The General Theory and the Special Theories

The title of my book-in-progress, The Economic Consequences of the Pandemic is obviously meant as an allusion to Keynes’ The Economic Consequences of the Peace, and one of the central messages will be the need to resist austerity policies of the kind Keynes criticised in his major work, The General Theory of Employment Interest and Money. That title, in turn was an allusion to Einstein*, and the Special and General theories of Relativity.

The special theory Keynes wanted to replace was that of classical economics, in which the economy always tends to full employment unless governments or unions get in the way. The implication of classical economics, articulated in the Great Depression by Mellon (“liquidate the rottenness”) and in the Lesser Depression by the advocates of “expansionary austerity” is that the correct government response to a recession is to cut taxes, cut spending even more so as to balance the budget, and let the private sector expand as it naturally will.

The disastrous failure of austerity, particularly in Europe, has put its advocates on the defensive. Nevertheless, the idea that deficits are always bad has plenty of intuitive appeal (think of Angela Merkel’s Swabian housewife carefully balancing the household books). Austerity has an even stronger hold on those in the policy elite whose thinking was formed in the “inter-crisis” period between the breakdown of the Bretton Woods system in the early 1970s and the Global Financial Crisis of 2008. That accounts for just about everyone in the political class aged over 40, with the exception of a handful of people who have stuck to positions taken in the 1960s or just afterwards, such as Jeremy Corbyn and Bernie Sanders** .

Public expenditure has expanded everywhere in response to the pandemic, and the need for more spending is going continue long after the pandemic is controlled, either by continued restrictions or the development of a vaccine. The fight against austerity will begin with the expiry of time-limited emergency measures, which will happen in the second half of this year (September in Australia and much sooner in the US).

But if we can fight off the push for austerity, there’s another special theory that needs to be dealt with. Modern Monetary Theory (MMT) is, in essence, based on the assumption that the economy is always in what Keynes called a “liquidity trap”. This is a situation where the economy is so depressed that cutting interest rates to zero has no effect on demand – people pile up money rather than spending it. The only solution is for the government to spend money creating jobs (expansionary fiscal policy). And, as long as the liquidity trap continues, governments can keep increasing spending, financed either by money creation or zero-interest bonds.

The problem with this special theory is that a successful application implies destroying the conditions under which it works. Once the economy reaches full employment, any increase in public expenditure requires a corresponding reduction in private expenditure. The only sustainable way of achieving this is through taxation, and the only just way of doing it is through progressive taxation, with those in the top decile of the income distribution giving up a bit more consumption, and those in the top 1 per cent giving up a lot more. MMT advocates, like Stephanie Kelton kind-of admit this, but continuously seek to dodge the point. Here for example MMT advocates Nersiyan and Wray suggest that the Green New Deal can be financed without “taxing the rich” (a problematic term for progressive income taxation, since so few people admit to being rich) relying instead on “well-targeted taxes, wage and price controls, rationing, and voluntary saving”. “Well-targeted taxes” turns out to be a euphemism for a payroll tax surcharge, the most regressive form of broad-based tax.

Nersiyan and Wray draw on Keynes’ proposals in “How to Pay for the War”, which do include measures such as rationing and deferred pay, as well as large trade deficits. But the central point underlying Keynes analysis was that the war could not last forever. One way or another, the struggle with Hitler would be decided. In these circumstances, and with the total mobilisation needed for a life-or-death struggle, measures like deferred pay and rationing represent a way of sharing a necessary sacrifice. These were additional to, not a substitute for, steep increases in income and consumption taxes

A permanent change, like the original New Deal or a Green New Deal can’t be sustained with temporary wartime expedients or expansionary fiscal policy. What is needed is a transfer of resources from private consumption and privately directed investment to public use. That can be achieved through various forms of predistribution, reducing the incomes of those receiving an excessive reward at present, or through taxation. While both need to be pursued, it’s unlikely that predistribution can do all the work.

Keynes got this right in 1937, when he said “the boom not the slump is the time for austerity at the Treasury”.

*This just struck me, but of course I’m not the first to notice. Here’s James K Galbraith, attributing it to Robert Skidelsky. Still, good company to be in and Galbraith says not many others have made this point. And, it has been pointed out on Twitter, Pigou made much the same point in his critical 1936 review.

