Scotland the brave: the road to the referendum

The spectre of Scotland voting yes to become independent of Great Britain in ten days haunts the British press and Britain’s political class. Like its cousin the Québec independence movement the Scotland referendum campaign has tightened into an apparently close horse race as the referendum day draws near. Many Canadians who follow politics and particularly Québecers are following this referendum closely. Many Canadians have Scottish or British roots and families. Many of us are very familiar with the excitement or dread that this sort of referendum can produce.The debate in Britain revolves around the traditional issues that bedevil these affairs. What are the terms on which Scotland would separate from its three hundred year old partner? Would Scotland have its own central bank and currency? The Scottish independence movement says it intends to negotiate a currency union with Britain but the Government in London insists that it won’t agree to a currency union. How would the national debt be divided between the newly recreated country of Scotland and its former partner? What role do ideological differences play in the debate? Can we make better sense of the debate by viewing it as a clash between neo-liberal politics and democratic socialist or social democratic politics? What would happen to Wales, England and Northern ireland if Scotland left? If Scotland votes narrowly no will this close call lead to federalist reform in Great Britain ? How much capital flight from Scotland will occur in the final days of the referendum campaign ? What would the consequences be of a yes vote in Scotland in Spain with its Catalan separatists, in Belgium, in France, in Québec ?

Paul Krugman has written a piece in the NYT in which he argues that Canada is an independent Scottish proxy in North America, a successful much smaller independent country from the U.S. with its own central bank and currency and more left of centre in social and economic policy. So if Scotland wishes the same status it needs to plan for its own currency and central bank something its nationalist leadership has insisted won’t happen. But Canada never broke away from the US. rather it was the US that broke away from British North America a revolution that Canada refused to join. So the analogy is not a good one.Furthermore Canada like the U.S is a continental country with vast resources and a population that is over 35 million people.But Krugman is right to argue the importance of having ones own currency and central bank. Some years ago when the Canadian doller was trading in the low 60cents US band a number of misguided Canadian economists speculated on the wisdom of abandoning our currency in exchange for a new shared currency with the U.S. That would have been a very bad idea and looks particularly foolish now that the currency has traded at above par since then and in the 90cent range recently. I wish the Scots and Britons well in the coming tense days.

Personally I think a respectful rejection of the nationalist side is a better outcome for both Scotland and Great Britain. Creative federalism and devolution can solve most of the complaints. A renewed commitment to full employment and greater support for the NHS would also help considerably. Whatever the outcome from the wilds of the Grampian mountains to the beauty of the south Downs from the delights of Edinburgh to the grandeur of London Britain and Scotland will remain a diverse land rich in history, culture and natural beauty.

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Poli 204/2 2014 course outline (under construction)

Poli 204/2 2014
Introduction to Canadian Politics
Professor Harold Chorney
Course outline

The study of Canadian politics is a complex field which draws upon a number of traditions in Canadian political science including institutionalism, political behaviour, political theory, international politics, political economy, history, judicial and constitutional history and economic history. In a broad survey course lasting a single term we can only touch upon a number of key aspects of the field. In my view some knowledge of the key economic and political history of Canada and its initial colonial relationship to Great Britain and France and its relationship to the great republic to the south , the United States is essential in making sense of Canadian politics and its political history. The ongoing debate about the place of Québec in Canada can only be properly understood in the light of Canadian history and the history of the French fact in the founding of the country. Much has changed in Canada over the past half century. In 1941 Canada had a population of about 11.5 million people. Its population today is over 35.2 million. Whereas in the 1940s and fifties the major groups were those of British or French background and people from other ethnicities constituted less than twenty percent of the population this third group has grown substantially in importance. Canada can no longer be understood as a British country or a former French colony. This in strong contrast to the Canada of the early 1950s when both the Union Jack and the Red Ensign flew on the flagpole of my elementary school in Winnipeg and we were considered British subjects. Rather Canadian nationality has come into its own based as it is on a wide range of ethnicities , founding peoples and nations and immigrants from all over the world. We will likely be a nation of more than 40 million in the not too distant future and have in much of the country a strong pan Canadian national sensibility. Yet at the same time Québec maintains its identity as the very successful product of more than 4 centuries of French dominant presence in North America. This French presence and identity is also strong in several other regions of the country notably New Brunswick, Ontario and Manitoba. The partly bilingual character of Canada and the tension over Québec’s place in Canada are creative if difficult elements of the Canadian nation making process.

Text :Eric Mintz, Livianna Tossutti and Christopher Dunn, Canada’s Politics:Democracy, Diversity and Good Government. Pearson , 2014. Available at text bookstore.

Evaluation: An essay due in the first week of November on a topic chosen from a list of possible topics made available in the next two weeks. 50 %. A final exam 50 %.

Additional reading: I draw upon several other works in Canadian history and Canadian Politics . these include Alvin Finkel and Margaret Conrad’s two volume History of the Canadian Peoples vol.1 Beginning to 1867 (1993) vol.2 3rd ed. 1867 to the present; Stanley Ryerson, French Canada; Unequal Union; Craig Brown, the illustrated history of Canada, 2002; Donald Creighton, The Road to Confederation:The Emergence of Canada; Rand Dyck& Christopher Cochrane Canadian Politics Critical Approaches; Stephen Brooks, Canadian Democracy, Oxford U Press, 2012. Michael Hart, A Trading Nation:Canadian Trade Policy from Confederation to Globalization, 2002. Mel Watkins and W. Easterbrook, Approaches to Canadian Economic History, 1969.


1. Introduction and overview.

2. Geography and Economic history the role of the staple in French Canada and British North America.

3. Aboriginal peoples in pre European Canada. Aboriginal Rights and Governance. The Riel rebellions Manitoba and Québec.

4. The conquest and its legacy.Québec nationalism in twentieth and twenty-first century Canada.

5. Democracy and the Liberal democratic state.The 1837 rebellions and the chartists. The roots of confederation and the Canadian constitution.

6. The clash between labour and capital in the nineteenth and twentieth centuries and its impact upon Canadian politics and the political party system.

7. The Canadian economy, the business cycle, free trade , globalization and regional disparities.

8. Canada as an urban nation. The growth of diversity. Canada’s treatment of its minorities. Québec nationalism and Canadian federalism.

9. Canadian political culture and our place in global politics.

10. Political parties, interest groups and social movements. Democratic reform.

11. The constitution and the Charter of Rights. The Federal system and the economics of federalism.

12. The institutions of government: Parliament and the power of the Prime Minister.

13. The judiciary and the courts.

14. Summary and Review.

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Poli 463/2 2014 course outline (under construction)

Poli 463/2
Government and Business course outline :
Keynes versus monetarists before and after the crash of 2008
Prof.Harold Chorney
Fall/ 2014

Course overview:

This course explores the tools that are necessary to deal with the contemporary global economy and the public policy that is appropriate after the events in the financial markets these past six years.The crash of September 2008 in the financial markets,the financial bubble that preceded it, the global dimension to the recession which followed it and the presence of widespread significant fraud and excessive reckless risk taking obliges us to reinvigorate standards of regulation in the public interest and to understand the full dimension of financial instability.

Governments all over the world initially reacted by engaging in re-regulation, Keynesian deficit finance and a dramatic overhaul of policy to roll back the laissez-faire ideology that had come to dominate public policy over the past two decades. In recent years there has been some backtracking as the defenders of laissez-faire , particularly in Europe at the ECB and among leading technocrats of the European union and the Republican critics of President Barack Obama have reasserted the ”wisdom” of laissez faire against what they claim are the failures of liberal socialism and Keynesian intervention and social engineering. Jean Claude Trichet of the European central bank and his successor Mario Draghi to a somewhat lesser extent have also been outspoken in their defense of sound finance and budget balance. Just this past month the French minister for economics,Arnaud Montebourg resigned in protest over the austerity policies of the EU and the Hollande government of France. This has been less the case for Ben Bernanke and his successor at the Fed Janet Yellen who have emphasized the importance of reducing unemployment instead. Hence the debate between the two schools continues.The British coalition Liberal conservative Government under the leadership of David Cameron and Nicholas Clegg has unfortunately also embraced sound finance and budget slashing despite the severity of the recession in the U.K. and the evidence that Labour’s return to Keynesian stimulation was working.

In the past this course examined intensively the clash between the Keynesians and the monetarists and the impact of this paradigmatic debate upon public policy. It also examined the neo-conservative and neo-liberal ideology and the break these ideologies have made with post-war liberalism, progressive toryism and social democracy. It argued the case for a return to Keynesian public policy.

