"The Reality of the Present and the Challenge of the Future": J. Fagg Foster for the Twenty-First Century

Abstract

This paper revisits J. Fagg Foster’s early assessment of the relevance of John Maynard Keynes’s theory of institutional economics. In his view, neither institutionalists nor most of Keynes’s followers really recognized the importance of Keynes’s theoretical insights. I examine Foster’s views on economic theory, with a particular focus on monetary theory. I apply Foster’s approach to what is now called modern money theory, an approach developed by heterodox economists working in the institutionalist and post-Keynesian traditions. I argue that this approach is consistent with Foster’s, and it offers a way forward to policy formation for the twenty-first century.

Keywords:

• institutionalist theory
• instrumental value theory
• J. Fagg Foster
• Keynesian theory
• modern money theory
• monetary theory and policy

JEL Classification Codes:

• A13
• B15
• B25
• B31
• B52
• E12
• E14
• E52
• E62

Notes

¹ See J. Fagg Foster (1981b) for a detailed examination of Keynes’s economics. I also discuss another paper Foster delivered in 1966 (1981a).

² See Stephanie Bell (2000), Mathew Forstater (1999), Scott T. Fullwiler (2003, 2005), F. Gregory Hayden (2013), Alexander Lascaux (2012), and Marc Lavoie (2013).

³ See Baldwin Ranson (1981) for an overview of Foster’s papers, published in the same issue. See also Gladys Foster (1987) and Marc Tool (1989) for discussions of Foster’s work.

⁴ I occasionally encountered such resistance when trying to publish papers on money in institutionalist journals. For example, my AFIT presidential address was published not in an institutionalist journal, but by the JPKE (“An Irreverent Overview of the History of Money from the Beginning of the Beginning through to the Present,” Journal of Post Keynesian Economics (Summer 1999): 679-687. An update and major extension was published in May 2012, “Introduction to an Alternative History of Money,” as Levy Institute Working Paper #717.)

⁵ We should not expand the critique made by Veblen and Foster of neoclassical theory to theory in general. As Foster 1981b, 955) argued, there is nothing wrong with scientific theory that is general, dynamic, and open: “Keynesian theory is clearly open-ended.”

⁶ While the existence of an equilibrium price vector was proven (given assumptions), neither uniqueness nor stability of the equilibrium could be shown. In that sense, the whole project was a failure. Ironically, the problem was the lack of institutional constraints that are required in order to narrow the set of equilibrium prices and to ensure stability (see Ingrao and Israel 1990).

⁷ See Fadhel Kaboub (2007) for a rejection of the orthodox view of the cause of unemployment, which is said to be found in the “labor market.”

⁸ See See L. Randall Wray (1992, 1995) for discussion.

⁹ See Jan A. Kregel (2010) and Wray (forthcoming).

¹⁰ See D.J. Bezemer (2007), Lascaux (2012 op.cit.), Georgios Papadopoulos (2009), and Wray (1989b, 1991a, 1992, 1993, 1995).

¹¹ See B.J. Moore (1995), Jane Knodell (1995), and Wray (1989a, 1995).

¹² Note that the mainstream would have no complaint about using the “horizontalist” supply-anddemand framework to display a case where the central bank chooses an interest rate peg, although they would reject it as a description of normal policy.

¹³ See Wray (1990).

¹⁴ Again, for recent examples, see Lascaux (2012), Papadopoulos (2009), Wennerlind (2001), and Wray (1989b, 1991a, 1992, 1993, 1995).

¹⁵ See, for example, Walter Neale (1976), who includes everything from cattle to Yap island stone wheels as “money.” Neale’s approach is very similar to Paul Samuelson’s list of things used as money that includes wives, focusing on the “functions” served by money. Like orthodox economists, the main function Neale uses to identify money is what thing is used to make payments. This is a common theme in institutionalist writings. Lascaux (2012, op.cit.), for example, insists that money is an institution, a socially constructed debt relation, but still focuses on money “as a means of discharging debt obligations.” Lascaux also follows Viviana Zelizer’s view that “every currency attaches to a circuit of exchange” (Lascaux 2012, 80). While this is a significant advance over orthodoxy, it still focuses excessively on money’s “thing-ness,” rather than on its institutional nature.

¹⁶ Neale (1976).

