The
so-called discipline of economics has been systematically corrupted in
two major ways: first to get rid of the word ‘land’ from the very
language of economics and second to downplay, omit or misrepresent any
discussion of the words ‘credit’, ‘banking’ and ‘money’. They
shamelessly describe banks as intermediaries when they know this is a
minor function and that bank’s major function is money creation. Fortunately
the story behind the flagrant omission of land as a factor of
production has now emerged, while the money story remains for some
enterprising researcher in the future, (though various DVDs and stories
hint in that direction).
The Corruption of Economics
by Mason Gaffney and Fred Harrison, while free online, is hardly known;
as of December 2015 only three New Zealand university libraries and the
Auckland Public Library held copies. Yet in it is a very important
story.
Fred Harrison describes the phenomenon of Henry George, the San Francisco journalist who took the world by storm with his book Progress and Poverty
in 1879, in which he argues that the benefits of land ownership must be
shared by all and that a single tax is needed to fund government – a
land tax. The factors of production are land, capital and labour. Untax
labour and tax land was the cry. Poverty could be beaten. Social
justice was possible!
Of Henry George influential economic historian John Kenneth Galbraith writes,
In
his time and even into the 1920s and 1930s Henry George was the most
widely read of American economic writers both at home and in Europe. He
was, indeed, one of the most widely read of Americans. Progress and
Poverty… in various editions and reprintings… had a circulation in the
millions.
Unlike many writers, Henry George didn’t
stop there. He took his message of hope everywhere he could travel –
across America and to England, New Zealand, Australia, Scotland and
Ireland. He turned
political. Seven years after his book came out in remote California, in
1886 he narrowly missed out on being elected Mayor of New York,
outpolling Teddy Roosevelt. During the 1890s George, Henry George was the third most famous American, after Mark Twain and Thomas Edison. Ten years after Progress and Poverty
he was influencing a radical wing of the British Liberal Party. He was
read by semi-literate workers from Birmingham, Alabama to Liverpool,
England. His Single Tax was understood by peasants in the remotest
crofts of Scotland and Ireland.
Gaffney’s section of
the book outlines how certain rich land barons, industrialists and
bankers funded influential universities in America and proceeded to
change the direction of their economics departments. He names names at
every turn, wading through presidents and funders of many prestigious
universities. In particular, Gaffney, an economist himself, names the
economists bought to discredit his theories, their debates with George and their papers written over many decades.
‘George’s
ideas were carried worldwide by such towering figures as Lloyd George
in England, Leo Tolstoy and Alexander Kerensky in Russia, Sun Yat-sen in
China, hundreds of local and state and a few power national politicians
in both Canada and the USA, Billy Hughes in Australia, Rolland O’Regan
in New Zealand, Chaim Weizmann in Palestine, Francisco Madero in Mexico,
and many others in Denmark, South Africa and around the world. In
England Lloyd George’s budget speech of 1909 reads in part as though
written by Henry George himself. Some of Winston Churchill’s speeches
were written by Georgist ghosts.’
When he died there were 100,000 at his funeral.
The
wealthy and influential just couldn’t let the dangerous ideas spread.
Their privileged position was gravely threatened. Henry George must be
stopped. But the strategy had to be subtle. What better route than by
using their money to influence the supposed fount of all knowledge, the
universities? That would then indoctrinate journalists and the general
public. Nice one!
The story explains how, for their
wealthy paymasters, academics corrupted the language to subsume it under
capital. They redefined rent, and created a jargon to confuse public
debate. Harrison says, ‘For a century they have taken people down
blind alleys with abstract models and algebraic equations. Economics
became detached from the real world in the course of the twentieth
century.’
Yes, the wealthy paid money to buy scholars to pervert the science.
Gaffney’s rich, whimsical language is a joy to read. He writes to Harrison,
‘Systematic,
universal brainwashing is the crime, tendentious mental conditioning
calculated to mislead students, to impoverish their mental ability, to
bend their minds to the service of a system that funnels power and
wealth to a parasitic minority.’