This has happened initially in the leading capitalist economies like the US and Japan, post crash. In many respects the new American Presidential administration of Barack Obama has led the way, although critics like Nobel prize winners Joseph Stiglitz and Paul Krugman argue that the American stimulus was too small and improperly focused. It has also been undertaken in Europe with Great Britain and to a lesser extent France leading the way, with Germany a very reluctant follower. Despite considerable resistance it has, in a much less dramatic fashion, been undertaken in Canada by the Harper conservative government.

We shall still do some exploration of the history of the previous monetarist classical macroeconomics paradigm but I intend to spend more time this year on deepening our understanding of how the Keynesian technique of demand stimulation is intended to work, the implications for public policy, and how I believe it should work given all of the economic and ideological changes that have occurred over the past thirty years.We shall also explore the emerging debate over growing inequality in much of the Western world by examining the work of Thomas Piketty, Capital in the Twenty-first century.

We also explore the environmental movement and assesses how environmentalism and green public policy can be integrated with Keynesian approaches to globalization.

We explore the transition from the Keynesian welfare state to the neo-con/neo-liberal doctrine of balanced budgets, free trade and unregulated globalization and to its consequences and now to the partial return of a refurbished Keynesian approach to public policy. The role of the media and popular culture in transmitting these changes is also explored.The impact of the successful Obama campaign for the Presidency will also be explored in terms of its impact upon public policy.

Texts and basic readings:

The first four works are basic texts and are on order at the text book store. The Deficit papers is available from me in electronic format as well a number of papers posted on my word Press web site will be assigned readings.

John Maynard Keynes, The General Theory of Employment, Interest and Money.

Joseph Stiglitz, Free Fall:America, Free Markets and the Sinking of the World economy , 2010

Paul Krugman, End This Depression Now, Penguin.

Thomas Piketty, Capital in the Twenty-first Century. Harvard university Press.

Harold Chorney, The Deficit Papers available from me in electronic format. As well a number of other papers which are posted on my blog will also be assigned as readings.

Other core readings:

Hyman Minsky, Stabilizing an Unstable economy

Can ”It” Happen again?:Essays on instability and finance

John Maynard Keynes

Kevin Phillips, Bad Money:Reckless finance, Failed Politics and the Global Crisis of American Capitalism

Peter Clarke, Keynes:The Rise ,Fall, and Return of the 20th Century’s Most Influential Economist.

David Mendell, Obama from Promise to Power

Harold Chorney, “On Manias, panics and bail-outs:further thoughts on the financial crisis” see my website.

Harold Chorney, Revisiting deficit hysteria, labour/Le travail, #54, 2004 available on the net

Harold Chorney, The Global Financial Crisis, the Re-emergence of Keynes and the Role of Quantitative Easing
paper Presented to the World Congress of Social Economics, Concordia university, Montréal, June 2010 A revised version presented to the Eastern economics association meetings in New York in 2011

Harold Chorney Restoring full employment:the natural rate of inflation versus the natural rate of unemployment paper presented to the Conference on Social Policy as if People Matter, Adelphi university, Garden City New York, November 12, 2004 (available on net)

Harold Chorney, Keynes, Lerner and Friedman in an Uncertain Age, paper presented to the Canadian economics Association meetings Vancouver May 2014.

Alvin Hansen, A Guide to Keynes (on reserve)

Sidney Blumenthal, The rise of the Counter-establishment:From Conservative Ideology to Political Power

Desmond King, The New Right:Politics, Markets and Citizenship

Brian Snowdon and Howard Vane, eds. A macroeconomics reader, 1997.

Snowdon and Vane, Modern Macroeconomics:its origins, development and current state.Edward elgar, 2006

The following are some selected basic supplementary readings.You are not expected to read them all but rather portions of some of them. Some of them will be placed on reserve. Others are available through the library .They are intended to help with your research papers and illustrate the breadth and richness of the literature in the area.

John McMurtry, Unequal freedoms:the global market as an ethical system.

Adam Harmes, The Return of the state: protestors, power brokers and the new global compromise, douglas and mcIntyre, 2004.

Henry M.Paulson,Jr. On The Brink, Inside the Race to Stop the Collapse of the Global Financial System, N.Y. :Business plus, 2010;

Scott Patterson, The Quants:How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, N.Y.: Crown Business, 2010;

William Cohan; House of Cards:A Tale of Wretched Excess on Wall Street,N.Y.:Random House Doubleday, 2009;

Benoit Mandelbrot & Richard Hudson, The Misbehaviour of Markets:A Fractal View of Financial turbulence, N.Y.:Basic Books, 2004;

Kevin Phillips, Bad Money:Reckless Finance, failed politics, and the Global Crisis of American Capitalism, N.Y.:Viking, 2008;;

Nouriel Roubini & Stephen Mihm, Crisis Economics:A crash course in the future of finance, N.Y.&London: the Penguin Press, 2010;

Paul Jorion, La Crise:Des subprimes au seisime financier planétaire,Paris, France: Fayard, 2008;

Richard Posner, A failure of Capitalism:The crisis of 08 and the descent into depression, Cambridge, Mass. and London U.K., 2009;

Bill Bamber & Andrew Spencer,Bear Trap: The Fall of Bear Stearns and the Panic of 2008, New York :Brick Tower Press, 2008;

Richard Bookstaber,A Demon of Our Own Design: Markets, Hedge funds and the Perils of Financial Innovation,Hoboken N.J., John Wiley & sons, 2007 )
John Kenneth Galbraith, The Great Crash,1929
Alvin Hansen, Monetary theory and Fiscal Policy.
Fausto Vicarelli, Keynes:The Instability of Capitalism
George Soros, The New Paradigm for financial markets..
Charles Kindleberger, Manias, Panics and Crashes.
The World in Depression:1929-1939.
David Colander and Dewey Daane, The Art of Monetary Policy.
J.A. Trevithick , Involuntary Unemployment:Macroeconomics from a Keynesian Perspective.
Robert Kuttner, Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.
Tim Lewis, In the Long Run We`re all Dead: The Canadian Turn to Fiscal restraint.(on reserve)
Robert Ascah, Politics and Public debt:the Dominion, the Banks and Alberta’s Social Credit.
Doug Henwood, Wall Street.
Richard Parker, John Kenneth Galbraith: His Life, His Politics , His Economics.
Peter Clarke, The Keynesian Revolution in the Making.
Will Hutton, The Revolution that Never Was: an Assessment of Keynesian Economics.
Lawrence Klein, The Keynesian Revolution.
J.C.Gilbert, Keynes’Impact on Monetary Economics.
Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes.
Gary Teeple, Globalization and the Decline of Social Reform(reserve)
Jonathon Michie and John Grieve Smith eds., Managing the Global Economy.
David Held & Mathias Koenig-Archibugi, Taming globalization: frontiers of Governance.
Bao Gao, Japan’s Economic Dilemma:the institutional origins of prosperity and stagnation.
Sidney Blumenthal, The Rise of the Counter Establishment, From Conservative Ideology to Political Power.
Armand Van Dormael, Bretton Woods: Birth of a Monetary System.
Robert Lucas, Studies in Business Cycle Theory.
Milton Friedman,” The role of monetary policy” The American Economic Review, 1968, vol.58, March, pp.1-17 reproduced in Brian Snowdon and Howard Vane, A Macroeconomics Reader.
Alan Blinder, The fall and rise of Keynesian economics, Economic Record, 1988, December reproduced in Snowdon and Vane., A Macroeconomics Reader
James Tobin, “Price Flexibility and output stability:an old Keynesian view.Journal of Economic Perspectives, 1993 vol7, Winter. reproduced in Snowdon and Vane.a Macroeconomics reader
David Laidler, Monetarism:an Interpretation and an assessment.Economic Journal,1981, vol.91 March reproduced in Snowdon and Vane.
F.A.Hayek, The Fatal Conceit:The Errors of Socialism.
Allan Meltzer, A History of the Federal Reserve, Vol. 1:1913-1951.
James Rock ed. ,Debt and the Twin Deficits Debate.
Robert Heilbroner and Peter Bernstein, The debt and the Deficit:fal;se Alarms/Real Possibilities.
Harold Chorney& Phil Hansen, Toward a Humanist Political Economy
Joseph Stiglitz, The Roaring Nineties;
Making Globalization Work
Thomas Kuhn, The Structure of Scientific revolutions;
Adam Harmes, The Return of the State:Protesters, power brokers and the new global compromise;
Georges Campeau, From UI to EI:Waging War on the Welfare State;
Stephen Clarkson, Uncle Sam and Us.
Michael Woodin & Caroline Lucas, Green alternatives to Globalisation.
Al Gore, An Inconvenient Truth,the planetary emergency of global warming and what we can do about it.
Nicholas Stern, Review Report on the economics of climate change to the British government (available on the internet)
Gwyne Dyer, Climate Wars.
Rubin Simkin, Comments on Consumption, Income distribution and Growth (on reserve)
E.F.Schumacher, Small is Beautiful.(on reserve)
E.J.Mishan, the Costs of Economic Growth (on reserve)
J.Kenneth Galbraith, The New Industrial State (on reserve)
The Affluent Society (on reserve)
A Short history of financial euphoria.
Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process (on reserve)
Joseph Schumpeter, History of Economic Analysis.
Paul Davidson, Post Keynesian Macroeconomic Theory.
H.Binhammer, Money and Banking and the Canadian Financal System
Alan Booth, British Economic Policy 1931-1949.Was There a Keynesian Revolution?
Anna Carabelli, On Keynes’ Method.
Leo Pliatzky, The Treasury under Mrs. Thatcher.
L.Randall Wray, Understanding Modern Money.the Key to Full Employment and Price Stability
William Greer, Ethics and Uncertainty, The Economics of John M. Keynes and Frank H. Knight.

