Throughout the last decades, the nominal interest rate became the dominant monetary policy instrument. Looking backward, the early 1980s proved to be a transition period in terms of monetary policy. After the monetarist experiences of Thatcher and Reagan, there was a pragmatic shift from the supply of the monetary base to the interest rate as monetary policy instrument. The recognition that the control of the monetary base could not only impose extreme volatility to the interest rate but also deeply affect the whole economy challenged, in fact, the previously stable empirical relationship between money supply, demand for money, prices, and income supported by Milton Friedman.

At the theoretical level, the so-called “New Consensus in Macroeconomics” favoured the short-term interest rate as the policy instrument in conjunction with inflation targeting. The new-Keynesian so-called “Taylor rule” has increasingly turned out to be adopted by central banks to manage the interest rate as the policy instrument. In this policy approach, the central bank, mainly through open market operations, sets the short-term interest rate in order to adjust its level in response to changes in inflation and output. In a framework of capital account openness, however, the autonomy of monetary policy, aimed to stabilize prices, subordinates the fiscal budget.

After the global financial crisis, academic economists and policy makers have actively participated in the debate on monetary policy. After the bail-outs, central banks in the US and European Union focused on lender-of-last-resort program extensions and dealt with multiple challenges: how to prevent a recessionary downturn, how to avoid asset and credit bubbles and inflationary pressures. The unprecedented actions of the Federal Reserve, European Central Bank and the Bank of England, for example, suggest the need to rethink the traditional scope of the lender of last resort. The scope of the recent central banks’ interventions has been expanded in order to include not only the provision of liquidity as lender of last resort, but also to include the expansion of repurchase agreements as buyer of last resort and the supply of liquidity to specific markets  as market maker of last resort.

The modern Keynesian literature emphasizes that, even if increasing the current money supply has no effect, monetary policy is far from ineffective at zero interest rates. What is important, however, is not the current money supply but managing expectations about the future nominal and real interest rates. Thus, recent research indicates that monetary policy is far from being ineffective at zero bound levels, but it worked mainly through expectations. So far, the key-issue is how very low or negative interest rates translate into improved growth rates since austerity programs are biased towards entrenching mass unemployment and introducing anti-social structural reforms.

The debate about the appropriate policies to achieve economic growth has been recently fuelled by the advocates of the MMT (Modern Monetary Theory). According to Warren Mosler, for instance, the mainstream version of fiscal responsibility is based on false premises. In his view, MMT provides new guidelines for the fiscal position for governments since the role of   fiscal policy is to ensure there is no spending gap. Fiscal interventions, through direct government spending and/or a tax cut to increase private disposable income, aim to create demand and provide enough jobs for all the workers who desire to work. Therefore, a zero spending gap occurs when the level of national income is a full employment

Against the Non-Accelerating Inflation Rate of Unemployment (NAIRU) that refers to the concept of full employment irrespective of how many workers are unemployed or underemployed, the MMT advocates propose the NAIBER – the Non-Accelerating Inflation Buffer Employment Ratio. The concept of NAIBER, designed by the economists Bill Mitchell and Warren Mosler, is associated to the idea of a Job Guarantee programme managed by the government in order to hire unemployed workers as an employer of last resort (ELR). Beyond negative rates and quantitative easing, MMT specifies a new discipline for the fiscal policy: if the goal is full employment and price stability, then the full-employment fiscal deficit condition has to be met.

Although the idea of ELR is not new, the current debate on price stability  considers the creation of jobs at the center of policy making.  Against mainstream economics, it is urgent to develop alternatives to face the social challenges of unemployment, underemployment, informality and poverty at large scale.


Published in  Dawn, Mar 27, 2019 , a leading Pakistani newspaper, in context of public debate about moving to a floating exchange rate regime —

In 1971, when Nixon shocked the world by abandoning the convertibility of dollars to gold, he dragged all of us, unwillingly, into the modern era of floating exchange rates. Since then, economic theories have changed. But old habits die hard; economists and policymakers today continue to think and operate as if they live in the old world. This article examines the question of fixed versus floating exchange rate regimes from the new perspective of Modern Monetary Theory (MMT).

In a floating exchange rate regime, the Central Bank allows the supply and demand for dollars and rupees to determine the exchange rate. This can lead to sharp and erratic movements in exchange rates because of speculation, shifting expectations, and manipulation. The “fear of floating” refers to Central Bank efforts to stabilize exchange rates by buying and selling dollars to counteract the market forces. These efforts ensure that movements in exchange rates are smooth, stable, and predictable, making foreign trade much easier for exporters and importers.

