History of Economic Thought 101: Modern Day

Foreword


This series of articles aims to provide a brief overview of the evolution of Economic thought through the lens of some of the key contributors to the discipline. Using Adam Smith’s Wealth of Nations as a jumping-off point, through John Maynard Keynes’ General Theory, Karl Marx’s Das Kapital, and the more recent contributions of Joseph Schumpeter and Milton Friedman. The series will conclude with an evaluation of modern-day Economic consensus.


The History of Economic Thought 101 series consists of 6 main articles:


1. History of Economic Thought: Adam Smith


2. History of Economic Thought: John Maynard Keynes


3. History of Economic Thought: Karl Marx


4. History of Economic Thought: Joseph Schumpeter


5. History of Economic Thought: Milton Friedman


6. History of Economic Thought: Modern Day



History of Economic Thought 101: Modern Day


Having provided a brief overview of the key contributions of some of the greatest minds in the long history of Economics to date, the final entry in this 101 series will aim to provide a snapshot of some of the key policy debates and discussions currently active in the field today.


Income Inequality


There is perhaps no more prominent name in modern-day economics than that of French Economist Thomas Piketty. Piketty, along with his economic cohorts Emmanuel Saez and Gabriel Zucman, has made it a personal crusade to raise awareness around the subject of global income inequality. His ultimate hope is to achieve tangible economic policy change aimed at addressing this issue. Piketty rose to international prominence after a 2003 study conducted by him and Saez, demonstrated the startling finding “that income inequality rose substantially between 1979 and 2002 because the top 10 per cent of the income distribution took 91% of the income growth during that period” (Rose, 2018). While some of Pikkety and Saez’s methodology has since been questioned, the fact that enormous levels of global income disparity remain worldwide is utterly undeniable.


Figure 1: Income Inequality today represents arguably the single greatest topic of debate in the field of economics

Amongst Pikkety’s proposals for addressing this issue is a progressive “wealth tax” aimed at targeting individuals’ net holdings rather than their present income (Clifford, 2020). The idea gained significant traction during the most recent US Presidential election, when Democratic candidate Elizabeth Warren made the concept a prime staple of her campaign ("What if America," 2019). A wealth tax operates under the same fundamental logic of a progressive income tax system – whereby the rate of tax paid progresses upward in parallel with an individual's earnings. The end goal is a redistribution of funds for the purpose of creating a more equal society. Advocates argue that the revenue gained from such a tax can in turn be re-invested in sectors such as education and healthcare, in effort to bridge the growing gap between global society’s haves and have nots.


In reality, the imposition of such a tax is challenging, if for no other reason than not everybody is likely to be on the same page. The practical fear from a policy maker’s standpoint is that if such a tax were imposed, many of the policy’s prime targets would simply relocate their funds elsewhere. This fear was borne out in Pikkety’s native France where the implementation of a wealth tax titled "Impôt sur la fortune", (ISF), resulted in “a net outflow of more than 60,000 millionaires between 2000 and 2016.” (McDougall, 2021). The tax was notably repealed in 2017 by current French President Emmanuel Macron. A global wealth tax as Pikkety has called for could indeed work, the irony being that the major stumbling block to the imposition of such a tax is the very global income inequality it seeks to target in the first place. Many developing and smaller nations are reliant on low levels of taxation in order to attract the capital investment necessary for their own economic development. A true Catch 22.

Modern Monetary Theory (MMT)


Modern Monetary Theory, or MMT, as it is commonly abbreviated, is a contemporary economic theory that has gained significant momentum in the field of economics of late. Depending on who you ask, it is either a ground-breaking paradigm shift, or complete bunkum. High profile advocates include US politicians Alexandria Ocasio-Cortez and Bernie Sanders, while Nobel Prize winning Economist Paul Krugman is a well-documented critic.


