:22] competition among the many intelligent participants
[00:31:24] leads to a situation where
[00:31:26] the actual price of a security
[00:31:28] will be a good estimate of its intrinsic value.
[00:31:31] Skaidelsky’s italics.
[00:31:36] In other words, we are obliged to pretend
[00:31:38] that markets could not, by definition,
[00:31:40] be wrong.
[00:31:42] If in the 1980s, the land on which
[00:31:44] the imperial compound in Tokyo was built,
[00:31:46] for example, was valued higher
[00:31:48] than that of all the land in New York City,
[00:31:51] then that would have to be because
[00:31:53] that was what it was actually worth.
[00:31:55] If there are deviations,
[00:31:57] they are purely random, stochastic,
[00:31:59] and therefore unpredictable,
[00:32:01] temporary, and ultimately insignificant.
[00:32:04] In any case,
[00:32:05] rational actors will quickly step in
[00:32:07] to sweep up any undervalued stocks.
[00:32:10] Skaidelsky dryly remarks,
[00:32:12] There is a paradox here.
[00:32:14] On the one hand,
[00:32:15] the theory says that there is no point
[00:32:17] in trying to profit from speculation,
[00:32:19] because shares are always correctly priced
[00:32:21] and their movements cannot be predicted.
[00:32:23] But on the other hand,
[00:32:25] if investors did not try to profit,
[00:32:27] the market would not be efficient
[00:32:29] because there would be no self-correcting mechanism.
[00:32:31] Secondly,
[00:32:33] if shares are always correctly priced,
[00:32:35] bubbles and crises cannot be generated by the market.
[00:32:38] This attitude leached into policy.
[00:32:41] Government officials,
[00:32:43] starting with Federal Reserve Chairman Alan Greenspan,
[00:32:45] were unwilling to burst the bubble
[00:32:47] precisely because they were unwilling
[00:32:49] to even judge that it was a bubble.
[00:32:51] The EMH made the identification of bubbles impossible
[00:32:55] because it ruled them out a priori.
[00:32:59] If there is an answer to the Queen’s famous question
[00:33:02] of why no one saw the crash coming,
[00:33:04] this would be it.
[00:33:06] At this point,
[00:33:07] we have come full circle.
[00:33:09] After such a catastrophic embarrassment,
[00:33:11] orthodox economists fell back on their strong suit,
[00:33:14] academic politics and institutional power.
[00:33:17] In the UK,
[00:33:19] one of the first moves of the new
[00:33:21] Conservative-Liberal Democratic Coalition in 2010
[00:33:24] was to reform the higher education system
[00:33:26] by tripling tuition and instituting
[00:33:28] an American-style regime of student loans.
[00:33:31] Common sense might have suggested that
[00:33:33] if the education system was performing successfully
[00:33:36] for all its foibles,
[00:33:38] the British university system
[00:33:40] was considered one of the best in the world.
[00:33:42] While the financial system was operating so badly
[00:33:45] that it had nearly destroyed the global economy,
[00:33:47] the sensible thing might be
[00:33:49] to reform the financial system
[00:33:51] to be a bit more like the educational system
[00:33:53] rather than the other way around.
[00:33:55] An aggressive effort to do the opposite
[00:33:57] could only be an ideological move.
[00:33:59] It was a full-on assault
[00:34:01] on the very idea
[00:34:02] that knowledge could be anything other
[00:34:04] than an economic good.
[00:34:07] Similar moves were made to solidify control
[00:34:10] over the institutional structure.
[00:34:12] The BBC,
[00:34:13] a once proudly independent body,
[00:34:15] under the Tories,
[00:34:16] has increasingly come to resemble
[00:34:18] a state broadcasting network.
[00:34:20] Their political commentators
[00:34:22] often reciting almost verbatim
[00:34:24] the latest talking points of the ruling party,
[00:34:26] which, at least economically,
[00:34:28] were premised on the very theories
[00:34:30] that had just been discredited.
[00:34:32] Political debates simply assumed
[00:34:34] that the usual harsh medicine
[00:34:36] and Gladstonian fiscal probity
[00:34:38] were the only solution.
[00:34:40] At the same time,
[00:34:42] the Bank of England began printing money
[00:34:44] like mad, and effectively
[00:34:46] handing it out to the 1%
[00:34:48] in an unsuccessful attempt
[00:34:50] to kickstart inflation.
[00:34:52] The practical results were,
[00:34:54] to put it mildly, uninspiring.
[00:34:56] Even at the height of the eventual recovery,
[00:34:59] in the fifth richest country in the world,
[00:35:01] something like one British citizen
[00:35:03] in twelve experienced hunger,
[00:35:05] up to and including
[00:35:07] going entire days without food.
[00:35:09] If an economy is to be defined
[00:35:11] as the means by which a human population
[00:35:13] provides itself with its material needs,
[00:35:15] the British economy
[00:35:17] is increasingly dysfunctional.
[00:35:19] Frenetic efforts
[00:35:21] on the part of the British political class
[00:35:23] to change the subject
[00:35:25] can hardly go on forever.
[00:35:27] Eventually,
[00:35:29] real issues will have to be addressed.
[00:35:31] Economic theory as it exists
[00:35:33] increasingly resembles
[00:35:35] a shed full of broken tools.
[00:35:37] This is not to say
[00:35:39] there are no useful insights here,
[00:35:41] but fundamentally,
[00:35:43] the existing discipline
[00:35:45] is designed to solve
[00:35:47] another century’s problems.
[00:35:49] The problem of how to determine
[00:35:51] the optimal distribution of work
[00:35:53] and resources to create high levels
[00:35:55] of economic growth
[00:35:57] is simply not the same problem
[00:35:59] we are now facing, i.e.,
[00:36:01] increasing productivity,
[00:36:03] decreasing real demand for labour
[00:36:05] and the effective management of care work
[00:36:07] without also destroying the earth.
[00:36:09] This demands a different science.
[00:36:11] The micro-foundations of current economics
[00:36:13] are precisely what is standing
[00:36:15] in the way of this.
[00:36:17] Any new viable science
[00:36:19] will either have to draw on
[00:36:21] the accumulated knowledge of feminism,
[00:36:23] behavioural economics, psychology
[00:36:25] and even anthropology
[00:36:27] to come up with theories
[00:36:29] based on how people actually behave,
[00:36:31] at levels of complexity,
[00:36:33] or most likely, both.
[00:36:35] Intellectually,
[00:36:37] this won’t be easy.
[00:36:39] Politically,
[00:36:41] it will be even more difficult.
[00:36:43] Breaking through neoclassical economics’
[00:36:45] lock on major institutions
[00:36:47] and its near theological hold
[00:36:49] over the media,
[00:36:51] not to mention all the subtle ways
[00:36:53] it has come to define our conception
[00:36:55] of human motivations
[00:36:57] and the horizons of human possibility
[00:36:59] is a daunting prospect.
[00:37:01] Some kind of shock would be required.
[00:37:03] What might it take?
[00:37:05] Another 2008-style collapse?
[00:37:07] Some radical political shift
[00:37:09] in a major world government?
[00:37:11] A global youth rebellion?
[00:37:13] However it will come about,
[00:37:15] books like this
[00:37:17] and quite possibly this book
[00:37:19] will play a crucial part.
[00:37:29] This has been a production
[00:37:31] of Audible Anarchist.
[00:37:33] You can find more Audible Anarchist
[00:37:35] on YouTube.