He painstakingly
describes the funding of various American universities by such figures
as JP Morgan and John D Rockefeller who choose the President who
obligingly appoints suitable economists to key academic positions. He
trawls through the writings of key figures in neoclassical economics
over many decades, quoting numerous pieces attacking Henry George and
his Single Tax proposal. Several neoclassical economists actually
debated George in person. These early neoclassical economists were J B
Clark, Philip Wicksteed, Alfred Marshall, ERA Seligman and Francis A
Walker, who each contributed something to ‘addle, baffle, boggle and
dazzle the laity’. J B Clark for instance has a bibliography that quotes at least 24 works directed against George over a span of 28 years.
Banker
JP Morgan funnelled his wealth through Seth Low to Columbia University
in New York, and John D Rockefeller did the same in Chicago. Ezra
Cornell, who Gaffney says once held one million acres of land, creator
of the Western Union Monopoly, founded Cornell University in Ithaca, New
York State. Leland Stanford of Southern Pacific Railroad (really a land
company), funded Stanford University. Johns Hopkins University in
Baltimore, Maryland was endowed by Johns Hopkins, millionaire merchant
and investor.
Each of these benefactors appointed their
own president. Hopkins appointed Daniel Gilman as President. Out of
that university came eleven Presidents of the American Economics
Association. Gilman had a natural hatred of Henry George as he had been
hounded out of Berkeley by the crusading young journalist when he
uncovered ‘Gilman’s improper diversion of the Morrill Act funds.’
In his chapter entitled The Chicago School Poison, Gaffney writes:
John
D Rockefeller funded Chicago spectacularly in 1892, and started raiding
other campuses by raising salaries. Rockefeller picked the first
President, William Rainey Harper. Harper picked the first economist, J
Laurence Laughlin, from Andrew Dickson White’s Cornell (he liked
Laughlin’s rigid conservative and anti-populist views. Harper drove out
Veblen in 1906, then died, leaving Laughlin in charge of economics until
he retired in 1916. He passed the torch to J. M. Clark, the son and
collaborator of J.B.Clark. Frank Knight came to Chicago in 1917 from
Laughlin’s Cornell. The apostolic succession is very clear from
Rockefeller to Harper to Laughlin to Clark to Knight. …Chicago to this
day is still the lengthened shadow of John D Rockefeller.
In
terms of numbers, and intensity of feeling generated, Knight probably
produced more neoclassical economists than anyone in history. He made no
secret of his firm opposition to Henry George and ideas that might
comfort Georgists. His enduring interest and his view point are clear
from the title “Fallacies in the Single Tax” (1953)
Who
would have thought nowadays that Henry George still have to be
neutralised six centuries later? After all, he wrote his books and did
his public speaking and touring from 1870 to 1897.
It
was in these five Universities that neoclassical economics developed to
the stage where it has almost completely taken over from classical
economics, and it was out of these universities that the American
Association of Economists was founded in 1885 by Ely, Walker, Edwin
Seligman and others. He notes they did not welcome ‘reformers’.
In addition Richard Ely retired after a long career a John Hopkins University, to found what he called The Institute for Research in Land and Public Utilities
whose purpose was ‘to investigate all problems connected with land
taxation’. Contributors included utilities, railways, building and loan
associations, land companies, lumbermen, farmers, bankers, lawyers and
insurance men.
At least two of these academics were
wealthy – E R A Seligman of Columbia came from a wealthy banking family.
Richard Ely, who was known as the ‘Dean of American economists,’ was a
well connected land speculator, making a small fortune in Wisconsin real
estate. He spent his life rationalising land speculation.
Of Chicago, generously funded by John D Rockefeller in 1892, Gaffney says, ‘The
apostolic succession is very clear from Rockefeller to Harper to
Laughlin to Clark to Knight. …Chicago to this day is still the
lengthened shadow of John D Rockefeller.’
To give you another taste of Gaffney (take a big breath):
‘To most modern readers, probably George seems too minor a figure to
have warranted such an extreme reaction. This impression is a measure of
the neo-classicals’ success; it is what they sought to make of him. It
took a generation, but by 1930 they had succeeded in reducing him in the
public mind. In the process of succeeding, however, they emasculated
the discipline, impoverished economic thought, muddled the minds of
countless students, rationalised free-riding by landowners, took dignity
from labour, rationalised chronic unemployment, hobbled us with today’s
counterproductive tax tangle, marginalised the obvious alternative
system of public finance, shattered our sense of community, subverted a
rising economic democracy for the benefit of rent-takers and led us into
becoming an increasingly nasty and dangerously divided plutocracy.’
