Wednesday, January 4, 2012

Marginal revolutionaries: The crisis and the blogosphere have opened mainstream economics up to new attack

    Wednesday, January 04, 2012   No comments


POINT UDALL on St Croix, one of the US Virgin Islands, is a far-flung, wind-whipped spot. You cannot travel farther east without leaving the United States. Visitors can pose next to a stone sundial commemorating America’s first dawn of the third millennium. A couple named “Sigi + Ricky” have added a memento of their own, an arrowstruck heart scrawled on the perimeter wall in memory of “us”.

Warren Mosler, an innovative carmaker, a successful bond-investor and an idiosyncratic economist, moved to St Croix in 2003 to take advantage of a hospitable tax code and clement weather. From his perch on America’s periphery, Mr Mosler champions a doctrine on the edge of economics: neo-chartalism, sometimes called “Modern Monetary Theory”. The neo-chartalists believe that because paper currency is a creature of the state, governments enjoy more financial freedom than they recognise. The fiscal authorities are free to spend whatever is required to revive their economies and restore employment. They can spend without first collecting taxes; they can borrow without fear of default. Budget-makers need not cower before the bond-market vigilantes. In fact, they need not bother with bond markets at all.

The neo-chartalists are not the only people telling governments mired in the aftermath of the global financial crisis that they could make things better if they would shed old inhibitions. “Market monetarists” favour more audacity in the monetary realm. Tight money caused America’s Great Recession, they argue, and easy money can end it. They do not think the federal government can or should rescue the economy, because they believe the Federal Reserve can.

The “Austrian” school of economics, which traces its roots to 19th-century Vienna, is more sternly pre-Freudian: more inhibition, not less, is its prescription. Its adherents believe that part of the economy’s suffering is necessary, an inevitable consequence of past excesses. They do not think the Federal Reserve can rescue the economy. They seek instead to rescue the economy from the Fed.

  

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