Figure 2: MMT is a subject of intense economic debate and discussion

The theory boils down to the notion of whether high levels of national debt are truly relevant for large independent economies who are producers of their own currency (Globerman, 2021). Advocates of MMT conclude “governments that control their own currency can spend freely, as they can always create more money to pay off debts in their own currency” (LSE SU Central Banking Society, 2022). Critics counter that printing an excess of money only serves to fuel false economic growth. As the amount of currency active in a given economy comes to exceed the level of resources with which said currency can be matched, the end result is inevitably spiralling inflation. Most MMT advocates do not deny but rather remain keenly aware of this risk, “Where the prevailing policy strategy sees budget deficits as the primary obstacle to spending, MMT asserts that inflation is the biggest risk.” (Winck, 2021).


A study published by Cambridge University Press titled “Modern Monetary Theory and the Changing Role of Tax in Society” takes this concept a little further. Authors Baker and Murphy conclude that what MMT advocates isn’t so much an unrestrained supply of fresh currency, but a rather more orthodox reversal of the existing taxation – spending paradigm. Instead of raising taxes to pay for future expenditure, the necessary funding can simply be supplied at a keystroke. Taxes can in turn be raised at a later date to counter the true threat to economic growth and stability - inflation (Baker and Murphy, 2020). Many policymakers however, will still prefer to do things the old-fashioned way.


Expansionary Fiscal and Monetary Policy


Having fallen out of popularity in the 1970’s – an era defined by rising stagflation (high levels of inflation in combination with low levels of economic growth), Keynesianism and the expansionary fiscal policy it promotes has seen a major comeback of late. There had been some evidence of its re-emergence in the aftermath of the 2009 financial crisis, with the US Federal Reserve’s Quantitative Easing policy serving as a prime example. Under Quantitative easing the Federal Reserve made great efforts to increase the level of money supplied within the US economy, through the purchase of long-term financial securities such as government and corporate bonds (Jackson and Curry, 2022). A policy action Milton Friedman would also notably have approved of.


Figure 3: The Covid-19 Pandemic has brought about an entirely new economic approach to crisis management from the E.U.

Consensus on how best to manage the inevitable economic fallout from the 2009 financial crisis was far from absolute. The E.U. memorably embarked on a union wide policy venture that came to be known as the “Austerity Era”, a catch all term for policies aimed at reducing public deficits. This translated to greatly reduced public spending with particular reference to healthcare, social welfare and infrastructural projects as a whole. It also meant widescale increases in taxation and heavily increased privatisation through the sale of Public Assets. The end result was historic levels of unemployment, a general downward trend in financial security and reduced standard of living, with youth demographics and Southern European member states particularly sorely affected (Associated Press, 2012).


The global response to the economic pandemonium brought about by the Covid-19 Pandemic has been quite the opposite. While specific regulatory measures across different nations have proven highly variable, governments worldwide have certainly been on the same page with regard to their fiscal and monetary policy responses. Having initially dedicated a total of €750 billion for immediate Covid relief amongst its member states, the EU have since pledged a further €1.074 trillion in ongoing recovery funds. This, coupled with the €540 billion “safety net” already in place for workers, businesses and member states, takes the EU’s cumulative spending in the aftermath of the Covid-19 Pandemic to a colossal €2.364 trillion (European Council, 2022). An obviously stark contrast to the austerity directive of post-2009. The collective Covid-19 stimulus in the world’s largest economy the USA meanwhile has now hit almost double this amount. To date, the US Federal government have committed a total of $4.57 trillion to Covid relief (“USASpending.gov,” 2022). Though not on the same resource scale, comparable levels of economic stimulus have been employed everywhere from Albania to Turkmenistan (IMF, 2021).


Inflationary Times


Having spent excessively in order to avoid a catastrophic global economic contraction, world governments now face an entirely different kind of problem. To paraphrase the great Sir Isaac Newton, “for every action, there must be an equal and opposite reaction”. With regard to global Covid relief policy and the historic levels of government expenditure that have come with it, that reaction has now firmly entrenched itself in the form of rising global inflation. As discussed previously on this site, the causes are myriad, but one of the most fundamental is certainly the excess of money now circulating in the global economy in the aftermath of such enormous economic stimuli.