Let’s turn a blind eye to money too
The
omission of the words credit, banking and money or the downright
distortion of facts in university teaching was also no accident. The
publishing in 1906 of Silvio Gesell’s book The Natural Economic Order
sparked a decades-long movement. Gesell has been described by Irving
Fisher as a ‘strangely neglected prophet’. John Maynard Keynes wrote, ‘I believe that the future will learn more from Gesell’s than from Marx’s spirit.’
For
centuries American politicians and British politicians had been making
money creation as issue.Thomas Jefferson and Abraham Lincoln are two who
knew that banks create money. But after the arrival of neoclassical
economics in the late nineteenth century, things started to change. To
please the banks who profit from land ownership, mention of the words
‘money’, ‘credit’ and ‘banking’ was also omitted, especially after the
widespread influence of both Major CH Douglas from the 1920s and Silvio
Gesell’s advocacy of a decaying currency. It was a bit worrying for
banks that the Social Credit Party in New Zealand won 12% of the vote in
1953. So a Royal Commission on Banking and Credit was set up. In 1956
it found that banks were ‘banks of issue as well as banks of deposit’.
However, thanks to their spin doctors, politicians their managed
to misrepresent the findings well enough for the public to believe the
Commission had ruled the opposite. Who knows what mischief went on
behind the scenes? Universities fell into line. Academic teaching on
money creation was reduced to a brazenly inaccurate paragraph or two,
misleading generations of students. But money is really created by
private banks as interest-bearing debt. This writes in a growth
imperative, ensuring we depend on exponentially growing debt and
continue to monetise and privatise the commons.
If universities are a vehicle for spreading misinformation about how money is created we can more easily understand Mayer Amschel Rothschild when he said “Let me issue and control a nation’s money and I care not who writes the laws.”
Predicting the Global Financial Crisis
The
corruption of economics in universities is no trivial matter. Economic
crises are serious matter involving loss of homes, savings and jobs and
economists need the right tools to predict them so they can deal with
them. Tragically only a handful of economists predicted the Global
Financial Crisis of 2007-8 and the Queen of England was known to ask,
‘Why didn’t anyone see this coming?’ Professor Steve Keen in his book Debunking Economics
spends a chapter summarising the work of a Dutch economist, Dr Dirk
Bezemer. After laying down certain criteria for selection, he concludes
there were only 12 (two published together). He named Dean Baker, Wynne
Godley, Fred Harrison (UK), Michael Hudson, Eric Janszen, Steve Keen
(Australia), Jakob Madsen & Jens Kjaer Sørensen (Denmark), Kurt
Richebächer, Nouriel Roubini, Peter Schiff and Robert Shiller.
Subsequently Bezemer had the list at three dozen, but out of a total
profession of at least 20,000 it is a very dismal record. If any other
profession (e.g medicine) was so wrong in something that affected
millions they would be sued. The universities who train economists
should hang their heads in shame.
Hyman Minsky claimed
that in prosperous times, when corporate cash flow rises beyond what is
needed to pay off debt, a speculative euphoria develops, and soon
thereafter debts exceed what borrowers can pay off from their incoming
revenues, which in turn produces a financial crisis. He said we moved
from a hedging stage where risk is low to a speculative stage and
finally to a Ponzi stage. A key indicator was the growth of private debt
as a fraction of GDP. The “Bezemer 12” quoted above had in common that
they were concerned with the distinction between the financial economy
(making money from money) and the real economy. Keen wrote in 2009,
“Unfortunately after the crisis everything being done by policy makers
around the world is instead trying to restart private borrowing.” Sadly
Wikipedia notes that while Minsky’s theories have enjoyed some
popularity, they have had little influence in mainstream economics or in
central bank policy.
These same people are among those
now warning of a very much larger international financial collapse, as
debt deflation takes hold and ongoing globalisation locks the global
economy ever more tightly together. Economics is too important to be
left to mistaught economists. The absence of good, reality-based
economic theory in education leaves millions of environmental and social
activists – along with the compassionate right – to flounder about
helplessly trying to solve growing inequality and the climate crisis.