Students are also expected to read extensively the financial and quality press each week.These include The Financial Times, The New York Times,the Wall Street Journal, The Guardian,the Globe and Mail, and focus on stories on the economy, the financial crisis and the recovery.

Evaluation: Essay due mid term, the first week of November 50 %

Final exam 50 %.


1.Introduction and overview.The interface between economics and politics.The art and science of political economy. The recent financial crisis, sub -prime mortgages, bank bailouts and the crash of 2008. The need for stimulus and the revival of Keynes. The eclipse of monetarism.? The challenge of climate change and the protection of the environment. The impact of the crash and challenges before Barack Obama. The rise and fall of the new right.The Canadian response. the origins of macroeconomics. The issue of inequality.

readings: Chorney, On manias , panics and crashes; Chorney; the introduction to the Deficit papers,Chorney the global financial Crisis, re-emergence of Keynes and origins of Quantitative easing.the essay on Keynes in the Deficit papers;chapter one in Kuttner.Obama’s challenge.chapter one in Phillips. Kindleberger; Galbraith, on the crash and Minsky, introduction to Can it Happen again and editors’ introduction to stabilizing an unstable economy.
Piketty,part one.

2.Globalization and the ethical dilemma. Myths and truths about globalization.The environmental challenge.Economic growth and entropy.
Readings: Nicholas Stern, Al Gore;K.Phillips; Stiglitz, introduction and chapter one. John McMurtry pp.1-52.

3. The myth of no alternative.The role of regulation and public enterprise. Laissez-faire versus planning.Hayek versus Keynes. The eclipse of Marx.The rejection of Keynes. Daniel Bell and the End of Ideology. The rise of post-modernism and the new classical macroeconomics.
Readings :Chorney global financial crisis…; Chorney deficit papers :The future of crown corporations:government ownership, Regulation or market control,A Keynesian approach, 1998; Blumenthal; King, Hayek, Mcmurtry, Harmes, Lucas, Friedman,Laidler.

4.The role of the media; political pressure groups;democracy propaganda and the policy process. The rise of the neo-cons.
Media and popular culture in the post modern age.The post war consensus and how it unravelled. Stagflation
and misinterpreting the General theory.
Readings :Chorney the deficit papers: The economic and political consequences of Canadian monetarism; Keynes and the problem of inflation.Keynes, the General Theory The two postulates of classical economics; the possibility that labour markets do not clear; the notion of involuntary unemployment.
Blumenthal, King, Block, Chorney, the natural rate of inflation…, Keynes GT ch.1-3; Peter Clarke Keynes, introduction.

5. The consumption function. The multiplier. Savings and investment.The theory of interest rate determination.Readings: Keynes GT; Hansen a guide to Keynes.

6. The controversy over debt and public finance.readings:Cavenaugh, Rock; Eisner; Heilbroner and Chorney: Rediscovering deficit hysteria, The deficit: hysteria and the current crisis and Chorney commentary on the FT’s austerity debate plus U tube video on deficits and debt.

7. The strategy of stimulus. investment in infrastructure. Investment versus tax cuts. The impact of capital flows.
Readings :Chorney blog entries on stimulus and the strategy behind it plus others tba.

8. The roots of neo-conservatism.The cold war. The Vietnam war and the sixties. The OPEC crisis of the 1970s. Stagflation. Thatcher Reagan and Mulroney in the 1980s. The Clinton, Blair and Chretien third way.The Bush and Blair war in Iraq. The challenge of Afghanistan.The resurgence of liberalism in America. Obama’s challenge.
Readings: blog; Stiglitz Free Fall; Stiglitz The roaring nineties;globalization and its discontents.Chorney and P.Hansen Toward a Humanist Political economy, The falling rate of legitimation ; introduction and Neo-conservatism, social democracy and provinve building;King and Blumenthal.

9. The roots of monetarism.Hayek versus Keynes in the thirties. Friedman versus neo-classical Keynesianism in the sixties and seventies. The post-Keynesians and John Kenneth Galbraith. Towards a new Keynesian paridigm.The return of regulation and the state. The bail-out of the banks , Freddie Mac and Fannie Mae and AIG insurance ; cleaning up the bubble,Readings :Stiglitz,Paulson,Phillips, Tobin; Blinder; Davidson;Harmes; Chorney

10. Post and neo-Keynesian policy in the age of OPEC. readings:Davidson,Harmon , The problem of growing inequality, the Piketty thesis.

11. Development issues. The IMF and the World Bank. The turn to the left in Latin America. The return of full employment ? Capitalism in Asia.
Readings: Stiglitz, Chorney.

12. Prospects for democracy, balanced ecologically sound growth and the compassionate society in the new world order.

Weekly notes: I will use this space to refer students to readings, updates sources etc.

Please note that the reading Harold Chorney,”On manias, panics and bailouts:further thoughts on the financial crisis” is available by referring to my blog. Jan.14, 2009 On manias, panic and bailouts: further thoughts. There are also numerous copies of Keynes’s GT in the libraries around town including Concordia and it is also accessible on line. Begin reading the first 50 pages and we will discuss it in class.

Please go to the site and watch their excellent documentary Inside the financial Meltdown which was broadcast on Frontline.It provides an insightful and personal look at the financial crisis as it unfolded in New York and Washington in 2008.

Essay assignment due in class in the first week of November.
Please research and write a 12 to 15 page essay on one of the following topics or if you prefer propose an alternative topic to me. Be sure to use a manual of style, include a full bibliography and proper notes identifying your sources. Sources should include books, periodical literature, quality financial papers like the Wall Street Journal, the Globe and Mail, The Financial Times or the New York Times well as internet sources.

Possible topics include:

1. Discuss the root causes of the financial crisis. Explore the factors that influenced its unfolding as it has. What are the principal flaws in the economic theory that business leaders and policy makers relied upon that led to this crisis? How must economic theory be reconstructed to avoid these policy failures in the future?

2. Compare and contrast the monetarist approach to public policy and management of the business cycle with the Keynesian schools’ approach.Why and how did monetarism displace the Keynes style approach in the 1970s? Does the current crisis suggest another paradigm shift?

3. Discuss the controversy over government use of deficits to stimulate the economy in an economic downturn.Explore the role of deficits in the current policy environment. How did the Canadian Harper stimulus compare with that of the Obama administration? What is the appropriate monetary policy in conjunction with stimulative deficits ? What impact have the austerity policies in Europe had on the European economy ? What about the U.K. ?

4. Explore the roots and current operations of the IMF and the World Bank.
What reforms appear necessary at these institutions. Give concrete country based examples.

5. Explore panics, manias and crashes in financial history. How does this panic compare with previous ones ?

6. Explore the theory of the multiplier and Keynes’ theory of investment. How ought we to modify Keynes’ theory of investment to adjust to the current circumstances of globalization ?

7. Explore the roots of neo-conservatism. Does it have a future ?

8. Explore the environmental aspects of economic stimulus. Is there an inherent contradiction between stimulus leading to full employment and sound environmental policy ?

9. What would constitute a viable and contemporary theory of economic liberalism that would respect the social and economic needs of people but at the same time be open to global values ?

10. Discuss in detail the inequality argument of Thomas Piketty. How has inequality evolved in Canada as opposed to the U.S. ?