** If I had ever achieved any political influence, I would also fall into the category

21 thoughts on “The General Theory and the Special Theories

  1. The trouble with talk of “The General Theory and the Special Theories” in relation to economics is that it harks back to science, via the allusion to Einstein. Economics is not a science and it never will be a science. I think it is better to admit this up front and as often as necessary. Economics is a prescriptive discipline. The hard sciences are descriptive disciplines: meaning physics, chemistry, biology and the systems sciences which follow on from them like cosmology and ecology.

    Economics, or more properly political economy, is a branch of moral philosophy. Traditionally, this was taken to be the case and value theory or “value philosophy” indicates that it is still the case. Simply speaking, there are two categories of values, objective and subjective. The only values with a claim to objectivity are those measured in the SI base units used by science which are defined physically and objectively in real dimensions. Here we can take “objective” to mean physically real, dependably measurable and not influenced by human ideas, beliefs or subjective valuations.

    We immediately note that economic values are influenced by human ideas, beliefs and subjective valuations. Ipso facto, we can throw out any notion that an objective discipline can be derived on this basis. To repeat, conventional economics is a prescriptive discipline. It is based on axioms, not on fundamental laws of nature. It is an entirely axiomatic system. It has a base set of axioms from which one may logically derive its theorems. This is consistent with all human subjective value systems. This is precisely how all such social value systems operate. They set rules which humans must obey. From that point on, such systems generate “axiomatic” or automatic outcomes IFF they are uniformly or generally obeyed by the actors (the human agents) and IFF behaving according to those rules would not violate any fundamental hard laws of the cosmos (what we would term scientific laws).

    A given economic system, as a set of axioms and axiom-guaranteed outcomes (derivable as theorems), is operable socially and objectively provided the human agents are (mostly) obedient to the axioms and provided the fundamental laws of physical reality are not violated, immediately or eventually. This indicates that the axioms of (any) economic system should be subjected to two tests:

    (a) Do the axioms break our moral philosophy values either up front or in the axiom-generated sequelae (downstream effects)?

    (b) Do the axioms operate the system in such a way as to approach an asymptote where further operations of the axioms break fundamental, dependable systems of nature upon which we depend (for example the benign Holocene climate)?

    If the axioms do not meet either test, it is the axioms which must be abandoned, not our broader ethical values and not the life-sustaining environment which is critical to our survival. Economics must be remolded into a discipline which obeys ethics and the laws of nature. Its invalid circular logic character, whereby it forms its values according to its values, must be abandoned and the discipline re-subjected to (consequentialist) ethical values and to scientific values.

    (Consequentialist ethics can be argued to tend to the objective but that is another discussion.)

  2. We also have an economic transition happening, and this one the government can’t ignore. The collapse of tourism is a done deal, and no amount of unilateral border-opening or disease-denying will make it come back (should anyone want to try that). Our governments have been doing a great job pretending that climate change will not lead to economic change, but the pandemic is different. The people have decided that pandemics matter and have changed their behaviour accordingly.

    I’m specifically thinking to Sydney’s second airport, which is still a “priority project” even though it’s a climate disaster and now very likely the pandemic has made it pointless. But I’m sure the construction industry will appreciate it, just as they have appreciated building all those empty “investor-grade” apartments.

    But the flow-on effects of all that will take someone much smarter than me to grind through (are there any economists in the room? Maybe one of you could write a book…😁)

  3. Very useful post clarifying what the book will be about and 100% agreement from me.

    I would argue that now is not the time to be bringing forward tax cuts for the well-paid or for flattening the personal income tax structure. Now is past the time to overhaul the whole tax system.

    Now is the time to guarantee a decent safety net for those who (for any reason) are not in sufficient work.

    @Moz in Oz: Sydney’s second airport is indeed likely to be a white elephant even if air travel picks up again. It is eerily reminiscent of Montreal’s Mirabel airport – opened 1975, junked 2004. A major problem was that it took twice as long to transit to the city centre compared to Dorval airport, and the planned high-speed rail link never got funded. Sydney’s Kingsford Smith is a ‘hub and spoke’ airport – why would you fly in to Kingsford Smith from Singapore then transit to Badgery’s Creek in order to fly to Canberra (for example) ? (You would sooner transit via Melbourne.)

