By Alexander Douglas*
In 1937 the English economist Joan Robinson proposed that “when capitalism is rightly understood, the rate of interest will be set at zero and the major evils of capitalism will disappear”. John Maynard Keynes, who had taught Robinson, suggested something similar a year earlier in slightly more qualified and technical terms, arguing that this would be “the most sensible way of gradually getting rid of many of the objectionable features of capitalism”.
Robinson and Keynes were writing during the great depression, when spending and investment were moribund and interest rates seemed like a stranglehold on the economy. Unlike the sort of temporary measure we saw from 2009-21 when rates were close to zero, they believed interest rates should be set at zero permanently as a way to purge capitalism of its most objectionable and destabilising features.
This was a time when the Soviet Union was challenging the western model of prosperity. Indeed, Robinson’s argument was in response to a Marxist, proposing it would lead to “even better results than the revolutionist theory”.
With interest rates rising steeply in the past couple of years and capitalism deeply unpopular among younger generations, it is worth returning to this idea. So what was the logic and how would it work?
The rationale
Inflation is sustained by consumers, businesses and governments spending in excess of the supply of goods and services. Central banks raise interest rates to reduce demand by discouraging borrowing and spending. This aims to restore equilibrium between supply and demand, and reduces inflationary pressure.
A major problem – setting aside the question of how well it works – is that this distributes the cost of curbing inflation very unevenly. A recent report by the Royal Bank of Canada said higher interest rates disproportionately hurt poorer and younger people, such as renters and first-time homebuyers. Anyone borrowing out of financial distress is likely to be in trouble with rising rates.
There are additional objections to positive interest rates. One relates to depleting resources.
Suppose I own a forest that regenerates at 2% per year and is worth £1 million in timber overall. I could log the forest sustainably, cutting down trees only in line with the speed of regeneration, which would earn me £20,000 a year.
But with interest rates at 5.25%, I would do better to cut down everything, invest my £1 million into bonds, and earn upwards of £52,500 in annual interest (I say upwards because the rate of interest on bonds is usually a little way above the central bank base rate).
If the interest rate were zero, it would reduce my incentive to log the entire forest today. It’s true I could still cut it all down and earn a passive income in other ways, such as holding shares that pay good dividends. But that would involve slightly more risk, since dividends are not guaranteed, and the underlying shares might lose value.
In general, to quote a recent op-ed, central banks raising interest rates make it harder to fight the climate crisis. A permanent zero rate might also discourage wealthy people from parking their money in bonds to earn a passive guaranteed income rather than taking entrepreneurial risks.
The fiscal alternative
If the interest rate were permanently zero, the government’s fiscal levers of taxation and spending would be the alternative means of controlling inflation. The economist John Kenneth Galbraith made the point that using progressive taxes rather than interest rates to control spending would put the greatest costs of maintaining stable prices on those best placed to weather them.
Targeted consumption taxes, for instance on luxury goods or products with an needlessly high carbon footprint, could be used to ensure that the most socially undesirable forms of spending are the first to be reduced during inflation. Likewise, socially desirable forms of spending such as essential infrastructure would be the first to increase during recessions.
Such a system would require several other changes. There would always be a danger that the government would manipulate tax and spending to try and win an election rather than focusing on inflation. This was the main reason independent central banks were given control over interest rates in the first place.
We could prevent that by restricting the inflation-controlling levers to just a few types of tax and spending. We could then give an independent body oversight of these levers to make sure they were not exploited for electoral purposes.
At the same time, there is a risk that permanent zero rates might encourage commercial banks to lend more irresponsibly. There wasn’t a lot of evidence of this in the UK when rates were close to zero in the 2010s. But we did see other economically hazardous activities such as companies borrowing cheaply to buy back their shares to drive up their prices. New regulatory frameworks could be introduced to prevent these kinds of activities.
Giving up control of the interest rate needn’t remove all central-bank control over lending. The “open secret of central banks” is that they also control lending through a list of types of loans that they are willing to take as collateral in exchange for providing banks with reserves (in practice these transactions are often indefinitely renewable, so they’re more like purchases).
Banks are strongly motivated to lend to customers according to this framework, since it gives them access to liquidity at low cost. Central banks claim to maintain “neutrality” on the types of loans on these lists, though others would disagree. The Bank of England includes mortgages but not construction loans, for instance, encouraging banks to lend more for buying houses than building them. Instead, central banks could openly use these frameworks to guide banks into making low-risk loans for socially and environmentally responsible ventures.
