Episode 9: ‘Monetarism’. With Tim Congdon.
Our guest in this episode is Professor Tim Congdon, a supporter of monetarism as the theoretical framework to explain national income determination. In the podcast Professor Congdon spoke to our director, Dr Juan Castañeda, about the monetarist school of thought, and the link between changes in the amount of money and in the price level. What followed was a discussion on how to define money. While this may seem like an unusual debate, the answer given by various economists has a significant impact on what one views to be the best monetary policy to achieve price stability over the medium and long term. Professor Congdon also emphasised that, while many economists like to think of their discipline as purely being a scientific one, it is in fact one of the humanities, therefore there is always a political element, which is why economists often disagree on key issues.More detail
Dr Castaneda asked Professor Congdon about the inflation episode after Covid19 pandemic and whether it vindicates the monetarist school of thought. Both published a joint paper in 2020 which correctly predicted the current inflation episode. Professor Congdon explained how it was monetary policy, rather than the pandemic itself, that were to blame.
References on monetarism:
- Congdon T. (2005): ‘Money and asset prices in boom and bust’. IEA Hobart Paper, no. 153. Institute of Economic Affairs, London.
- Congdon T. ed. (2017): Money in the Great Recession. Edward Elgar.
- Friedman, M. (1970): ‘The Counter-Revolution in Monetary Theory’. IEA Occasional Paper, no. 33. Institute of Economic Affairs, London.
Tim Congdon is one of the world’s leading monetary analysts. He advised the UK’s 1979-97 Conservative government on economic policy, serving as a member of the Treasury Panel (the so-called ‘Wise Men’ ) from 1992 to 1997. He is usually regarded as the UK’s leading exponent of the ‘monetarist’ school of thought, and was influential in the late 1970s and early 1980s in the defence of ‘Thatcherite monetarism’.
After starting his career as a journalist on The Times, he became an economist in the City of London in 1976. He founded the research consultancy, Lombard Street Research, in 1989 after correctly warning that the excessive money growth during the Lawson Chancellorship would lead to double-digit inflation. In his period on the Treasury Panel, he emphasised the importance of monetary variables in determining macroeconomic outcomes, and the difference between his approach to forecasting and that of other Treasury Panel members.
He left Lombard Street Research in 2005, to create more time to write about monetary theory and practice. Four significant works have appeared since then. In 2005 he published a long pamphlet on Money and Asset Prices in Boom and Bust and in 2009 a critique of the Bank of England’s conduct in the Northern Rock affair called Central Banking in a Free Society. In 2007 a collection of essays on Keynes, the Keynesians and Monetarism appeared in the UK and in 2011 another collection with the title Money in a Free Society was published by Encounter Books in New York.
Tim Congdon is the Founder and Chair and main patron of the Institute of International Monetary Research.
Episode 8: ‘Education without the state’. With James Tooley
In this episode, Juan Castaneda hosts Professor James Tooley, Vice Chancellor, at the University of Buckingham, Britain’s oldest independent university. Professor Tooley spoke about education without the state, which has been his research area for many years.More detail
- West, E. G. (1965): ‘Education and the state’. IE. London.
- West, E. G. (1975): Education and the industrial revolution’. London: B.T. Batsford.
- Tooley, J. (1998): ‘Education without the state’. IEA. London.
- Tooley, J. (2009): ‘The Beautiful Tree: A Personal Journey into How the World’s Poorest People are Educating Themselves’. Cato Institute. Washington DC.
James Tooley, PhD, was appointed Vice-Chancellor at The University of Buckingham on 1st October 2020, where he is also Professor of Educational Entrepreneurship and Policy. For two decades he was professor of education policy at Newcastle University. During those two decades, he also took five years’ unpaid leave, to enable him to foster entrepreneurial projects in education in the developing world, tied to his research. He was previously an academic at the Universities of Oxford and Manchester.