¹⁷ I do not intend to be overly critical. Carl Wennerlind (2001) clearly argues that money is a social relation that mediates interaction between people. Faruk Ülgen (2014) refers to the “peculiar” nature of money in that it is socially guided and controlled, allowing individuals to undertake decentralized decisions. Papadopoulos (2009, 962) defines money as an institution “because of its dependence to [sic] these constitutive and normative rules” that give “rise to specific patterns of behavior and habits of thought.” Lascaux (2012) defines money as a socially constructed relation of debt.

¹⁸ As Geoffrey Ingham states, examples of non-state currency are few and short-lived, and the authority of the state seems to be necessary to sustain currency (Ingham 2006; Papadopoulos 2009).

¹⁹ “Such evidence, although inconclusive, is supportive of the explanation of the emergence of money in terms of taxation and authority, as opposed to an outcome of exchange and efficiency” (Papadopoulos 2009, 959).

²⁰ See Ingham (2004) and Wennerlind (2001).

²¹ “Typically, but not exclusively, the right to issue money is reserved for a political authority. This political authority symbolizes and represents the community it governs, and the monopoly to issue money is exercised in the name of this community. Still, this authority and the consequent monopoly on issuing money are also socially constituted — and thus are dependent on the collective intentionality of the subjects of the political authority … the fact that money is socially recognized creates obligations as well as expectations for the people who share this collective intentionality toward its status as money” (Papadopoulos 2009, 962).

²² Grierson (1977).

²³ Hudson (2004).

²⁴ “As far as we know, writing proper began in ancient Iraq. By 3300 B.C. simple impressed tokens were superseded by a system of pictographic and numerical signs. The first known use of writing was for official book-keeping in city states like Uruk. By about 3100 BC we find documents recording multiple transactions over a period of days, months or years or involving several cities.” Between 3300 and 3100 BC, food rations are recorded “by combining a human head and a bowl. Temples issued workers with daily rations of barley beer, the staple drink of Mesopotamia,” with the ration claims “written” on clay tablets that could cover “rations to feed one worker from a day to 150 years” (Source: Display in the British Museum, London).

²⁵ Knapp ([1924] 1973).

²⁶ Forstater (2010).

²⁷ George Dalton (1965).

²⁸ See Wray (1998).

²⁹ See Alfred Mitchell-Innes’s paper, “What is Money,” (1913) (in Wray 2004, op.cit.). Following Keynes then, I am only addressing “modern money” — the nature of money for the past 4,000 years.

³⁰ See Viviana Zelizer (1994, 18-19).

³¹ This is not to deny the main points that Zelizer and Neale were driving at. Zelizer argues quite sensibly that individuals earmark varied income sources for different purposes (wages pay rent, tips are for splurges). Neale holds that ceremonial use of primitive valuables should not lead one to jump to the conclusion that tribal societies used general purpose money. In my view, while correct, these observations are substantially unrelated to the topic of the institution identified by Dillard and Foster as “money.”

³² As is well-known, orthodoxy presumes that money evolved as a solution to the problem of barter. Not only is there little historical or anthropological evidence in support of that view, but it also faces a logical problem: Individuals are supposed to believe that the chosen “money thin” is and will remain acceptable, but that it is “predicated on and conditioned by the collective belief … To put it more clearly, the construction of the collective acceptance of money as the aggregation of individual beliefs presuppose the collective acceptance they need to constitute.” This poses a fatal free-rider problem for the presumed evolution to a paper money: “[A]s long as fiat money remains intrinsically valueless, individuals will be better off if others exchange their goods for ‘worthless’ fiat money with them, while they exchange their goods only for other goods” (Papadopoulos 2009, 955-956). While many “goldbugs” would agree with that critique — which is why they want to go back to gold — they cannot explain why the so-called fiat money duped so many dopes for so long.