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French Economics Minister Arnaud Montebourg resigns in opposition to misguided counterproductive austerity policies

M.Arnaud Montebourg has openly protested against the austerity policies of the Hollande Government headed by Prime Minister Manuel Valls. He correctly denounced the policies as absurd and counterproductive in the fight against unemployment and the deficit. As a consequence of his very public denunciation of the policies, President Hollande has dissolved his government and asked his prime minister to form a new cabinet purged presumably of any Keynesians. But the brave statement of Montebourg which he correctly stated required both intellectual and political courage ought to serve as a rallying cry for those enlightened French politicians, civil servants and public intellectuals who share the perspective and who would like to see a long overdue shift in policy in France and Europe generally.I strongly encourage them and assure them they are correct in their diagnosis which is backed up by more than eighty years of scientific debate and the results of the last great depression and the delayed economic recovery which only occurred after the obsession with austerity was overcome by the requirements of the war time for greatly increased public spending. But it was not the war, per se, which solved the problem . Rather the war removed the political barrier to the increased investment and boosting of aggregate demand which was the necessary fiscal part of the solution.It became unpatriotic to oppose public spending and unemployment reduction. As a consequence the fiscal conservatives and anti deficit balance the budget fanatics melted away. As the economy recovered the positive business cycle and low unemployment allowed the debts that were incurred to shrink over time as a proportion of the GDP so they were no longer an issue for many decades. This positive growth cycle can be restored in Europe but it will take courageous politicians, public intellectuals,academics, journalists and business people like M.Montebourg to speak out to promote the necessary sea change in policy. Merci beaucoup M. Montebourg. Votre courage est une inspiration.

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Economic stagnation persists in Europe: austerity policies are the cause

This week Stats Canada has announced it is recalculating its employment numbers because of a processing error in its July tabulation. It will be interesting to find out in what direction and way they erred in their earlier release. The new data is due to be revealed on August 15th , coincidentally my birthday. But the concern over unemployment and the apparent slowing of growth in Canada has prompted me to do some investigation again of how employment is faring elsewhere, particularly in the U.S. and Europe.

This has been a troubled summer with several horrible wars in the Middle East and beyond, understandably affecting the mood and business outlook for many countries. The latest round in the Palestinian Israel conflict, the war in Syria and Iraq and the conflict between the Ukraine and Russia and the creeping march to a new cold war between the West and Russia raise both human considerations of how such horrible wars and hatred are still possible in the twenty first century and concerns about how they may impact on the global economy.

But beyond this context there is still operational in Europe the dogmatic anti Keynesian obsession with budget cutting and austerity in a number of European countries including France where unemployment is stuck at 10.3 % (June 2014); Finland 8.8 %; Portugal 14.1 %; Spain 24.5 %; Greece 27.2 % (May, 2014);Cyprus 15.2%; Italy 12.3 %; Ireland 11.8 %; Sweden 8.0%; Latvia, 11.4%; Lithuania, 10.5 %; Poland 9.5 %; Belgium 8.5 %; Hungry 8.1 and Slovakia 13.8 . Only Germany at 5.0%; and Austria 5.0% could be considered to be doing well.The U.K. which is significantly not in the Euro zone and therefore not subject to the draconian anti Keynesian position of the European central bank is at 6.5% unemployment well below the European average but still elevated unemployment and with a government still committed to austerity.U.S. unemployment is 6.1% and Japan 3.5 %. Luxembourg which neighbours France, Belgium and Germany has an unemployment rate of 6.3 % , the Czech Republic 6.1% ; Belgium 8.5 %; the Netherlands and Denmark 6.5 % (All the data courtesy of Eurostat)

From this picture what sort of tentative conclusions can we draw? For one the European union’s insistence that budget deficits be kept to less than 3 % of the GDP and the central bank’s obsessive support for austerity policies are clear factors in the unemployment problems of many European countries.This would definitely seem to be the case in France, Spain, Portugal and Greece.Geographic contagion also plays a role, as Eurostat’s map of unemployment illustrates. It pays to be close to a well performing country like Germany and Austria.Although this seems less the case in France which in addition to Germany also shares a border with high unemployment Italy, Spain and Belgium. It is well long over due for the European union to modernize and jettison its austerity high unemployment policy paralysis but barring major political shifts this seems unlikely for the near future.

Posted in deficit hysteria, deficits and debt, European debt crisis, European unemployment, fiscal policy, France politics+economy, full employment, Greek sovereign debt crisis, monetary policy, Spain, treasury view, U.K. economy, unemployment | Leave a comment

Ontario election an apparent rejection of neo-con deficit hysteria but also a product of our distorted electoral system.

The Ontario election has delivered a solid majority government to the Liberal party. This is a good thing because the alternative was an austerity obsessed budget slashing Conservative party. That would have been very bad for Ontario and very bad for Canada. However when we look at the split in the popular vote it is clear that the distortions of the first past the post winner takes all electoral system also played a big role in the outcome. Just look at the table below and draw your own conclusions.

Party               Percentage of the vote                                    Seats

                      2011                   2014                      2011               2014

Liberal           37.65%             38.64 %                 53                     59

Conservative  35.45%          31.2%                    37                      27

NDP                22.74%          23.76%                   17                       21

Green 2.9%                                     4.9%                     0                        0


The Liberals gained less than a percentage point in the popular vote yet won six additional seats or roughly 11.3 % more seats. The Conservatives lost a full ten seats or 27 % of their seats with a loss of 4.25 % points in the popular vote or 12 % of their 2011 share of the popular vote. The NDP share of the popular vote increased by one % point and their seat total rose by 4 seats roughly a 25 % gain in seats for a roughly 5 % increase in their popular vote. The Greens were denied any seats despite winning about 5% of the popular vote up from 2.92 % in 2011. Its not surprising that the turnout was possibly under 50 %. which suggests that many potential voters are reluctant to participate because their views are not adequately reflected in the results.

Still it was a good night for Premier Kathleen Wynne and the Liberals and for the significant number of Ontario voters who prefer lower unemployment and proper social services and health care to the wreckage of austerity driven government.




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Keynes, Lerner and Friedman in an Uncertain Age paper presented to Canadian Economics Association meetings , Vancouver May 31, 2014

Keynes, Lerner and Friedman in an uncertain age






                                   by Harold Chorney

                                   Professor of Political Economy

                                   Graduate Program in Public administration                                  and Public Policy

                                   Dept. of Political Science

                                   Concordia University, Montréal












Paper presented to the annual meetings of the Canadian Economics Association, Vancouver, Simon Fraser University, May 31, 2014



Abstract: I have written elsewhere about the return of Keynes and the relevance of his work on aggregate demand and the slump of the 1930s to the current post crash prolonged slow recovery. I have also written about Friedman’s notion of the natural rate of unemployment and the importance of recognizing the lower limits to anti-inflation policy in terms of the natural rate of inflation. I have also written extensively on deficits and debt and the policy debate over deficit finance as a tool of economic policy. Finally I was one of the first economists to address the issue of what has come to be known as quantitative easing by exploring temporary debt monetization as a policy tool in the context of Canadian data over a 40 year time series from 1950 to 1989. Now that the Federal Reserve has begun to taper back its QE experiment and the U.K. appears to be following the Fed’s lead(but with a much more anti-Keynesian fiscal stance) more data will come available on how well the domestic economies and the global economy can accommodate these policy shifts over a relatively short time period. As one analyst has put it to me at a Conference on Social Economics in Montréal at which I presented my argument in a paper on the crash and Keynes and QE, the fact that we have had this experiment with QE and no inflation problem has emerged ,raises questions about what remains of Friedman’s monetarist case. In this paper I begin the process of integrating these different approaches as part of a strategy to develop a coherent theoretical framework that bridges the gap between Keynesian and neo –classical and classical analysis. I am aiming for a policy alternative which privileges low unemployment and moderately low inflation and takes as a given a high degree of uncertain behaviour in the financial markets which feeds back at certain points into asset markets and mass consumer behaviour. Bibliography available at the back of the paper. 








We live in an uncertain age. Perhaps in reality we always did. But despite enormous advances in science, technology particularly the technology of communications and mass behaviour, the core of economic behavior remains partly unpredictable, even perversely so. What we do know is that most of the time financial markets can be highly unstable with risk factors large enough to permit drastic errors in the valuation of assets, the supply of animal spirits – the very essence of animal spirits is of course the suggestion that they are beyond reason and are instead instinctual , animal like governed by passions, hunches, intuition and gambling.(See Keynes’s chapter on the state of long term expectations and the  behavior of stock markets in the GT.)


Sheila and A.Dow argue that John Maynard Keynes drew the term from his extensive knowledge of the classical and ancient world.(See S&A.Dow,”Animal spirits and Rationality” in T.Lawson&M.Peseran,Keynes’s Economics:Methodological Issues,1985 cited in Fitzgibbons, Keynes’s vision, 1988) Keynes revealed  some of that knowledge in his discussion of ancient coinage in the opening pages of the first volume of the Treatise on money published in 1930.


My daughter is a  student of neuroscience. She is convinced that by accumulation of enough scientific evidence we can anticipate most behaviour and tame most irrational acts. I am as befits my choice of title for this paper and my age, experience and knowledge of history much less certain of this.


