Money and Government by Robert Skidelsky

Rating: ★★★★

Money and Government is a history of economic thought with an emphasis on how ideology affects economic theory. If anyone's qualified to write this book, it's Skidelsky: he's an economic historian best known for his enormous three-volume biography of John Maynard Keynes.

This was a great read. The core information is solid, and I learned a lot about the Great Financial Crisis in particular. Skidelsky is also opinionated, and he doesn't pull punches. He calls a quote from Milton Friedman disengenuous; he says the claim that central banks saved the global economy is "sloppy journalism"; he writes that behavioral economics's insights are surprising "only to those who have literally taken leave of their senses." It's fun.

Here are some of the ideas I thought were most interesting:

The EU is structurally flawed

"The structural flaw in the EU's Single Currency Area was obvious from the start; it was a monetary union without a political union." The Eurozone was created in way that "reflected the view of neo-liberal economics that markets needed rules, not states."

The EU was also hampered by the ECB's passive behavior in the GFC because of "a particular historical mindset. For the ECB, heir to the Bundesbank, the supreme danger to avoid was a repetition of the hyperinflation of the early 1920s. By contrast, it was the Great Depression ... which had the biggest historical impact on Ben Bernanke and other US policymakers."

Against free trade

Orthodox economics says that free trade is good, but "[this] is bad history, since many nations have prospered under Protection." Arguments for free trade focus on the long run. They forget "that what happens in the short-run can blight the lives of a generation and, beyond that, those of their children"

Models for free trade assume full employment, but unemployment exists. This is an argument against free trade, and "[this] is a good argument." And we "should not forget that globalization was intended to depress wage growth in the developed world"

Neoliberalism pushed free trade and eroded its political legitimacy. "It scrapped or emasculated the protectionist features of the post-war order which made it politically acceptable. Enslaved by utopian theories and ignorant of history, the ideologues of the free market have been preparing the ground for the Apocalypse"

Economics has always been ideological

"The history of fiscal theory shows that, far from being the scientific paragon it claims to be, it is highly ideological"

When economists say that they're just trying to measure things objectively, alarm bells should be going off. "Like all social scientific analysis that claims to reduce the political to the natural" it is likely "a cover for vested interests."

Adam Smith was an anti-imperialist

Adam Smith said mercantalist wars were fought for vested interests and were bad for the consumer. He thought Britain should not be an empire "and endeavor to accomodate her future views and designs to the real mediocrity of her circumstances"

On austerity

"One may feel that insistence on the need for short-run pain (e.g. austerity) for the sake of long-term gain, when the short-run can last decades and the long-run may never happen, testifies to a refined intellectual sadism."

"In reality, the only deficits the deficit-hawks really mind about are deficits incurred to protect the poor. The wealthy have never been against tax cuts for themselves, even if this widens the deficit; and their economist friends have been busy demonstrating what wonderful multipliers are available for the economy if governments take this course. To cut the deficit for the poor and expand it for the rich - what more could one ask of government fiscal policy?"

On Friedman's monetarism

Friedman smoothed income over expected lifetime income and denied speculative demand for money, both dubious assumptions. He assumed that consumers would have adequate savings or access to credit in downturns, which is a completely bad assumption. He failed to see money as a store of value.

"Friedman's weaknesses were overlooked because his theory served an ideological purpose ... Monetarism became fashionable because it was not the incumbent philosophy in a time of crisis"

Friedman said he was apolitical and just trying to understand economics better. "This is disingenuous. The motivation for his work was thoroughly political. Friedman restarted neo-classical economics in order to expel the expanded Keynesian state from the economy."

Some other great quotes

  • On the Austrian preference for liquidation in crisis: "Economists whose common sense had not been completely destroyed by their theories rejected the drastic cure of destroying the existing economy in order to rebuild it in the correct proportions."
  • "Governments whose policies fail to achieve their promised results always claim that they were pursuing policies that would have succeeded had it not been for unexpected 'headwinds'"
  • On the efficient market hypothesis: "A dose of realism, or even a cursory knowledge of history, would have told these savants that markets do not work in this way"
  • "Few economists can resist a correlation which seems to confirm their theories"