³³ The term “modern money” comes from a quote of Keynes, who argued that the chartalist or state money approach — that provides the foundation for the MMT — applies to the last 4,000 years, “at least.” So, in short, the MMT applies to the use of money since the rise of civilization (see Wray 1998a). Neale (1976) uses the term “modern money” to apply to “general purpose money,” as opposed to “limited purpose.” Hence, his use of the term is similar, although more restricted, arguing that its origins can be found in early coinage and the rise of commercial debt (i.e., only 2,500 years ago). Neale (1976, 2-3, 65) goes on to argue that modern money is used in six ways — again closely identifying money with its functions. Neale has little to say about the government’s role, and denies that there can be a “nature” of money. His book has no citations to the early chartalist literature, to Keynes, or to later developments, such as Lerner’s “money as a creature of the state” or “functional finance” approach, nor to work by Grierson and others who linked money’s origins to wergild debts (see Wray 1990, 1998a, 2012, for discussions of the chartalist, state money, or the MMT approaches; also see Forstater 1998a, 1998b, 2005; Kaboub 2007; and Fullwiler 2005, for discussion of the functional finance approach. A collection of chapters on the topic can be found in Reinventing Functional Finance: Transformational Growth and Full Employment, edited by Edward Nell and Mat Forstater. Cheltenham, UK: Edward Elgar, 2003).

³⁴ Neale (1976) distinguishes between “credit” and “money” (or, more narrowly, “money proper”). Credit is a promise to make a deferred payment, while money is accepted as full and final payment. While “credit” might be accepted in payment by a “second party,” it is not likely to be accepted as final payment by a “third party.” However, Neale notes that in the case of a bank’s demand deposit, it is simultaneously credit (can be redeemed for cash) and money (accepted as final payment).

³⁵ In Roman law, an exception was made if one deposited coins for safe-keeping in a sealed sack, in which case, the bank must return the sack still sealed (see Wray 2012).

³⁶ However, Gresham’s Law dynamics would not allow nominal value to fall much below the bullion value since coins would be taken out of circulation (see Wray 2012, op.cit.).

³⁷ See Moacir dos Anjos, Jr. (1999) and Lascaux (2012).

³⁸ Wennerlind (2001, 571) cites Karl Marx’s “insistence that money is grounded in the concrete reality of social relations and not in ephemeral reflections of ideas and thought (trust and confidence).” In a related Marxian vein, Wennerlind (2001, 565) also cites Heiner Gansmann that “money must be seen as an expression of domination … [I]n a commodified society the dispossessed are forced to sell their labor power for money in order to gain access to a share of social wealth.”

³⁹ Enter the bitcoin, which seems to satisfy at least some of those who have lost trust in “Uncle Sam” at the Treasury, as well as “Uncle” Ben Bernanke and “Aunt” Janet Yellen at the Fed.

⁴⁰ See Wray (1998a, 2004, 2012), Papadopoulos (2009, op.cit.), Mitchell-Innes (1913, op.cit.), and Knapp ([1924] 1973, op.cit.).

⁴¹ Note that different forms of government have different forms of sovereignty, and sovereign power goes well beyond the ability to choose a money of account and to impose and enforce obligations. While some critics have scapegoated the MMT as applying only to dictatorships, it is obvious that all modern democracies have representative governments with vast sovereign powers, including these specific powers. In the case of the US, the Constitution specifically gives these powers to Congress.

⁴² The history of the use of coins confirms that their circulation was not a simple matter of determining the value of the embodied precious metal. The following quotes are taken from the British Museum’s display on ancient monies: “In ancient Egypt many transactions were made in metal, measured using weights like this. Once coinage was introduced, a Greek system was combined with the Egyptian one. Coins like this could have been used to pay the penalties specified in the papyrus below.” “Demotic papyrus found in Thebes (Egypt) recording an inheritance and the penalties for non-compliance, in coined or uncoined weights of gold, silver, and copper.” “The Temple in Jerusalem required every adult Jewish male to pay a half-shekel in tax. Tyrian shekels like these were preferred to the local Roman coinage as they had a higher silver content. This is why money-changers were operating at the Temple (as referred to in the Bible). Jews objected to having to pay taxes using coins that showed an image of the Roman emperor and referred to him as a god. The bible reports that when Jesus was questioned about this, he asked to see the coin, which was probably one like this. He then replied ‘Render unto Caesar the things that are Caesar’s.’ When the Jews rebelled against the abuses of Roman rule in AD 66 they issued their own shekels. In AD 70 the Roman authorities regained control of Jerusalem, and the Temple was destroyed. Coins were issued in Rome to celebrate the defeat of Judaea. The emperor Vespasian insisted the temple tax be paid to the Capitoline temple in Rome. The tax collection was carried out in a particularly cruel manner. Emperor Nerva issued a coin in AD 97 stating that he had ended this outrage (calumnia), although he maintained the tax (‘fiscus Jadaicus’) itself. The clemency did not last. During a Second Jewish Revolt in AD 132–[13]5, rebels over-struck this Roman coin of Trajan with the inscription ‘deliverance of Jerusalem.’ The emperor Hadrian crushed this revolt and re-founded Jerusalem as the Roman colony Aelia Capitolina. Money in the ancient world was used to pay a wide range of taxes, fees and fines. Such transactions were carried out between individuals as well as at the level of the state. Taxes were usually accepted in coins of a controlled standard (for example, gold) and unofficial or local coins might have to be exchanged for this purpose. For the Jewish population of Judaea, the coins required to pay taxes to the Roman authorities were unsuitable for their own religious levies” (Source: British Museum display).