The future of central banks
Also worth mentioning is the current push by the Bank of England towards central bank digital currencies (CBDCs), in which buyers and sellers would transfer money directly without having to use the banking system. This could enable central banks to encourage or discourage certain spending in more targeted ways, for example by restricting what can be spent by people in certain areas or income brackets. If inflation was controlled using only fiscal levers, CBDCs could be used to reinforce this policy.
The idea of permanent zero rates is far outside the mainstream of economic thinking. But perhaps Robinson was right to suggest it as a viable compromise between capitalism and more radical alternatives: rewarding entrepreneurship without compounding inequality or incentivising the unsustainable use of resources. At a time like this, it’s an old idea well worth considering.
*Alexander Douglas, Lecturer in Philosophy, University of St Andrews. This article is republished from The Conversation under a Creative Commons license. Read the original article.
45 Comments
Getting closer.
To fit a being-depleted world, zero and then below zero interest-rates are the only fit. Raw resources are the only game in town when the chips are down (intended); all else is of arbitrary value. Ultimately capitalism and usury required an unlimited planet; this is why resource-poor places tend to outlaw usury.
Try and run usury concurrently with depletion, and you get inflation (and inter-denomination competition resulting in same).
Perhaps the question here is whether the allocation of credit regulations need to be aggressively tightened rather than through the actual cost of it.
The TOP policy of making you finance 100% of an additional property from cash as opposed to leveraged equity is one I'm quite partial to, rather than the blunt nature of the OCR.
On our planet earth – as opposed to the very different planet that economists seem to be on – all markets are rationed. In rationed markets a simple rule applies: the short side principle. It says that whichever quantity of demand or supply is smaller (the ‘short side’) will be transacted (it is the only quantity that can be transacted). Meanwhile, the rest will remain unserved, and thus the short side wields power: the power to pick and choose with whom to do business. Examples abound. For instance, when applying for a job, there tend to be more applicants than jobs, resulting in a selection procedure that may involve a number of activities and demands that can only be described as being of a non-market nature (think about how Hollywood actresses are selected), but does not usually include the question: what is the lowest wage you are prepared to work for?
Thus the theoretical dream world of “market equilibrium” allows economists to avoid talking about the reality of pervasive rationing, and with it, power being exerted by the short side in every market. Thus the entire power dimension in our economic reality – how the short side, such as the producer hiring starlets for Hollywood films, can exploit his power of being able to pick and choose with whom to do business, by extracting ‘non-market benefits’ of all kinds. The pretense of ‘equilibrium’ not only keeps this real power dimension hidden. It also helps to deflect the public discourse onto the politically more convenient alleged role of ‘prices’, such as the price of money, the interest rate. The emphasis on prices then also helps to justify the charging of usury (interest), which until about 300 years ago was illegal in most countries, including throughout Europe.
However, this narrative has suffered an abductio ad absurdum by the long period of near zero interest rates, so that it became obvious that the true monetary policy action takes place in terms of quantities, not the interest rate.
Thus it can be plainly seen today that the most important macroeconomic variable cannot be the price of money. Instead, it is its quantity. Is the quantity of money rationed by the demand or supply side? Asked differently, what is larger – the demand for money or its supply? Since money – and this includes bank money – is so useful, there is always some demand for it by someone. As a result, the short side is always the supply of money and credit. Banks ration credit even at the best of times in order to ensure that borrowers with sensible investment projects stay among the loan applicants – if rates are raised to equilibrate demand and supply, the resulting interest rate would be so high that only speculative projects would remain and banks’ loan portfolios would be too risky.
The banks thus occupy a pivotal role in the economy as they undertake the task of creating and allocating the new purchasing power that is added to the money supply and they decide what projects will get this newly created funding, and what projects will have to be abandoned due to a ‘lack of money’.
It is for this reason that we need the right type of banks that take the right decisions concerning the important question of how much money should be created, for what purpose and given into whose hands. These decisions will reshape the economic landscape within a short time period.
Moreover, it is for this reason that central banks have always monitored bank credit creation and allocation closely and most have intervened directly – if often secretly or ‘informally’ – in order to manage or control bank credit creation. Guidance of bank credit is in fact the only monetary policy tool with a strong track record of preventing asset bubbles and thus avoiding the subsequent banking crises. But credit guidance has always been undertaken in secrecy by central banks, since awareness of its existence and effectiveness gives away the truth that the official central banking narrative is smokescreen. Link Werner
Economists - with very few exceptions (Mills, Soddy, Galbraith, Boulding, Keen) - take no cognisance of the real world, which is why it is in trouble. Problem is, we cannot live on this one if we stuff it up. So they have to be challenged.
We need to be well beyond listening to economics-educated commentators; they're essentially flat-earthers (the only geometrical format offering endless growth).