Figure 4: As the cost of living continues to rise globally, social tensions are almost certain to rise in tandem

The staple policy response to rising inflation levels brought about by an excess of money supply is to raise interest rates – which in representing the cost of borrowing for businesses, banks, governments and private individuals, effectively represent the cost of money itself. Turkey, whose government have to date failed to heed this conventional economic wisdom, have paid the price over the past now several years in the form of truly extraordinary rates of inflation. A year on year increase of 54.4% recorded for February 2022 was the highest experienced in the country in 20 years (Erkoyun & Kucukgocmen, 2022). In spite of widespread calls for the Turkish government to raise interest rates to help to cool down a drastically overheated economy, these calls have to date remained unheeded. Turkish President Recep Tayyip Erdoğan has gone so far as to brand interest rates "the mother and father of all evil," indicating that any such policy changes are unlikely to come about anytime soon ("Turkey’s inflation hits," 2022) .


In the US, the Federal Reserve have also been reluctant to raise interest rates. This in spite of the US Consumer Price Index having risen by 7.9 percent year on year for February 2022, the sharpest rise in yearly inflation in 40 years (Smialek, 2022). The Federal Reserve’s reluctance to raise interest rates can be traced back, at least in part to a September 2020 pledge not to do so until employment had rebounded to its maximum sustainable level ("Why the Federal," 2022). While understandable in the context of the economic uncertainty that prevailed throughout 2020 when the Covid Pandemic stood at its apex, times have since changed. With Global inflation expected to average 4.1% for 2022, an increase on a rate of 3.8% in 2021, and 2.2% in 2020 the threat of rising prices is by no means localised, but rather endemic to the Global economy as a whole (Johnson 2022).


The existential threat of Covid-19 is now largely in the rear view mirror of most major economies – with China proving the notable exception, and the impact of expansionary Covid era policies now threatens to overwhelm the very global economic stability they were originally intended to preserve. Rising energy prices prompted by Russia’s invasion of Ukraine have certainly not helped in this regard. At a time when global policymakers had already been left scratching their heads uneasily at how best to navigate the uncharted waters of a post-covid world, the economic fall-out from the Russian Ukrainian conflict has created a whole different kind of economic conundrum. Just how those waters will be navigated remains to be seen.


Figure 5: Economics is a subject which exists in a permanent state of debate

Once branded “the dismal science”, Economics is a discipline that has taken its fair share of licks over the years. It remains however as vibrant, divisive, and relevant as ever. While bona fide consensus in the field as a whole remains a distant dream, it is worth considering whether such a consensus could ever in fact be desirable? The notion of a one size fits all economic system is one that runs counter to the very world we occupy, and all of the startling diversity that defines it. Having just exited the largest scale pandemic of modern times only to be met directly with the prospect of a full blown global energy crisis, and with the long standing issues of climate change and income inequality patiently waiting their turn, economic policy makers appear unlikely to catch a break, or reach a consensus, anytime soon.





References


Associated Press, (2012). Austerity in Europe: what does it mean for ordinary people? The Guardian. https://www.theguardian.com/business/2012/may/08/austerity-europe-what-does-it-mean


Clifford, C., (2020). Top economists Stiglitz and Piketty: The US needs a wealth tax on millionaires and billionaires. CNBC. https://www.cnbc.com/2020/09/17/economists-stiglitz-and-piketty-us-needs-a-wealth-tax.html


European Council. (2022). COVID-19: the EU’s response to the economic fallout. Europa.eu. Retrieved from https://www.consilium.europa.eu/en/policies/coronavirus/covid-19-economy/#:%7E:text=On%2021%20July%202020%2C%20EU,crisis%20caused%20by%20the%20pandemic


Erkoyun, E., and Kucukgocmen, A. (2022). Turkey's inflation surges to 54%, highest in 20 years. Reuters. https://www.reuters.com/markets/currencies/turkeys-inflation-surges-5444-highest-20-years-2022-03-03/


Globerman, S., (2021). A Primer on Modern Monetary Theory. Fraser Institute. Retrieved from https://www.fraserinstitute.org/studies/primer-on-modern-monetary-theory


Johnson, S., (2022). The global economy disrupted: Higher inflation and slower growth in the 2022 outlook. IHS Markit. https://ihsmarkit.com/research-analysis/the-global-economy-disrupted-higher-inflation-and-slower-growt.html#:~:text=On%20an%20annual%20basis%2C%20global,subsiding%20to%202.8%25%20in%202023.