Keynes was convinced that the relationship between risk, probability and uncertainty was central to his theory. He made it clear in his famous Quarterly Journal of Economics article,” The General theory of employment”( QJE Feb . 1937 CW, pp109-123) that followed the publication of The General Theory. The article was a response to four interpretative reviews published in the same journal in November 1936 . In this key article which is an absolutely necessary paper in furthering proper understanding of Keynes’s intentions in the General Theory, (GT) Keynes make it clear that in order to avoid an increase in the tendency to hoard cash and thereby force the rate of interest to rise which in turn reinforces a slump it is necessary to lower rates as far as possible. This is in fact the origins of the rationale for quantitative easing as I have argued in an earlier paper. “After the crash, rediscovering Keynes and the origins of quantitative easing.” (Posted on my web site Without an increase in the money supply the increased demand for cash in response to a slump , no matter how irrational this may seem in terms of the zero rate of return, in comparison to the fear of capital losses it is quite understandable. Hence, he came to believe in The General Theory and in his testimony before the Macmillan inquiry that it was necessary to fight the slump by  a policy of low interest rates supplemented with a program of deficit financed public infrastructure spending(See Peter Clarke’s account of how Keynes evolved to this position in a series of stages, The Keynesian Revolution in the Making, pp.297-304, See also Warren Young Interpreting Mr. Keynes:The IS-LM enigma, 1987.) Hyman Minsky takes both the GT and Keynes’s QJE article as the point of departure for his construction of the financial instability hypothesis that has loomed large during and immediately following the great Wall street crash and banking crisis that swept through the global economy. According to Minsky as with other Keynesians and post Keynesians the neo classical argument that Keynes was all about wage rigidity was clearly wrong. As Joan Robinson put it “Keynes’s argument was not one that was foisted upon him by the bastard Keynesians-that money wages are rigid for institutional reasons. It was that if wages could be cut, in a slump, it would make the situation worse..”  This is why the austerity policies of the European union and the IMF are so disastrous .


They are premised on the false assumption that cutting wages will restore employment because falling prices for labour will both increase exports  and restore employment. But the degree of wage cutting required to bring this result about is so large and socially damaging as to be impractical. In fact, according to Keynes and his circle the exact opposite will likely occur. Prices may fall faster than wages and real wages fall less than that level at the margin required to bring about full employment. Much of the evidence is in for this policy based on inferior theory. The rate of unemployment in countries like Spain 26.2%, Greece 27.5 % and Portugal 16.4 % is extremely high and in France and Italy it is very high 10.3 % and 12.1 % (Eurostat) In all of these countries political instability is also on the rise. There is a very real possibility that France will elect Marine Le Pen the right wing anti immigrant leader of the National Front to the Presidency in the next Presidential election, largely because of the high unemployment.(See How the National Front is systematically winning over the French March 26,2014)


But of course, if we believe that uncertainty that cannot be completely precisely quantified by probabilistic terms to be true  and Keynes clearly did despite Frank Ramsey’s position, then self reflexively we have to adjust our degree of confident belief in policy and its consequences, including Keynes’s policies. This was a point that Alan Coddington originally made in his critique of the Cambridge school’s promotion of uncertainty as the key factor in Keynes’s GT.(Alan Coddington Keynesian Economics :The Search for first Principles, 1983) Of course, Coddington was a fan of the Hick’s distortion of Keynes, the IS-LM analysis which came to dominate neo-classical thought during its Keynesian epoch . Indeed it was the Hicks Hansen model of the ISLM that is central to Gardner Ackley’s leading Neo-classical Keynesian macro text published in 1961.  Although Ackley does acknowledge in his discussion of liquidity preference that a tendency to hoard cash in bad times by private nonbank investors might disturb the smooth functioning of the securities markets and increase uncertainty in bad times. According to Ackley “What Keynes argued was that there exists an inherent tendency for hoarding and dishoarding to occur in a way that is systematically destabilizing.”(p173 Ackley)   Coddington argues that uncertainty ought not to prevent approximation  of near certainty sufficient for analysts to operate within. What is important he argues is not the fact of uncertainty but rather the way in which economic actors behave in the face of such uncertainty. So, for example , he argues that even if uncertainty does exist simply replicating the investment decisions of the last period where after the fact real information does exist is not very likely to result in wayward or unruly results. “Thus the fact of uncertainty does not of itself establish the conclusion concerning the wayward and unruly behavior of  particular macroeconomic variables.” Compare this statement with Keynes’s letter to Hubert Henderson on 28 May 1936 where he writes “I should I think be prepared to argue that in a world ruled by uncertainty with an uncertain future linked to an actual present, a final position of equilibrium , such as one deals with in static economics, does not properly exist.”(p.222, The General theory and After:A supplement, vol.xxix,CW)


Coddington may be right much of the time. But the explosive results of the bursting of the real estate markets and the cascading credit default swap algorithims that we witnessed in the crash suggests otherwise. As the fractal mathematician Benoit Mandelbrot has shown fat tail distributions of outcomes are more common than we once believed.(See Mandelbrot’s The Misbehaviour of Markets See also Nassim Taleb , The Black Swan; Scott Paterson ,The Quants:How a New Breed Of Math Whizzes Conquered Wall Street and Nearly Destroyed it;William Cohan, House of Cards;Michael Lewis, Panic, and The Big Short and Richard Bookstaber,A Demon of our own Design:Markets , Hedge Funds and the Perils of Financial Innovation)


As Keynes stressed we need to factor in the great importance of states of mind or beliefs for action. We cannot simply reduce policy to numbers, even probabilistic numbers. As Carabelli puts it Keynes “fought against the blind application of the calculus of probability and the reduction of probability and of other magnitudes like goodness,utility and price relations(in the context of index numbers) to numerical measurement.  (Carabelli pp99-100) So in fact we need not only a policy which understands the importance of animal spirits and the sustaining of aggregate demand but one which enhances our and the public’s robustness of belief in the efficacy of policy.

As William Greer puts it Keynes in responding to Ramsey made it clear that rationality could only be the result of “legitimate, reasonable information…probability is not an objective property of reality but rather one aspect of the way we perceive it to be. As Paul Davidson likes to argue “Keynes’s own perception of reality was that of a non ergodic ,transmutable world possessing a permanently uncertain future”. (Davidson and Keynes quoted in William Greer, Ethics and Uncertainty The Economics of John M.Keynes and Frank H.Knight p.36-37)

In the above sense of animal spirits sense there is some convergence of method in the approach adopted by Keynes and Lerner and later post Keynesians and Friedman and some of his followers who believed it was crucial for the success of their policy that public attitudes toward growth and inflation be shaped to resemble the behavior implicit in their models of stable monetary growth and moderation of inflationary expectations. Fitzgibbons explores many of these issues in his work on macroeconomics.(Athol Fitzgibbons, 2000)


One of the greatest strengths of John Maynard Keynes thus was his grounding in the work of probability and risk and uncertainty. His work in this area made him famous in the Anglo philosophical world and has been the subject of considerable interpretive research. His notion that there was a core of uncertainty to economic behavior served him well in making sense of the economic collapse that followed the crash of 1929 and equipped his followers like Hyman Minsky to anticipate the crash of 2007-08 although it was never truly understood by many of his peers and was in fact rejected in scientific terms by other leading theorists. (See the critical work of F.P.Ramsey, ‘Mr.Keynes on Probability”, 1921; A. Carabelli, On Keynes’s Method, 1988.) Of course, Keynes did not accept this rejection happily.


In fact, Carabelli argues quite persuasively that Keynes anticipates this response by developing his quite powerful and possibly feminine notion of induction, intuition and intuitive understanding as a counter to probabilistic hard analytical  knowledge . As Fitzgibbons pointed out in an earlier important work Keynes’s Vision, Keynes was strongly influenced by the events in the physical sciences and philosophy in the early part of the nineteenth century.(See Roy Harrod, The life of JMK, p.186) He was fascinated by both Einstein and Freud and hence he was trying to introduce some of these notions in his work in economics. Ever an optimist ,even he was deeply troubled by the long slide into the second world war and by what he considered to be the irrational fatheadedness of the powers that be which ran Britain in the 1930s. (See  Virginia Woolf’s comment “Maynard, even Maynard cannot find much that is hopeful now” in Quentin Bell, Virginia Woolf, A Biography, 1972, p.209 vol.2 and Keynes’s comment when the war broke out and a number of Jewish and other refugee economists were interned by Britain because they were refugees from the axis powers. “ Our behaviour towards refugees is the most disgraceful and humiliating thing which has happened for a long time. Also rather disconcerting to find that we have such obvious fatheads still in charge” quoted in Harrod p.497. See also Keynes’s memoir club paper My early beliefs for his commentary on his “pre Freudian habit” of “attributing an unreal irrationality to other people’s feelings and behavior (and doubtless to my own too) “ Keynes was seeking to show that in his late middle age he could appreciate the importance of passion as opposed to pure reason.(S.E.Rosenbaum, ed. The Bloomsbury Group, p.96 , 1995) Keynes also visited Einstein on several occasions . He clearly admired him and in an intriguing passage from the New Statesman in Skidelsky’s biography he is quoted defending Einstein and his theories against his anti semitic detractors in Nazi Germany. Skidelsky also points out the parallels between Keynes’s work and that of Einstein  (p.487)

                                                Keynes’s identification with Einstein is also too clear to miss. Keynes was writing a ‘ General Theory’ of employment in which he called classical economics a special case and classical economists Euclidean geometers in a non Euclidean world. “ (p.487-8) But according to Skidelsky Keynes had stopped at total revolution and made his peace with the bankers and businessmen as early as his Eton days.  He knew how to get on with them. “His mission was not to destroy them, but to persuade them into paths of righteousness.”  This ambiguity remains an issue to this day and the heart of a debate between the Kalecki inclined post Keynesians and the more moderate Keynesians, neoclassical and otherwise.