"if the society toward which we are developing is not to be a nightmare of exhaustion, we must use the interlude of the present era to develop a new technology which is based on a circular flow of materials such that the only sources of man's provisions will be his own waste products."
Source : "Economics As a Science". Book by Kenneth E. Boulding, 1970.
He's a philosopher of economics - which in and of itself requires a significant understanding of economic theory as well as economic history. A very credible knowledge base on which to present an article such as this. Philosophers are not constrained by orthodoxy in praxis - the very thing that makes them philosophers.
The tragedy in the urban space is more, I suspect, as result of aging infrastructure (not fit-for-purpose) and operational mismanagement;
https://www.washingtonpost.com/climate-environment/2023/08/12/maui-fire-electric-utility/
It's not difficult to regulate the quantity of money that banks can create as credit other than through interest rates. Increase the capital that they must hold or bring in a reserve ratio which we don't have at the moment but other countries do and banks can be instructed in their lending practises.
My prediction would be a deflationary depression within 12-24 months, riots and wars.
Repeat of the 1930-1940's.
If monetary policy stops being used as the intensive care for a crippled global economy, then as the article recommends, individual nations will need to remedy their situations by fiscal policy. Which will mean deciding who is going to lose by:
1. Being taxed more.
2. Losing government funding.
As it stands, the reason why are not in a recession/depression is because we have war time fiscal and monetary policies being enabled. Meaning that we aren't dealing with any of the underlying problems we have. We are simply spending more than we are earning (fiscal policy) and we have central banks kicking the can down the road using funny money that is only going to make the future worse.
If the funny money is removed from the system, in our democracies we are going to have to decide who is going to suffer the pain of higher taxes and reduced funding. This is going to cause a lot of short term pain for people as life won't be as easy as what it was - i.e. asset prices won't go up for doing nothing for example or you stop receiving welfare payments for doing nothing.
Actually it might be a good idea because we stop giving wealth/money to people for doing nothing!
If you want to receive money, you have to produce goods/services. You don't just get capital gains or welfare as your form of income.
But it doesn't fix the problem that we have extended too much debt across our economies relative to our incomes/GDP.
If inflation is 0% and you have high debt levels, deflation/depression doom loops is a very real possiblity (until debt levels return to sustainable levels).
This would be extremely painful in the short term - as the 1930's depression was. But it set the world up for the subsequent 80 year boom that we have just experienced.
Imagine as an exercise - a global debt forgiveness programme to accompany such a move to zero interest as proposed. Radical and life-changing for humanity. A shock for sure, but one that might just be necessary. Rating agencies would become the new boom industry that would determine lender willingness and "real" valuations in the traditional sense would become the norm again.. .
The scribes provide guidance, this time in the form of wisdom of the prophet Moses:
Deuteronomy 15:1
"At the end of every seven years you shall grant a release. And this is the manner of the release: every creditor shall release what he has lent to his neighbor. He shall not exact it of his neighbor, his brother, because the Lord's release has been proclaimed. Of a foreigner you may exact it, but whatever of yours is with your brother your hand shall release. But there will be no poor among you; for the Lord will bless you in the land that the Lord your God is giving you for an inheritance to possess— if only you will strictly obey the voice of the Lord your God, being careful to do all this commandment that I command you today. ... "
Leviticus:
"You shall count off seven Sabbaths of years, seven times seven years; and there shall be to you the days of seven Sabbaths of years, even forty-nine years. Then you shall sound the loud trumpet on the tenth day of the seventh month. On the Day of Atonement you shall sound the trumpet throughout all your land. You shall make the fiftieth year holy, and proclaim liberty throughout the land to all its inhabitants. It shall be a jubilee to you; and each of you shall return to his own property, and each of you shall return to his family. That fiftieth year shall be a jubilee to you. In it you shall not sow, neither reap that which grows of itself, nor gather from the undressed vines. For it is a jubilee; it shall be holy to you. You shall eat of its increase out of the field. In this Year of Jubilee each of you shall return to his property"
Interesting how 7 years is quite close to the current business cycle that we see at play (and we also have a long debt cycle, but it appears to be a bit longer than 49 years (7 cycles of 7 years). But in modern times, instead of debt forgiveness, we have used central banks to lower interest rates and allow people to load up with even more debt. There has been no debt forgiveness, only a doubling down on the debt slavery system we are encouraging and using to divide and punish one another with (with fear and greed regarding our individual economic futures).
What we need is more brotherhood and love for one another (instead of fear and greed). Hence my posts about a need to improve financial and social stability, which comes from lower house prices, and improving/higher rates of ownership.
