4 Brilliant New Books about Economics Explain How We Got in This Mess and How We Get Out
From the South Sea Bubble to the Green New Deal, in the last few months four fascinating books on economic history have been published. Together they tell a powerful narrative of economic innovation and how it has created the modern world.
The first two, Thomas Levenson’s Money For Nothing and Zachary Carter’s The Price of Peace trace economic innovations that created the modern world and what went wrong.
The second two books are a prescription to get out of this mess. Thirty years of neoliberalism brought us to the global financial crisis in 2008/09. Failed monetary policies brought the misery of austerity to millions for a decade, and now the pandemic may turn a decade of misery into a generation. It does not need to be that way. Stephanie Kelton’s The Deficit Myth argues convincingly that we’ve got it all wrong when we worry about deficit spending. And C.J Polychroniou interviews Noam Chomsky and economist Robert Pollin in The Climate Crisis and the Global Green New Deal. Here, they outline a practical plan to solve the climate crisis within the confines of the capitalist system.
(Here’s a great interview with Carter and Kelton on Politics and Prose.)
Money for Nothing
Thomas Levenson
★★★★★
The subtitle to this book says it all: The scientists, fraudsters and corrupt politicians who reinvented money, panicked a nation and made the world rich. It could have been written for these times.
The book begins with Isaac Newton. Coincidentally, a pandemic forced Newton to leave Cambridge and hole up with his family in Lincolnshire for a few years. In this time he wrote his magnum opus on physics and mathematics. From there his career took a few twists and turns before he ended up as head of the Royal Mint. Along with two other scientists and leading intellectuals of the time, Edmund Halley, of Halley’s comet fame, and William Petty a statistician, he became embroiled in the South Sea Bubble debacle.
The book is the story of the financial innovation, creativity, naivity, greed and incompetence that led to the bubble in Britain around 1720. It is, in essence, the story of the early days of the stock exchange, the British elite’s inventiveness and their cavalier approach to risk.
Throughout the 1600s, the British government constantly sought new ways to raise money to pay for wars it was either waging or running towards with some vigour. Between the coffee houses of Exchange Alley in London, the Treasury and parliament, a group of traders, politicians, bankers and scientists evolved schemes to issue bonds and shares that allowed the government to raise ludicrous amounts of money to pay its war debts. The most audacious of all schemes revolved around the South Sea Company.
The South Sea Company was set up in 1711 as a joint-stock company (a shareholding company). This business model had become popular in the previous two centuries as Europeans ventured to the Americas. The government handed the South Sea Company a monopoly on all trade with Spanish colonies, including the slave trade. Why would the government do such a thing? In return for this monopoly the South Sea Company was to take on the government debt from the War of Spanish Succession, which ended in 1714.
Britain had struggled to pay back all it had borrowed in its numerous wars. Now, through a clever financial innovation, anyone who had lent money to the British government to pay for the war with Spain was given shares in the South Sea Company instead. They could receive dividends and sell the shares at any time. The potential growth of the company was considerable particularly if it really did have exclusive access to Spanish colonies in the Americas (spoiler alert: it didn’t). Nevertheless investors believed that backed by the British government, it was a safe investment. The directors of the company promoted this belief enthusiastically pumping up the price.
At its peak in the summer of 1720, the company’s share price reached £1000 from just £100 at the start of the year. This equated to the combined value of all property — every acre of useful land — in Great Britain. Naïve investors blindly believed stocks would keep rising. With interest in joint-stock companies surging, new hair-brained companies emerged on Exchange Alley to capitalize on investor demand for what were often unviable businesses.
These experiments made some very rich but many lost fortunes (Newton, arguably the smartest mathematician alive at that time lost much of his gains). They also caused chaos and collapse until bankers and politicians learned how to tame these new financial beasts.
Levenson concludes that Britain became the most powerful nation on Earth not due to the industrial revolution but because of its reinvention of money. He points to its victories over France for evidence of this. Britain was a much smaller country than France, with a smaller population and fewer resources. But what Britain had was the ability to mobilise money through a level of creativity not seen before. Britain discovered new ways to leverage the future. This meant it could fund armadas with the best weapons and, colonial expansion, and eventually industrialisation.
The author notes that in contrast to the French, which defaulted on loans throughout the 18th century, Britain had ready access to debt. “That combination of a market and an increasingly plausible official guarantee meant that the ultimate legacy of the bubble for Britain was the emergence of an elastic expandable pool of credit available for any national purchase.”