The Bretton-Woods institution of the IMF was formed in 1945 to ensure stability of exchange rates in the post-WW2 era, by lending currencies to member nations facing temporary balance of payments deficits. Post-WW2, instead of adapting to the strange and unfamiliar demands of a floating exchange rate regime, the vast majority of developing countries preferred to peg their soft currency to the dollar (or some basket of hard currencies). This is known as a “managed float” or “dirty float” regime because the Central Bank intervenes to ensure that the floating exchange rates remain fairly close to some fixed rate determined by policy makers.

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In this post, we provide some details regarding the origins of the Bank of England, the mother of all Central Banks and discuss some implications of this early history for our modern world. A link to a video-lecture on the topic is given at the bottom of the post. 

We start with an excerpt from Ellen Brown in the Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Below, selected passages from Chapter 6: Pulling The Strings Of The King: The Moneylenders Take England: [passages in italics are my comments on the text, rest are quotes]

The first passage discusses how Queen Elizabeth asserted her sovereign right to issue money, and how the financiers worked to undermine this:

In 1600, Queen Elizabeth issued base metal coins as legal tender in Ireland. All other coins were annulled and had to be returned to the mints. When the action was challenged in the highest court of the land, the court ruled that it was the sovereign’s sole prerogative to create the money of the realm. What the sovereign declared to be money was money, and it was treason for anyone else to create it. Zarlenga states that this decision was so detested by the merchant classes, the goldsmiths, and later the British East India Company that they worked incessantly to destroy it.

Cromwell’s revolution was instigated and financed, on the condition that financiers were allowed back into England. In the process, the power to print money was given to the Parliament.

The moneylenders agreed to provide the funds to back Parliament, on condition that they be allowed back into England and that the loans be guaranteed. That meant the permanent removal of King Charles, who would have repudiated the loans had he gotten back into power. Charles’ recapture, trial, and execution were duly arranged and carried out to secure the loans to the Parliament.

Having wrested the power of creation of money away from the King, the moneylenders restored the aristocracy, but gained much greater powers in the process, by providing financial aid to the King. The process of “Enclosure” which was the privatization of the “commons” – land belonging to the public – enriched the wealthy elites enormously. It has been called a revolution of the rich against the poor by Polanyi. The financiers consolidated their grip on the power to print money:

After Cromwell’s death, Charles’ son Charles II was invited to return; but Parliament had no intention of granting him the sovereign power over the money supply enjoyed by his predecessors. When the king needed a standing army, Parliament refused to vote the funds, forcing him to borrow instead from the English goldsmiths at usurious interest rates. The final blow to the royal prerogative was the Free Coinage Act of 1666, which allowed anyone to bring gold or silver to the mint to have it stamped into coins. The power to issue money, which had for centuries been the sole right of the king, was transferred into private hands, giving bankers the power to cause inflations and depressions at will by issuing or withholding their gold coins.

None of the earlier English kings or queens would have agreed to charter a private central bank that had the power to create money and lend it to the government. Since they could issue money themselves, they had no need for loans. But King William III, who followed James II, was a Dutchman and a tool of the powerful Wisselbank of Amsterdam

Important additional historical detail, taken from Wikipedia:

England’s crushing defeat by France, the dominant naval power, in naval engagements culminating in the 1690 Battle of Beachy Head, became the catalyst for England rebuilding itself as a global power. England had no choice but to build a powerful navy. No public funds were available, and the credit of William III‘s government was so low in London that it was impossible for it to borrow the £1,200,000 (at 8% p.a.) that the government wanted.

Back to Ellen Brown

A Dutch-bred King Charters the Bank of England on Behalf of Foreign Moneylenders

The man who would become King William III began his career as a Dutch aristocrat. He was elevated to Captain General of the Dutch Forces and then to Prince William of Orange with the backing of Dutch moneylenders. His marriage was arranged to Princess Mary of York, eldest daughter of the English Duke of York, who reigned as James II of England from 1685 to 1688. James was then deposed, and William and Mary became joint rulers in 1689.

