Lessons for Corbyn in “Lerner’s Law”

I’ve seen a couple of references to “Lerner’s Law” on Twitter in the last couple of days and thought “What’s that?”. Before anwering this question, let’s wind back a bit.

Who is Lerner?

Abraham (Abba) Lerner was a Russian-born British economist, who, writing in the 40s and 50s developed a theory he called “functional finance“. JM Keynes was aware of some of this work, and there is evidence he agreed with much of it. Unfortunately Keynes died before really exploring Lerner’s ideas. If he had, maybe what we think we know about “Keynesian economics” would look a lot different today.

Lerner’s functional finance is a key plank of what is today called Modern Monetary Theory (MMT), and it was one of MMT’s key figures Warren Mosler who I first saw mention “Lerner’s Law”:

So what is Lerner’s Law?

I’m not sure it’s actually known widely as such, but what Mosler alluded to was a passage from Lerner’s 1951 work “Economics of Employment”. Bill Mitchell quotes this passage in his latest book “Eurozone Dystopia”. I found the relevant section here. Bill writes:

“Lerner’s work also contains a very clear message for progressive thinkers who are reluctant in the current debate to think outside of the confines that the neo-liberals have created. For example, Labour politicians in the United Kingdom confront the austerity debate with claims that they would ‘fix the budget’ over a longer time period to avoid the massive damage that immediate austerity brings. Of course, even debating the ‘health’ of the fiscal position in terms of some financial ratios is ceding ground to the conservatives, ground that is illegitimate. Lerner (1951:15) called progressives who argued in this way ‘proponents of organised prosperity’ and argued:

A kind of timidity makes them shrink from saying anything that might shock the respectable upholders of traditional doctrine and tempts them to disguise the new doctrine so that it might be easily mistaken for the old. This does not help much, for they are soon found out, and it hinders them because, in endeavoring to make the new doctrine appear harmless in the eyes of the upholders of tradition, they often damage their case. Thus instead of saying that the size of the national debt is of no great concern … [and] … that the budget may have to be unbalanced and that this is insignificant when compared with the attainment of prosperity, it is proposed to disguise an unbalanced budget (and therefore the size of the national debt) by having an elaborate system of annual, cyclical, capital, and other special budgets.

Progressives should first and foremost seek to educate the public about how the economy and money actually operate and what opportunities the government has to act on our behalf to advance our wellbeing. If we think in this way, then options that have been constructed by the neo-liberals to be ‘dangerous’, ‘radical’ or ‘taboo’ will start to appear reasonable and grounded in reality.”

So simply stated, Lerner’s Law would be something like “If you try to present your ideas cloaked in the language of you opponents, it will do your cause great damage”.

This offers a lesson to Corbyn and his supporters. Corbyn has manfully tried to present policy ideas that currently sit outside what is thought ‘possible’ within the current orthodoxy. He has done so though while trying to present himself as being enthusiastic about balancing the budget, or at least the ‘current’ budget. He has also talked about how he would ‘pay for’ his policies by raising taxes on the rich. Both of these are examples of disguising ‘new doctrine’ as old as Lerner wrote, and leave him open to attacks from those holding on tight to the old.

Mosler, in his Tweet embedded above invokes Lerner’s Law to criticise the idea of “People’s Quantitative Easing” as proposed by Richard Murphy and adopted by the the Corbyn campaign. It takes an idea that is actually quite revolutionary (Overt Monetary Financing), and cloaks it in the language of something that was on the unorthodox edge of current orthodoxy (Quantitative Easing). This has opened it up to all kinds of criticism (for example the recent FT letter signed by 55 economists).

When it’s suggested that ‘progressives’ should adopt different language to try and explain alternative policies, it’s sometimes replied that this is a hopeless cause as the current orthodoxy is so ingrained in the public’s minds. Lerner has an answer to this (quote also referenced from Bill’s book):

The scholars who understand it [the “new doctrine”] hesitate to speak out boldly for fear that the people will not understand. The people, who understand it quite easily, also fear to speak out while they wait for the scholars to speak out first. The difference between out present situation and that of the story [The Emporer’s New Clothes] is that it is not an emporer but the people who are periodically made to go naked and hungry and insecure and discontented – a ready prey to less timid organisers of discontent for the destruction of civilisation.

Let’s speak out!

Links for the w/e 13.04.14

Just a few links to share this week. First up, Brian Romanchuk gives us a primer on functional finance as proposed by the economist Abba Lerner, which is an alternative approach to government finances:

Primer: What Is Functional Finance?