  Keynes’s Economic Consequences of the Peace had introduced him to Einstein and Keynes rightly considered him a sage.(See D. Moggridge,Maynard Keynes:An Economist’s biography p.659  “I paid a call on Einstein. The old sage was in bed with a vast olive corrugated countenance crowned with a white shock of Struwelpeter hair, and a big toe protruding from under the counterpane.  He was full of gusto and enthusiasm…” Keynes had also written about the importance of relativity with respect to time. He had done so as early as 1903. (‘Time’ A paper read at the Parrhesiasts Society, May 8, 1903, Marshall library manuscripts of J.M.Keynes cited in Carabelli, p.127+p.305) According to Carabelli the paper stresses the relativity of time and of “all time measurement. “ It is, Keynes writes “I believe impossible to arrive at any conception of time which shall be independent of the conception of change.” He argues in the paper the essential interconnection of ideas of time and change and the importance of knowledge to the measurement of time. So his fascination with Einstein, Freud and the rise of phenomenology all of which occurs at the end of the nineteenth century and the beginning of the twentieth century should come as no surprise and forms the intellectual backdrop to the development of his own ideas about economics. Einstein like Keynes argued that beauty and aesthetic judgement could be an arbiter of scientific truth. “He believed both in 1913 and hereafter that a theory had to be beautiful, formally graceful, if it was to capture a glimpse of nature in action. “ (Einstein in Berlin, p45, Thomas Levenson, 2003)


Keynes, of course , because of his being influenced by G.E.Moore operated with somewhat similar principles.  For Keynes for a theory to be sound it had to produce moral or beautiful outcomes. Unemployment and poverty were not beautiful nor  morally justified so the theories that justified them were inherently unsound.


It is intriguing that Pigou , Keynes’s straw man target in The General Theory, understood that Keynes was seeking to follow Einstein’s lead in arguing that classical and neo classical thought on market clearing and rationality was a special case and his general theory was the general case just as Einstein’s theory was intended to show that the classical mechanics of Newton was the special case. But Pigou was not pleased that, as he claimed unlike Einstein who had shown proper respect for the greatness of Newton, Keynes had disrespected his classical opponents. 


“Einstein actually did for Physics what Mr.Keynes believes himself to have done for Economics. He developed a far reaching generalization under which

Newton’s results can be subsumed as a special case. But he did not ,in announcing his discovery, insinuate, through carefully barbed sentences, that Newton and those who had hitherto followed his lead were a gang of incompetent bunglers.” (P.592 Moggridge. )


 These kinds of acerbic comments and counterblasts have bedeviled the profession of economics ever since its inception and they are not likely to be banished anytime soon. This is so for both ideological reasons since economics is closely bound up with politics but also because of human nature. But humanity faces very serious economic, ecological and demographic challenges. For reasons of peace and our very survival as a species being we cannot go on as we have in the past. Wars, instability and violence are always exacerbated by economic instability. The state of the global economy since the crash, the slowness and incomplete nature of the recovery obliges us as servants of reason, enlightenment and the public good to find a way to draw the most from competing theories to find more effective policies for increasing employment, diminishing poverty and restoring a sense of greater equity all the while respecting the environment as much as possible. It seems clear, at least to me, that the synthesis I am beginning to propose in this paper has some potential. I say so cautiously because I know that its very possible for bad policy based on flawed theory to reign supreme for a relatively long period of time.


Abba Lerner was originally part of the Hayek circle at the London School of Economics assembled by Lionel Robbins specifically to counter the subversive ideas of Keynes at Cambridge. But after his encounter with Joan Robinson and Richard Kahn at the London -Oxford -Cambridge student seminars he switched his position(as did Kaldor and Hicks) and became an outspoken advocate of Keynes’s economics and a strong advocate of stimulus through deficit finance, financed if need be by greater monetization of the public debt. Although he never called it by this name Lerner’s functional finance was in effect the equivalent of quantitative easing. Lerner was harshly critical of the fiscal conservative school as was Keynes. But Keynes understood the limitations of theory in the world of practical reason. As David Colander has shown in a now famous short article “Was Keynes a Keynesian or a Lernerian “Keynes was reluctant to publicly associate himself with a view that he privately knew to be impeccably correct , though politically difficult. This was Lerner’s assertion that in a slump if there were resistance by investors and the banks to buy government securities at the prevailing rate of interest driven low by the rise in the propensity to hoard cash the central bank could simply buy the securities to the necessary level and pay for them by issuing money or as is often commonly said by opponents of deficits by printing money.


Once while in Washington speaking at a function at the Federal Reserve attended by central bankers and other officials with Lerner and Evsey Domar of Harrod –Domar fame) in the audience Keynes made it clear to Lerner sotto voce that one had to curb theoretical excess with the discipline of practical policy. Lerner drawing upon his clear understanding of the role of deficit finance in Keynes’s work was suggesting that there would be no problem with excess saving after the war because the government could simply increase spending to soak up the excess and finance the increased spending by expanding the national debt. Indeed. in later years Lerner formalized these notions in his work on functional finance in the Economics of Control and the Economics of Employment. Keynes on this occasion was quite negative and insisted that Lerner was wrong. Domar who was beside Lerner as they spoke with Keynes whispered in his ear that Keynes should read his own work, The General Theory !


Later Keynes changed his view and wrote a very favorable review and letter to Lerner about his notion of functional finance. But at the time according to Domar he called Lerner’s suggestion “humbug” and said something about being unable to fool all the people all of the time. The great European turned American labour economist W.Woytinsky who had been an advocate of counter cyclical works in the late 1920s and early 1930s in Germany to fight unemployment reviewed Lerner’s work and Colander quotes a very revealing passage in which he identifies Keynes and Lerner in religious terms with Keynes being the chief prophet and Lerner his first disciple.


Lerner’s ideas about functional finance assumed that there was a direct one to one correspondence between theory and practical policy. Keynes despite his recognition of Lerner’s quality of exposition of his ideas didn’t quite see it that way. Practical politics and interests might well serve as a barrier or modifier of implementation. But Keynes wrote about Lerner’s work in praiseworthy terms .


In a letter he sent to James Meade about Lerner’s work he wrote:


 I recently read an interesting article (1943) by Lerner on deficit budgeting, in which he shows that, in fact, this does not mean an infinite increase in the national debt, since in the course of time the interest on the previous debt takes the place of the new debt which would otherwise be required. He , of course is thinking of a chronic deficiency of purchasing power rather than an intermittent one.) His argument is impeccable. But heaven help anyone who tries to put it across to the plain man at this stage of the evolution of our ideas. (April 25,1943,p 320 personal letter to James Meade , reprinted in CW JMK vol.27, 1980)


During 1936 he also had written to Lerner praising him for an article about Keynes’s GT which Lerner had written for the International Labour Review. Keynes calls the article “splendid” and then at Lerner’s request  makes several suggestions for improving it by mentioning the importance which Keynes gave to breaking away from  Say’s law and his emphasis upon the problem of effective aggregate demand; the fact consumption didn’t keep pace with growth of income and hence the importance of investment; finally he suggests that Lerner should distinguish between bank financed money creation through the purchase of treasuries from individuals and the case in which individuals experience greater income and therefore find themselves with more money. (letter from Keynes to Lerner, June 16, 1936)


In fact, Lerner’s conception of functional finance was clear and logical and very different from the advocates of sound finance who typical leaped to ahistorical conclusions drawing not on economic logic and data but on ideology and myth. But that does not mean that Lerner’s policy was without any political risk, particularly for those improperly schooled politicians who did not understand how to explain the argument to the general public and mobilize public opinion in support of the propositions . FDR when he argued in favour of the New Deal despite his earlier fiscal conservatism during which time he followed Morganthou’s balanced budget plans did to some extent later understand although he professed on meeting Keynes not to understand his mathematical prose !( See the discussion in Richard Parker.,John Kenneth Galbraith, His Life His Politics His Economics,   p.91 In a note to FDR Keynes offered him sage humorous advice about how to relate to business men that is worth reading.Essentially Keynes tells FDR not to be afraid of big businessmen .Treat them not as tigers or wolves rather as domestic animals even though they have not been brought up as you would wish. “If you work them into the surly, obstinate,terrified mood, of which domestic animals wrongly handled are so capable, the nation’s burdens will not get carried to market; and in the end public opinion will veer their way. Parker quoting Keynes to FDR first cited in Hession,’s biography of Keynes.)