  4. Moz.

    You are quite right. The collapses of tourism, professional sports, gambling and excess consumption in pubs, clubs, restaurants and bars are all done deals or should be. These are all non-essential activities which waste scarce resources. Privately owned automobiles are another indulgence due for obsolescence. People who think that all these behaviors don’t have to change are kidding themselves.

    We have two options. One, phase these behaviors out before we wreck the planet or two, wreck the planet and have no resources left for these behaviors anyway. Either way, these behaviors have to and will go. This outcome is already baked into the real systems (real environment, real economy). The axiomatic prescriptive system of (capitalist) economics posits that over-consumption can continue indefinitely. That ideology is in a for a sad crash landing. We are already clipping the tree-tops on empty tanks and the capitalist sky-pilots want to pull on the stick again.

  5. John, I always find that you are happy for the government to spend more, raise higher taxes, and to incur more debt. Do you have constraints in mind for these things – even constraints independent of the current situation? If taxes took 80% of income and if the public debt was 300% of GDP would this be excessively onerous in your view? What are the limits to government?

  6. “The problem with this special theory (MMT) is that a successful application implies destroying the conditions under which it works.” (Term in brackets added to convey the context) beautifully makes clear the ‘special’ case status of MMT relative to Keynes theory.

    As for austerity, if people read the entire article in The Guardian, which you linked, regarding Merkel’s Swabian housewife, then the readers can figure out the difference between spending household money – private or public – in a careful (economical – in the primary meaning of economic, namely waste not want not) manner versus austerity as practised in the UK since the GFC and until a few days ago. Incidentally, the former Finance minister Schäuble is from Swabia. Merkel was borne in Hamburg and grew up in a small town in the former East Germany.

    Unfortunately, Keynes theory cannot deal with environmental problems.

  7. Re: collapse of tourism and COVID, Carnival have announced a $4.4B loss and it’s been said that Royal Caribbean are chewing through $250M a month.

    It’s a ship buyers market.

    You would wonder as to the viability of Sydney’s second airport and also question the longterm return on investment in such infrastructure.

  8. There’s another 1918 angle worth thinking about. At the Versailles negotiations, the victors were divided between those (Lloyd George, Clemenceau) who basically wanted to restore the Great Power system as it stood in 1914, just updated with us on top; and those like Wilson and Keynes who realized that the Great Power system was a big part of the problem and needed to be changed. The reforms failed as we all know. The League of Nations was far too weak and the principle of national self-determination created more problems than it solved. Sill, the reformers were right that a paradigm shift was needed. They got a second chance in 1945, and v2.0 has proved more robust: the UN has more authority, military action is seen as a proper last recourse of collective action, the institutions recognize the de facto inequality of states through the Security Council, balanced by the more democratic General Assembly, and national self-determination was dethroned by fundamental individual rights as the ideological lodestar.

    I am relying on common knowledge here rather than Keynes’ TECOP, which I confess to not having read. I understand that much of it is a perfectly sound denunciation of the folly of punitive reparations – one of the reforming innovations of Versailles, based on the attribution of war guilt. This concern was unknown to the authors of the Peace of Westphalia in 1648, the Congress of Vienna in 1815, or the parties to the Franco-Prussian peace in 1871. To these, war was normal and lawful behaviour by states. If you lose, you expect to cede territory, trading rights or other assets. But guilt does not come into it.

    The paradigm shift that did take place was in the understanding of the economic role of the state in a crisis such as war. The war economies of 1914-18 were deepened in 1939-45, but the big change was the earlier one.

    This all suggests a question for John’s TECOP-2. Have the bold, trillion-dollar policies forced on very ordinary BAU governments by the pandemic led to a paradigm shift in élite opinion about what’s feasible more generally? Or desirable? Why not nationalize coal, levy border carbon taxes, crush the tax havens through unitary company taxation, tax great individual wealth, switch from patents to prizes to reward innovation, institute a jobs guarantee or UBI? At the very least, there will be fewer voices saying “it just can’t be done”.

  9. So long as the Left talk about things like ‘well targeted tax increase’ and rationing it well get nowhere.

  10. “The paradigm shift that did take place was in the understanding of the economic role of the state in a crisis such as war. The war economies of 1914-18 were deepened in 1939-45, but the big change was the earlier one.”

    Historyintime makes a good point. I think modern billionaires tend to be pretty undeserving. So I’d want to have good ways of making them pay their way. Georgist tax with a threshold. Getting rid of tax loopholes. Get rid of many artificial entities like these family trusts.

