Automation should not lead to a workless society. Bad economic management could.

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The current issue of Liberator, an anti-establishment house magazine for the Lib Dems, bemoans the lack of policy on the advance of automation and robotics:

If we are heading for a world in [which] relatively few people conventionally work – because machines can perform tasks better and cheaper – how will the non-working population be paid, and what will it be paid for?

Such thoughts are prevalent in chattering circles these days. On one occasion I expressed a little scepticism in a Facebook conversation, given that current employment rates have never been higher – and I was quickly shouted down for having my head in the sand. As it happens the Lib Dems are developing policy here, with a working group on the “21st Century Economy” in the advanced stages of deliberation, having already held a consultative session at Conference. But what should liberals be thinking?

The claims about automation and robotics are not all hype, though there is a fair bit of that too. Artificial Intelligence (AI), and its harnessing of “Big Data” is in the process of revolutionising many areas of work. This has proceeded faster than I personally expected, after AI had gone through decades of marginal progress combined with absurd hype. Many jobs  are now threatened, including vehicle drivers and many professional roles. Just how far this is going is very hard to say. Colossal resources are being ploughed in, and there have been some spectacular achievements, and yet few of the breathless boosters of the technology appear to have much idea of what intelligence actually is – they just project present progress into the future and assume that AI will catch up with humans. There is no magic in the human brain, after all, just cells, chemicals and electrical connections. My guess is that at some point AI will hit a point of diminishing returns, and progress will slow.

But not for a while yet. Meanwhile undoubtedly consume many jobs will be replaced there will be a lot of economic disruption. But are we heading to a near jobless society? Here I struggle. Quite a bit of progress has been made already, after all, and yet in many countries, Britain in particular, employment has never been higher. And not just that. We are constantly aware of jobs that need to be done that are being cut. This is a lot of what is behind the fuss about austerity. Not enough care workers, doctors, or police officers: the list goes on. And there are plenty of new fields of endeavour that are opening up: cancer treatments, mental health care, green energy and so on. So the jobless society looks like self-harm rather than an inevitability.

Indeed a conventional economist would say that there is nothing much to worry about. Similar things were being said in the 19th century, as new technology cut swathes through agriculture and textiles. That didn’t work out too badly in the end did it? As one industry becomes more efficient, it simply creates demand for others. I believe that a lot of this has been happening already. A lot of the new jobs are being created in low productivity sectors of the economy, meaning that overall economic growth is not advancing as much as many expected. That’s just the nature of the beast.

But that is too complacent. A closer examination of 19th Century economic development reveals a lot of human misery as workers were thrown out of modernising industries. It was not at all clear for many years that human wellbeing was being advanced. In any case economists tend to overlook the the specifics of how particular technologies affect the overall economy. The massive advances in working class and middle class welfare in many economies after 1945 until the 1970s is often attributed to good management of overall demand in the economy. And yet it had everything to do with the advance of light industry and office work, based on technological breakthroughs made in the war years, which were particularly good for the creation of medium-skilled jobs. We do have to look closely at the specific implications of technologies of the age, and adjust our economic management to ensure the best outcome for overall human wellbeing.

The post war boom was particularly happy on two fronts. It threw up a lot of new things that people wanted to buy, from cars to washing machines to cosmetics and new textiles. And producing them was intensive in mid-level jobs on the factory floor, distribution and administration. Further, other industries, like insurance, produced the same mix of things people wanted and lots of jobs. But modern technology is focusing on efficiency rather than labour intensive new products. A lot of it is about replacing labour with capital, without necessarily producing much more product or service.

But are what people are going to need more of? Overall we do not need to consume more things or eat more food, though in parts of our society that is clearly true. The technology sector itself will generate a lot of demand, in the development of new systems, and in teaching people how to make best use of them. A second obvious area is health and care. The health economy has huge potential to expand, especially here in Britain – it is much larger in the US, even when so much of the population is excluded from it by lack of insurance cover. And an ageing population will not only need more health services, but general care too. Automation and AI in health and care is also likely to generate more work, by opening up new treatments and by making diagnoses more available, faster than it destroys work by making things more efficient. That has been our consistent experience to date. And a third area of potential expansion is what is being called “experiences” – entertainment, travel, games and so on. This is mixed up a further wrinkle: a possible increase in leisure time. People may want to work fewer days and hours. This will both create work (depending on what they do in that leisure time) and reduce time available to work.