Next, here’s Bill Black comparing and contrasting two Nobel economics prize winners:

Nobel Schizophrenia over the Georges: Stigler and Akerlof

And here’s a nice interview with economist Ha-Joon Chang:

Ha-Joon Chang: Economics Is A Political Argument

Over in Ireland, it seems some discussion of a full job guarantee may be starting to take place:

Joan Burton wants a job guarantee for everyone on the dole

And to end, because this is a short list this week, we finish with Chris Dillow writing:

In praise of brevity

 

Functional Finance, not fiscal rules is the responsible way to manage an economy

During Ed Balls’ speech a couple of weeks ago, he set out his thinking about how a Labour Government would need to operate within tight constraints if it won the election in 2015. Making clear he thought difficult choices would have to be made, he said Labour would have to show an ‘iron discipline’ on spending. He also spoke of ‘fiscal rules’, saying:

“Instead, Labour will set out, in our general election manifesto, tough fiscal rules that the next Labour government will have to stick to – to get our country’s current budget back to balance and national debt on a downward path.”

A lot of commentators praised the speech, including Polly Toynbee in The Guardian who wrote:

“Ed Balls’s brain was never in doubt, and his impressive speech set out a credible economic plan, tough as titanium – too tough for some Labour tweeters. Whatever flak he takes will not be for softness: one look in his steely eye and you know he’ll mince any colleague uttering an uncosted spending promise.”

So from this it would seem the way to go on the public finances is ‘responsible’ government, sound finances and fiscal rules. It seems there is agreement from left to right. Not on the specifics maybe, but certainly on the need to cut the deficit and get the public finances on a ‘sustainable’ footing. But is this approach actually ‘responsible’ at all? I say no. There is a much better approach available.

It’s called ‘Functional Finance’. It’s been around for a long time and was championed by the economist Abba Lerner in an article in ‘Social Research’ in 1943I’m going to quote quite extensively from this paper now to give you a flavour of what he was trying to say. It very straightforwardly cuts through the bullshit inherent in arguments about sound finance that were around even then (some things never change). Lerner writes:

The central idea [of functional finance] is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound.

The first responsibility of the government (since nobody else can undertake the responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. The government can increase total spending by spending more itself or by reducing taxes so that taxpayers have more money left to spend [and vice versa to reduce total spending]. …By these means total spending can be kept at the required level, where it will be enough to buy the goods that can be produced by all who want to work, and yet not enough to bring inflation by demanding (at current prices) more than can be produced.

In applying this first law of Functional Finance, the government may find itself collecting more in taxes than it is spending, or spending more than it collects in taxes. In the former case it can keep the difference in its coffers or use it to repay some of the national debt, and in the latter case it would have to provide the difference by borrowing or printing money. In neither case should the government feel that there is anything particularly good or bad about this result; it should merely concentrate on keeping the total rate of spending neither too small nor too great, in this way preventing both unemployment and inflation.”

My last post was on tax and how it’s not correct to think of governments needing taxation to finance its spending. Here’s Lerner on the same topic:

An interesting, and to many a shocking, corollary is that taxing is never to be undertaken merely because the government needs to make money payments. According to the principles of Functional Finance, taxation must be judged only by its effects. Its main effects are two: the taxpayer has less money left to spend and the government has more money. The second effect can be brought about so much more easily by printing the money that only the first effect is significant. Taxation should therefore be imposed only when it is desirable that the taxpayers shall have less money to spend, for example, when they would otherwise spend enough to bring about inflation.”

So that’s Functional Finance then. Simple, logical and theoretically sound. It places a focus on real outcomes rather than arbitrary numbers the government has little control over. If our leaders could share Lerner’s clarity of thought, our economic malaise could be brought to a close swiftly.

Lerner on Functional Finance

After yesterday’s Keynes quote, I thought I’d follow it up with one from the late economist Abba Lerner. The quote is about ‘functional finance’ that he developed. I’ve blogged about functional finance before here. Here’s the quote:

“The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and withdrawal of money, shall be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine what is sound and what is unsound …Government should adjust its rates of expenditure and taxation such that total spending is neither more or less than that which is sufficient to purchase the full employment level of output at current prices. If this means there is deficit, greater borrowing, “printing money,” etc., then these things in themselves are neither good or bad, they are simply the means to the desired ends of full employment and price stability.”  (Lerner, 1943. From “Functional Finance and the Federal Debt”, taken from here)

This is kind of what I was referring to in this blog post. It’s the idea that governments today are pursuing all the wrong goals while ignoring the ones that really matter.

Lerner was a contemporary of Keynes and they corresponded in the 40s. There is some evidence that after initially disagreeing with Lerner, Keynes came to accept the logic of functional finance. For an interesting discussion of this, see here. I think we can learn a lot from Lerner’s ideas, and functional finance was built upon by economists from the branch of economics known as Modern Monetary Theory, of which I am a fan. Check out some of the links on the right hand side bar for more about MMT.