This sequence of posts goes through Charles Goodhart’s book on Evolution of Central Banking. Previous post is: RG5 Evolution of Economic Systems
Chapter 2 opens with a discussion of the views of Walter Bagehot (pronounce as badge-it), author of Lombard Street, which has received a lot of recent acclaim as masterpiece on central banking. After the Global Financial Crisis, Martin Wolf asked “Doesn’t what has happened in the past few years simply suggest that [academic] economists did not understand what was going on?”. Larry Summers responded by naming Lombard Street (1873). There are many articles which examine how a 150 year old book provides insights into the financial crisis which modern economists do not understand!. See, for example, Brad De-Long’s This Time is Not Different. (For a more realistic and clear-sighted appraisal of Bagehot for modern Central Banking, see Misreading Walter Bagehot.)
As also discussed in the first chapter, Walter Bagehot supported free banking as a normative ideal, but recognized that it would not be practical or possible to create the radical changes required to move from Central Banking towards that ideal. Why then is it worth going over dead arguments of a dead economist from 150 years ago? As in a game of whack-a-mole, these arguments keep getting whacked down, and they keep popping up again and again. In practice, today, the shadow banking industry is close to a re-creation of the free banking idea. So, it is worth going over these ideas from their origins. In this post, we will discuss the general arguments for “laissez-faire” – let everyone do whatever they want to do – which is at the heart of many arguments for free banking. The general idea is that all type of regulations tie the hands of free markets and lead to less than optimal outcomes. The best system is a free market system without any regulation, where everyone is free to do whatever they want. In fact, this idea is disastrously wrong, and this can easily be proven theoretically, and backed up by many many empirical examples where free markets have led to major disasters like the Great Depression and the Global Financial Crisis. So ,question is: Why does this hopelessly bad argument keep popping up over and over again, like the whack-a-mole puppets, impervious to any number of blows? In this post, we attempt to provide an answer.
All economic policies hurt some classes and help others. No class has by itself sufficient power to control the outcomes. Thus, powerful classes must depend on persuasion to convince other classes that actions they want to take are in the common interest of all. Karl Marx said that capitalism depends on the willing compliance of the laborer with his own exploitation. Why do the bottom 90% strongly support a system which generates increasing inequality and siphons more than 50% of economic gains into the pockets of the top 1%? Their willing consent is based on the dominance of deficient economic theories (See ET1% Blindfolds Created by Economic Theory). To see how this works, we start with an example from ancient times.
Mazdak was an ancient Persian philosopher who preached against private property, and argued in favor of communal ownership of all resources. This would obviously appeal to the poor, who would thereby acquire a share of ownership in the palaces, wealth, and luxuries of the rich. However, the practical effect of the philosophy was the opposite of this egalitarian dream. The rich and powerful were able to defend their properties, and also were able to occupy and take over the property – including wives and children – of the poor, because they had the power to enforce their will upon others. The philosophy provided a cover for their actions because it deprived the poor of their rights to their own property. This is exactly how ET1% works: by appealing to the poor, while working against their interests.
Among the most powerful of the theories of the top 1% is the idea of “freedom” – let everyone be free to pursue his/her dreams. This matches the individualist and hedonistic spirit of the age, and appeals to everyone. Milton Friedman’s book “Free to Choose” has been a popular bestseller, and defends capitalism by selling dreams of freedom. The essential trick to selling these dreams is by creating a phantom enemy. The bottom 90% is initimately familiar with being oppressed – this is part of the life experience of the labor class. However, very few have understanding of the causes of this oppression. Therefore, free market demagogues can provide a simple enemy. For example, Trump appealed to the oppressed masses by telling them that it is the “immigrants” who are taking away your jobs and wealth. Similarly, free market economists blame everything on big government. They sell the “Horatio Alger” dream to the masses – if we move to a free market system, there will prosperity for all, and everyone will have a chance to become a millionaire. The reality of very low social mobility is hidden from sight. If you are born poor, you live poor, you have poor children, and you die poor. Of course, there are always a few who break free, and these people are glamorized and celebrate to create the dream that this is possible for everyone, and the only obstacle to the realization of this dream is the big government.
If you can successfully sell these dreams, as Trump did, you can make the masses focus on the wrong enemies, like immigrants, WMD of Saddam Hussein, Islamic terrorism, or the demon-of-the-month. That way, the people being exploited by the system do not recognize what is going on and are unable to unite to fight their common enemy. (See my post on “The Shifting Battleground” for more details about this analogy.). Over the course of the 20th Century, there has been revolution in techniques of persuasion – the selling of dreams. Our minds are shaped by the “hidden persuaders” in ways we are largely unaware of.
