Wed May 29th, 2013 at 08:30:12 AM EST
In their paper Fiscal Systems, Organizational Capacity, and Crisis: A Political Balance of Payments Approach Nathaniel Cline and Nathan Cedric Tankus illustrate the power of carefully looking at economic history while illuminating some of the limitations of economic and monetary theory, in this case that of MMT, and clarifying factors that affect the abilities of different societies to create a truly sovereign state.
(Warren) Mosler argues that in the mid 1990s he thought, "the theory of the monetary circuit was correct to the point of being entirely beyond dispute". However, he also argues that the theory "could be further enhanced by starting from the beginning". This beginning for Mosler was of course why the workers accepted the units of a currency as payment for their labor services. His answer (which is quite well known among heterodox economists by now) was that imposed debts denominated in that unit of account, give it's units value; in other words taxes. This is an important part of the story, but we would argue it is in fact not the beginning. The true beginning to the circuit is the question of where people and organizations gain the ability to tax.
In order to impose liabilities onto a population (i.e., build a tax system), an organization or group needs to have the resources to impose a tax, collect a tax, and use the real resources it gains through spending to expand and institutionalize its power. The catch-22 is that all of these tasks take real resources and personnel, which is precisely what the tax system is supposed to get. This brings us to history and why this approach has fruitful insights for understanding growth and development. Western Europe was in many ways set up for the modern period by having a deeply institutionalized system of taxation and tribute (some of it in tally sticks and some of it in real resources) before capitalism started developing. They already had the ability and authority to extract real resources and thus it took minimal institutional change to do this purely through a monetary system run by a nation state rather then city-states and feudal hierarchies.
The authors note how the UK developed its fiscal capabilities after 1688 with the establishment of The Bank of England, [they skip over how the formalization of a commercial oligarchy in the guise of a constitutional monarchy, (see The Sinews of Power: War, Money and the English State, 1688-1783
and this shorter online review
) gave wealthy Whigs the confidence in that government to lend it substantial portions of their wealth in the furtherance of national projects that strengthened that wealth], how the Napoleonic Wars, by greatly increasing the national debt, consolidated the financial power of the UK and how this led to a significant asymmetry in international political power by making the Pound Sterling the preferred currency in which to denominate international loans, along with the rise of the power of the Rothschild family.
They note that the USA effectively inherited most of the needed institutions and financial knowledge, which greatly contributed to the development of effective sovereignty for the USA. And then they note that this did not happen in Latin America, where effective national fiscal sovereignty did not emerge in the 19th century, (or, in many cases, even in the 20th centruy).
Political balance of payments constraint
Among certain portions of Post-Keynesianism, there is much focus on the balance of payments constraint. While we don't disagree with the idea that there is a balance of payments constraint, we do feel that too often Post-Keynesians are willing to take it's existence for granted to the point of arguing that balance of payment deficits will adjust automatically. When pushed, these writers will acknowledge other factors, but those "other factors" are at best not a focus.
We take the opposite approach. For us the construction of balance of payment constraints for some countries and their loosening to the point of elimination for others, is a deeply political process. A classic (although under-read and under-cited) example comes from Michael Hudson's 1970 book "A financial payments-flow analysis of U.S. international transactions":
Analysis can highlight the adjustment process, which if it is to work on the cause of today's balance-of-payments disequilibrium, must work not so much "through the marketplace" as through self-controlling policies by the governments of the "key currency" deficit countries. Otherwise, disequilibrium must continue to be financed through compensating diplomatic arrangements (for example, troop offset-cost agreements such as have been drawn up with Germany), swap lending, and a reconstructing of the IMF to increase U.S. credit lines. Balance-of-payments evolution in this event becomes a function of international power politics.
From this perspective the ability of a country to run persistent balance of payment deficits depends on how they finance those deficits and whether that financing can potentially go on indefinitely.
Add to this the analysis of Yanis Varoufakis in The Global Minotaur
, online review here
and, perhaps, we have the outline of a sturdy theory of international political economy.