But there is an obvious problem with all this: money. And by money I do not mean limits to real resources, but the fact that if there is not an even distribution of spending power, too many people will not able to afford these things, while a minority will have more money than they can actually spend things that create work, rather than being part of a churning cycle of finance and property . That cycle of finance, incidentally will also create some jobs – but this looks more like part of the problem than the solution. The problem is that the jobs being created, in sectors with low productivity, are often too badly paid or insecure for people to buy enough services and things. This is the way things seem to be heading in too many developed societies.

Technological advance should be a good thing. It allows us to do more while consuming fewer of the world’s scarce resources. But s skewed distribution of income means that the changes to work patterns risk suffocating the economy rather than advancing wellbeing. That is one of the central challenges of our times.


23 thoughts on “Automation should not lead to a workless society. Bad economic management could.”

  1. I’d go along with much of this. I’m quite distressed to see the poor and rundown state of our municipal parks. I don’t see many robots mowing the grass and tending the flower beds! We, as a society, when we were supposedly much poorer, used to be able to afford to do all that by employing council workers. Now the work is done much less well by outside contractors. We have to ‘save money’ because we somehow now don’t have enough.

    I don’t believe technology has changed everything fundamentally as you’ve previously claimed. I would say that ‘bad economic management’ has been brought about by a poor understanding of how things work. It’s all down to a neoliberal economic perspective, which an emphasis on the importance of balanced govt budgets, as you won’t be surprised to hear me say. I’ve had another try at addressing the issue of causality which we disagreed on previously.

    Forcible reductions in Government Deficits are highly counterproductive. The EU has shot itself in the foot by insisting that they be kept below 3% which has created economic stagnation in the EZ. This in turn has led to Brexit. That’s another story, perhaps, but most things do come down to economic understanding. This is how it works for a currency issuing country like the UK:

    The Govt’s Deficit = Everyone Else’s Savings.

    ‘Everyone Else’ includes our overseas trading partners and, of course, their central banks. They are the big savers. The Bundesbank will have somewhat more than just a few billion of gilts in its coffers. So if we divide everyone else up according to location and adjust the terminology slightly we get:

    Government Budget Deficit = Savings of Private Dom. Sector + Current Account Deficit (Trade)

    If the Government wants to reduce its deficit it can encourage us all to borrow more by lowering interest rates. Borrowings can be regarded as negative savings. It has done exactly that since the GFC. But that could just give everyone more spending money for imports too. So what causes what? Does a higher Government deficit cause a higher trade deficit and/or more savings or vice versa?

    To answer that question we need to look at how countries manage their currencies. It’s easy enough to keep your currency slightly lower than it should be. But it’s just about impossible to keep it higher. The Tories tried that in the early nineties with the pound and came unstuck on Black Wednesday. The big net exporters all have ways of ‘managing’ ( I would call it manipulating) their currencies to keep their trade in the black. Germany uses the euro which is by common agreement is too weak for its economy. Denmark pegs to the euro. Singapore openly admits to managing its $ to support its own industry and maintain export competitiveness. China pegs its currency to the dollar.

    So what about countries like the USA, Canada, the UK, Australia, and NZ who genuinely let their currencies float? They’ll almost certainly, apart from in exceptional circumstances, end up with a current account deficit in their trade. That has to happen as one country’s export surplus is another’s import surplus.

    If we admit that a genuinely floating pound is almost certain to lead to an current account deficit we also have to accept that our govt budget inevitably is going to be in deficit too. If we try and reduce it by raising taxes and/or cutting spending we are going to do ourselves damage by depressing our economy unnecessarily. We should only do that to cool an overheating economy.