James’ ground-breaking research on low-cost private education has won numerous awards; including gold prize in the first International Finance Corporation/Financial Times Private Sector Development Competition, a Templeton Prize for Free Market Solutions to Poverty, and the National Free Enterprise Award from the Institute of Economic Affairs, London. His book based on this research, “The Beautiful Tree: A personal journey into how the world’s poorest are educating themselves”, (Penguin), was a best-seller in India and won the Sir Antony Fisher Memorial Prize. Other of his books include “Education, War and Peace” and “Liberty to Learn”.
More on James Tooley’s works and career available here
Episode 7: ‘The School of Salamanca’. With Pedro Schwartz
Pedro Schwartz is an adjunct scholar at the Cato Institute, fellow of the Institute of Economic Affairs and Professor at the Universidad Camilo Jose Cela in Madrid. Pedro has previously held positions at the Research Department of the Bank of Spain and the research center FUNDESCO. He has been a professor of economics at three Spanish universities and served as a member of the Spanish Chamber of Deputies from 1982 to 1986. He is also the vice president of the Spanish think tank Civismo. Ha has been president of the Mont Pélerin Society, of which he has been a member since 1977.
Pedro obtained his doctorate in political science from the London School of Economics, where he studied under Lionel Robbins and Karl Popper and from where he later received a master’s degree in economics.More detail
The name “School of Salamanca”, by which a group of catholic moralists and theologians of the 16th an d 17th centuries are known for their contribution to economics is less than exact. They neither did all study at the University of Salamanca nor did they all teach there. More exact would be ‘late Scholastic political economists’. No matter. The name is now in general use and calls attention to the contributions of a distinguished group of clerics and laymen who, with their achievements and despite their shortcomings, applied the theology and philosophy of the Schools to solve the moral problems set by trade and finance in the Renaissance economy. Their controversies in the matter of prices, of money and inflation, of exchanges and interest rates, should attract the attention of today’s economists, who often remain on the surface of ethical questions. Also, they could help us re-examine our analytical instruments, since an excessive formalism often leads us to forget how the free market work.’
– Marjorie Grice-Hutchinson’ s 1952 book on ‘The School of Salamanca, Readings in Spanish Monetary Theory, 1544-1605’.
– Pedro Schwartz: ‘The legacy of the School of Salamanca: A review from the present. Procesos de Mercado. 2022.
Episode 6: ‘Hayek: A life, 1899 – 1950’. With Bruce Caldwell
In this episode, Juan Castaneda hosts Professor Bruce Caldwell, a renowned academic, Director of the Center for the History of Political Economy at Duke University who has co-authored the first volume of Hayek’s biography in 2022 (see details below). They explore Hayek’s life and journey up to 1950, towards becoming a leading classical liberal economist and social thinker.More detail
The conversation begins at post-World War I Vienna, a city teeming with intellectual ferment and political and economic turmoil. Caldwell highlights the importance of understanding the historical context in which Hayek grew up, emphasising that the aftermath of war and the subsequent economic crisis and the hyperinflation episode played a significant role in shaping his ideas; in particular, Hayek’s deep interest in monetary issues, his scepticism of central planning and his advocacy for individual freedom and free markets. Hayek’s engagement with the ideas of socialism during his time as a student, is explored, as well as the impact of witnessing the rise of mass parties and the erosion of individual liberties.
Caldwell discusses Hayek as a classical liberal and not as a libertarian. Hayek did not deny the state to allow for a well-functioning society, but one we needed to put limits on. The discussion then shifts to Hayek’s publication of The Road to Serfdom (1944), which emerged in response to the growing popularity of socialism and the perception by many at the time that central planning was a means to achieve economic and social justice. Caldwell highlights Hayek’s argument that centralised control inevitably leads to the erosion of individual freedom. The discussion of these ideas was at the core of the foundation of the Mont Pelerin Society by Hayek in 1947.
Throughout the podcast, Caldwell emphasises Hayek’s commitment to understanding the complexity of the social order and the importance of spontaneous market processes. The conversation ends with Caldwell’s recommendations on Hayek’s works.
- Caldwell (2004): Hayek’s Challenge: an intellectual biography of F.A. Hayek. University of Chicago Press.
- Caldwell and H. Klausinger (2022): Hayek: A Life, 1899-1950. University of Chicago Press.