⁴³ This is hard to enforce, except in courts. If private parties agree to use something else, legal tender laws are irrelevant, except in the case of a dispute brought before the authorities. Some writers distinguish between “money,” which is defined as a final means of settlement, and “credit,” which represents the relation between creditor and debtor. In that case, “money” would be what the state designates as legal tender. Jongchul Kim (2014, 1009) associates “money” with “thingness” — for example, precious metal coins — but recognizes that, since most “money” today is “immaterial money in electronic and digital form,” indicating that “the origin and power of money has nothing to do with the thingness of money,” “the fundamental difference between money and debt (credit) disappears.”

⁴⁴ The MMT does not claim that taxes and other obligations are necessary to drive a currency. It is difficult to find exceptions — that is, cases in which currency (defined here as government-issued “current” IOUs) circulated without taxes, fees, fines, tithes, or tribute, requiring its use in payment. If we broaden the definition of currency to include nongovernment-issued current means of payment, then bitcoins might qualify as a counter-example.

⁴⁵ “[O]wing to our modern systems of coinage, we have been led to the notion that payment in coin means payment in a certain weight of gold. Before we can understand the principles of commerce we must wholly divest our minds of this false idea. The root meaning of the verb ‘to pay’ is that of ‘to appease,’ ‘to pacify,’ ‘to satisfy,’ and while a debtor must be in a position to satisfy his creditor, the really important characteristic of a credit is not the right which it gives to ‘payment’ of a debt, but the right that it confers on the holder to liberate himself from debt by its means — a right recognized by all societies. By buying we become debtors and by selling we become creditors, and being all both buyers and sellers we are all debtors and creditors. As debtor we can compel our creditor to cancel our obligation to him by handing to him his own acknowledgment of a debt to an equivalent amount which he, in his turn, has incurred” (Mitchell-Innes [1913] in Wray 2004, 31).

⁴⁶ “This is the primitive law of commerce. The constant creation of credits and debts, and their extinction by being cancelled against one another, forms the whole mechanism of commerce and it is so simple that there is no one who cannot understand it. Credit and debt have nothing and never have had anything to do with gold and silver. There is not and there never has been, so far as I am aware, a law compelling a debtor to pay his debt in gold or silver, or in any other commodity; nor so far as I know, has there ever been a law compelling a creditor to receive payment of a debt in gold or silver bullion, and the instances in colonial days of legislation compelling creditors to accept payment in tobacco and other commodities were exceptional and due to the stress of peculiar circumstances … It is by selling, I repeat, and by selling alone — whether it be by the sale of property or the sale of the use of our talents or of our land — that we acquire the credits by which we liberate ourselves from debt, and it is by his selling power that a prudent banker estimates his client’s value as a debtor. Debts due at a certain moment can only be cancelled by being offset against credits which become available at that moment; that is to say that a creditor cannot be compelled to accept in payment of a debt due to him an acknowledgment of indebtedness which he himself has given and which only falls due at a later time. Hence it follows that a man is only solvent if he has immediately available credits at least equal to the amount of his debts immediately due and presented for payment. If, therefore, the sum of his immediate debts exceeds the sum of his immediate credits, the real value of these debts to his creditors will fall to an amount which will make them equal to the amount of his credits. This is one of the most important principles of commerce” ((Mitchell-Innes [1913] in Wray 2004, 31-32).