    Of course, even if we get all this right, we’ll still have problems if and when, for example, drivers of trucks and trains are no longer required after the introduction of self driving vehicles. But, those problem will be far greater if we continue to get it wrong.

    1. I’m not entirely sure I agree with you on about exchange rates, but I do accept that with so many countries determined to be net savers and build reserves it is much easier for other countries, like the UK, to sustain fiscal deficits. Where I struggle is to understand at what point a deficit reaches a size that it will damage the economy. Turkey and Egypt have clearly found this limit and breached it. But can we rely on watching inflation? I suspect not, and that overheating is more likely in the UK to lead to a financial crisis of some sort that messes up the real economy than excessive consumer price inflation. I don’t think Britain is anywhere near that point now, but it might have been in 2010, and a lot of people were convinced it was. In that event austerity might have been the lesser of the evils on offer.

    2. For example under MF it suggests that interest rates rise when the fiscal stimulus takes place. That is not what we generally observe these days

      I’m still struggling to understand what the M-F theory is all about. I do like to try to understand an argument even if I disagree with it. But when have things ever been any different? Governments , or the BoE, have always just decided what interest rates should be. So why would anyone think that interest rates should, or would, rise with the application of a fiscal stimulus?

      So, going back to what Gordon Brown should have done, I’d say that he should have done whatever was needed to reduce dependency of the mid noughties economy on private debt by replacing that with public debt. Whichever way you look at it that had to mean running a looser fiscal policy and a tighter monetary policy to encourage more saving. IF a rising exchange rate had been a problem ( which it probably wouldn’t!) then the Govt should have just held it down just like Denmark holds its currency down.

      1. It goes back to the neo-Keynesian IS-LM model which dates back to the 1930s. The IS (Investment-Savings) half is traditional Keynesianism. The LM (Liquidity/Money) is more contentious. This is based on the idea that the interest rate is set by the balance between supply and demand for money. We are, of course, used to the idea that interest rates are set by the central bank. This is not entirely true. For example after the crash the BoE cut rates, and you often hear the comment that “interest rates fell”. In fact for most purposes interest rates rose because the commercial banks did not want to lend, and drastically reduced liquidity available to businesses and the public. ALL MF suggests is that the government raises aggregate demand, so that raises the demand for money and so the interest rate. Or, to put it another way, looser fiscal policy amounts to reduced net savings (in the short term – which is all the MF idea is about) and therefore the funds available for investment – so interest rates must rise. Of course the government can loosen monetary policy at the same time to accommodate it – which is what happens when the government is running a fixed exchange rate policy. But what if it wants to do something else with its monetary policy? My contention is that although IS/LM and MF don’t reflect modern reality in the exact mechanisms (especially LM), they are describing basic laws of physics. So if the mechanism does not work one way, nature finds another way of achieving the same thing. The new monetarism is clearly trying to say something important here, but I am struggling to break through the ranting about neoliberalism and conventional economics to understand what it is they are trying to say.

        We probably aren’t so far apart when it comes to what Labour should have done in terms of medium-term policy in the mid-noughties – which was to reduce the dependence of the economy on the banking system and stop stoking the bubble. But that is easier said than done. If their action to do so had set off a mini-recession, then fiscal policy would have to be loosened to accommodate that. But if they had adopted a more gradual approach then tighter fiscal policy would surely be what was needed to damp down excess demand.

  2. “……at what point a deficit reaches a size that it will damage the economy. ”

    Don’t you mean the size of the debt? Japan has over a 200% debt to GDP ratio. That’s often “excused” by neolibs because the debt is largely held by Japanese citizens. If they all decided to cash their savings in at once there could potentially be a problem. The Govt would have to raise taxes to control that spending which could be politically difficult.

    It would be better for the Japanese Govt if the debt was held by some foreign government and then they could negotiate a sensible rate of spending. The USA could do that with China, for example. They’d only allow the Chinese to buy certain goods with their dollars and at an agreed rate. If all else failed they could simply apply an export tax.