William was soon at war with Louis XIV of France. To finance his war, he borrowed 1.2 million pounds in gold from a group of moneylenders, whose names were to be kept secret. The money was raised by a novel device that is still used by governments today: the lenders would issue a permanent loan on which interest would be paid but the principal portion of the loan would not be repaid.6 The loan also came with other strings attached. They included:

  1. The lenders were to be granted a charter to establish a Bank of England, which would issue banknotes that would circulate as the national paper currency.
  2. The Bank would create banknotes out of nothing, with only a fraction of them backed by coin. Banknotes created and lent to the government would be backed mainly by government I.O.U.s, which would serve as the “reserves” for creating additional loans to private parties.
  3. Interest of 8 percent would be paid by the government on its loans, marking the birth of the national debt.
  4. The lenders would be allowed to secure payment on the national debt by direct taxation of the people. Taxes were immediately imposed on a whole range of goods to pay the interest owed to the Bank.7

The Bank of England has been called “the Mother of Central Banks.” It was chartered in 1694 to William Paterson, a Scotsman who had previously lived in Amsterdam.8 A circular distributed to attract subscribers to the Bank’s initial stock offering said, “The Bank hath benefit of interest on all moneys which it, the Bank, creates out of nothing.”9 The negotiation of additional loans caused England’s national debt to go from 1.2 million pounds in 1694 to 16 million pounds in 1698. By 1815, the debt was up to 885 million pounds, largely due to the compounding of interest. The lenders not only reaped huge profits, but the indebtedness gave them substantial political leverage.

The Bank’s charter gave the force of law to the “fractional reserve” banking scheme that put control of the country’s money in a privately owned company. The Bank of England had the legal right to create paper money out of nothing and lend it to the government at interest. It did this by trading its own paper notes for paper bonds representing the government’s promise to pay principal and interest back to the Bank — the same device used by the U.S. Federal Reserve and other central banks today.

End of Excerpt from Ellen Brown.

Some more detail of interest is that the creation of Bank of England was tremendously beneficial for England. The King, no longer constrained, was able to build up his navy to counter the French. The massive (deficit) spending required for this purpose led to substantial progress in industrialization. Quoting Wikipedia on this: “As a side effect, the huge industrial effort needed, including establishing ironworks to make more nails and advances in agriculture feeding the quadrupled strength of the navy, started to transform the economy. This helped the new Kingdom of Great Britain – England and Scotland were formally united in 1707 – to become powerful. The power of the navy made Britain the dominant world power in the late 18th and early 19th centuries”

The events described can be viewed from the perspective that accumulation of capital is a central driver of history:

Lessons from History

Contrary to what is commonly believed, history is not a sequence of facts, recorded observations of events. The central contribution of Ibn-e-Khaldun in his study of the rise and fall of civilizations was to discover the hidden logic, the short and long run causal chains, which were the drivers of history. In such a study, there is always room for error, because these causal chains can only be recovered on a speculative basis – they are not present on the surface. Yet, we must make the effort required for this deeper examination, because without it, we would be blind to the possibilities for our future. In attempting to understand the drivers of history, we come across the difficulty that there is always a multiplicity of causes, with complex interactions between them. In such situations, it is useful to isolate and simplify, and attempt to explain history on the basis of a small number of causal factors, while knowing that the reality is more complex. Another way of saying this is that every attempt to understand history is necessarily subjective; the best we can do is to present history from a multiplicity of perspectives. One of these perspectives is the view that money and finance have been the central drivers of history. As Giovanni Arrighi puts it, history is driven by cycles of accumulation of capital. While we understand this is a vast oversimplification, it is useful to take this perspective, just to see how far it can take us, without committing ourselves to believing in this perspective. It is in this spirit that we offer a “finance drives history” view of the creation of the first Central Bank. The history above can be encapsulated as follows:

  1. Queen Elizabeth asserted and acquired the sovereign right to issue money.
  2. The moneylenders (the mysterious 0.1% of that time) financed and funded a revolution against the king, acquiring many privileges in the process.
  3. Then they financed and funded the restoration of the aristocracy, acquiring even more privileges in the process.
  4. Finally, when the King was in desperate straits to raise money, they offered to lend him money at 8% interest, in return for creating the Bank of England, acquiring permanently the privilege of printing money on behalf of the king.

The process by which money was created by the Bank of England is extremely interesting. They acquired the debt of the King. This debt was used as collateral/backing for the money they created. The notes they issued were legal tender in England. Whenever necessary, they were prepared to exchange them for gold, at the prescribed rates. However, when the confidence of the public is high, the need for actual gold as backing is substantially reduced.

There is a small mystery here. The King’s debt was used as the backing for the money issued by the Bank of England. Why couldn’t the King issue debt directly, and have it used as money? This is the basic concept of sovereign money, and would have saved the King the 8% interest on the amount he had to borrow. The key here is to understand Minsky’s dictum: “Anybody can create money. The problem lies in having it be accepted.” The reason King William could not create money which would be widely acceptable by the public are the following

  1. The authority to create money had been transferred to the Parliament.
  2. The King could borrow, but did not have gold to pay back his debts.
  3. When the King borrowed from the moneylenders, they did not give him gold. They gave him the authority to write checks on the Bank. The Bank could redeem these checks in notes which were backed by the King’s debt. Thus, the Bank “monetized” the debt of the King.
  4. The Bank’s created money was far more acceptable than the King’s debt, because it had the appearance of being backed by gold (in addition to the King’s debt). The bankers, unlike the King, could convert bank-notes to gold as needed. This ability of the Bank to do so, created the confidence in the public, which allowed the bank to keep only a fraction of the entire amount of notes in circulation, in the form of gold.