Challenging the universities
Tackling
the veracity of university teaching in economics is no job for a
quitter. In 2013 a retired engineer started on a mission when he read
the Bank of England paper on money creation. Peter Morgan wrote to the
Vice-Chancellor of Auckland University, Professor Ananish Chaudhuri:
‘The
textbook used by the University of Auckland for its macroeconomics
courses is Principles of Macroeconomics in New Zealand, by N. Gregory
Mankiw, Debasis Bandyopadhyay and Paul Wooding. It contains several
statements that are unequivocally fallacious. By way of example – by no
means the only one in the textbook – the following is an example:
“Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers.”’
He
went on to quote from both the Royal Commission on Banking and Credit
in New Zealand in 1956, but mostly from the Bank of England papers e.g. Banks are not intermediaries of loanable funds – and why this matters by Zoltan Jakab and Michael Kumhof
Back came his answer:-
“Dear Mr Morgan:
Thank you for your recent letter to the Vice Chancellor which has now been sent on to me via the Dean of the Business School.
First of all, thank you for taking the time to write.
I
begin by noting that the questions you have raised go to the heart of
the debate raging around the world. There is no question that in the
aftermath of the GFC, the state of macroeconomics globally is in a flux with possibly more questions than answers.
As you must be well aware leading scholars as well as policy makers are
currently engaged in a robust debate world-wide particularly as Greece
and Germany enter into a stare-down which may result in the break-up of
the European currency union.
Having said that let me make a few points:
First,
the textbook at issue is the most popular textbook world-wide including
most leading institutions of higher learning. Greg Mankiw is a leading
scholar, a professor at Harvard (which I believe also teaches from this
text) and was Chairman of George W. Bush’s Council of Economic Advisors.
I expect that he is well aware of the state of the art in terms of both
the theory and policy-making. There are local editions of this book
written by leading scholars in those countries. The Australian edition
was done by Joshua Gans of Melbourne and Stephen King (till recently
Dean at Monash Business School). Their role is to provide a local
perspective and local data but the major intellectual force is provided
by Mankiw. It is important to understand that the scholarship in this
area is still very much evolving and therefore a plausible
counter-argument is that no matter which text-book we choose to use, it
will suffer from some flaws and deficiencies.
Second,
while authors do their best to keep up with evolving knowledge
nevertheless it takes time to update textbook content, at least partly
because it takes time to understand and absorb the lessons of history.
As I noted above the state of macroeconomics is in a flux and new
research needs to be integrated into future editions.
Third,
I would disagree that the book contains fundamental errors. I think
this may have more to do with differences in assumptions and
philosophies rather than violations of some universally held truths. We
and indeed all scholars welcome robust debate on such differences. They
are part and parcel of the academic discourse. As the VC has already
pointed out, at the end of the day, this is also an issue of academic
freedom. I have absolutely no reservations about the use of this
textbook in our degree program.”
So having
acknowledged that economists have spent a fruitless seven years
scratching their heads about what caused the GFC, or the crisis in
Greece, the Head of Department, Professor Chaudhuri
puts this major issue aside and declares the book valuable. He
justifies using a textbook with fundamental inaccuracies by saying other
universities are doing it too! In a subsequent letter he confesses that
he is not an expert in monetary policy. This is rather like the head of
a medical school saying he is not an expert in medicine or the head of
an architecture school saying he is not an expert in building design.
The sheer nerve of senior economists to think that they don’t need to
come to grips with monetary policy when the world is awash with debt
would be incomprehensible if one didn’t know their very jobs depend on
their pulling the party line.
Perhaps
we can get some clarity from Steve Keen here. In a 2014 blog, he
explains the three options open to universities after the 2014 Bank of
England paper that refuted the loanable funds model. ‘Now
if I believed in the tooth fairy, I would hope this emphatic
denunciation of the textbook model would cause macroeconomics lecturers
to drastically revise their lectures for next week. But I’m too long in
the tooth to have such a delusion. They’ll ignore it instead. Their
dominant “tactic” – if I can call it that – will be ignorance itself:
most economics lecturers won’t even know that the bank’s paper exists,
and they will continue to teach from whatever textbook bible they’ve
chosen to inflict upon their students. A secondary one will be to know
of it, but ignore it, as they’ve ignored countless critiques of
mainstream economics before. The third arrow in the quill, if they are
challenged by students about it (hint hint!), will be to argue that the
textbook story is a “useful parable” for beginning students, and a more
realistic version is introduced in more advanced courses.’