You can read P. Schwartz’s 2023 review on Caldwell and Klausinger’s (2022) Hayek’s biography in Economic Affairs (June issue), available at https://onlinelibrary.wiley.com/doi/10.1111/ecaf.12580.
Episode 5: ‘Economic Affairs. An International Journal of Liberal Political Economy’ with Len Shackleton
Len Shackleton explains how the journal was founded by Arthur Sheldon, of the Institute of Economic Affairs (IEA), to provide an opportunity for those authoritative on the workings of markets to analyse events more promptly and crisply than is possible in the IEA papers. Since its birth in 1980, it has become increasingly international in its scope and readership.More detail
The discussion then turns to another trend amongst academic economics articles: a detachment from day-to-day economic issues. Castaneda questions whether Economic Affairs has followed this trend, and enquires what topics the journal typically features. Shackleton replies that the journal publishes three types of articles: (1) new research original articles, (2) discussion, more provocative pieces, and (3) a book reviews section and one long review article.
Castaneda then questions how relevant the classical liberal approach that Economic Affairs follows is to the understanding of Economics? Shackleton replies that whilst Economic Affairs does publish articles in this tradition, it isn’t an exclusive club, and they welcome articles approaching political economy from a range of different perspectives. The podcast ends with Shackleton offering advice to young scholars when assessing which journal to submit their manuscripts for publication: his major advice is to be aware of who you are talking to, who your audience is. Somebody reading your article is interested in your core message and the way in which you present relevant conclusions.
Economic Affairs is a peer reviewed journal published by the Vinson Centre at the University of Buckingham and the Institute of Economic Affairs, in collaboration with Hesperides University and Francisco Marroquin University, through academic publisher Wiley. It is edited by Prof. Len Shackleton. The journal content is available by subscription, though a substantial number of articles are open access. Further details can be obtained from: https://onlinelibrary.wiley.com/journal/14680270
Episode 4: ‘Trade and Development in Africa’. With Alexander Hammond
Alexander Hammond opens the discussion by explaining the benefits of trade. Through examining how long it would take for one individual to make a chicken sandwich from scratch, it becomes clear how dystopian (and much poorer and inefficient) a world without trade would be.More detail
Juan Castaneda then questions why there is so much opposition to trade from policymakers across the world. Hammond explains that much opposition to trade is partly the result of companies lobbying governments to erect artificial trade barriers to protect them from foreign competition. Another reason for protectionist sentiment among policymakers is that tariffs can create direct revenue streams for governments, yet their costs are largely unseen. Hammond explains that common barriers to trade aside from tariffs include inadequate infrastructure and excessive regulation.
The discussion then turns to different standards and labour market regulations between countries, and whether this should restrict free trade. Hammond debunks the idea that richer nations are taking advantage of people in poorer countries by looking at opportunity cost: average incomes of people working in the agricultural sector and family or community run farms tends to be significantly lower than those working in factories or even sweatshops. This highlights that whilst labour market conditions in poorer countries may shock people in the developed world, they are preferable to other domestic job opportunities. Furthermore, Hammond states that trade can bring poorer countries a greater range of products at lower prices.
Castaneda draws attention to the ‘infant industry argument’ raised by the critics of free trade, and whether smaller countries can compete internationally without being protected and subsidised first. Hammond refutes this by stating that protected industries will ‘never grow up’ unless they trade internationally, and that government subsidies arbitrarily select winners. Hammond then explains how Africa has become significantly freer since the end of the Cold War, as many countries previously bankrolled by the Soviet Union became freer, and that this has correlated with greater economic development.
Finally, Castaneda asks whether aid is an appropriate alternative to free trade. To this, Hammond explains the problems of foreign aid through debunking the vicious cycle of poverty theory, an argument that helped create the modern aid industry. Hammond explains that many formerly rich countries have become poor (e.g. Venezuela) and vice versa. He concludes by explaining that an estimated 30% of aid does not reach its final destination due to corruption, and politicians spend too much valuable time coordinating aid.