This same system, fractional reserve banking, and the monetization of the debt of the Government, is still in operation. But very few have correct understanding of how the system works. It is worth pointing out that the reason the Bank of England was able to obtain a charter to print money was because it offered very generous terms to King William. It offered to provide him with all money that he needed, in return for his IOU’s — After all, having captured the Sovereign right to print money, it had the ability to print arbitrary amounts. Also, it did not ask for repayment of the principal, but only the interest on the debt. Finally, it also offered to collect this repayment, in form of taxes, on behalf of the King. This was a very sweet deal for the cash-strapped King. 

For more material, see: The Battle for the Control of Money

The first 16m of video-lecture linked below discuss the material in the above post:

StiglitzRicardian equivalence is taught in every graduate school in the country. It is also sheer nonsense  [see “Quotes Critical of Economics” for more.] This post explains why.

NOTE: Many readers have pointed out that this modern fallacy is not actually due to Ricardo. As with comparative advantage, and with the Invisible Hand, modern theories which serve interests of the rich and powerful, are given respectability by being given a forged pedigree.

In this post, we will create a simple model that demonstrates some fundamental truths of Modern Monetary Theory.  This is a variant of “.Simple Model Explains Complex Keynesian Concepts“, We will show the following phenomena

  1. A Market Economy naturally creates an equilibrium with high unemployment and under-employment, showing existence of under-employment equilibria
  2. Government Deficit Spending increases aggregate demand, and moves the economy to full employment.
  3. Deficit Spending, also massively improves social welfare, by providing food even to the unemployed, using the additional output created by the increased aggregate demand
  4. Deficit Spending is not  “FINANCED” from any source. Government spending money which it does not have, creates welfare by injecting money into the economy. This money leads to increased output and is not inflationary. The government can continue this deficit spending forever, without worrying about sustainability or “paying back” the debt.
  5. Government Deficit injects money into the system which is exactly equal to the PROFITS of the firms, plus the SAVINGS of the laborers. Since firms work for profits while households wish to save, neither can succeed UNLESS the government runs deficits. Thus deficit spending is crucial to a capitalist economy — without it there would be no profits for business, and without profits and savings the economy would collapse.

Consider a simple isolated village, which has 10 Farmers each of whom owns 1 Acre of Land. There are 40 laborers in the village. The production function is 1 Laborer plus 1 Acre will yield 100 units of corn. Going wage rate (determined by wages in nearby city) is $100 per laborer for full duration of period. For simplicity assume period is 100 days, and hiring a laborer for N days costs $N and produces N units of corn. When N is less than 100, the laborer is under-employed.

As per Keynesian assumptions, production decision are made first. At start of period, all farmers hire one full-time laborer for $100, assuming they will be able to sell their product. There are two key differences here from the neoclassical models.

  1. The wages are determined by reference wage in nearby labor market, and NOT by marginal product. Wage bargain is in NOMINAL terms, not in real terms.
  2. The future is uncertain. Farmers do not know what price they will get for corn at the end of the period, so it is impossible for them to compute the required marginal product. As we will see, the price can vary substantially, due to a number of different factors, none which can be known at time production decisions are made. This is why wage bargain CANNOT be made in real terms.

At the end of production period, all laborers have earned a wage of $100 and all Farmers have produced an output of 100 units of corn. We now consider several different scenarios regarding what may happen at the end of the period.

  1. All of the corn – 1000 units – is placed on the market for sale. The ONLY buyers are the employed laborers. No one else has money. Total wages are $1000, so price of corn will be $1 per unit to clear the market. Each laborer will consume 100 units of corn. Note that PROFITS of the Farmers will be ZERO. Since there are no injections of money into the economy, it is impossible for Farmers to make profits in the aggregate.
  2. Suppose Laborers want to save some of their income. Suppose they save $50 and spend $50. Now supply is 1000 units but $500 is available for purchase. Market clearing price will be $0.50, and each laborer will still consume 100 units of corn. Note the massive difference in real wage between cases A & B. In this case, the Farmers will make a LOSS. The Consumer Savings of $500 will offset by Farmer Losses of $500 and Aggregate savings plus profits will still be ZERO.
  3. Suppose Farmers consume 20 units of the corn produced. Thus, only 80 units is available for marketing. Aggregate supply is 800 units of corn, and $1000 is available to purchase it, so market clearing price will be $1.25 per unit. Each employed laborer will be able to purchase 80 units of corn with his $100 of income.
  4. Suppose Laborers wish to save half of their income. Then $500 will be available to purchase 800 units of corn. Market will clear at $0.625 per unit of corn. Each employed laborer will still get 80 units of corn. Laborer savings of $500 will be exactly offset by the Farmers loss of $500.