    1. The budget deficit is what the government can control from year to year; the level of debt is historical. A high level of debt may be one thing that makes a deficit unsustainable, of course. But a government can come a cropper with low levels of debt if people lose confidence in the currency.

      I’ve always argued that Japan can manage high levels of debt because of its current account surplus. As you imply, this is down to high levels of domestic savings. I’m not sure of the details, but I think this is due to a high level of retained profit in businesses – as Japan ages the domestic savings ratio is going down. To most people negotiating with a foreign country about a sensible level of spending sounds like a loss of sovereignty. That government would doubtless tilt things to its own advantage. And they would certainly not take kindly to a devaluation. A proud, independent people like the Japanese might prefer higher taxes.

  3. I haven’t looked too closely at the figures for Egypt and Turkey, but just supposing that any particular country was considered a poor credit risk. The level of inflation might be too high in comparison to the yield on any bonds that the Gov would issue.

    In such circumstances it wouldn’t be possible for the Government to run a deficit unless they had some forcible saving scheme in operation that was really a tax. A Government deficit has to equal everyone’s else’s savings. So no savings means no deficit. I would expect that the high deficits which Govts ran in wartime were partially on the basis of compulsory saving and partially on the basis that rationing meant that there wasn’t much to spend money on in any case.

    So, the ability to run a deficit at the same time as interest rates are low is a vote of confidence in the country as whole. Perhaps ironically the time to worry is when Govt can no longer run a deficit because no one wants to save with us.

    Instead of fretting about deficits we should, as I’ve always said, concentrate on having the economy run as well as it can to ensure that doesn’t happen.

    PS Sorry to drag the subject back to this, but the economy is the real problem. But when it’s malfunctioning there is a tendency for ordinary people to start thinking that it’s all the fault of the Jews, or immigrants or whatever. ‘Its all the fault of the robots or automation’ is a more benign fallacy, but a fallacy nonetheless.

    1. For a socialist you display remarkable faith in the rationality of financial markets. In fact they are plagued by what economists call the agency problem. They play with other people’s money which gives them a distorted appreciation of risk. One aspect of this is that they often turn very quickly – and you don’t know something is going wrong until it is too late.

      I suppose I am looking for a Goldilocks formula – signs that the level of deficits is about right and sustainable so as to reduce the risks of the sort of the disruption that hit Britain in 2008-2010, but which other countries (Canada, France…) largely avoided. This is not about defining absolute levels of deficit that are excessive or not – because it all depends on context. It is about trying to understand the vital signs of an economy so that corrective action can be taken before things blow up. The worrying thing about the UK pre 2008 is that still so many people argue that things were going well and that the crisis blew up from outside. Until we understand why the economy was being managed recklessly then, your idea that we should just focus on the economy and not deficits rings a bit hollow.

      1. I had thought you were coming around to a more sensible line of economic thinking but here you are pointing the finger at Govt deficits being the cause of the 2008 GFC when the sectoral balances of the USA clearly show otherwise. It was the build up of private debt. The sectoral balances of the UK now look more unhealthy than they did in 2008 but fortunately after 8 years of Obama the USA is pulling the rest of us, including the EU, along.

        1. You haven’t read what I said. Where did I say that govt deficits caused the GFC? How on Earth does your explanation address my query which was that the GFC affected the UK much more dramatically than Canada or France, to name but two examples?

          Yes I do think (still) that in the UK fiscal policy had something to do with it, amongst other factors. It was an inappropriate reaction to the build-up of risk, which was the explosion of off-balance sheet financing by banks. I have explained many times why (in explanations specific to the UK at the time, not general principles on deficits), and you’ve never given me a convincing counter-explanation. But it was other things too. Lax regulation of UK banks. Badly designed tax system which relied too much on financial turnover, and so on. What I am trying to do is disentangle it all based on factual evidence. You claim that you are guided by facts, but seen very little evidence of that.

