Thursday, May 20, 2010

Nicholas Kaldor's Scourge of Monetarism

A lot of people are concerned that the Conservative party might deliberately screw up the economy again. I feel like, although before the election might have been a better time, now might be a good time to get to the bottom of Britain's monetarist experiment. This is an an agreable introduction, an article about Sir Keith Joseph, who pushed monetarism in the UK.

"Monetarism has some of the characteristics of Asperger's in its insensitivity and its harshness - that is my point, the man and what he does in life are one. It is important to know this because these people control the destiny of the nation,"

I had a look through Nicholas Kaldor's book The Scourge of Monetarism which is a technical work from the early Thatcher era, rather than a history. Kaldor has some interesting points.

Sir Nicholas Kaldor, the scourge of monetarism

Postulates of monetarism, according to Kaldor

1. prices change in proportion to changes in the money supply
2. the productive economy is not affected by inflation
3. the money supply is determined by the government

Kaldor's critique

I. the money supply as a percentage of income varies widely between countries, or within the same country in different years
II. the money supply is NOT determined by the government

Kaldor's anti-monetarism

III. inflation is caused by the autonomous marking up of prices

With regard to point (1.), the monetarists aren't very far from a Keynesian view that an increase in effective demand will raise prices in normal circumstances, if prices aren't otherwise fixed. The extension of the money supply is an extension of debt, and borrowers are likely to spend a large proportion of borrowed money immediately, otherwise what was the point of borrowing it? The extension of the money supply can be taken for an extension of efective demand. If we accept Keynes's argument that effective demand differs from the money supply, because money can be saved, we can accept that the extension of the money supply increases prices, without supposing proportionality. In addition, we can suppose that Keynesian increases in production with a less marked increase in price are possible in response to an increase in effective demand, and that it's possible for a great proportion of new money to circulate in the purchase and resale of existing assets, without wholly filtering into commodity markets, and increasing commodity prices.

Point (2.) is incorrect, and was held either in order to give the impression that capitalism is amenable to being accurately represented by a Walras type theory that makes it appear perfectly efficient, or the theory of costless inflation was held out of ignorance.

Point (3.) is false, as Kaldor demonstrates. Commercial banks are responsible for changes in the money supply. The government of a capitalist country cannot regulate the money supply itself without risking bankrupting banks, which is politically infeasible. Changes in the central bank's discount rate have some effect on the increase in the money supply, but this is probably best thought of as a benchmark rate set by and for banking capital, which commercial banks can profitably work from. Kaldor's point (II) is correct.

Kaldor's point (I) is certainly correct, but deals with something different from changes in the money supply, changes in effective demand, and changes in prices. It's rather a gratuitous refutation of the pre-Keynesian assumptions of monetarism, and assumes itself that inflation can't be related to increases in the money supply by post-Keynesian arguments. The money supply in toto is related to the capitalisation of costs and opportunities for speculation in existing assets in domestic currency. There is no reason why the ratio of the money supply to income should be the same in 70s Switzerland as in 70s Yugoslavia.

Kaldor's point (III) is incorrect, because it fails to recognise that inflation imposes costs by itself, leaving aside the costs of uncertainty and administering price changes. Kaldor effectively concedes monetarism's point (2.). There is no economic reason why workers can't gear down the rate of profit and improve their real wages. There are several social and political reasons why they don't do this.

1 comment:

catmint said...

regarding point 2.

"the productive economy is not affected by inflation"

Kaldor actually says that later monetarism:

"is compelled to regard inflation as quite harmless and as a great evil at the same time - two views which are not easy to reconcile with one another."