In all these scenarios, we note that Farmer Profit + Laborer Savings = ZERO = Government Injections.

Keynesian unemployment scenarios arise if the Farmers make losses and decide to produce less in the next period. A plausible scenario arises if we put a maximum bound on the consumption of corn. Suppose 20 units of corn is the maximum possible consumption for one person for one period. Suppose Farmers consume 20 units, and put the remaining 80 units for sale on the market

  1. Total aggregate demand for corn is 200 units. With 800 units available for sale, price would decline to virtually zero in D&S equilibrium.
  2. As a solution to excess production, farmers may decide to BURN 600 units of the overproduction. Now the supply is 200 and laborers have $1000 in wage income to purchase it. The price will be $5 per unit, and all laborers will get exactly 20 units of corn.
  3. Continuing from F above, the next period, the farmers may decide to cut back production to only 400 units, noting that they ended up with excess production of 600 units which they had to destroy. Instead of full-time labor at $100, they might hire part-time labor at $40 in order to produce only 40 units of corn each. Now 30 laborers are unemployed, and 10 laborers are under-employed. The supply of corn in the market is 200, and $400 is available to purchase it. So the price of corn will be $2 per unit, and each employed laborer will purchase 20 units with his income of $40. Since the wage bill is $400 and the revenue from sales of corn is also $400, profits of farmers are ZERO, as expected, since there are no injections.

This last case is exactly the scenario where lack of effective aggregate demand leads to unemployment and under-employment. Now consider this same scenario as in G, but introduce a Government. The Government announce a social welfare plan. All unemployed laborers will receive $50 as social security payments from the government. Government will spend $50 each on the 30 unemployed laborers running a budget deficit of $1500. Now let us consider what happens

  1. Anticipating greater demand, Farmers hire full-time laborers and pay them $100 each to produce Aggregate Supply of 1000 units of corn. They self-consume 200 units and bring 800 units to the market. Now there are $1000 of wage income plus $1500 of welfare payments available to purchase this corn. At the price of $3.125 per unit of corn, $2500 will purchase 800 units and clear the market. At this price, $100 will buy 32 units, while $50 will buy 16 units. So, the unemployed laborers can get 16 units and the employed can buy 32 units.

According to our assumptions of 20 units maximum consumption of corn, this is not a feasible outcome. So a different feasible scenario is as follows.

  1. Employed laborers decide to save half of their income. Now $500 is available from the employed while $1500 is welfare so total of $2000 is available to purchase 800 units. Market clears at $2.50 per unit of corn. All laborers, employed and unemployed, consume 20 units of corn.

It is this last scenario which shows the magic of MMT. The government spends $1500 out of no-where – no taxes in present or future – no Ricardian equivalence. This deficit spending allows a private sector surplus of exactly the same amount, with $500 in savings of the employed laborers, and $1000 in profits of the farmers. As per Keynesian prescriptions, this spending generates additional aggregate demand which brings the economy to full employment. The surplus generated is enough to feed the unemployed workers – forever – That is, the government can continue to make this deficit spending forever, keeping the economy at full employment, without worrying about sustainability of the budget deficit.

Note that in standard MMT models, value of money is created by taxation. Here we are thinking of a village which is out of the government tax net. The value of money is created by the ability of villagers to go to nearby city and purchase city goods with the money.

A  BIGGER point in context of this model is the following. Human understanding of abstract concepts is based on translating these concepts to concrete forms. Models helps us to do that by simplifying reality, and enabling us to see the abstractions in action. Thus the MMT idea that Government Injections = Firm Profits + Household Savings is an abstraction until it is  illustrated via a concrete model, such as the one above, where it appear with much greater clarity. BUT the model by itself is not enough either, because it just shows one instance and not the general principle. UNDERSTANDING requires operating at BOTH levels at the same time — understanding the abstractions, and understanding the form that these take in concrete representations, like models. This point is brought out in the following 16 minute mini-discussion





My last post on Behavioural Economics arose some interesting questions about the rationality of the neoliberal governance of the self and its relation to the current research about psychology and cognitive theories. (

The neoliberal governance of self-care (or neoliberal governance of the self) relies on Dual Process Cognitive Theories (DPTs), especially the one elaborated by Daniel Kahneman. According to him, the distinction between Econs and Humans rejects the concept of homo oeconomicus of the neoclassical theory.  The human brain functions in ways that refer to a distinction between two kinds of thinking: automatic  and reflective (rational), and Kahneman called these ways of thinking System 1 and System 2, respectively. His Dual Process Cognitive Theory tries to explain why human beings actually systematically deviate from rational decisions.

