Tuesday, 2 June 2015

Positive Money and Abba Lerner make the same mistake.

Summary.   PM and Lerner argue that even when an economy is at capacity or “full employment”, government should have the right to adjust the total amount borrowed and invested as compared to the total amount spent on current consumption. Strikes me that government (i.e. bureaucrats and politicians) have no better idea on what the total optimum amount to invest is as compared to the free market. I.e. I’ll argue below that, while numerous decisions are best taken by government, that particular “invest / consumption” choice is best left to market forces


Both PM and Lerner advocate/d substantially different ways of regulating economies as compared the prevailing orthodoxy. Their two systems are quite similar and I basically agree with them.

But one idea they both back, and which I don’t like, is the idea that government (i.e. bureaucrats, politicians and economists employed by government) should have the right to adjust the total amount borrowed and loaned because those people are allegedly good judges of that matter. Strikes me that, on the contrary, this is an area where market forces should prevail.


Note, that’s not  to say that the state should not adjust interest rates with a view adjusting demand (although as it happens I don’t think that IS A GOOD way of adjusting demand). Also, I am NOT SAYING that government shouldn’t from time to time re-consider what it invests in infrastructure and the like. What I AM criticising is the PM / Lerner claim is that EVEN ASSUMING the economy is at capacity or “full employment”, government might still decide or think that OVER THE ECONOMY AS A WHOLE, too much or too little is being borrowed and invested.

For a flavor of the PM/Lerner idea, her is a quote from Lerner’s “Functional Finance and the Federal Debt” followed by one from PM. (Quotes are in green italics).

“The second law of Functional Finance is that the government should borrow money only if it is desirable that the public should have less money and more government bonds, for these are the effects of government borrowing. This might be desirable if otherwise the rate of interest would be reduced too low (by attempts on the part of the holders of the cash to lend it out) and induce too much investment....”

And this PM article says (8th item under the heading “3. The Positive Money Proposals.”

“If there is a lack of credit for businesses banks will be able to borrow from the Bank of England to on lend into the economy.”

Well if there’s a “lack of credit” interest rates will rise. Why not just let them rise?


The flaws in the PM / Lerner idea.

One flaw is that a factor that influences the total amount of lending, borrowing and investment is INTEREST RATES. And the interest rate is simply the going price for borrowed funds: it’s determined largely by supply and demand, just like the price of apples is determined by supply and demand.

Now free markets often go wrong. But those who claim they HAVE GONE WRONG need to explain exactly how, where and why, otherwise their claim that “bureaucrats, politicians and economists know better than the market” doesn’t stand inspection. After all, those people have been guilty in the past of some monumental errors. So if those sort of people are to interfere with market forces, there must be some VERY GOOD reasons. And PM and Lerner don’t attempt to explain where the market might go wrong.

Moreover, interest rates have fallen by a HUGE amount over the last 30 years or so. Yet strangely we didn’t have an outcry 30 years ago that far too little was being invested. And today, there’s no outcry to the effect that far TOO MUCH is being invested. This is all a bit odd.

I suggest the best judges of how much any given industry or firm should invest should be left to those who actually run those industries. People running the chemical industry know VASTLY MORE about what potential investments there are to be made in that industry than bureaucrats, politicians and economists sitting in offices in Washington, London or some other capital city.

As for Lerner’s idea that if there’s an increased desire to lend that therefor “too much investment” will take place, that’s nonsense. An increased willingness to save and lend out money will cause interest rates to fall, which in turn will induce all and sundry to invest a bit more. Frankly that’s all thoroughly unimportant. That sort of minor change that will definitely not make or break an economy.

And finally, interest rates do not have a HUGE effect on total amounts invested for the simple reason that there are numerous OTHER COSTS involved in making and running capital equipment and the like: depreciation, insurance, associated energy consumption costs and the costs of bad debts – some entities that borrow and invest don’t repay what they’ve borrowed!

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