Episode 3: ‘Adam Smith – A strawman for unfettered capitalism?’ With Mikko Arevuo
‘Adam Smith is credited as the father of modern economics for his work on systemizing economic activity as an independent discipline of political economy in his 1776 work The Wealth of Nations. WN has come to overshadow Smith’s earlier 1759 work The Theory of Moral Sentiments where he expanded on David Hume’s (1751) account of moral philosophy by developing the concepts of sympathy (or sympathetic imagination that enables us to grasp the situation and sentiments of others), and the impartial spectator (an observer of our own behaviour and that of the others) that culminated in the articulation of virtue ethics based on prudence, temperance, justice, benevolence, and self-command in commercial society. Smith’s political economy laid the foundations for modern economics, arguing that markets should be free from government intervention. However, Smith’s ideas about economics were not divorced from his moral philosophy. He believed that economics and morals were inextricably linked and that a healthy economy depended on a society of virtuous individuals’.More detail
In our conversation with Mikko Arevou, we ‘address the mistaken interpretations of Adam Smith’s fundamental concepts that have been said to have had a corrosive influence on commercial behaviour’. Mikko argues that ‘a close reading of Smith’s work reveals that although he promoted free market competition as a prerequisite for wealth creation and limited government intervention in economic and social affairs, he was a critic of greed, the commodification and alienation of human relationships that resulted from division of labour, crony capitalism, and he was aware of the corrosive effect of inequality on human morality’.
(*) Should you want to request a copy of the paper, please contact the author directly.
Smith. A. (2009 ): The Theory of Moral Sentiments. Cambridge Texts in the History of Philosophy. Cambridge University Press, Cambridge.
Smith, A. (1999 ): The Wealth of Nations, Books I-V. Penguin Classics, London.
Episode 2: ‘Monetary policy of the Bank of England’, With John Greenwood
Our conversation with John Greenwood provides a detailed discussion on the Bank of England’s policies in 2020-21 and their role in explaining the current inflation episode in the UK. Our discussion elaborates on John Greenwood’s latest contribution to the journal of Economic Affairs (February, 2023, pp. 53-72; to hyperlink to the journal’s page online, https://onlinelibrary.wiley.com/doi/10.1111/ecaf.12568 ), “The monetary policy strategy of the Bank of England in 2020-21: An assessment”.More detail
Juan Castaneda starts the conversation suggesting that senior academics, policy makers, and central bankers do not seem to have a coherent theory of what causes inflation. John Greenwood then gives an overview of the current monetary policy of the Bank of England, which is based on an aggregate demand and supply model. The staff of the bank prepares estimates of aggregate demand, which is the spending side, and aggregate supply, which is composed of the potential outcome and the output gap. The output gap is the difference between the actual output and the calculated potential output. If the potential output is above the actual output, the bank might try to stimulate the economy. If aggregate demand exceeds aggregate supply, the bank will tighten policy by raising rates. However, quantifying all of this is challenging, especially in real-time. As John Greenwood concludes, while it is in part a Keynesian model it is certainly not monetarist.
John Greenwood then discusses the role played by the Bank of England in the creation of money during the Covid19 pandemic, mainly via Quantitative Easing (QE) operations. These consist of the purchase by the central bank of assets such as government securities and potentially private sector bonds and securities by the central bank. In 2020 and 2021 the Bank of England purchased a large amount of guilts (i.e. government bonds), mainly from non-banks, resulting in the creation of additional reserves and new deposits in the banking system (i.e. money).
Why QE has now been inflationary and it wasn’t back in the aftermath of the Global Financial Crisis (2007-09)? This is a key question John Greenwood addresses in our conversation. In 2009 commercial banks focused on repairing their balance sheet and reducing bank lending, leading to subdued growth of money, broadly defined (including bank deposits). With QE central banks, in essence, ‘filled the hole’ left by commercial banks and managed to avoid a more profound fall in the amount of money. This low rate of growth of money broadly defined is what explains subdued inflation in those years. However, in 2020 and 2021, QE resulted in a significant increase in the amount of money, which explains the increase in nominal spending and ultimately in inflation, though with a delay.