Considering the normativity perspective in behavioural economics, nudges are social norms that  aim to foster “better” choices, “happiness” and freedom of choice. Nowadays, nudges are part of the neoliberal governance. As Thaler and Sunstein say: nudges are everywhere.

The political rationality of neoliberalism is that the strategy of rendering individual subjects “responsible” entails shifting to them the responsibility for social risks such as illness, unemployment, retirement plans, etc.. Therefore, there is a call for “personal responsibility” and “self-care”.  In other words, the political rationality of neoliberalism calls for  the relevance of System 2. However, on behalf of the human cognitive biases, people need a helping hand of the government to be rational and exercise self-control.

It is worth remembering Cass Sunstein and  Richard Thaler´s words:

Equipped with an understanding of behavioral findings of bounded rationality and bounded self-control, libertarian paternalists should attempt to steer people’s choices in welfare-promoting directions without eliminating freedom of choice. It is also possible to show how a libertarian paternalist might select among the possible options and to assess how much choice to offer.

Indeed, the understanding of the Libertarian Paternalism of Thaler and Sunstein  involves implicit forms of power and processes of subjectivation.

Looking back, after the Second World War, new theoretical and applied work in economics fostered empirical techniques that included structural estimation, the development of input-output methods and linear programming. Among the theoretical advances, the Keynesian revolution, the mathematical modeling of the business cycle, game theory, dynamic modeling, new models of consumer behavior and general equilibrium analysis can be highlighted.

What is significant about these changes is that, as theoretical and empirical work became more formal and mathematical, the conceptions of economic theory and of its relationship to various types of applied work changed. “Measurement without theory”, as Rutledge Vining explained, means that empirical work was needed in order to discover the appropriate theory. The ensuing debates were dominated by this view, that also included Milton Friedman’s contribution that turned out to be one of the most widely read methodological essays in economics.

By the 1970s, mainstream economics was centered on mathematical modeling of maximizing agents and econometric models were widely spread in applied work. Consequenlty, economics was becoming more methodologically homogeneous despite the protests from heterodox economists. In this setting, new theories for specific fields in economics were developed. As Backhouse and Cherrier claimed, there has been a process of unification and fragmentation in economics.  

Some of the new theories fostered a renewed understanding of economic behavior, bringing in imperfect information or psychological evidence. In this context, behavioral economics rejected the commonly accepted model of rational choice. In order to demonstrate the existence of cognitive biases, behavioral economists rely on empirical data, collected through designed experiments, surveys and field studies. Beyond the belief in positive analysis, behavioral economics developed normative recommendations to make people “happier” as the result of government interventions (nudge) that can help people change their behaviors and act more rationally. This normative program has been called Libertarian Paternalism by Richard Thaler and Cass Sunstein.

However, behavioral economists have not abandoned the ideal of rationality in economics. According to Stefan Heidl, psychology is treated as a mere add-on to mainstream economics and, therefore, behavioral economics faces the same methodological limitations.

In accordance with the same line of thought, Leonard adds: ‘The irony is that behavioral economics, having attacked homo oeconomicus as an empirically false description of human choice, now proposes, in the name of paternalism, to enshrine the very same fellow as the image of what people should want to be. Or, more precisely, what paternalists want people to be’.

Taking in account the spread of behavioral public policies in contemporary research and economics education, the relevant concern is related to the implicit political and social processes at stake.

In our view, the dominant ideology underlying behavioural public policies is the self-governance of nudging that reflects a neoliberalization of everyday life.




Backhouse, R.  and Cherrier, B. (2014). Becoming Applied: The Transformation of Economics After 1970. Department of Economics Discussion Paper 14-11. University of Birmingham.

Heidel, S. (2014) Philosophical Problems of Behavioural Economics.  PhD dissertation University of Bonn.

Leonard, T. C. (2008). Review of “Richard H. Thaler, Cass R. Sunstein, Nudge: Improving decisions about health, wealth, and happiness”. Constitutional Political Economy, 19 (4): 356-360

Friedman, M.  (1953). The Methodology of Positive Economics. In Essays in Positive Economics. Chicago: University of Chicago Press. pp. 3-43.

