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Heterodox Economics

The Revolution Will Be Blogged

Gil Scott-Heron chants in one of his songs “The revolution will not be televised. The revolution will not be brought to you by Xerox in four parts without commercial interruptions.” Gil Scott-Heron explains that the revolution will be so fast and so drastic that the mainstream media sources will not even be able to keep up and broadcast it. While he was talking about an actual revolution, recently with the rise of the internet, there has been increased revolution in the sphere of intellectual development. The internet has allowed more obscure ideas to find their niche market. Whereas before, smaller ideas had trouble spreading as they could not find publications and mainstream media willing to spread their ideas, the internet allows intellectuals to share their ideas more easily. This uptick in idea sharing is in all areas of thought, but specifically there has been a rising influence of smaller economic ideas. Quick economic history lesson: before 1936, there was neoclassical theory, which no one liked, but no one had any better idea. The only exception was the growth of accepting Marxism. However in 1936, John Maynard Keynes wrote The General Theory of Employment, Interest and Money. Keynes created a single book that offered explanations to most economic woes. In doing so, Keynesian economics became widely accepted as the “orthodox” economic idea. Throughout the 20th century, the two primary economic ideas that ruled uncontested were Keynesian and Marxian. However, enter the 21st century, and “heterodox” economic theories begin to gain prevalence. These theories are both Pre-Keynesian, with the Austrian School and Neoclassical theories being the primary theories, and Post-Keynesian, including Neo-Chartalism and Market Monetary theories. These heterodox ideas went largely silenced until they were able to gain fan bases via the internet. With the recent rise of the Austrian School and neo- chartalism, it is revealed that Austrians and Neo-Chartalists disagree on economic ailments, with both ailments are rooted in fear, have two polarized views of currency, although the means of popularization is the same; ultimately highlighting that Keynesian economics are still rightly prevalent.

It is nothing new or surprising that our economy, quite frankly, sucks. However the causes behind our economic fall from grace have been largely contested. In the world of heterodox economics, Neo-Chartalists and Austrians have largely disagreed on what exactly it is that has caused our economy to lose it’s magnificence. In the world of economics and politics, no one disagrees that our world and domestic economy could both use a little bit of help. While the Great Recession supposedly ended in July 2009, many are still experiencing the shock that it has left. During the Great Depression, Franklin Delano Roosevelt established a system of reform, social welfare and public works to pull the United States out of the economic drought that was the Depression. When Keynes released his masterpiece in 1936, the Depression was mostly over. Keynes mostly agreed with what FDR was doing, but at the same time felt it was not enough. For all the spending that FDR did, he still made an effort to balance the budget. Keynes would have preferred more spending and a larger deficit. Keynes simply felt that more jobs were ultimately what mattered. However, with the recent Recession, since Keynesian policies were mostly in place going into the Recession, many were questioning their validity. For this reason, many economists turned to heterodox economics to figure out what caused this bust. Bill Mitchell, a leading Neo-Chartalist and professor at the University of Newcastle in Australia argues that ultimately what hurts the economy is government fear, and obsession with a balanced budget. He argues that governments are simply too cautious with their fiscal stimulus and too fearful of insolvency. If the government was less cautious, it would be able to pump loads of money into the economy and ultimately create a booming economy. On the other hand, the Austrians believe that the economic woes are caused by fear as well. But instead of fear of spending, Austrians believe that people are simply too afraid of deflation. This fear leads to central banks overspending. As The Economist explains, Austrians believe that when central banks fear deflation, they spend, however this spending is often malinvested, which distorts business. Central banks generally pump money into the economy by keeping interest rates low, encouraging banks to take out loans. Currently, Federal Reserve interest rates are at about zero. Austrians hate this. “By keeping interest rates artificially low, central banks trick entrepreneurs into believing that society is more abstemious than it really is.” By doing so, central banks distort businesses’ views of the state of the economy, and superficially inflate bubbles. And ask any .com owner from 2000, and they will know that bubbles are bound to burst. Between the Neo-Chartalists and Austrians, there are huge differences. Austrians argue that governments intervene too much, giving false appearances and hurting the economy, while Neo-Chartalists advocate a constant government presence with fiscal stimulus. However, there is a happy medium, and Keynes has offered it to us. Keynesians believe that in good economic times, the government will not have to intervene as much, and is able to run a budget surplus. Then, the government will have extra money to spend when the economy falls, and this spending will cushion the fall. But with this sinusoidal pattern of booms and busts, the government is able to maintain a small debt. Neo-Chartalists and Austrians have extreme views of economic ailments that differ greatly, however good ‘ole Keynes offers the best explanation and solution.

