Positive Money’s Economics: Keynes, not Friedman

Our proposals have little to do with the economic school of monetarism, in the vein of Milton Friedman and the Chicago School. Instead, John Maynard Keynes remains the intellectual forerunner for our work.

“The ideas of economists and political philosophers… are more powerful than is commonly understood… Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

John Maynard Keynes, The General Theory

Economic theories are of vast importance. As Keynes described and his own legacy confirmed, politicians of all stripes reach for them to make sense of a chaotic world. But, as Positive Money supporters often ask, what sort of theory motivates our campaign? To which defunct economist are we beholden?

Theory throws a filter over the social world, through which we might interpret problems and offer proposals to solve them. How people see theory also affects how they understand a proposal on the table. At a recent Positive Money event, Ed Balls, former Shadow Chancellor in the UK, made some worrying claims: that the notion of taking the discretion to create money away from banks has monetarist roots.

Monetarism, roughly speaking, holds that the stock of money in the economy is the ultimate driver of nominal output, through its impact on inflation. As Milton Friedman argued, ‘inflation is always and everywhere a monetary phenomenon.’ Monetarist thought might imply placing control of the money supply squarely in public hands – very unlike the current system of money creation by private banks.

If this is a direction shared by Positive Money, it is where the similarities end. As Martin Wolf argued forcefully in reply to Balls, there are two areas of debate:

The first concerns how money is created. Monetarists and reformists like us admittedly share ground here. The objective of such reform is, in Wolf’s words, ‘to prevent a series of specific and vital range of financial crises’ from shaking our economy to the core, like that of 2007-08. Uncontrolled loan-making, for example, to speculate on the housing market, is (unsurprisingly) a poor choice for how things should be done.

A second, all-important area for debate separates us from monetarism. Even when money creation is tamed, how much to create remains an open question. Monetarists would have the supply carefully managed, to promote a steady growth path. Yet the path is a fiction – actual lending is also dependent on the demand for loans, which cannot be taken for granted. The weight of evidence from the past several years suffices to demonstrate that.

Instead, one ought to ask: what should new money be spent on? This avoids the monetarist focus on the stock of money, in favour of focusing on beneficial flows of finance.

Only with this in mind can we even start to ponder the amounts required. The potential destinations for investment created by new money are bountiful and urgent. Green infrastructure to avert climate change needs billions of pounds over the next few years, let alone decades. Remedying the housing crisis demands money to be spent to build new houses.

Crucially, these are real, productive activities that grow prosperity and improve our society. To me at least, the intellectual heritage of our work thus becomes very clear. It is Keynes, the defunct economist par excellence – in person but by no means in thought – who guides our thinking.

As outlined by Ann Pettifor in a decisive book released this year, Keynes has been the subject of a tremendous intellectual ‘coup’:

‘Keynes was concerned with the prevention of economic crises [via financial stability]… The Keynes that has survived into the lecture theatre is a gravely distorted and diminished figure… associated largely with fiscal actions to combat crisis.’

At our event, Balls replicated this error, presuming that hardline Keynesians don’t even worry about crises because government can correct them. And Wolf was right in his rebuttal – it is simply not true that a concern with the unruly form of money creation we have at present is by default a monetarist position.

Positive Money hardly believes itself ‘exempt from any intellectual influences.’ But explicit recognition of those influences can at times go a long way towards framing the debate, and easing dissent.