Phil Armstrong, University of Southampton Solent and York College
2020
1. Norwood Hanson: Is the sun going around the Earth or the Earth going around the sun?
Norwood Russell Hanson (1961) considers the conceptual foundations of science; he notes that the work of scientists involves observation. However, such observation is likely to be interpreted differently by different observers, as consistent with an acceptance of the view that all facts are theory-laden (but, importantly, not theory determined). Hanson focuses upon how we conceptualise what we see into general systems, ‘Let us examine not how observation, facts and data are built up into general systems of physical explanation, but how these systems are built into our observations, and our appreciation of facts and data’ (Hanson 1961: 3).
Hanson considers how different observers perceive things differently. He talks about Tycho Brahe[1] and Kepler looking up at the sky, and asks a question, ‘Kepler regarded the sun as fixed: it was the Earth that moved. But Tycho followed Ptolemy[2] and Aristotle in this much at least: the Earth was fixed and all other celestial bodies moved around it. Do Kepler and Tycho see the same thing in the east at dawn?’ (Hanson 1961: 5). Hanson argues that ‘people, not their eyes, see’ (Hanson 1961: 6) and develops his story by noting, ‘Tycho and Simplicius[3] see a mobile sun, Kepler and Galileo see a static sun’ (Hanson 1961: 17) and later notes, ‘Our sense observation shows only that in the morning the distance between the horizon and the sun is increasing, but it does not tell us whether the sun is ascending or the horizon is descending…For Galileo and Kepler the horizon drops; for Simplicius and Tycho and the sun rises’ (Hanson 1961:182). Hanson points out that ‘There is a sense, then, in which seeing is a ‘theory-laden’ undertaking (Hanson 1961: 19) and ‘The observer…aims only to get his observations to cohere against a background of established knowledge’ (Hanson 1961: 20).
2. Paul Krugman like Tycho and Simplicius
Moving on from the solar system to the financial system we move from asking whether the sun revolves around the Earth (or vice versa) to asking if taxes fund spending (or vice versa); specifically, when we consider the dynamic nature of the efflux and reflux of credit and debits in relation to government’s account we might conceptualise what we observe in two ways: first we may ‘see’ the taxation (or borrowing) as funding the spending or (lending) [view A] or second, as the spending (or lending) funding the taxation (or borrowing) [view B].[4]
In this context, we might reasonably compare Paul Krugman to Tycho and Simplicius. By way of example, I might consider a recent series of Twitter posts from Krugman (I have collected them into one passage below).
“I’ve been getting some questions from readers wondering about the cost of the not-a-stimulus (it’s actually disaster relief) package. “Where’s the $2 trillion coming from? Thin air?” Basically, yes. We went through this argument back in 2008-2009, when many people (including some who should have known better) worried that government borrowing was going to “crowd out” private investment. There are times when that happens, but this isn’t one of them. In the most immediate sense, the govt. is going to borrow the money — and its borrowing costs are near record lows, despite the surging deficit…But where does the borrowed money come from? Basically, right now we have trillions in private savings with no place to go, because private investment demand isn’t sufficient to use them; who’s going to invest in the face of a plague of unknown duration? So government borrowing just draws on this pool of excess savings. Furthermore, in so doing it helps prevent an even steeper economic contraction” (Paul Krugman, combined 5 tweets 27/03/20, emphasis added).
It is clear from the text that Krugman implicitly accepts view A. The italicised sections show this most clearly. By acknowledging the possibility of ‘crowding out’[5], arguing that ‘the govt. is going to borrow the money’ and that ‘government borrowing just draws on this pool of excess savings’, it is clear that Krugman conceptualises the government as a currency-user; a position that, as I will show below – in common with Ptolemaic astronomy -is not consistent with the evidence.
3. Modern Monetary Theorists like Copernicus, Galileo and Kepler
Returning to our discussion of the solar system we might note that the eventual triumph of heliocentrism did not come quickly or easily. Much hard work from astronomers was required but eventually, the battle was won and, ‘By the eighteenth century, after the successes of Galileo, Kepler and Newton, the universe was construed as an intricate geometric-arithmetic puzzle’ (Hanson 1961: 66). I might argue that shifts in worldview are prompted by the observation of some deeply significant anomaly (or anomalies) (Kuhn 1962). In this context, Hanson (1961: 68-9) notes, “We ask, ‘What is its cause?’ selectively: we ask only when we are confronted with some breach of routine, an event that stands out and leads us to ask after its nature and genesis.” Hanson refers to retroduction[6] and argues “A theory is not pieced together from observed phenomena; it is rather what makes it possible to observe phenomena as being of a certain sort, and as related to other phenomena. Theories put phenomena into systems. They are built up ‘in reverse’ – retroductively” (Hanson 1961:90).