    But what would be the effect of James’ proposed actions taken under situations of emergency and panic? What was the effect of World War I financing? It was a disaster. The wealth was being created in the North. Either side of the Scottish border. Thats where the industrial revolution had been orchestrated. Perhaps it was more of a celtic phenomenon than Anglo Saxon? World War I financing moved all the wealth back down to London and the south. Deficit financing helps profits not wages, the big end of town and not small business. The usurers not the manufacturers. Fast monetary growth tends to do the same. So this idea of emergency action creating good effects … Doesn’t have such a great track record.

    I think the emergency situation that the pandemic represented should have been more fully used as well. Closing down all manner of government departments to get access to the funds. If you couldn’t get the underlying budget (ie not including pandemic measures) in massive surplus under these conditions you aren’t going to do it in a month of Sundays.

  11. If I was clever and determined enough I would write a book called ” A History of the Weaponisation of Economics ” ,it could be subtitled ” Cultural Engineering and the Capitalist Class ” .

  12. Classic Radio Stories: Granted, the war economies of 1014-18 were often chaotic and in particular allowed a lot of (bitterly resented) profiteering. My point is that the scale of state intervention in munitions, the labour market, shipping, food rationing, imported raw materials and other key sectors was something new. In 1939 everyone knew where to start. The Soviets already had a command economy.

  13. If anyone can find a punchier straight to the guts quote for inclusion in JQ’s book, I’m all ears.

    Tolentino is a staff writer at The New Yorker.


    This is THE line:
    “… cause and effect disrupted for all but the wealthiest”

    The whole para;
    “INTERVIEW: What is the worst-case scenario for the future? 

    “TOLENTINO: Melted permafrost, dead coral reefs, no more birds, whales engorged with plastic, much of the world’s population living as refugees from one thing or another, permanently disturbed weather, semi-constant natural disaster, cause and effect disrupted for all but the wealthiest—scarcity increasing the rationale for selfishness rather than for cooperation, and also Twitter still exists. ”

    “INTERVIEW: What has this pandemic confirmed or reinforced about your view of society? 

    “TOLENTINO: That capitalist individualism has turned into a death cult; that the internet is a weak substitute for physical presence; that this country criminally undervalues its most important people and its most important forms of labor; that we’re incentivized through online mechanisms to value the representation of something (like justice) over the thing itself; that most of us hold more unknown potential, more negative capability, than we’re accustomed to accessing; that the material conditions of life in America are constructed and maintained by those best set up to exploit them; and that the way we live is not inevitable at all. ”

  14. Tolentino is mostly right. However, the worst case scenario for humans, as a species, is extinction. Our extinction is very probable now. A Buddhist might see that as a best case. Extinction, or non-existence, is nirvana, nothingness, escape from rebirth and the wheel of suffering.

  15. Underlying the argument here is a question about human belief systems, about how argument works in setting them and keeping them in place, often in defiance of overwhelmingly obvious conditions. I’m seeing this increasingly as a question about how the human brain works in certain cultural climates.
    Why has neoliberalism – whose inception coincides with the post war situation you discuss – held sway for so long? Why is it so hard to dislodge?
    I was listening yesterday to a talk by Niall Fergusson, in which he described the revelatory impact of reading Fukuyama’s End of History when it was first published.
    I thought of Thatcher reading Hayek as revelation.
    And I thought… my first year as an undergraduate studying English Lit taught me never to treat an argument as a revelation. I was specifically trained – through hours of slogging it out with paragraph by paragraph analyses of Samuel Johnson essays and early Spectator writings – not to do this.
    One of the characteristics of the neoliberal credo is a pincer movement of something that feels like revelation and something that looks like downhome common sense.
    This combination really hardwires the brain.

  16. Jane Goodall,

    For certain, Fukuyama’s End of History was not revelation but delusion. It has already been refuted empirically by events. More broadly and obviously human history will never end until humans end. This is true by definition and was always the prime objection to any End of History thesis. Paul Kennedy’s “The Rise and Fall of the Great Powers” was far more on target geopolitically, geostrategically and even economically. He predicted China would be become the top superpower in the early to mid 21st century and here we are.