Currency is one of those things that most people do not think about much. They use it to pay the cashier at Walmart, carry it in their wallets and do not give it a though. However economists just love to think and argue about currency and where it should come from. In the 1880’s, a debate over the gold standard waged on. The gold standard held for many years, but started to fade away towards the end of the 19th century. However the US Dollar was still exchangeable for gold up until 1971. This was one of the first of debates on who should issue currency and how. Gold is something tangible that was tied to currency for many years. However, now, in our system, the Federal Reserve determines how much currency should be in circulation. Since the Federal Reserve is mainly backed by the Government, the only thing really backing our currency is the word of the government that it is actually worth something. Our currency system is one of trust. Most of entire world, since 1944, has used the United States dollar as the international reserve currency. This basically means that the value of almost every other currency is directly correlated to the value of the USD. However, because the USD is only based around the accountability of the government to give it value, it is considered a “fiat currency.” While Keynes did not say much about currency, it is assumed that he supported the USD as it is, with the people trusting that the United States will not do anything exorbitant to devalue or overvalue the USD. However, the heterodox economic theories of the Austrian School and Neo-Chartalists, disagree immensely on how currency should be treated. Prominent Neo-Chartalist and economist Warren Mosler explains that currency is inherently a beast of the government. Because they are the ones that print it, the government should never have to worry about paying their bills. If the government has debt, they simply can print more money to pay for it. Now, before you flash to nightmares of pre-WWII Germany, 2002 Argentina, 1994 Brazil, or 2008 Zimbabwe, the Neo-Chartalists have a way of ensuring this does not happen. Because this is only to be instituted when the government owes money, Neo-Chartalists argue that it will balance out since that money is supposed to be somewhere anyway. This argument is flawed however, simply because most of the time when a country or bank offers a loan, it does not have all that money in the first place. Most of the entire world of economics is built around a façade that money is there somewhere. However most people do not see through the façade, and therefore confidence remains high and people have trust in the money. The Austrians on the other hand, despise the concept of a fiat currency all around. They believe that money should be returned to some sort of gold standard. As The Library of Economics and Liberty states, Austrians prefer a return to metalism, a currency being backed by something solid like gold or silver. This would keep the levels of currency within an economy stable and therefore allow the economy itself to be stable. Any fluctuations in the money supply causes distorting ripples across the entire face of the economy. Therefore, if the government were to keep the currency stable off of a tangible object, they would be held responsible to minimize these distortions. Some Austrians even go so far as to argue for “free banking.” Free banking essentially takes away any national currency and instead encourages independent banks to print their own banknotes to use as currency. In order for a bank to be credible, they would be expected to make the amount of bank notes they print directly related to their liquid assets. This system however is also not viable. While it may be great for stabilizing an economy, it would not be effective in creating a growing economy. It is no secret that inflation and growth are directly proportional; however with metalism, the economy can only grow as fast as the amount of that metal in circulation grows, which in many cases is not fast enough. Therefore, neither Neo-Chartalists nor Austrians have a view of currency that is viable for long term stable growth, but rather the traditional system of currency should be retained.

Despite the drastic differences in the actual economic theories themselves, the means by which they have gained recent prevalence has been the same. Hint: this revolution of heterodox economic theories has not been televised. Rather, this revolution has been blogged. Traditionally, economic theories gained prevalence through going down pretty much one path. This path consisted of being published in a scholarly journal. Then publishing a book. Having your book accepted by professors who teach your ideas. And finally gaining support. However, recently, economists have taken to the internet as their means of debate. Economic discussion has become less Harvard and more WordPress. Economists are now able to publish their thoughts and ideas on economics to a website easily. Discussion and argument has moved into the comment sections on many prevalent blogs. While Austrians are peppered throughout American politics, they have little influence elsewhere, and Neo-Chartalists have hardly any influence anywhere. However supporters of both of these ideas have taken to the keyboards and advocated their support. With this, they are able to find those with similar ideas who they may not have found before. Furthermore, as people are realizing those who share opinions, the debates are actually moving into the real world. Many economists are finding each other online and meeting in person to discuss these ideas. Economists are using the comments sections of blogs as a sort of Match.com. This similarity does not mean anything for the ideas themselves, but rather indicates an overall trend of increased speech. The one advantage that these ideas have over Keynes is their means of discussion. Not only does this revolution connect preexisting supporters of these theories, it also creates new ones. Many minds, young and old, have never been exposed to the likes of Neo-Chartalism or the Austrian School. With this revolution, the exchange of economic ideas is improved drastically. That is why I am posting this essay to RantAWeek, as my way of advocating for increased political and economic discussion online. So while economists disagree on the semantics of their theories, no one can deny the fact that the revolution being blogged is much better than the revolution being distributed in the old ways.

With this economic revolution of heterodoxy, the Austrian School and Neo-Chartalism arise as clear front running heterodox economic theories; yet the views of these theories are ultimately moot because Keynesian economics still present the best solution to economic woes and the issue of currency. Heterodox economics may not be the best yet, but with this revolution continually growing, a 21st century Keynes may rise out of the blogosphere and present a more applicable supertheory to economics. But for now, we must accept that Keynes is still “the man” of economics, and sit back and watch or participate as this economic revolution is blogged.

 

5 Comments

  • On February 29, 2012 at 10:10 am Peter Dudak said

    Nicely done.

    Reply

  • On March 2, 2012 at 8:19 pm Magen said

    It is very hard to find skilled persons on this matter, but you sound like you are aware of what you are sharing! Thanks

    Reply

  • On March 31, 2012 at 1:19 pm Polly said

    Thanks a lot for finding the time to describe the terminlogy for the starters!

    Reply

  • On September 19, 2012 at 1:25 pm Julia said

    I’m so confused right now.

    Reply

  • On September 4, 2014 at 11:50 am ora exacta said

    Heterodox Economics – RantAWeek este scris de dvs?

    Reply

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