Economist sees change of direction in Socred thinking

Press, 28 May 1981, Page 17

Economist sees change of direction in Socred thinking

By

GARRY ARTHUR

"It doesn't matter how old these arc/’ said the Social Credit worker, digging 'some pamplets out of the office cupboard. "Our financial policy hasn't changed.” Or has it? In the past, Social Credit monetary policy always linked, the total amount of money in the economy directly to the money value of total output. But its most recent policy appears to do something different: it apparently links the quantity of money to the value of "real” output — that is. it takes inflation into account.

"What it means is that if output goes up by a little bit, then they will allow the quantity of money to go up by a little bit, "and that's going to mean that prices won't go up,” says one New Zealand economist. He is Dr Ewen McCann, a senior lecturer in economics at the University of Canterbury. who has studied Social ’ Credit's monetary policy ■ from the viewpoint of i modern macro-economic ' theory. Dr McCann says that if i Social Credit is now linking i the quantity of money to real output ("real” means allowing for inflation) this is a very significant change in policy.' "It would mean that they are now making a verydirect relationship,” he says, "between the amount of money and the amount of physical resources. If they do that, .they’re not going to have the "inflation problem. "What New Zealand -is doing right now is to allow the quantity of money to go up very rapidly, but our output is constant, and that's why we’ve got inflation, in mv view.”

Dr McCann believes that by linking changes in the quantity of money to changes in reaf output, Social Credit would be able to cut back inflation, and market interest rates would start to fall within two or three years.

"Bv cutting back inflation,” he says, "they cut back interest.”.

He concludes that Social Credit may now have arrived at the same answer to inflation that "a very' important group” of economists has been arguing for years. Mil ton Friedman, the archpriest of monetarism, scoffed at Social Credit’s monetary policy when -he was interviewed on television in New Zealand recently, but Dr McCann says this is because

Friedman is not a "deficient demand” theorist. If he had studied the New Zealand Social Credit policy, and not based his comments on Major Douglas's writing, he might have reached a different conclusion, Dr McCann .says. "Social Credit's linking" of the money supply to real output is the' very core of Friedman’s monetarism;”

Assuming that Dr McCann is right, and Social Credit's policy would deal with inflation. what would be the cost? "You can’t get out of inflation in a costless way,” he says. "The cost depends on how rapidly you try and cut inflation. If you tried to cut it in half straight away, unemployment might go up by 50 p'er cent. The more slowly you reduce the inflation "rate the smaller the temporary increase in unemployment would be. In two or three years, unemployment would stajTt to drop. "The costs of continuing with inflation — unemployment and reduced national income — are also very high. Inflation is costly, and getting out of it "is also costly. McCann says that the word "credit” in Social Credit refers to a financial mechanism already open to the New Zealand banking system; The Government can ■issue bonds to the central bank and get credit in return. Treasury can then draw cheques on that bank deposit and pay them to contractors. The contractors’ bank deposits are increased, with a consequent rise in the quantity of money in existence. The Governemnt has created money. , • ' The mechanism is exactly

the same as proposed by Social Credit, Dr McCann says. "So I don't think the term ‘funny money’ contributes anything to the discussion. It’s just obfuscation.” Dr McCann says it is very important to the fairness of the debate over Social Credit’s monetary policies to point out that Governments currently allow expansions in the quantity of money. "I think that is where Social Credit has been open to the ‘funny money’ jibe. In the last decade New- Zealand governments have been following policies of allowing the money supply to increase.”(Dr McCann explains that this does not mean that the Government has been printing lots of banknotes; notes are quite a small proportion of the total quantity of money. What it means is that the Government has been allowing bank deposits to expand.) Economists have always recognised explicitly that bank lending affects the money supply, and that total bank lending is closely related to' the level of "bank deposits, Dr McCann says. "I suspect that the two parties have been looking at two sides of the same thing. The emphasis in traditional economics has been on bank deposits, but the Social , Creditors have focussed on bank lending. I don’t think that either side has realised that there’s not a great deal of difference between those two things.” So how much of Major Douglas’s monetary policy remains in Social Credit today? Dr McCann points out that there is no mention of Major. Douglas in Social Credit’s background papers

to the last party conference in August, nor in the latest financial policy statement. Neither is there any reference these days to Major Douglas’s A plus B Theorem which purported to prove that there was a chronicdeficiency of demand. Dr McCann. says that Social Crediters, in Canada at least, have now recognised that the theorem is just not correct.

He says that because economists have seen the fallacy in Douglas’s A plus B Theorem, they have dismissed the whole Social Credit argument. "I don’t think they have seen that it was merely a deficient demand theory,” he says. "If they’d seen that it would be much easier for them to accept.” ("The deficient-demand theory is the same as John Maynard Keynes’ aggregate demand theory, which holds that the total planned expenditures in an economy depend primarily on the total of people's incomes — "national income.” Unemployment — caused by the failure of certain markets to clear continuously, with a consequent deficiency in aggregate demand — could continue indefinitely,. Keynes held, unless a Government took specific steps to remedy it. Classical economists, oh the Other hand, believe that free market forces will ensure reasonably full employment.)

Ma ; or Douglas’s A plus B theorem was a way of getting at the deficient demand problem. "It was just a- mistake,” says Dr McCann, "like getting -the right answer the wrong way.” If there is riot enough money around, people cannot

buy the goods and services being produced, and Keynes held that this could be cured by more Government spending or by increasing the money supply. "Deficient demand reasoning is prevalent in modern economics,” Dr McCann says,

> "and if Douglas is a deficient ; demand theorist, maybe he I wasn't so bad — broadly ■ speaking.”. > Douglas should be viewed as a deficient demand theor- • ist, says Dr McCann. Accordi ing to interventionist , economics it is then quite

respectable to increase"the quantify of money, because the additional money will be spent and that will increase demand. Dr McCann notes that Keynes is now suffering a reassessment, because adequate demand management does not seem to be very successful when you have inflation and unemployment. Both Keynes and Douglas were writing in the 1920 s and 1930 s when there was no problem of price inflation. New Zealand Social Crediters worked out that the ratio of the quantity of money (including bank deposits) to the money value of national' income has been going down over the years, Dr McCann says. They concluded that there was a shortage of- money in New Zealand, and that the answer was to increase the amount of money.

"In fact,” says Dr McCann, "what has happened over that decade is'that real output has not changed greatly, but the price level has been going up. So most of the rise in the money value of national income can be attributed to the increase in the price level. "It is my view that the increase in the quantity of money has caused the rise in prices.” But — and this is where

Dr McCann feels that a significient new policy has developed — Social Credit appears to be linking the quantity of money to real resources, not to the money value of national income.

"Once you start relating the quantity of money to real output, then you- reach a conclusion " thoroughly respectable in modern economics, and one which has a very, very long history,” he says. He would’like to see New Zealand move in the direction of such a policy, because this would eventually stabilise prices. "If this is what Social Credit really means, it is ahead of both National and Labour in its monetary economics. It has returned to what was the core of classical economics, before Kevnes.”

that is not to say that Dr McCann finds merit in all of Social Credit’s monetary policies. "There are aspects of their policy, which in my view are naive,” he says, "such as the plan to move outside the present trading system and make bilateral trading deals. "As yet the party has not adequately confronted monetary aspects of international trade. Social Credit has not thought about the exchange rate and the balance of payments issue.”