As Levenson says in an interview for MIT, “In one way, the single most important takeaway from the book is that although the South Sea Bubble was a disaster for those who lost all their money, it worked. It was the final victory in a revolutionary change in the way Britain, uniquely among the nations, was able to fund its national obligations. It led to the creation of the first modern bond market. If you think of finance as a technology, that’s an incredibly powerful technology. Because it allows you to basically rent money from the future, use that money in the present to do things that help build the wealth of your nation going forward, and thus make the future richer than it otherwise would have been.”
The book is a fascinating insight into the dawn of a new financial era. But it is not just some historic curiosity. The big picture twists and turns of the story are enough to spark Post Traumatic Stress Disorder in anyone close to the 2008 global financial crisis. Like the bubble, governments, banks and investors found themselves suddenly caught in a financial rip tide, out of their depth, a long way from shore and no easy way back.
The Price of Peace: Money, democracy and the life of John Maynard Keynes
Zachary Carter
★★★★★
Fast forward a few centuries from the get-rich-quick schemes of London’s coffee houses to 1914 on the outbreak of the “War to end all wars.”
As war loomed, London’s financial institutions risked collapse (again) as European banks, facing an uncertain future, demanded their gold. The bankers envisaged a future, days away, when the vaults would lie empty. But a young academic from Cambridge University, John Maynard Keynes realized that London’s economic power rested not with how much of a metal hoarded in its vaults, but rather on its reputation. Trust meant everything. Gold meant nothing. He recommended the Bank of England hand over all the gold requested by those beyond its shores, (but limit withdrawals in Britain to ensure it could meet all requests). Overseas banks, companies and states watched in awe at the unassailable financial power in the city of London. The capital’s reputation held steady and was even enhanced by the move.
Keynes’ influence in the world is often narrowed down to his set technocratic economic levers to beat recessions and keep economies ticking over nicely, for example, the policy of increasing government spending in an economic downturn. But as Zachary Carter writes in The Price of Peace Keynes “was a man whose chief project was not taxation or government spending, but the survival of what he called ‘civilisation’”. What then, in the Anthropocene as humanity faces its greatest threats, can we learn from Keynes?
Keynes was a civilizational thinker. He believed in the project of civilization. He believed economic systems should be put to use to drive progress in providing basic needs to all but also culture, the arts and science.
Keynes was a mathematician but realized that economic systems, and the markets in particular, are more about human psychology, belief, confidence and narrative than decimal points on balance sheets.
Keynes was a bohemian. He ran with the Bloomsbury Set, an influential group of writers and artists who hung out in Bloomsbury Square, London, including Virginia Woolf and E.M Forster. They “lived in squares, painted in circles, and loved in triangles” according to one unattributed quote at the time. Carter informs us Keynes was “enthusiastically gay” right up to the point he met a Russian ballerina whom he later married.
Keynes was an idealist. Discussing the ideal future of society, he wrote, “My feeling is that it has to be attacked in the first instance from the ethical side rather than the standpoint of economical efficiency. What we need is a form of society that is ethically tolerable and economically not intolerable.”
Keynes was an influencer. He stalked the corridors of power. As an advisor to governments he influenced international economic policy. As a journalist and writer he attacked government policies. As a media owner he gave others the platform to do the same. As an academic he built a formidable network of like-minded economists around him at Cambridge (some who unfairly sit in his shadow). He finely honed his skills as a polemist. His attacks on political errors were ruthless. Indeed, his influence reached long past his death in 1946.
The intellectual origin of the economic and social powerhouse that drove the developed world after the Second World War up to the oil crisis in the early 1970s can be traced back to Keynes. Indeed, shortly before his death, in 1944 Keynes attended the influential Bretton Woods conference in the US as lead negotiator for the UK. That meeting would lead to the formation of the International Monetary Fund and the World Bank. The Bretton Woods conference is often framed as a battle between Keynes and US lead negotiator Harry Dexter White — and where the two substantially differed, the balance of power tended to swing to White. Oddly, this monumental battle is skipped over breezily by Carter in just a few pages.
Keynes grasped that economies are not driven by numbers and supply and demand curves; they are driven by people and institutions. We understand the world around us through narrative so economic narrative is important. Not just that, though, our economic narratives are often built on fiction not reality. He realized that capitalism is in some way a belief system. The double bluff of capitalism is that it only works if people believe it will work. For workers, this belief system centres around the social contract between them, employers and governments. There is an unspoken understanding (a belief?) that if everyone believes it, then it will become true. This is a delicate balance based on trust but enforced by strong union powers that worked for three decades following the war. In the US this is best exemplified by Roosevelt’s New Deal. The signature project being an audacious investment in road building to drive employment, economic activity and revolutionise transport to place the automobile at the centre. Since the 1970s, the contract with workers has been torched leading to deep political instabilities leading to a rise in populist demagogues.