He
seriously doubts if the paper will cause senior economists to change
their current position and explains that until you know that banks can
create and cancel money, you will never be able to understand how demand
rises and falls. ‘All the parables of conventional economics fly out
the window once you know this. The level of economic activity now
depends on the lending decisions of banks (and the repayment decisions
of borrowers). If banks lend more rapidly, or if borrowers repay more
slowly, there will be a boom; if the reverse, there will be a slump. If
new loans simply make up for old ones being repaid, then there is no
effect, but if new loans exceed repayment then aggregate demand will
increase.’
The urgency of getting this right
If
universities are failing us by misleading our young people, journalists
and politicians, think how critical it is to reverse this. Naomi Klein
says that the climate crisis came along at the just the wrong time –
when neoclassical economics was at its zenith. No wonder there was a
reluctance to do anything meaningful as it simply clashed with the
dominant economic paradigm. She says, ‘Economics is at war with the
planet’. According to many experts there is only a small window to
reverse climate change, until 2017.
There is a long way
to go to reverse public thinking. Neoclassical (or neoliberal)
economics has a death like grip on us. In over a century the doctrine
has succeeded in further privatising the commons, dismantling the state, deregulating
everything that moves and fooling the public over land and money. The
economic theory that ignores the role of money and debt can’t possibly
make sense of the economy in which we live. It should be jettisoned.
While
the collapse of the global economy will be terribly painful and
chaotic, it will certainly reduce carbon emissions dramatically. But as
long as it holds up we need to get on our bikes and work. Whatever
happens, no future economy should have the flaws we have now. It is time
to get cracking, or as the sheep farmers of the South Island of New
Zealand say – rattle our dags. We can do it.
Do universities lead advances in economics?
During depressions great thinking is done, sometimes in universities, but more often not. Henry George, a journalist, wrote Progress and Poverty
in response to abject poverty in San Francisco (1879 book), Silvio
Gesell, a businessman, wrote after an Argentinian depression of the 1880
and 1890s and John Maynard Keynes wrote after the Great Depression of
the 1930s. As we descend into worldwide debt deflation today’s searchers
now must urgently find and implement a new economic model. And that
will involve a huge shift in thinking.
Keynes
suggestions were widely adopted after the Great Depression. In 1933-4
Gesell’s currency was put into practice in a small town in Austria with
spectacular results. People came from all over Europe to witness the
‘miracle of Wørgl’. But it
lasted a mere fifteen months, cut short by the influence of big banks
over the Austrian government at the time, who made the ‘work
certificates’ illegal. So despite considerable influence for three
decades for his important thinking on currency design (a currency must only
act as a medium of exchange and must rot like potatoes and rust like
iron), Gesell is now all but forgotten. As central bankers grope
helplessly for tools to stimulate the economy at the same time as
controlling inflation, Gesell presents answers.
Gaffney’s description of how land barons, industrialists and bankers perverted university’s teaching, which in turn leads to wrong
government policy, is reminiscent of the story of the history of
banking. Banks have been a powerful influence on governments ever since
governments allowed banks to create credit that could be used to pay
taxes. This may have happened in Europe centuries ago after the
goldsmiths.
To add to our troubles universities, under
the influence of neoclassical economists, have all but stopped teaching
economic history so no one can study Gesell or George.
The
tie-up between universities and neoclassical economists also influences
the relationship of politicians to bankers. Nomi Prins in her landmark
book All the Presidents Bankers sheds light on the symbiotic
relationship of a century of American presidents with the top bankers of
the country, and how elite bankers can even dictate foreign policy. The
dust cover of her book says she ‘ushers us into the intimate world of
exclusive clubs, vacation spots, and Ivy League universities that binds
presidents and financiers. She unravels the multi-generational blood,
intermarriage, and protege relationships that have confined national
influence to a privileged cluster of people. These families and
individuals recycle their power through elected office and private
channels in Washington, DC.’
Bankers admit they create money
Of
course the bankers themselves know better than the universities who
prefer to be complicit in keeping the secret. Graham Towers, Governor of
the Bank of Canada and Lord Josiah Stamp of the Bank of England have
been quoted regularly in the monetary reform literature. Even in New
Zealand in 1955 we had H W White, Chairman of the Associated Banks
telling the Royal Commission on Banking and Credit:
“The banks do create money. They have been doing it for a long time, but they didn’t realise it, and they did not admit it.”
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