          And my problem with the policy line you are advocating? Not that is often necessary to turn on the fiscal tap. It is that you have given me no steer at all about when governments should turn that tap down or off except when it is too late (i.e. inflation out of hand or after a banking crisis has already taken its toll). That suggests that your main concern is find economic arguments to oppose austerity, and not to think about how optimally to manage the economy.

          1. “……signs that the level of deficits is about right and sustainable so as to reduce the risks of the sort of the disruption that hit Britain in 2008-2010…”

            This was the wording that concerned me. The level of Govt deficits were quite unremarkable in both the UK and USA. So it’s not realistic to look for any signs, if Govt deficits are all that you’re looking at. Both Canada and Australia initially seemed to be hit hard by the GFC too. The A$ fell from almost parity with the US$ to about US$0.60 in late 2008. The politicians were so panic stricken they handed out instant $1000 tax rebates to keep the economy moving. They probably didn’t need to. China came to the rescue of both Australia and Canada when they started buying up coal and metals big time.

            France has been in the economic doldrums since 2008. The socialist party barely exists. The run off between the FN and a totally new party was quite extraordinary. There’s something quite odd going on there. The situation in the USA, the epicentre of the GFC, looks quite normal by comparison.

            France didn’t seem to initially suffer to the same extent as Spain. But, oddly, Spain was one of the few EU countries that was compliant on all requirements prior to the GFC. But there were no rules in the SGP on allowable levels of private debt and deficits in the Spanish economy. It wasn’t fashionable in an era of deregulation to have such rules.

            Steve Keen makes the point that the economic mainstream regarded the levels of private debt to be unimportant. Is he right in saying that? If you allow debt bubbles to build up and then burst, 2008 style, then you’re always going to have problems with failing banks. Although it is fashionable to blame banks in left wing circles, I don’t think they are really responsible for the crisis. Banks will always behave like that if there seems to be easy money to be made. The real culprits were in the Bush administration, and to some extent Blair and Brown in the UK who followed the same policies, for allowing the bubble to build with a mix of cheap credit and irresponsible deregulation.

          2. First, I’m not talking about the US. I’m talking about the UK. My premise the New Monetarist one that fiscal policy is a much better way to regulate aggregate demand than monetary policy. And in Britain in 2006 the was some fairly clear evidence of excess demand in the UK economy. I remember discussing this at the time with my UCL economics tutor, the far from neoliberal Wendy Carlin. It doesn’t matter what the deficit was – the same logic would apply if the government had been running a surplus. It really doesn’t matter (how often have you sad that?) The government should have started to raise taxes and cut spending. So what did Gordon Brown do: he cut the basic rate of income tax, making government revenues yet more dependent on the continuing financial bubble. That was reckless mismanagement.

            What has excessive private debt got to do with it? This was clearly one of the contributors to excess aggregate demand, but what tools did the government have to reverse it? Raising interest rates. But that is not so easy in a world of open capital flows and floating exchange rates, which tends to force a global convergence of rates. That ran the risk of destabilising the financial system, raising the exchange rate when it should be depreciating and making the economy less manageable. Poor fiscal policy did not cause the crash, but it made its aftermath much worse for Britain. We suffered a much greater fall in income than anybody else (I think).

            Which leads to one of my big criticisms of new monetarists. If a great brain like Gordon Brown could not recognise excess aggregate demand, what chance has any government? And instead of discussing you keep trying to change the subject by talking about how excessive private debt makes the system unstable. I agree. So what?

          3. The government should have started to raise taxes and cut spending. ??

            So you appear to be saying that excess demand was brought about by lax monetary policy but there wasn’t anything the government could do about that because of the interlinked nature of the international financial system. They couldn’t just raise interest rates to cool things down. Because that would cause the pound to rise.

            I would argue that a looser fiscal policy causes a fall in the value of the currency. I’ve never really understood why you think it’s the opposite way around. In the 60s and 70s when the Govt was struggling to keep the £ at whatever value they thought it should be at, there was never any suggestion that the way to do that was for the Govt to spend more and tax less. That would have been a marvellous cure!

