Robert Skidelsky

The quantity theory of money : from Locke to Keynes and Friedman

Contents: Introduction (Mark Blaug) 1. John Locke, the Quantity Theory of Money and the Establishment of a Sound Currency (Walter Eltis) 2. Why is the Quantity Theory of Money the Oldest Surviving Theory in Economics? (Mark Blaug) 3. Long - Run Equilibrium andCyclical Disturbances - The Currency and Banking Controversy Over Monetary Control (Denis OBrien) 4. J.M. Keynes and the Quantity Theory of Money (Robert Skidelsky) 5. The Quantity Theory in the 1980s: Hume, Thornton, Friedman and the Relation Between Money and Inflation (Geoffrey E. Wood) 6. Concluding Comments on the Quantity Theory (Don Patinkin) Index

The Moral Limits of Markets

This is going to be a continuation of the discussion before lunch. In that discussion we heard about two different arguments, or kinds of argument, for calling a market ‘noxious’: an argument from equality and an argument from corruption. A market can be called noxious because it undermines human equality, either because some of its participants are vulnerable to exploitation or because it inflicts serious harms on some section of the population. Alternatively, a market can be called noxious because it corrupts the good it traffics in, by imposing on it a meaning that is not properly its own. Modern liberals are generally uncomfortable with this latter argument, because it implies, unpalatably from their point of view, that a voluntary, victim-free transaction can nonetheless be vicious. I want to defend the corruption argument, both because I think it is a valid argument and also because I think it is primarily a worry about corruption, and not equality, that underlies our fear of creeping marketisation. Here, as elsewhere, modern liberalism imposes a kind of hypocrisy on us. It forces us to voice our moral intuitions in a language alien to them.

Keynes, John Maynard (1883–1946)

John Maynard Keynes (1883–1946), British economist and civil servant. The most influential economist of the twentieth century, he made important contributions to philosophy, political thought, and arts policy. He invented, almost single-handedly, a new branch of economics, macroeconomics, or the theory of what determines output as a whole, as contrasted with microeconomics which studies the forces determining the composition of a given output. He did so in order to destroy the implicit assumption of ‘classical’ economics that a competitive market economy would always ensure full employment and thus to justify government intervention to maintain full employment. The task seemed the more urgent in the wake of the Great Depression of 1929–1933. The result was The General Theory of Employment, Interest and Money, whose publication in 1936 is conventionally taken to be the start of the Keynesian Revolution. Its main policy fruit was the commitment, till the mid-1970s, by most Western governments, to maintain high and stable levels of employment in their countries. The lack of secure microfoundations for Keynesian macrotheory, as well as the somewhat contentious implications of that theory for the role of governments, has continued to make Keynesian economics controversial; while economic historians have disputed the contribution of Keynesian policy to the ‘golden age’ of global prosperity running from the 1950s to the early 1970s.

Austerity: The wrong story

Over their 5 years in power, the Conservative Party has claimed that their austerity policy saved the country from disaster. This purported economic competence sat at the heart of their 2015 election campaign. It needs critical scrutiny. The Coalition government has given two main reasons why austerity – cutting the budget deficit – was necessary. The first is that its predecessor Labour government, living ‘beyond its means’, left the nation with a rising mountain of public debt. The only way to restore fiscal probity was to start austerity as soon as possible. The second reason was that commitment to austerity was the only way to reassure the bond markets that the British government would not ‘go the way of Greece’, that is, default on its debts. Both arguments were false, but they have never been properly exposed in the media, and for various reasons, Labour has not attacked them with the vigour they deserve. In economic logic, the two reasons are independent of each other. How much a government needs to borrow should be determined by the state of the economy, not by how much debt its predecessor has left it. In a slump, a government should aim to increase its deficit, not reduce it, to compensate for the fall in private sector spending. This will normally cause the economy to grow faster than the deficit and in turn reduce the deficit, and eventually the national debt, as a share of national income. But to understand this, you need to understand that a slump is defined by the existence of spare capacity: spare because the private sector is unwilling to create the jobs to use it. Instead of borrowing to keep people in idleness, the government should borrow to create jobs. But this common sense was seemingly no longer the common understanding. Linking Labour overspending with the risk of ‘going the way of Greece’ offered the Conservatives an alternative narrative of undoubted persuasive power. Had the Labour government not left so much debt, the Conservatives said, there would have been less need for austerity to reassure bondholders. George Osborne had to be so austere because Gordon Brown had been so profligate.

The Economic Consequences of Mr. Osborne

The Ferguson-Skidelsky debate opens with an article by Ferguson which appeared in the Financial Times on 10 May 2015 [omitted] following the general election in which he claimed that the architect of the Conservative victory was George Osborne.

Myths of Austerity

When I was young and naive, I believed that important people took positions based on careful consideration of the options. Now I know better. Much of what Serious People believe rests on prejudices, not analysis. And these prejudices are subject to fads and fashions. Which brings me to the subject [of this article]. For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.

Keynes’s Philosophy of Practice and Economic Policy

Keynes advocated state intervention to improve the working of economies. He also supplied, and invented, economic theories to justify the interventionist measures he advocated. Ever since the publication of the General Theory in 1936, economists have argued about the nature of these theories, and their relationship to Keynes’s (and Keynesian) practice. My distinguished discussant, Samuel Brittan, once wrote: ‘One of the great growth industries of the English-speaking world is the exegesis of the writings of John Maynard Keynes. What exactly did Keynes say? When did he say it? Who were his precursors? What did he really mean? What should he have meant? What would he be saying if he were alive today?’ Mr Brittan added that he enjoyed a good wallow as much as anyone else, which I suppose is one reason why he is here this afternoon.1

Confidence in the UK Is Different from the One in the Eurozone

Why does the Spanish government pay significantly more to borrow than the UK government—despite having a smaller deficit and lower overall debt? This column argues that the reason lies in the Eurozone’s fragility. Its members lose their ability to issue debt in a currency over which they have full control. The column discusses ways to deal with this weakness.

Britain’s Confidence

Vince Cable’s essay […] is the first, and very welcome, sign of a senior coalition politician being willing to engage in a serious public debate on economic policy. It is in a different intellectual league from the jejune meditations of the Chancellor, George Osborne.

A Stimulus Policy for the UK

This is a modified version of the article published in The New Statesman on January 16, 2016 with the title The Optimism Error.