McDougall, M., (2021). Lessons from history: France’s wealth tax did more harm than good. Investors’ Chronicle. Retrieved from https://www.investorschronicle.co.uk/education/2021/02/11/lessons-from-history-france-s-wealth-tax-did-more-harm-than-good/


Ng, S. Han, B., Clarey, A. & Almas, P. (2021). Modern Monetary Theory. LSE SU Central Banking Society. https://lsecentralbanking.medium.com/modern-monetary-theory-58d25e79877b


IMF. (2021, July 2). Policy Responses to COVID19. https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19


Rose, S. J., (2018). How Different Studies Measure Income Inequality in the US. Urban Institute. Retrieved from https://www.urban.org/sites/default/files/publication/99455/how_different_studies_measure_income_inequality_1.pdf


Smialek, J., (2022). Surging U.S. Inflation Raises Stakes as War Pushes Up Prices. New York Times. https://www.nytimes.com/2022/03/10/business/economy/cpi-inflation-february-2022.html

USASpending.gov. (2022). The Federal Response to COVID-19, 46(11), 46-5983-46–5983. https://doi.org/10.5860/choice.46-5983

Turkey’s inflation hits 36% amid financial turmoil. (2022). BBC News. https://www.bbc.com/news/business-59857420


What if America introduces a wealth tax? (2019). The Economist. https://www.economist.com/the-world-if/2019/07/06/what-if-america-introduces-a-wealth-tax


Why the Federal Reserve has made a historic mistake on inflation, (2022). The Economist. https://www.economist.com/leaders/2022/04/23/why-the-federal-reserve-has-made-a-historic-mistake-on-inflation?utm_content=ed-picks-article-link-1&etear=nl_special_1&utm_campaign=a.coronavirus-special-edition&utm_medium=email.internal-newsletter.np&utm_source=salesforce-marketing-cloud&utm_term=4/23/2022&utm_id=1142419


Winck, B., (2021). Nobel prize-winning economist Paul Krugman explains why he's more left-wing than the Modern Monetary Theory crowd. Business Insider. https://www.businessinsider.com/paul-krugman-modern-monetary-theory-inflation-stimulus-federal-reserve-policy-2021-5



Image Sources


Figure 1: Somsuk, N., (2020). Economic inequality, rich and poor gap, unfairness income, different money people being paid concept, white rich businessman standing on high salary coins tower with poor black man on low coins stack. [Illustration].Retrieved from https://www.aeaweb.org/research/income-inequality-capital-labor-us


Figure 2: Rzeczy, K., (N.D.). MMT-Illo-WEB_credit-Klawe-Rzeczy. [Hybrid Art]. Retrieved from https://spearswms.com/modern-monetary-theory-spears/


Figure 3: Lohnes, T., Getty Images, (2020). Frankfurt Finance District As Coronavirus Restrictions Go Into Effect. [Photograph]. Retrieved from https://www.pewresearch.org/fact-tank/2020/11/17/europeans-approved-of-eus-handling-of-covid-19-this-summer-but-much-has-changed-since/


Figure 4: Gurdogan, C., Reuters, (2022). A woman displays her electricity bill during a protest against high energy prices in Ankara. [Photograph]. Retrieved from https://www.aljazeera.com/news/2022/5/5/turkeys-inflation-rate-soars-to-almost-70-percent-in-april


Figure 5: Corbis, Getty Images, (2019). The labor union UNITE HERE holds a rally for American Airlines food caterers to demand health care for the workers at Terminal 8 at JFK Airport in New York, Nov. 26, 2019. [Photograph]. Retrieved from https://abcnews.go.com/Business/top-economic-issues-facing-middle-class-ahead-2020/story?id=68665990


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James Duggan

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