            So I would argue that Gordon Brown was right to have had a looser fiscal policy but that he should have compensated by a tighter monetary policy. But by that stage both the UK and US economies were in the danger zone with high levels of private sector debt.

            So that’s what that “has to do with it”.

            So it was inevitable that there was going to be a crash. There was really nothing that the UK government could do on its own to prevent that. But if the US had also done the same thing and used much looser fiscal policy in conjunction with tighter monetary policy to replace private debt with public debt then the effects of the crash would have been much reduced.

            But that doesn’t change the fact that if you allow a credit bubble to develop and the price of assets becomes over-inflated then there is bound to be some considerable economic disruption when they do finally return to what they should be. So ‘don’t let it happen to start with’ would be my advice.

          4. It is probably oversimplifying to suggest that surplus demand was brought about by loose fiscal policy. What I am saying is that tighter fiscal policy was the most appropriate response.

            I would argue that a looser fiscal policy causes a fall in the value of the currency. I’ve never really understood why you think it’s the opposite way around

            We’ve been round that block a few times. This comes from my macroeconomics teaching: it’s basic engineering. Since sectoral balances is your favoured explanatory tool I’ll try to use that. Looser fiscal policy means a bigger government deficit. If private behaviour remains much the same (since you are making no effort to restrain private demand) it follows that the external deficit will increase also. In order for the external deficit to rise the exchange rate must appreciate. This logic only breaks down when creditworthiness or inflation comes into the picture. Which was the case in the 60s and 70s… when we did not have free capital movements anyway. Look carefully and you will find many examples of this. The recent fall in the US dollar in response to tax cuts is a case in point. Of course if you believe that tighter fiscal policy leads to a more dynamic private sector economy, then in due course the currency appreciates again. But I don’t remember you suggesting that.

            The Labour government actively aided and abetted the bubble. They mistook the thinly based economic growth from the building of the bubble (and from globalised supply chains) was a much more secure, broadly based growth based on productivity. But, as Professor Carlin pointed out to us students at the time, the appreciating real exchange rate gave the game away. Given that the government actively promoted the bubble, it seems a bit academic to suggest things they might have done to head it off. But “nothing” is definitely not the answer to that. A tighter fiscal policy would have helped. Tougher regulation of the banks too, especially with regard to their international dealings and off-balance sheet products. That would have been the better long-term policy. But fiscal policy is quicker and more flexible. What the country needed was a better balanced economy operating at a lower exchange rate. The standard of living pre crisis was built on sand… to a much greater extent than any other major economy. Which is why it has taken us so much longer than anybody else to get back to those levels. Of course the international environment was tough, and made turbulence inevitable – but apologists for the Labour government make far too much of it. Gordon Brown was much more on the ball after the crash, it needs to be admitted.

          5. Oh dear. A real howler there. If Trump’s tax cuts loosen fiscal policy it will cause the dollar to rise not fall. To be fair it is a bit too early to tell. And multiple factors affect the rate. Given that monetary policy is expected to tighten too, we might expect the dollar to rise. Which D. Trump will take as a sign of strength just as the share markets sag.

          6. “Looser fiscal policy means a bigger government deficit.”

            Possibly but that is only if everyone else chooses to save more.

            If private behaviour remains much the same (since you are making no effort to restrain private demand) it follows that the external deficit will increase

            The external deficit will only increase if the overseas sector chooses to save more.

            In order for the external deficit to rise the exchange rate must appreciate

            Yes, if our overseas trading partners choose to save more then the exchange rate will rise. But why would looser fiscal policy which could be seen as an inflation risk induce anyone to save more?

            In any case Govt can always stop the exchange rate rising by selling as many pounds as anyone wants to buy at the exchange rate it wants to have.

            If private behaviour remains much the same (since you are making no effort to restrain private demand) it follows that the external deficit will increase also. In order for the external deficit to rise the exchange rate must appreciate.