Barack Obama clearly possesses the intellect necessary to understand these economic ideas yet he, at least in the beginning, like FDR deferred to his fiscal conservative leaning economic advisor Austin Goolsbee in the first term despite agreeing to and passing the key fiscal stimulus bill. But the fact that they for political reasons and also because of the presence of fiscal conservatives within Democratic party inner circles, enacted too small of a stimulus bill because of the politics involved or their own predilections and then complained when it didn’t work as well or as fast as they expected, once again demonstrates the perils of economic policy in practice.


  Lets look briefly at some of Lerner’s argument. Here I am drawing from Lerner’s paper Functional Finance and the Federal Debt published in 1943 reproduced by Brad Delong on his blog.(Abba Lerner Selected Economic writings)  Lerner opens his argument by linking to the task of winning the war and eliminating economic insecurity. In a way that has much relevance today he states “Many of our publicly minded men who have come to see that deficit spending actually works still oppose the permanent maintenance of prosperity because in their failure to see how it all works they are easily frightened by fairy tales

of terrible consequences” (Lerner p.38) Lerner stresses the new theory’s simplicity “ The central idea is that government fiscal policy, its spending and taxing , its borrowing  and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any traditional doctrine about what is sound or unsound…The principle of judging fiscal measures by the way they work or function in the economy we may call Functional Finance.”



Lerner proceeds to develop his model by arguing  that inflation and unemployment  can be controlled by the government keeping spending neither more nor less than the amount required to buy all the goods and services possible to be produced at current prices.The neo-conservative onslaught on this approach was to develop the idea in public choice theory that politicians spend money to get themselves reelected, first and foremost, so it is naïve to expect them to do otherwise. In other words dysfunctional spending would occur if Lerner’s scheme could be enacted. It is ironic that such a powerful bulwark against functional finance arose out of the work on the political business cycle first explored by the co-discoverer of Keynesian economics Michael Kalecki.(See his essay on the politics of the trade cycle(1943) in which he advances the theory that boom economics is unsustainable because the establishment will not support the consequences of redistribution in favor of the poor and lower classes at the their expense.


The issue of distribution and the interests of the wealthy versus those of the poor and middle classes has become a hot topic. See Thomas Pikketty, Capital in the 21st Century) If spending is deficient it can either reduce taxes or spend more by borrowing or printing money all the while concentrating on keeping total spending at the optimal level that guarantees full employment and no inflation. Taxation is never undertaken because the government needs money since it can print all that it needs. Only when it is necessary to prevent inflation should taxes be levied.  At this point the reader should have a clear idea of why Lerner’s exposition would provoke enormous hostility from great swaths of the public and elite opinion even if his ideas were impeccable and logical.

Lerner goes on to argue that the government should borrow money from the public only if it desires the public to hold less cash and more government bonds and to lower interest rates. Lerner is very aware of the shocking nature of what he is proposing but he makes use of it to attempt to teach the public about the nature of public finance when faced with a fiat currency in a time of economic crisis.


“The almost instinctive revulsion that we have to the idea of printing money and the tendency we have to identify it with inflation can be overcome if we calm ourselves and take note that this printing does not affect the amount of money spent….In brief functional Finance rejects completely the traditional doctrines of sound finance and the principle of trying to balance the budget over a solar year or any other arbitrary period”  Instead the goal is stable full employment, very low inflation and a rate of interest which achieves the most desirable rate of investment and the printing, hoarding or destruction of money necessary to achieve the other goals.(p.41)


Lerner goes on to debunk the myths that are circulated about deficit spending by most conventional analysts. He points out that it was a mistake of Keynesians like Alvin Hansen who in their efforts to appease the critics of deficit finance argued that by keeping the ratio of debt to GDP within reasonable limits and that interest due on it would be easily available from the taxes imposed on a larger national income . “This ‘unnecessary appeasement’ opened the way to an extremely effective opposition to functional finance. Even men who have a clear understanding of the mechanism whereby government spending in times of depression can increase the national income by several times the amount laid out by government, and who understand perfectly well that the national debt, when it is not owed to other nations, is not a burden on the nation in the same way as an individual’s debt is a burden on the individual have come out strongly against ‘deficit spending’.(Lerner,p.43)


Lerner’s pain at this is understandable when we think about the growing hostility to deficit spending among governments and political parties across Europe and in the United States and Canada. This after it is clear that deficit spending combined with quantitative easing to keep interest rates from rising have rescued the global economy from the catastrophe of another great depression. Lerner explains that this reaction occurs because it is understood that the necessity of deficit spending may well continue for several years and cannot easily be a one off experience. This would lead to hikes in taxation which would it is argued discourage investment. As Lerner suggests this crowding out argument is not new. He then goes on to rebut the argument by showing that the deductibility of losses through taxation precisely compensates the investor for the tax burden. To deal with the assertion that a large national debt imposes a great burden in interest payments he points out that the interest on the debt is paid to the bond holders who are the taxpayers who have financed the debt in the first place. These days Lerner’s argument is phrased as “we owe it to ourselves.


“ Indeed the alternative to selling the bonds to taxpayers and paying them the interest thereby ensuring that there is no burden is for the central bank to print the money to finance the additional expenditure or for the central bank to buy the bonds from the Treasury. Clearly in the current world of nation states and national central banks or banks of federations it is possible to finance debt by selling bonds to foreigners and real burdens then do follow from this. But these can be reduced in Europe for example if the European central bank actually performed like a Lernerian central bank and helped overcome the mass unemployment and misery that is so unnecessary in Europe. Lerner argues that the growth of the debt is self limiting , ostensibly because once the debt is spent into the circular flow of the economy growth resumes , employment grows and tax revenues rise and the debt shrinks in proportion to the GDP and then eventually absolutely so long as the rate of interest on it is kept low.


So long as the real rate of interest on the debt is kept below the growth rate of the economy it will behave in this fashion. Inflation, the one legitimate worry that Lerner recognizes might emerge out of the printing of money will not occur because it is the duty of a Functional Finance regime to withdraw money supply to prevent inflation from happening. So in a funny sort of way Lerner respected certain monetarist inclinations insofar as he accepted the notion that excessive money supplied might cause inflation in certain circumstances.


The point is and one that I often make, Keynes was a monetary economist and money does matter but so too does fiscal stimulus, the scissors effect of the two strategies working together is what counts. Keynes in his Treatise on Money and in the chapter on prices in the GT had a well developed theory of how inflation might well develop through supply bottlenecks and disproportionalities and wage and profit push well before the point of full employment, thereby anticipating stagflation. Hence , he might have been skeptical of Lerner’s assurances in Functional Finance to the contrary although he didn’t write so in his praise of Lerner’s argument. Rather it is implicit in his statement quoted above “But heaven help anyone who tries to put Lerner’s argument across to the plain man at this stage of the evolution of our ideas. “ Lerner argues that” so long as Functional finance is on guard against inflation, for it is the fear of inflation which is the only rational basis for suspicion of the printing of money,” there is no problem in financing debt expenditure to fight a slump in the way that he proposes. He goes on to state that instead of crowding out occurring, crowding in is to be expected since “the guarantee of permanent full employment will make private investments much more attractive once investors have got over their suspicions of the new procedure.” This new investment will diminish the need for deficit spending. (p.48)



As the national debt increases tax yields will rise on higher incomes and inherited wealth (again Pickketty’s argument looms large although interestingly this is also the argument of some conservative critics of Pikketty who claim he is ignoring or underestimating the difference in after tax incomes of the rich in making his calculations.) and will help pay the interest on the debt. Finally if governments do not want to borrow from the rich it can increase taxes on them instead which will not reduce domestic spending by as much and the debt will be gradually reduced. (p.49)


 Lerner summarizes his argument: The national debt does not have to keep on increasing. Even if it does grow the interest on it does not have to be raised out of current taxes. Even if it is these taxes constitute only a fraction of the total benefit which flows from government spending in a slump and are not lost to the nation but transferred from taxpayers to bondholders,.” High income taxes need not discourage investment because appropriate deductions for losses can diminish the capital actually risked by the investor in the same proportion as his net income from the investment is reduced.” (p.50)


Lerner’s work in logical and analytical terms is impressive. But clearly Keynes was right to worry that its message would be difficult to convey to and convince the public of its wisdom. Yet , we can see now after five years or more of some degree of Lernerian functional finance unemployment has been reduced, growth has resumed and there is absolutely no sign of inflation. Indeed, the opposite worry is still present.


