European Monetary Union Without Political Union

I recently read Richard Davenport-Hines' Universal Man: The Lives of John Maynard Keynes. One thing I learned was of the existence of the Latin Monetary Union.

Apparently, in the latter half of the nineteenth century, gold and silver coins circulated in a number of European countries in which they speak Romance languages. And the amount of gold or silver in these coins was specified. I guess this is part of being on the gold standard. I gather the countries in the Latin Monetary Union agreed on a fixed ratio of silver to gold. As part of this agreement, coins from all these countries circulated freely throughout these countries. You could spend a franc coin in Italy just as conveniently as a lira coin.

I am surprised that this union lasted past World War I. From Keynes' Tract on Monetary Reform (1924), I recall something about the European inflations and deflations that hit Europe after World War I. Yet from my limited reading, I do not recall much about the stresses that must have arisen in this monetary union. Larger issues seem to me to revolve around how the allies in the United States in the war could pay off their loans and how Germany could pay their reparations, agreed to at Versailles, while abiding by the limitations on their economy - such as the occupation of the Ruhr - imposed by the allies. My interest here might be biased by my interest in Keynes, since these issues were a major point of Economic Consequences of the Peace.

A Cynical Take By Greece's Finance Minister On Mainstream Economists

I have found Yanis Varoufakis' 2014 book, Economic Indeterminacy: A personnel encounter with economists' peculiar nemesis a bit too abstract for my tastes. I am not sure that game theory counts as a subset of neoclassical economics, although I can see how some game theory meets Varoufakis' definition. One might see how a lot of game theory illustrates the idea that economists, collectively, exhibit weakness of will. That is, a lot of game theory can be used to develop models with multiple equilibria and of nondeterministic outcomes. One might expect economists to shy away from these conclusions.

I find it hard to accept Varoufakis's argument that in games, one might want to deliberately be irrational. I wondered if that was so, wouldn't an opponent see this? And, thus, would not this irrational behavior therefore be rational at a meta-level? Varoufakis' argument is structured to address this objection.

But my point in this post is to quote from the preface:

"...my project's failure was predetermined, at least in the sense that it was never going to cause a shift in the attitudes and demeanour of a profession which operates like a priesthood, dedicated solely to preservation of its dogmas... as well as to the recapitulation of its authority within the universities, the financial sector and the government. Indeed, at no point did I harbour any significant hope that this priesthood would take kindly to the demons of doubt and indeterminacy which my work was bound to give rise to. But it did not matter, at least not at a personal level. My intimate familiarity with the neoclassical models was sufficient to keep me on the roster of neoclassical economics departments, where a capacity to teach these models, and produce academic papers based on them is all that matters.

Looking back at these long years of tampering with, and delving into, the complex models of the neoclassical tradition, I cannot but question my decision to keep pushing, Sisyphus-like, the theoretical rock up the neoclassical hill. Why did I stick to this task, when I knew it would end up in failure? In retrospect, there were two reasons, neither of which was predicated upon any hope of influencing a profession utterly uninterested in the truth status of its models. First, I deeply enjoyed toying with these models as an end-in-itself, just as a clockmaker enjoys taking apart and then re-assembling some old clock for the hell of it. Secondly, and more importantly, I felt it necessary to make it hard for my colleagues to pretend to themselves that the models they were being forced to with, by a particularly authoritarian profession, were logically coherent. Bringing them, even fleetingly, to the point when they had to confess to their models' internal contradictions was, I felt, a victory of sorts; the equivalent of a lone sniper behind enemy lines making life difficult for an army of cocupation." -- Yannis Varoufakis (2004: p. xxiv.)

Varoufakis has some other books that sound interesting and more popular. I think his book; The Global Minotaur: America, Europe and the Future of the Global Economy; might be especially topical at the moment.

Update: Steve Keen provides a link to one exposition of Varoufakis' argument that, in game theory, agents can and will deliberately choose irrational behavior.

The Economic Consequences Of Mr. Draghi

This post is somewhat on current events, and about topics I'm even less expert in than usual. I suggest that a certain historical analogy might be useful for understanding certain aspects of the Greek crisis¹. Not that I'm willing to propose a solution. I look to, for example, Yanis Varoufakis for more informed takes on the Euro².

John Maynard Keynes, in 1925, wrote a pamphlet, "The Economic Consequences of Mr. Churchill". Keynes' title is a suggestion of his previous best-seller, The Economic Consequences of the Peace, another work in which Keynes foresaw the dire consequence of then current events. In the case of Churchill, Sir Winton was then serving as Chancellor of the Exchequer.

Britain had gone off the gold standard during World War I. Churchill oversaw the restoration of the gold standard, with the Treasury insisting on establishing the foreign exchange value of the pound sterling to its pre-war parity in gold. Apparently, according to Keynes, the market value was about 10% below that at the time. The foreign exchange rate of a currency combines with the general price level to determine the standard of living in terms of foreign goods. If the British wanted to maintain their then-current standard of living, and Churchill insisted on the pre-war parity, then prices and costs, including wages, must drop 10%. And this process of deflation could be expected to be resisted. In fact, widespread unemployment and general labor unrest were some of the economic consequences of Mr. Churchill. I think you can see some of these consequences in the 1926 general strike in Great Britain.

Churchill refused to acknowledge the necessity of devaluing the pound. In the case of Greece, they do not have control over the value of their currency, as long as they remain on the Euro. So they cannot devalue their currency. But, as in the case of the British population in the 1920s, they are being asked for the functional equivalent - that is, for a general reduction of prices and wages throughout the country. Maybe the consequences in Greece will resemble the consequences in Britain in the 1920s. I don't see how this is likely to increase the odds of Greece fully paying back their external debts.

Footnotes:

1. I think of this post as, perhaps, an illustration of the usefulness of studying economic history and the history of economics. Even if you conclude that my suggested analogy is too facile, you might accept that discussing it is a useful point of departure.
2. D-Squared also has a view on the topic, given certain constraints.

The European Union: A Prescient Sraffian Economist

"It is my view that the European project for arriving at economic and monetary union (EMU) should be regarded as the combined result of a radical change, since the late 1970s, in the principal economic policy objective of the major industrial countries - an epoch-making shift in emphasis away from unemployment and poverty to the objective of reducing inflation; and of the theoretical restoration that has occurred over the last twenty years, with the revival of pre-Keynesin conceptions in macroeconomic thinking. This view, which I have discussed elsewhere ..., makes it reasonable to believe also that the project's fortunes will reflect developments in these two ambits. Specifically, one can sensibly expect the EMU project to be definitively abandoned as soon as the social impact of actual unemployment will again make the pursuit of its reduction each government's main focus of concern, at the same time leading to a rejection of the 'natural' rate concept of the economy.

This process of gradual abandonment of the project, however, is likely to be delayed as regards countries in which the EMU is seen as a means of solving a 'commitment problem' in their national economic policies - an irreplaceable source of discipline, that is to say, with respect to inflation, government budget deficits and government debt." -- Massimo Pivetti (1999). "High Public Debt and Inflation: On the 'Disciplinary' View of European Monetary Union". In Value, Distribution and Capital: Essays in Honour of Pierangelo Garegnani (edited by Gary Mongiovi and Fabio Petri), Routledge.

I think federal systems are a good idea. I'm hoping a European government capable of conducting fiscal policy and issuing "euro-bonds" will emerge under the pressure of events.