          7. Easy. Looser fiscal policy leads to an increase in aggregate demand, which causes an increase in consumption. The supply side of the economy can’t respond (this is at the top of the cycle, hence the diagnosis of excessive demand) so the only way to satisfy that demand is to import more goods. To those foreigners supplying the goods this is a no-brainer. Tradable goods are generally in flexible, highly productive industries. It is easy to ramp up production without having to reduce domestic consumption by simply raising productivity. Of course if the domestic economy could pull off this trick there wouldn’t be an issue, but the proportionate rise in productivity of one country’s trabable sector is much higher than the world at large. And some of those foreign economies may be running slack. The fiscal stimulus in effect goes to the world economy at large, and not to the national economy. This is one of the theoretical predictions of the impact of free exchange rates in an open economy.

            As you may have gathered, one aspect of my world model is that in developed economies the inflation risk of loose fiscal and monetary policy is low. It might have been in the 1970s, or in places like Argentina, but not in the UK in the 2000s. Besides there are ways that foreign suppliers can handle that risk, for example by billing in their own currency.

          8. I’d say you need to question if the Mundell Flemming (is this the model you mentioned previously?) is really correct. I know Bill Mitchell disagrees with M-F and that means Prof Wray does too but I can’t find a reference from him.

            The way I see it, when the government wants to grow the economy, the government can reduce taxes and/or spend more. This leads to increased aggregate demand, which pushes the overall price of goods and services higher.

            As the prices of goods increases, this also makes exports more expensive and imports more attractive. This leads to higher local demand for foreign currency to import goods and lower demand from overseas for domestic currency for the export of local goods. This lowers the exchange rate. A decrease in government spending or increases in taxes, has the opposite effect.

            This was always the way it used to be explained whenever the government used to justify tighter fiscal policy as being necessary to prevent the pound falling in value – and I can’t really see any flaw in the logic.


          9. Yes Mundell-Flemming does predict this, but as Mitchell says, this is deeply tied to the IS-LM model so that way of looking at it won’t be convincing to people who reject that model on principle. For example under MF it suggests that interest rates rise when the fiscal stimulus takes place. That is not what we generally observe these days when interest rates are so closely managed by central banks (at least if you use central bank rates as your guide). In fact monetary policy is so distorted by the way central banks have come to manage things that it is very hard to tell what is going on. It’s not hard to see why IS-LM is disliked. Which is why I take a leaf out of your book and use the sectoral balances concept to explain it. Looked at that way it makes sense, and although it clearly won’t work in all situations, it works well for the UK in the mid-noughties.

            Incidentally I find Bill Mitchell very hard to read. It’s very ranty and jumps all over the place. He seems more interested in saying that neoliberalism is rubbish than advancing his own explanations of events and why they are different. I will have to give Wray a chance but I have rather written Mitchell off as being an over-promoted student. I still remember when in a blog you showed me he demonstrated that Australian interest rates behaved exactly as MF predicted. He thought he was saying the opposite. Good luck with that text book.

    1. There’s a curious comment from Prof Wray just after the 1:22:00 mark in this video where he says that studying economics changes the way people view the world and that makes it harder for economists to understand what people like him are talking about. On the other hand others in the financial sector pick it up very quickly.

      It does seem odd sometimes that what seems so obvious to me provokes such disagreement from you! 🙂


      1. Well at least Prof Wray admits that governments can overspend, even if he is reluctant to admit that it causes the problems people say. As it happens I am an accountant and my life is balance sheets. And I worked in finance for 20 years (admittedly in the back office). And I agree that most economists have a real blind spot on both these. Hence my obsession with the off-balance sheet vehicles promoted by banks before the crash. And the fact that I moved my pension fund completely into index-linked gilts in 2007 when many economists (and quite a few financiers) where shrugging at the early signs of trouble. I could see that the problem was massive. I came to formal economics very late in life – I took my degree 2005-2008. Incidentally my tutor, Professor Carlin, is in the forefront of reform to change the teaching of economics. She correctly pointed out the flaws in the Euro system, which for Euro supporters like me was very uncomfortable. Give me some credit!
        I might make time to run the whole video. Thanks!

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