Vining, R.  (1949). Methodological issues in quantitative economics: Koopmans on the choice of variables to be studied and of methods of measurement, The Review of Economic and Statistics, 21 (2): 77- 86.



Guest Post by Donni Wang [author details at bottom of post]. Republished from The Economic Historian blog: “No Go from the Get Go: Adam Smith’s Bad History, Lessons from Ancient Greece, and the Need to Subsume Economics” – She is a historian, and argues here that a false history which portrays progression and progress actually seals off alternatives and choices which we could, and indeed need to, make today. Correcting Adam Smith’s views about history of mankind, using lessons from Ancient Greece, thus creates new possibilities for us today.

WORLDVIEWS THAT gain traction tend to be comprehensive in nature. They account for a wide range of phenomena that define the human condition, one of which being the changes that occur to society over time. This is true also for capitalism as an extensive body of thought. Although there is much emphasis placed on the modern epoch that features the rise of the industrial nation in the West, the weltanschauung of capitalism does supply a neat story of human development that extends back to earlier periods.

The obvious source for this narrative is to be found in the writing of Adam Smith.  Having been rightly credited as the father of capitalism, Smith has contributed much to the overall coherence of the market system by reinforcing it with a supportive philosophical foundation. In fact, his narrative of the past, which is still being circulated in contemporary textbooks and popular discourse, has not only rationalized the ascent of market forces in 18th century Europe, it also validated the major assumptions that undergird orthodox economic thinking today.

The historical account proffered by Smith, however, does not hold up even to the most basic test. A closer look at actual history, particularly that of Greek antiquity, renders the type of the human past constructed in service of modern economics untenable.  In fact, a careful analysis of the Greek experience yields a historical society that resoundingly rejected the current capitalist logic.  Furthermore, the ancient Greek case brings forth a different economic model, one that supplies a radical paradigm-shift at a time when the governing structural configuration of the last two hundred years appears increasingly incapable of dealing with escalating crises.

First, a very brief recap of Smith’s theory of the past. In The Wealth of Nations, Smith stated that human society had gone through four consecutive stages: the age of hunters, the age of pasturage, the age of agriculture, and the age of commerce, with each succeeding one more advanced than the previous.1 At the same time, Smith stressed that human beings have always been driven by self-interest, a powerful primordial force that remains operative throughout time.

Smith’s narrative performs two functions. First, it aligns all prior historical movements along a neat evolutionary path, so that the emerging commercial society which Smith presided over automatically gains affirmation. As Smith asserted, a huge gap exists between the “savage nations of hunters and fishers” and “civilized and thriving nations” of his time.2 Secondly, adherence to a universal conception of human nature ensures that economic and state policies that legitimize and reward self-interest reign supreme.

In fact, while Smith simultaneously expresses reservations about capitalism elsewhere — notably in The Theories of Moral Sentiments — those feelings are exclusively directed at the excesses and extremes of market forces, but not the general condition itself. As a result of these discursive features, readers of Smith would be prepared to accept governmental measures that compensate for economic volatility, such as regulation, welfare, and charity, but not any serious appraisal of the fundamental cornerstones of modern economics, such as private property, wage labor, and commercialization, which generate social disintegration in the first place. This idiosyncratic moral tale hinders the possibility that capitalism can be resisted and overthrown — as feudalism was — as it refuses to question the very core assumption that the individuals in pursuit of market-based material interest is the best vehicle for social progress.

This is not the place to dwell on the incredible stunt of both illustrating dramatic stagial change and insisting upon constant human nature at the same time. The current task is a simple one: to square Smith’s story against the knowledge about ancient Greece, one of the best documented, widely-known, and most relevant European cultures, according to both the standards of the 18th century and our time.

FIRST, TURNING ancient Greece into an agricultural society at the low end of a linear trajectory departs from other meaningful engagement with antiquity in Smith’s day. Back then, learned men became enamored with Greece and Rome because of the extraordinary cultural, artistic, and philosophical achievements of these two places. This fascination suggests a firm refusal to reduce the legacy of the ancients to the specifics of economic activity, and this anti-materialist approach opens the possibility of viewing history as moving in the direction of decline/fall, prompting a more critical evaluation of 18th English bourgeois society as well as its lingering ideology.