In the same way that Tycho and Kepler ‘see’ the same things, those who conceptualise the government as a currency-user – such as all mainstream economists and many so-called ‘progressives’ such as Krugman – and those who conceptualise it as a currency-issuer – notably the advocates of MMT – ‘see’ the same things. The issue is how to decide which view is consistent with the development of a theory with the most explanatory power? Returning to the issue of anomalies – or unforeseen observations – we have a clue to the answer. The economics profession has long argued that heightened public deficits would lead to higher long term interest rates and, in turn, that these higher interest rates would lead to lower private investment or ‘crowding out’. This hypothesis follows from their view of the government as a currency-user which borrows from a ‘fixed pot’ of saving in competition with private borrowers. This prediction was decisively falsified during, and immediately after, the global financial crisis when all the world’s major nations with their own currencies, operating under floating exchange rates, saw declines, not increases, in long term interest rates on government debt[7]. It is true that some, although by no means all – Eurozone nations did see a rise in long term interest rates. However, since MMT explicitly recognises the distinction between Eurozone nations (which have ceded currency-issuing power to another entity – the ECB) and currency-issuing nations, it recognises that Eurozone nations should be conceptualised as currency-users meaning that this outcome is exactly in line with the expectations of MMT[8].
An understanding of MMT removes the supposed element of ‘surprise’ from what is a highly significant anomaly from the perspective of mainstream economics, The advocates of MMT are able – retroductively – to posit the structures and mechanisms which explain this contrast between currency-issuing and currency-using states and I would, therefore, argue that MMT provides the basis for the provision of a satisfying explanation of observed phenomena – absent from mainstream thinking based upon ‘seeing’ the state as a currency-user.
In contrast to perspective which underpins the comments made by Krugman, above, Modern Monetary Theorists contend that when a nation has its own sovereign currency and operates under floating exchange rates, ‘borrowing’ by the state is not operationally required. The government should be thought of as a currency-issuer; it spends first and creates reserves, ex nihilo. It is never revenue-constrained as a currency-user might be. The so-called ‘borrowing’ operation which removes the reserves is voluntary (Mosler 2012). It could allow any untaxed spending to remain in the system. However, such a policy would result in the overnight rate falling to zero (if no other action was taken, such as the central bank agreeing to pay interest on excess reserves).
However, it must be conceded that the difficulties involved in replacing deeply-embedded theories (or paradigms in Kuhn’s [1962] terminology) should not be underestimated and I would argue that this is particularly the case in economics. The economics academy has been highly successful in reducing the ability of alternative perspectives to gain traction. Contrary to their professed acceptance of the principle of falsification, mainstream economists have introduced numerous ad hoc modifications to their apparently failed theories (Armstrong 2018) to avoid falsification. However, despite this disappointing situation, the position of mainstream economics is far from impregnable and the advocates of MMT must continue to challenge its hegemonic status. We can only hope that mainstream economics and its conceptualisation of the state as a currency-user is eventually destined to be consigned to the status of an episode in the history of economic thought, following in the footsteps geocentric thinking in astronomy.
References
Armstrong, P. (2018), ‘MMT and an Alternative Heterodox Paradigm’, Gower Initiative for Modern Money Studies, https://gimms.org.uk/2018/12/26/mmt-heterodox-alternative-paradigm/.
Bhaskar, R., (2017), The Order of Natural Necessity, Gary Hawke (ed.), Luxemburg: CreateSpace Independent Publishing Platform.
Galilei, G. (1632/1953), Dialogue Concerning the Two Chief World Systems (Dialogo sopra i due massimi sistemi del mondo), Berkley: University of California Press.
Hanson. N (1961), Patterns of Discovery, Cambridge: Cambridge University Press.
Kuhn, T. (1962), The Structure of Scientific Revolutions, Chicago: University of Chicago Press.
Mosler, W (2012), Soft Currency Economics II, US Virgin Islands: Valance.
[1] Tycho Brahe (1546 – 1601) was a Danish astronomer who developed a view of the solar system which recognised that the moon orbits the Earth and the planets orbit the sun, but retained the position that the sun orbits the Earth.
[2] Claudius Ptolemy (c. AD 100 – c. 170) was a Greek mathematician, astronomer and astrologer whose Ptolemaic approach suggests that the Earth is at the centre of the universe.
[3] Galileo compares the Copernican with the Ptolemaic systems in Dialogue Concerning the Two Chief World Systems (1632). In the text, Simplicio presents the case for the Ptolemaic system and argues against the Copernican alternative. The character’s name is generally supposed to be derived from that of a sixth-century follower of Aristotle, Simplicius of Cilicia.
[4] A third view might be summed up by the question, ‘Is the distinction important?’ I would argue that the distinction is important since the government can spend without prior tax revenue whereas prior spending (or lending) is logically and historically required for taxes to be paid. Thus only view B above is valid.
[5] The crowding-ou hypothesis suggests that heightened government deficits lead to higher long term interest rates and that, in turn, these higher rates, reduce – or ‘crowd out’ – private investment. Little or no evidence to support this hypothesis exists (Armstrong 2018).
[6] In the retroductive moment, a scientist imagines a mechanism or structure which, if it were true, would explain the event or regularity in question. It is the use of the imagination to posit explanatory mechanisms and structures’ (Bhaskar 2017: 28).
[7] Armstrong (2018).
[8] Armstrong (2018)
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