The rise of populist leaders due to a collapse in economic trust and confidence can be seen as history is repeating itself. In 1919, following the Treaty of Versailles Keynes published his first popular work, The Economic Consequences of the Peace. In it he excoriated the US, British and especially the French governments for their humiliation of Germany, the loser in the war. He predicted it would set Germany on a course for economic ruin and grave political instability.
The New York Time’s review of Carter’s book makes the point that while Keynes’s ideas were radical, he was anti-revolutionary. The shock of World War I, persuaded Keynes that “a more just and equitable society didn’t have to come at the point of a gun”. Indeed, a responsible government, and specifically deficit spending, can spur growth and alleviate hardship. Austerity is ethically indefensible because it is economically avoidable. This is a lesson returned to in Stephanie Kelton’s incredible Deficit Myth, reviewed here. Of course, deficit spending is not new. As Thomas Levenon notes in Money for Nothing, it is often justified by governments both left and right not to protect the most vulnerable in society during economic shocks but rather to pay for military expansion to this day.
In the 1970s, the ideas of Keynes fell from favour. Filling the void came neoliberalism. Bur Carter concludes that the Keynesian project was not killed by Thatcher, Reagan, Milton Friedman and the Chicago School. Rather it was killed by the parties to the left of centre — Clinton and Obama, Blair and Brown as they flung in the towel and bowed at the feet of the markets. The financial crash of 2008 and now the pandemic are important moments to revisit Keynes.
Highly recommended. For more see this Goldman Sachs interview with Carter.
The Deficit Myth
Stephanie Kelton
★★★★★
If governments want to raise money they tend to assume they have two options. They can borrow money from banks or other investors to spend. But this diverts money lenders from investing in private growth. Or raise taxes. But this reduces consumer spending power reducing consumption leading to less investment in production slowing the economy down. There is a third option: spin money out of thin air.
In the Deficit Myth, Stephanie Kelton has done more than anyone dead or alive to make Modern Monetary Theory sexy. Modern Monetary Theory (or MMT or, more subversively the Magic Money Tree) has been around for many decades but politicians don’t seem to understand it and certainly do not apply it.
The big story is that countries manage their budgets as if they are households. Politicians from both sides of the aisle talk about the importance of fiscal prudence and the need to balance the budget at all costs. Money that goes out to pay for roads, schools, hospitals or social security must come in largely from taxes or borrowing.
Kelton says managing a country’s budget should NEVER be done like you would a household IF that country issues its OWN currency like the US, UK or Sweden. These countries are in the position to budget as an issuer not a borrower. This means the only issue is inflation. Keep this down and you can spend all you like (more or less).
The mindbending part of MMT is to stop thinking of taxes as a way to raise money for spending, rather, it is a way to limit inflationary pressures — if the economy is overheating and prices are rising, tax hikes can take some of the heat out of it. The limit on government spending is not money; it’s resources. The limit to the US and Britain firepower when they entered the Second World War was not money but resources. As long as a country has resources to do something — that is, spare labour capacity, spare industrial capacity — it can create the money to make it happen.
The big example in the book is the 2008 global financial crisis. Kelton argues that a decade of austerity that many countries endured (and the pandemic will turn this decade into a generation) was unnecessarily cruel. Governments who issue their own currencies did not need to inflict this misery on the most vulnerable in society. They could create enough money (with a couple of mouse clicks, as Kelton keeps reminding us) to build back better. The US did better than many countries but Kelton argues Obama should have requested from Congress a recovery package in the trillions not billions.
Why don’t politicians do this then? Kelton argues they just don’t know enough about this area of economics, neither does the electorate and so everyone remains willfully constrained. Politicians are right to be worried about inflation. But more than anything politicians want to give simple messages to the electorate that they will use taxpayers’ money responsibly.
Kelton argues that because the US dollar is essentially the currency of last resort on Earth, then the US government could create a global green deal driving massive long-term infrastructure projects and much more to build the stable economic future on a stable planet. This is not so far fetched. The US Federal Reserve was forced to provide the dollars to bailout many European banks (among others) during the 2008/09 global financial crisis.
