I arrived as a student at the London School of Economics, nearly four decades ago, full of enthusiasm and idealism, wanting to learn how to make the world a better place. I had already done âAdvancedâ level economics at school, and read a little bit of Keynes , without properly understanding what I was reading. I believed in 1981, as he had written in 1935, that âthe outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomesâ. This seemed obvious, and under the Prime Ministership of Margaret Thatcher, it was only getting worse.
I had at least taken in Keynesâ statement, made in the final sentence of The General Theory , that âsoon or late, it is ideas, not vested interests, which are dangerous for good or evilâ, although this is in part because I have always had a tendency to read the final sentence in a book before reading what goes before it. Like many of my contemporaries, I wanted to learn about how the world worked. I wanted a set of ideas which would help to bring about a better society.
What I got, from lecturers who were, in many cases, among the leading economists of the day, was training in pure mathematics, and particularly in the fruits of the rational expectations revolution in macroeconomics of the previous decade. By the time I left university, I knew a great deal about the work of Robert Lucas , whose name will crop up in Chapter 2 of this book, and of his colleagues. I knew they had built on earlier work by Milton Friedman . I was vaguely aware of a debate between Friedmanâs monetarists and James Tobin and his fellow Keynesians, which it seemed the monetarists had won. I was thoroughly taken in by the notion that macroeconomics had progressed to be a genuine science; that my job was to learn to use the tools of this science; that no serious alternative existed; and that Keynes , and anyone who had ever worked with him, was out of date. Keynes had been dead for more than thirty years, and economics had moved on. In the apparently triumphant words of the economist David Laidler (1981, 7), âwe are all monetarists nowâ. 1
Like many of my generation, and of the next, I had been sold a pup. Macroeconomics had not moved forwards, and the whole discipline of economics was not progressing. It was regressing. It was already in a muddle, and sadly since then, the muddle has only got worse. I did not learn what I had expected to learn, in my naivety. I learned an economics which normally serves powerful vested interests, albeit often without economists being aware this was the case. It is an economics resting on a set of assumptions which, though demonstrably invalid, were convenient both for the development of particular types of mathematical models, and as a justification for the neoliberal transformation which followed, not only in the USA and the UK, but across most of the world.
I was never exposed to the work of Post-Keynesians, like Michal Kalecki , Joan Robinson , Nicholas Kaldor , Abba Lerner , Hyman Minsky , Paul Davidson or Wynne Godley . I never did understand Keynes , or at least not until many years later. We did not so much as mention the ecological limits to growth, as discussed in the Club of Rome report (Meadows et al. 1972). There was nothing from the then newly emerging literature of behavioural economics. We certainly did not discuss Karl Marx . This is not to say that there were no electives available, where Marx might at least have got a look in. However, by the time you had taken your macro, micro and econometrics subjects, in my masters degree, there was no room for more than one elective. I chose development economics and swallowed even more neoclassical dogma as a result. By then, I had been so badly misled, that I would have objected to anything else.
It took me many years, before I understood that I had been misled. I began to develop an interest in behavioural economics, after the 1987 stock market crash, which undermined my faith in the previously all-conquering efficient markets view of financial markets. Over time, during a career spent training accountants and bankers, I met the odd banker who suggested to me that the orthodox description of monetary policy could not possibly be correct, and gradually the significance of this began to sink in. Financial crises seemed to be happening more and more frequently. Inequality kept rising in many countries, and trickle-down economics began to seem absurd.
Then, in 2002, I started teaching at the University of Adelaide, which at the time, in Colin Rogers , had a head of school who was a prominent Post-Keynesian. I barely knew such economists existed. I read some of Colinâs work (for example, Rogers 1989), which led me on to that of Geoffrey Harcourt (Harcourt 2001, for a good start) , the most famous economist ever to work at the University, and to what was for the first time a correct understanding of Keynes . Forgive me for the religious reference, but I felt like a born-again economist. This was what I had wanted to know in 1981, and had lacked both the maturity to discover for myself, and the encouragement to do so from those who had been my educators.
There was still something missing, though. The general equilibrium approach of orthodox economics, which I will reject in Chapter 2, for very good reasons, at least seems to hang together. It is suggestive of the approach to economic management which the great majority of economists, politicians and pundits continue to take for granted, to this day. Post-Keynesian economics seemed to me to lack the internal consistency and power to ever challenge orthodox economics with much prospect of success. To change the direction of our societies from a path of neoliberalism towards one of equitable and sustainable prosperity , something was missing.
That something is modern monetary theory . I was originally introduced to modern monetary theory by Philip Lawn , who is Australiaâs leading ecological economist, and a pioneer of a metric of economic development called the Genuine Progress Indicator . Phil was a colleague of mine at Flinders University, in the middle of the last decade, and persuaded me to start reading Bill Mitchellâs Billyblog. William Mitchell, from the Centre of Full Employment and Equity, in Newcastle, New South Wales, is not only one of the principal developers of modern monetary theory , but also a candidate for the title of the worldâs best living economist. However, despite reading his blog, I remained something of an MMT sceptic until the collapse of Lehman Brothers, on 15 September 2008. It was that event, and the events that followed it, which led me to read voraciously all the modern monetary theory I could lay my hands on, as well as books and papers by Hyman Minsky and Paul Davidson , and by Michal Kalecki and Keynes himself.
As you can see, I am a slow learner. It took years for me to think about and understand the main elements of an economics for sustainable prosperity . Modern monetary theory is central to such an economics. It is, in my opinion, a genuinely beautiful set of ideas, concepts and principles; elegant in its simplicity; powerful in its validity; profound in its significance; revolutionary in its implications; and for many people, transformational in its impact on their thinking. For me, it lies at the centre of a broader set of ideas, arguments and discoveries, drawn from a variety of disciplines and perspectives, which hold out the hope that we can harness this interconnected knowledge to deliver a future economy characterised by sustainable prosperity . We can do much better in the future than we have ever done in the past.
Escaping from the Old Ideas
More and more people are learning about modern monetary theory ; asking questions about it; discussing it with others; using it to distinguish truth from fallacy in a variety of economic debates; and applying it to make sense of the appropriate role for governments to play in pursuit of genuinely sustainable and equitable prosperity. It is close to a tipping point, beyond which it will become impossible to ignore. There is a great deal of momentum behind it.
This is just as well, as the dominant, orthodox wing of the economics profession stands in the way. The barriers to fundamental change in the economics profession are very high. Heterodox economists have been trying to challenge the prevailing orthodoxy for many years, with little practical success, even when the evidence has been clearly in their favour. They have often been sidelined and ignored.
It seems, then, that a large part of the impetus for any such change has to come from outside the economics profession, so that the mass of the profession is eventually forced to wake up and think again about much that has long been taken for granted. This book is meant to be a small push in the direction of change. While I hope it is a good read for economists, of both the heterodox and the more open-minded orthodox varieties, it is intended just as much for activists and policy-makers with an interest in economics. I hope for some people it will be a short cut. I would not like you to have to go through such a long process of transition as I have done. I hope it is accessible to all, useful to many and I hope it doesnât make economics seem like brain damage.
That is exactly how economics was described by the environmental activist, David Suzuki , in a 2011 documentary movie. 2 Economics, however, is obviously just the study of the economy. The economy is the set of natural and fabricated resources, institutional arrangements, organisations and markets which are available to meet our needs and to influence our current and future well-being . It is something which we have created and which we can and will change, for better or for worse. Like all institutions, it evolves over time, and not necessarily in ways which are co...