The main proposition of the ‘quantitative theory of money’ is that there is a stable relationship between the quantity of money in the economy and nominal spending in the economy. If there is a change in the amount of money, in the longer run it will impact the price level: if too much money, that causes inflation, and vice versa. However, the Bank of England didn’t (doesn’t) use this rationale to assess the effects of the increase in the amount of money (which reached 15% on an annual basis between 2020 and 2021). There is roughly a two-year delay between the policy change and inflationary figures. Instead the Bank of England seems to focus on the policy rate and not the change in the quantity of money when assessing inflation.
Overall, you will find in this episode a comprehensive overview of the monetary policy strategy of the Bank of England and the quantitative theory of money, and how the Bank of England has contributed to the 2021 – 2023 inflation episode in the UK.
Greenwood, J. (2023): ‘The monetary policy strategy of the Bank of England in 2020–21: An assessment’. In Economic Affairs Vol. 43,1. February. Pp. 53-72.
Friedman, M. and Schwartz, A. (1982). Monetary Trends in the United States and the United Kingdom: Their Relations to Income, Prices, and Interest Rates. University of Chicago Press.
Greenwood, J. and Hanke, S. (2022). On monetary growth and inflation in leading economies, 2021–2022: Relative prices and the overall price level. Journal of Applied Corporate Finance, 33 (4), pp. 39–51.
King, M. (2022). Monetary policy in a world of radical uncertainty. Economic Affairs, 42 (1), pp. 2–12.
Episode 1: ‘The search for stability’, with Geoffrey Wood
In our conversation with Professor Geoffrey Wood, we discussed some of the topics in his latest contribution to the journal of Economic Affairs (February, 2023, to hyperlink to the journal’s page online, https://onlinelibrary.wiley.com/doi/full/10.1111/ecaf.12565 ), with the title “The Search for Stability.” The first topic of discussion is the definition of what a financial crisis is and how it differs from other crises. The policies to deal with financial crises were developed in the early/mid 19th century by the Bank of England during successive banking crises. The Bank of England realised that it was important to preserve the stability of the banking system as a whole since financial crises affect a large portion of the banks, and one firm’s failure can have a domino effect. The classic example of this is the Great Depression.More detail
The discussion then delves into the different types of banking crises: a capital crisis and a liquidity crisis. A capital crisis occurs when there is a sudden drop in a bank’s capital, for example when a large loan goes wrong. On the other hand, a liquidity crisis is when a bank is solvent (i.e. it has enough capital) but cannot meet all its payment obligations. In the event of a run on a bank this can precipitate a loss of confidence in other banks and thus provoke the collapse of the entire banking system.
The conversation then moves to how central banks should respond to a liquidity crisis. Professor Wood suggests that the central bank should lend freely to any affected bank to prevent a crisis, provided that the bank in crisis has enough assets to borrow money from the central bank. The central bank should lend on a higher interest rate to account for the greater risk incurred by the bank in crisis, even if the collateral provided is not ideal. Professor Wood makes it clear that the emphasis should be put on the stability of the whole financial system; thus any firm should be allowed to fail, as long as there is a legal mechanism in place to ensure that the process is orderly, which is the case in the UK and the US.
Finally, regarding the new regulations approved by both international and national regulators to prevent a financial crisis, Professor Wood argues that creating a framework on how to deal effectively with crises, rather than making institutions similar in terms of their balance sheets, is a better approach. Our conversation ends with a summary discussion on the importance of understanding the different types of financial crises and how to respond to them effectively.
Wood, G. (2023). ‘In search for stability’. In Economic Affairs. Vol. 43,1. February. Pp. 1-9.
Daníelsson, J. (2022). The Illusion of Control: Why Financial Crises Happen, and What We Can (and Can’t) Do About It.
Schwartz, A. (1986). Real and pseudo-financial crises. In F. Capie and G. Wood (Eds.), Financial Crises and the World Banking System (pp. 11–31). Macmillan.
Pollock, A. & Adler, H. (2022). Surprised Again! The COVID Crisis and the New Market Bubble.