WEA Pedagogy Blog 
This was well written. This is more along the lines necessary to reach out to more than just economic students.
I notice you have your own page/blog for MMT for Pakistan. It seems you are attempting a similar thing as Bill Mitchell for Australia (and other countries).
In order to reach such goals, it is imperative that all voters, and not just economic students, come to more of an understanding of how the system works. The key difference between the majority and that small slice of society that become economists or academics, is that the latter tend to be more individual and isolated, i.e. they are not really people people, and hence, they use more of their intellect and rely very little on their emotional side. Whereas, the majority of people who are less academically minded are by far more ‘crowd’ people, people who rely on other people, and as such, come to interpret the world more through emotions and imagery (there is much literature on this, but a great book which explains this is the Art of Contrary Thinking by Neill).
To put simply, no one will ever be able to convince the world of the merits of certain economic policies (such as MMT) unless they speak to the world in a language they understand, and for the majority of people (which make up the very people who will vote either yes or no), this has to come to them in emotional language, imagery, and sensations. The workers of this world do not need to know the identities that prove where money comes from, or how budget deficits leads to savings etc , what they need to hear is how will the world and their own lives look, feel, and smell like if such policies were put in place – how will my work day pan out, how will I feel like after I come home from work, will I be less tired than before, what will my bank account look like, how will my security improve, will I have more time with my family, will I be able to pursue more hobbies and passions, how will society look and smell like, will I have more freedoms to move around, will such policies make me feel better and more secure etc etc??
Does this make sense?
Completely Agreed. The Economists will be the LAST to be convinced, and so it is necessary to launch the revolution from the general public. Note that this is a political battle (see my link in post on the Shifting Battleground
I will have to suggest something else aswell.
You said two lines which I want to draw attention to:
“The bottom 90% is initimately familiar with being oppressed – this is part of the life experience of the labor class”
“the people being exploited by the system”
I never used to use words such as ‘oppressed’, ‘exploited’, and even ‘slavery’ and it’s opposite ‘freedom’ until I began studying the whole system from money, economics, politics, history etc. It was only then that these words became part of my vocabulary.
The reason I make mention of this is because these very words (and I’m sure you can think of others that would fit this bill), do not gel with the average person who is just out there trying to make ends meet – these words come across as way to strong and conspiratorial. These words actually have the opposite of the desired effect because they turn people off – they don’t want to be associated with ideas that they conceive as conspiratorial.
I feel the best way to appeal to the general public is to talk in their language, and use the words they do..they don’t feel oppressed, they feel struggle, they don’t feel enslaved, they feel tired and worn out, they dont seek freedom, they seek a way of life, purpose or comfort or security, they don’t feel exploited, they feel misunderstood, and so forth.
You are right – actually Marx said that Capitalism does not work by force, but by making workers willing and compliant participants of an exploitative system
@Dingo – please contact me via email at First Name dot Last name at alumni dot stanford dot edu — Comment/Response is too cumbersome as a communication method .
If we step away towards a bigger picture view for a second, and see that “corruption” occurs in the hearts of people and is caused by ignorance and greed, to what extent is the structure of institutions causing social malaise and financial instability? In other words, any institution if driven by “good” people will result in good results and even the best institutions will bend to the wickedness of its representatives. Alternatively, good people will found good institutions. Bagehot alludes to the “character” of the board of bank directors of the BoE who “withstood the temptation ” to misuse institutional impunity .
This is true. But institutions are like the body which physically constrains what the spirit can do, Institutions designed for one purpose cannot, even in the hands of good people, accomplish things they are not designed to do
I reply to Asad and Dingo the answer to how do we get political economic change is to encourage and empower them empower them with the confidence to stand up and demand change. From my experience in the real world of real people this can only be done by speaking to them in a language that they understand and addressing the issues that concern them. Next i refer back to Iconoclast May 8 , where his attitude was a bit defeatist which is understandable when we become overwhelmed by the lack of progress in the right direction.. However as Helen once wrote,it is necessary to never give up. , Therefore i believe both Asad and Dingo clearly outline what i have been advocating for a long time. so let us all get behind the idea. Ted-
SORRY I meant encourage and empower people on the first line