This then brings me to my final theorist, Milton Friedman. Friedman is undoubtedly among the great economists of the last century. His massive 860 page work with Anna Jacobson Schwartz, A Monetary History of the United States 1867-1960 published in 1963 is a major work of importance regardless of whether one agrees with all of its conclusions and policy implications with respect to the quantity theory of money. It is a work of great value for the historical research alone. Coupled with Friedman’s prolific publication of well written essays on policy and politics, his polemical pieces and his work on the permanent income hypothesis Friedman like Keynes and Lerner must be acknowledged as a major figure in the history of economic thought. Intriguingly the work on monetary history begins with a quote from Keynes’s teacher Alfred Marshall which is worth quoting because it still speaks to modern controversy.


“Experience in controversies such as these brings out the impossibility of learning anything from facts till they are interpreted by reason; and teaches that the most reckless and treacherous of all theorists is he who professes to let facts and figures speak for themselves, who keeps in the background the part he has played, perhaps unconsciously in selecting and grouping them, and in suggesting the argument post hoc ergo propter hoc.”(Friedman and Schwartz, A Monetary History p.xix )


This insight is of key importance when studying monetary policy and the supply of money and seeking to reach a conclusion about whether prices and employment follow money supplied or money supplied reacts as Kaldor and others argued to changes in prices and aggregate demand whose sources lie elsewhere. (See Nicholas Kaldor, The Scourge of Monetarism for the elaboration of this,) 1982&1986. (It is important to note judging from Friedman’s very worthwhile memoirs that he wrote with his wife Rose, Two lucky people that Friedman despite differences in ideology and policy preferences maintained a cordial and friendly relationship with Nicky Kaldor and Joan Robinson and other Cambridge Keynesian inclined economists. The chapter in the memoirs “Our first year abroad” makes this very clear. See the passage on p.245 where Friedman at a sherry party organized by Kaldor analyzes Keynes’s handwriting to confirm that he was an optimist . According to Friedman optimists have handwriting that slopes sharply upwards. Graphology being even less than an exact science than economics we should take this as a sign of Friedman’s sociability but not have complete confidence in the analysis. Friedman praises both Kaldor and Joan Robinson for being first rate technical economists but with whom he disagreed over values and policies.)


Interestingly Kaldor based his rebuttal of Friedman on the notion that the quantity theory of money stood or fell on whether or not the velocity of money was stable or at least largely invariant to changes in the quantity of money.


As Kaldor puts it “when I first heard of Friedman’s empirical findings I received the news with some incredulity , until it suddenly dawned on me that Friedman’s results must be read in reverse,;the causation must run from Y to M, and not from M to Y.”(p.22)Kaldor then introduces evidence about the degree of variation in a number of countries in velocity over time and concludes that Friedman and the monetarists are wrong in what they argue. Friedman’s partial response which is included in Kaldor’s book as an appendix points out that he and his American colleagues are quite aware of this argument and have taken pains to test out the direction of the causality. He acknowledges that some of what Kaldor is arguing is true but some of it is not. “The outcome is about as decisive as the answer to any question can ever be: Clearly there are influences running from income to the equaltity of money, as Prof. Kaldor asserts, but equally clearly, there are strong influences running from the quantity of money to income. The latter do not and should not exclude the former.(See also the discussion of Harry Johnson’s view of the monetarist case in Dimand, Harry G. Johnson as a Chronicler)


However, Kaldor does not accept this answer as an attempt by Friedman to compromise with his position. Indeed Friedman poses a question about post war data and British economic policy with Kaldor answering that Friedman has “invented data” to support his case and then he presents IMF data on a wide range of countries that shows great variation in the ratio of the money supply to the GDP indicating great variation in velocity.


The curious thing about Friedman’s argument is that he himself in his monetary history has a table on p.774 in the appendix which reports velocity from 1869 to 1960 for the U.S. Its value at its high point in the U.S. was 4.97 in 1880. Its low point was 1.16 in 1946.

But for the period 1931 to 1960 it varied between 1.16 in 1946 to 1.84 in 1942 Velocity of Money, 1860-1960 Table A-5 in Friedman and Schwartz, p.774)


Friedman and Schwartz’s description of these changes is worth quoting.


The velocity of money which affects the money holding propensities of the community, offers another example of the stability of basic monetary relations. As the real income of the people of the United States rose, and perhaps also as deposits were made more convenient by the spread of banking facilities, the community came to hold a decidedly larger amount of money relative to its income, which is to say that the velocity of money declined. In 1869 the stock of money amounted to less than three months’ income; in 1960 to more than seven months’ income. The numerical value of velocity therefore changed considerably. However the change occurred rather steadily…. In response to cyclical fluctuations, velocity has shown a systematic and stable movement about its trend rising during expansion and falling during contraction. Even the large movement accompanying the Great contraction partly fits this pattern; it was so large partly because the cyclical movement was so large. (p.682)


So Friedman clearly accepts that the cycle affects the value of velocity. This then means one has to adjust the degree of confidence you have in arguing that the movement is from money to income, as opposed to the other way round. To be fair to Friedman he does acknowledge this but presumes that the change will be slow enough to happen to permit changes in money supply to do their work.

But there is no guarantee of this, particularly in a time of crisis. For example the velocity of money in the U.S. was 1.95 in 1929 but it fell to 1.28 by 1932 a fall of 34 %. So just as with Lerner and Keynes we need to temper our enthusiasm when we come to actual policy implementation.


Friedman’s argument about the natural rate of unemployment also needs cautious handling. He borrowed this concept from Wicksell and his natural rate of interest. (See Friedman’s American Economics Association Presidential Address, “The role of monetary policy “, 1968 and my paper “Restoring Full Employment:The Natural Rate of Inflation versus the Natural Rate of unemployment “paper presented to the Conference on Social Policy as if People Matter, Adelphi university , Garden city NY, Nov. 12, 2004) He himself when he first broached the subject of the natural or Nairu rate of unemployment suggested that it was in the range of three per cent.He later said he didn’t know what the natural rate was “and neither does anyone else” (Milton Friedman quoted in Amanda Bennett, “Business and Academia clash over a Concept:’Natural Jobless Rate’ Wall street journal, Jan.24, 1995, p. A8 cited in Ronald Ehrenberg, Robert Smith & Richard Chaykowski, Modern Labour economics:Theory and Public policy,Toronto:Pearson education, 2004) If one completes his natural rate of unemployment concept with the natural rate of inflation notion that shows based on actual evidence where further tightening leads to accelerating unemployment then the two concepts together can be helpful in identifying the range within which policy can be productive.


These days 3 % unemployment would be a rate that Keynesians like myself would celebrate. He was also clearly wrong when he suggested that crunching the economy through central bank supported austerity would have little or no long term consequences. The reality is that each time the Bank of Canada has implemented that policy unemployed jumped substantially and stayed elevated for more than five years. That is much more damaging than the short term pain that was supposed to accompany the policy. It also violated Pareto optimality.

Finally followers of Friedman and other neo-con inclined and non Keynesian economists have warned very loudly about the dangers of inflation on account of quantitative easing or what in the 1980s I originally called the temporary greater monetization of the debt.


We have conducted this experiment in the United States now for more than five years and we see no rise in inflation. In fact for a while the rate actually fell. This would seem to permit us the luxury of cautiously embracing the policy along side its necessary partner of fiscal stimulus as an excellent, if imperfect policy response to a great slump. Keynes and Lerner both come into their own in such times. In the case of Friedman he retains some policy usefulness in times when inflation is threatening if price controls and incomes policies are too difficult to implement and if the initial rate of unemployment is close to 3 %. But the problem of defining the money stock and knowing which variable to target without the targeting itself affecting the behaviour of the variable and the endogeneity of money remain important obstacles. Simply raising interest rates and tightening regulations may well be more effective. At the same time his research and writings are still very useful and deepen our knowledge of critical institutions and history. And yes money matters.


Our age is shot through with uncertainty and the unexpected has become the expected. But with these three great economists there is plenty of material to work with to develop a coherent policy that is also politically feasible and capable of more than likely delivering the goods. Combining Keynes’s notions of aggregate demand and the critical role of investment in public infrastructure with Lerner’s emphasis upon banishing deficit hysteria with quantitative easing to hold interest rates at low level to faciltate investment and recovery seems like a winning combination which draws from all three theorists. Money supply management is part of the package because of the role of quantitative easing, but so too is fiscal stimulus. Together they may lead us to a more prosperous future .










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