Again as Moses said:
"Take care lest there be an unworthy thought in your heart and you say, ‘The seventh year, the year of release is near,’ and your eye look grudgingly on your poor brother, and you give him nothing, and he cry to the Lord against you, and you be guilty of sin"
Instead we now have a landlord class that fails to see a poor brother, they see a rent slave. They see more wealth for themselves, not brotherhood and community.
Modern capitalism is quite a nasty system when it goes rogue like our has and the culture that accompanies it - and oddly we like to look down at other systems and societies and other periods of history as being inferior to ourselves in the present moment. It really is quite strange.
Perhaps a better way to look at this would be to ask why have we deviated from the wisdom of these principles/lessons that the prophets gave and which the laws of our society are based?
What has gone wrong?
And how to we change the culture of a society to more back towards this historic wisdom, that despite being 2000-3000 years old, (depending if old or new testament) is still relevant?
We have deviated from the wisdom of most ethical philosophies - be they religious or secular in nature.
We have lost all understanding of ethics in our general population.
I'd say we can only change the culture through knowledge/education - and it needs to be a part of the standard curriculum.
Civics is not ethics - this is a mistake this government made when revising the curriculum recently.
All money is created as debt and is someones liability. Banks create credit money when we borrow from them and the government creates currency as its own liability or 'debt' when it spends. There is no other source of money for us and as NZ runs current account deficits we have a constant loss of our money to offshore and QE was not money creation it was an asset swap, reserves for bonds.
If a country had a comprehensive land value tax an independent reserve bank could be given authority to raise or lower this tax to maintain an inflation target band.
Land value and other resource taxes are the least distorting of taxes. So they should minimise distortionary effects.
A variable land value tax controlled by a RB could be more responsive than OCR changes because it would affect all property owners, not just those with mortgage debt. And the tax change would have an immediate effect not the current delayed effect because of the large number of mortgages with fixed term contracts in the banking system.
That could work - but not (I suspect) in the way you intend.
Land is solar-energy capture, and beyond fossil energy, that is probably all we'll have, so in a way the more land, the richer the person.
But the capitalist system will likely collapse, meaning much tech won't happen via supply disruption. And if the capitalist system collapses, what chance that ownership is backed? By which court, justice and policing system? Taxing is more likely to be local tithes, in kind and mostly food (which is the first energy; the one which is not surplus).
Is the government competing with the private sector for resources is the question. just extra spending on its own won't cause prices to increase, if households receive more money they may pay down their debt or increase their savings rather than spend and we still have unemployment and underemployment which shows that there is still slack in the economy. We also have a large financial drain due to our current account deficits and inflation is almost always a supply side issue.
I think the exact opposite to this article, low interest rates increase inequality.
Having low interest rates means that you can borrow cheaply. You borrow against your existing assets (which may include your earning potential). Those with more assets can borrow more, and lower rates magnifies the amount you're able to borrow, and magnifies the amount you're able to spend on buying more assets, causing asset price inflation.
As a result, we get the current situation where house prices increase from 3x to 8x average income. People are forced to borrow for a home because it's not practical to save for one, and there is indeed pain when interest rates increase - though it's the increase and not the absolute rate that causes the trouble.
If we imagine a situation where interest rates are greater than the house value inflation rate then people are encouraged to save for their home first. Every little bit you save gets you closer to your goal, guaranteed, unlike in recent history. If you are able to hold on long enough, you never borrow for your home, and high interest rates are never a problem.
The catch with high rates is it may discourage investment: why invest in business when you can do well at the bank? On the other hand, if rates are too low then money is invested poorly, chasing any form of return. The challenge becomes finding the right balance...
Those with more assets can borrow more, and lower rates magnifies the amount you're able to borrow, and magnifies the amount you're able to spend on buying more assets, causing asset price inflation.
That's only true based on the risk weighting the RBNZ (and CBs the world over) assign to residential real estate. Change the risk weighting and that dynamic changes too.
Absolutely Andrew. Crazy thinking, have the extremely low interest rates from 2009-21 (and the resulting rise of stock markets and house prices) taught people nothing? If regulations are added to limit some asset purchases then there’ll be bubbles in boats or bitcoin or bullion…
All remaining credibility was lost with..
In general, to quote a recent op-ed, central banks raising interest rates make it harder to fight the climate crisis.
LMAO
In 1937 when Joan Robinson said what he said the world was on a gold standard. Zero rates today would simply mean severe financial repression. The real interest rate would be the negative value of the likley high inflation rate. Capital controls would be necessary both to prevent capital flight, and limit people's spending on pretty much every item.
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