    China is already the top power in many respects: biggest population, biggest economy on PPP measures and the most competent by far against an exogenous natural threat, COVID-19. This is not to say they don’t face serious sustainability problems. They do. Sure, their conventional army and nuclear weapon capabilities still lag the US but their cyberwar and asymmetric capabilities already exceed those of the US. The US is declining ad in denial. China is still rising and getting overconfident perhaps too early. What really matters is relative, not abslute, rise ad decline.

    On your other issues, one may take a text’s method as a revelation while not taking its content as a revelation. I took and take Bishop George Berkeley’s philosophical method, style and precision as a revelation, to me at least. However as to the overall immaterialism thesis, I would, for a quick riposte, kick a stone down the road as Johnson is reputed to have done and say “I refute it thus.” My position is actually more nuances than that but this thread is not the place.

    The neoliberal credo is a dogma. The human mind seems well developed to accept immediate empirical sense data but to have little innate ability to abstract and project from it to more than proximal outcomes or to think logically and use deductive, inductive and abductive reasoning. These intellectual processes need largely to be taught and learned. Rather than thinking in those more advanced modes we often tend to accept narratives, myths etc. from authority figures as truth.

  17. Interesting point about method as distinct from content as creating the ‘revelation effect’.
    Though the point I’m trying to make is different: it’s to do with the pincer movement created by the revelation experience brought together with a discourse of what passes for common sense – the Swabian housewife, or Thatcher’s manner of pontificating as if she were instructing 8 year olds, or Theresa May’s ‘there is no magic money tree.’
    It’s as if the one mode of understanding is used to guarantee the other, though they work on different planes.
    Also perhaps a case of – the revelation is for ‘us’ the cognoscenti and the common sense is for you, the people.

  18. Ikonoclast, my take is that Buddhists like most major religionist brands are nothing if not chauvinistic human specists. Human extinction in the near term from their unenlightened’s perspective could hardly be seen as a best case. It augurs not for non-existence, nirvana, nothingness, escape from rebirth and the wheel of suffering””, but for reincarnations (On and on and on on and on – apologies to J Lennon) as ‘lower’ forms of life that THE Earth may then suffer to suffer, eg,. as sentient worms, or as worm riddled sentient starving dogs… Or worse, it could augur for many the best part of forever being spent incarnate and fully aware on hell planets in other supposed planes of existence until a species similar in composition and sentience to the old style corporeal humans evolves somewhere else other than the by then long ago dispersed and recycled star stuff of Earth.

    Instant Karma’s gonna get you
    Gonna knock you right on the head
    You better get yourself together
    Pretty soon you’re gonna be dead…

    Instant Karma’s gonna get you
    Gonna knock you off your feet

    Yeah we all shine on
    On and on and on on and on
    Who in the hell d’you think you are
    A super star…
    A Bodhisattva?!#Composition

  19. BTW, regarding revelations and delusions, as passionately told me by an Iranian Bahai refugee I worked with 25 and more years ago, in the late 1800s Baháʼu’lláh predicted China would become THE superpower in a not too distant future – surely a bold claim then with China at her nadir. Was anyone else calling it then? Just saying. B also predicted Chinese democratic government due no doubt to press coverage and his own extensive network of correspondents’ reports.

    Sun Yat-sen and his fellow “Four Bandits” were around then whereas Mao was but an infant… The then future revolutionary President Sun Yat-sen’s Three Principles of the People, principally “nationalism” but with major differences in interpretation of “democracy” and “peoples welfare”, would be claimed by both the Kuomintang under Chiang Kai-shek and the CPC under Mao Zedong. However, along came the socialist market economy boosting Jiang Zemin and his New Three Principles of the People followed by his Three Represents as ratified by the CPC in 2002, but on balance B’s China prophesy hasn’t reached a use by date yet. Two out of three major links to substantiation is it? Not too bad so far. And with plenty of the religionist obligatory covering bets of coming global tribulations thrown in, B probably just cannot lose. Anyway, not in our lifetime.

  20. Though the point I’m trying to make is different: it’s to do with the pincer movement created by the revelation experience brought together with a discourse of what passes for common sense – the Swabian housewife, or Thatcher’s manner of pontificating as if she were instructing 8 year olds, or Theresa May’s ‘there is no magic money tree.’

    ‘Sergeant Colon had a broad education. He’d been to the school of My Dad Always Said, the College of it Stands to Reason, and was now a post graduate student of the University of What Some Bloke in the Pub Told Me.’ (Terry Pratchett, Jingo)

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