The details of Smith’s argument also betray a poor reading of the ancient texts. Drawing on the Homeric epics, Smith identified the prevalence of self-interest in antiquity by pointing out that the Trojan war “was not undertaken with a view to conquest but in revenge of goods that were carried off.”3 As all readers of the Homer are aware, the immediate cause of the war was the abduction of Helen by the Trojan prince Paris. That Paris was able to meet his lover in the first place owes to the fact that he was entertained as a guest-friend by Helen’s husband Menelaus. This tradition of hosting foreigners as guest-friends, called xenia, was an important custom in ancient Greece.  The cultural institution of xenia mandated the circulation of goods and objects for the purpose of cementing long-term social bonds.

In this light, the punitive expedition was prompted by Menelaus’ desire to seek redress for an errant act that violated the norms of cordial exchange, and the long-distance campaign was made possible by a prior oath of solidarity shared by the Greek princes who were peers to Menelaus. These motives, which grew out of strong expectation of reciprocity, could hardly be equated to the universal human propensity to truck, barter, and exchange. If anything, it can be argued that a trusting and mutually-beneficial relationship was so central that its breakdown led directly to violence and war.

Just as problematic is Smith’s generalization that all the disputes mentioned in the epics “were concerning some women, or oxen, cattle, or sheep or goats.”4 To be sure, the Greeks looted cities and competed for booty during their ten-year campaign, but Homer explicitly states that the heroes fought for undying glory (kleos). It is for this kleos that Achilles was willing to give up a long and prosperous life.

True, the Homeric warriors were no ascetics, and this glory they sought after very often had to manifest tangibly in the physical objects they won as rewards in the eye of the public. Nevertheless, kleosis fundamentally defined by its symbolic and interactive dimension, and its pursuit must be consciously aligned with the common goals of the community, a collective entity that determined what sort actions were praise-worthy or reprobative — in contrast to the invisible hand that is neither known nor needs to be taken into account by the individual.

If Smith’s overarching historical narrative seems reductive and problematic for his own time, it is even more so given what we have learned since then. Economically speaking, scholars now see Athens as the home to vibrant manufacturing, large public works, extensive long-distance trade, and diverse banking practices. In short, the city was far from being a simple farming society that Smith made it out to be. Furthermore, historians of recent years concluded that the Athenian society enjoyed relatively decent standards of living and was remarkably egalitarian, upsetting a simple image of civilization steadily marching from a primitive, impoverished state toward more advanced and progressive ones.5

Since the 19th century, ancient Greece has also become a symbol for democracy and freedom, inspiring many in the age of revolution to turn against the ancien regime. This tradition of drawing lessons of social justice and equality from ancient Greece rather than fixating on its level and amount of production remains strong. It is true that some of us moderns living in the 21st century could rightly fault the Athenians for having failed to include women, slaves, and foreigners in their democratic experiment.

This moral high ground, however, was not available to Adam Smith, for 18th century England was involved in the colonization of indigenous lands, enslavement of natives, and denial of equal rights to women. Furthermore, the industrial revolution in Smith’s time allowed appalling living conditions to afflict domestic citizens through precisely the type of division of labor that he marveled at in his writing.

IF WE are to reject the Smithian historical narrative, which legitimizes a certain notion of the 18th century commercial society that appealed to his class, then what kind of alternative can we envision when we consider the more nuanced dynamics of the ancient world? A new account of the Greeks that does more justice to their actual lived experience is given in Before the Market. This new historical study points to a different model of political economy that is diametrically opposed to the core structural logic of liberal capitalism.

This economic system called Olympianism, revolved around a specific understanding of human nature that was central to the world’s first and only direct democracy which took roots in Athens. According to the distinctive moral philosophy of Olympianism, it is natural for human beings to connect the wellbeing of the community with their own through acts of horizontal collaboration, mutual trust, and solidarity. This powerful paradigm, rendered in literary texts and conveyed by political practice, shifts the focus of historical gaze from material pursuits to civic deeds, and short-circuits the kind of linear, stagial story postulated by Enlightenment thinkers like Adam Smith.

By learning about other articulations of human nature and human potential, and by recognizing that history was highly contested and contingent rather than teleological, we are forced to take the experience of societies before us very seriously.6 The knowledge that we can live very differently through our own constructed notion of who we are is empowering as it brings moral responsibility and moral choice back in the crucial debate on what sort of economic system we ought to adopt.

About the Author

Donni Wang received her B.A. in Economics from U.C. Berkeley and her Ph.D. in Classics from Stanford University. Her first book, Before the Market: The Political Economy of Olympianism, came out in February 2018.  An excerpt of it can be downloaded from Her research interests revolve around a series of hard and urgent questions that are critical of both the market and the nation-state.  She currently lives in Berlin and hopes to expand her academic oeuvre as an independent scholar.  In her spare time, she writes popular history (most of which in Chinese), goes to ballet classes, and carries out her duties as a citizen of the emergent global democracy.