Kelton’s six deficit myths
1. Governments should balance their income and outgoings like a household. No. Countries that have the power to create their own currency should not feel obliged to do this. In fact this seriously restricts their economic potential.
2. Public deficit is overspending. No. Government deficit creates a surplus for someone else.
3. Deficits burden the next generation. No. It increases national prosperity which is good for the next generation.
4. Deficits harm private business. No. It can stimulate private business.
5. Trade deficits make nations dependent on other countries. No. If the US is carrying a trade deficit with China, China gets wheat and a stack of US Treasury bonds, and the US gets computers and other stuff. This is a good deal for the US and China.
6. Governments can’t afford social security and public health programmes. No, governments who issue their own currency can always meet these costs.
If a country has the resources do something, it can find a way to do it economically.
Climate Crisis and the Global Green New Deal
Noam Chomsky, Robert Pollin and C.J Polychroniou (interviewing)
This book was not what I expected.
With Chomsky I expected a blistering attack on the power structures of capitalism.
I expected the authors to frame the solutions to our climate woes as a transformation of existing power systems — power in the political sense not energy.
Instead, the authors rightly argue that we don’t have time. Political transformation on the necessary scale is intergenerational. Stabilizing the climate means colossal action now and within the capitalist belief system, they argue. Or, as Chomsky told Vox, “We should recognize that if global warming is an automatic consequence of capitalism, we might as well say goodbye to each other. I would like to overcome capitalism, but it’s not in the relevant time scale. Global warming basically has to be taken care of within the framework of existing institutions, modifying them as necessary. That’s the problem we face.”
The starting point of the book, after a few swipes at neoliberalism, is the question of how to implement a global Green New Deal, defined as a bold vision of environmental economics inspired by Franklin D Roosevelt’s New Deal and guided by the logic of Keynesian economics regarding growth. The authors highlight that different proposals have been pushed up into the limelight.
So, given it is now scientifically established that it is possible to have a net zero economy globally by 2050, what is a politically realistic and economically feasible project to get there? Critically, such a plan must overcome political, economic and cultural resistance. The authors emphasize unsurprisingly that the challenge is not just to cut emissions by about 50% by 2030 and shrink the fossil fuel industry to around zero by 2050, it must do this in a way that creates good job opportunities and raises mass living standards around the globe. Reaching net zero will require investment in the region of 2.5% of global GDP each year to begin with focused in two areas: dramatic improvements in efficiency standards in building, transport and industry and massive expansion of renewable energy sources primarily solar and wind at competitive prices, while stopping deforestation and supporting afforestation.
Assuming a launch of a Global Green Deal plan in 2024, the authors estimate that clean energy investments would need to start around $2.6 trillion in the first year rising to $4.5 trillion a year of public and private sector investment (split 50:50). They emphasize that this is an investment in the future that will pay for itself and bring lower energy costs to everyone in the world — consumers will spend less money on energy intensive activities.
“It should not be especially challenging to solve this problem. As of 2019, Credit Suisse estimates that the total value of global financial assets was $317 trillion,” the authors argue. The investment needed to start the Green New Deal amounts to just 0.7% of this potential asset pool.
The authors outline four large-scale funding sources to pay for this.
First, a carbon tax with 75% of the funds raised rebated back to the public and the remaining 25% channeled into clean energy project.
Second, a transfer of funds out of military budgets from all countries but primarily the US.
Third, a green bond lending programme initiated by the US Federal Reserve and the European Central Bank.
Fourth, the elimination of all fossil-fuel subsidies. These funds should be channeled instead into clean energy investments.
These are all sensible proposals that capitalize on the many benefits of capitalism and market forces to drive rapid change. Of course, the big picture simplicity risks ignoring additional changes that need to happen to reach net zero by 2050. A reform of agricultural subsidies must also be high on the list in order to stop deforestation and turn agriculture into a large store of carbon. Also, on the subject of food, governments will need to guide a transition to healthy eating which will provide a win-win of reducing emissions into the bargain.
The authors make a strong case that the Green New Deal will be a major force driving the transformation capitalism away from neoliberalism and neo-fascism. As such, an unintended consequence may well be to save capitalism from its “suicidal tendencies”. That said, as Polling told Vox, “Globally, 90 percent of fossil fuel assets are publicly owned. So if we say the problem of climate change is private ownership of fossil fuel assets, and we need to transition to public ownership, well, we’re 90 percent of the way there! So that clearly is not a solution.” Highly recommended.