⁴⁷ Bell (2001), Duncan Foley (1987), and Hyman P. Minsky (1986).

⁴⁸ Wray (2012, op.cit.).

⁴⁹ See Glen Atkinson (2013), who argues in line with Foster that our technical potential to achieve abundance has been stymied by our institutions. He goes on to advocate employer-of-last-resort policies (see below).

⁵⁰ John R. Commons emphasized the “collective action in control, liberation and expansion of individual action” which spreads “the will of the individual far beyond what he can do by his own puny acts” (Ülgen 2014, op.cit.) Ülgen argues that money is a peculiar institution which allows individuals to undertake decentralized decisions, but requires a political authority to support that institution. Papadopouls (2009, 966-967) provides justification for regulation of the institution: “The postulation of a political authority and its contribution in the constitution of money can be defended ontologically against methodological individualists by using the notion of collective intentionality and the respective analysis of the ascription of social status through constitutive rules. Political authority constitutes and enforces these rules, safeguarding at the same time the collective intentionality of its subjects.”

⁵¹ While I will not explore the topic in detail, the MMT has long included an employer of last resort (or job guarantee) as an important component in its structure. This is not simply to ensure full employment, but also to improve price stability. This follows the work of Minsky, who was developing his employer-of-last-resort proposal at the time that Foster wrote his paper (see Kaboub (2007, op.cit., for an exposition of the ELR proposal, following Foster’s notion of institutional adjustment; see also Gordon 1997; Forstater 1998a, 1998b; Long 1999; Mitchell 1998; Mitchell and Wray 2005; Sawyer 2003; Tcherneva 2011; Wray 1998b, 1999).

⁵² See Wray (2012).

⁵³ As Papadopoulos (2009, 962) argues, the sovereign is invested with a legitimate monopoly of power over its currency, “dependent on the collective intentionality of the political authority … This remains possible as long as the political authority enjoys the collective intentionality of its users.” (See also Lascaux [2012, 77], who argues that the political authority gives legitimacy to “certain properties and functions of money within the area of its jurisdiction.”)

⁵⁴ See also Ülgen (2014), Henry (2012), and Kaboub (2007). Note, as Kaboub (2007) argues, that the creation of an ELR program is an example of institutional adjustment, putting in place an institutional arrangement that ensures there is a job for anyone seeking work, at the program wage.

⁵⁵ An example of an employment policy that must fail is one that focuses on changing the character of the unemployed, rather than one that creates institutions to ensure the unemployed can obtain jobs for which they are ready. As Minsky (see Wray 2016, 109) put it, the ELR program “takes workers as they are.” Note that because mainstream economics keeps its analysis focused on “the market,” the unemployment problem is not institutional — the unemployed have a reservation wage that is too high. New Keynesians allow for “market failures,” but, again, the problem is not with institutions but with “frictions” that prevent the market from working properly.

⁵⁶ See, for example, the December 1981 issue of the Journal of Economic Issues, which contains a number of relevant articles by Foster (see especially Foster 1981e, 923).

⁵⁷ This is not to deny Foster’s principle of minimal dislocation. It is important to ascertain what can be done, given existing institutional arrangements. However, to relieve the apparent financial constraint requires simple adjustment to current operating procedures — they have been adjusted many times over the course of the past century, sometimes precisely to relieve financial constraints — such as during major wars.

⁵⁸ Lavoie (2013, op.cit.).

⁵⁹ See Scott T. Fullwiler, Stephanie Kelton and L. Randall Wray (2012). Note that Marc Lavoie (2013), an outspoken critic, agrees that in practice the self-imposed rules are not constraining.

⁶⁰ Eric Tymoigne (2014, 652) explains the spending process in the US this way: “Under current budgetary procedures, if the Treasury deficit-spends, it must obtain Federal Reserve currency by selling securities to economic units other than the Federal Reserve (provided there are not enough funds in TGA [Treasury general account] and TT&Ls [Treasury tax and loan accounts]). The government has at least four ways to bypass this budgetary procedure. The first one is the issuance of monetary instruments by the Treasury. The second way is to allow banks to buy treasuries by crediting TT&L accounts instead of paying with Federal Reserve currency. The third way is to allow the Federal Reserve to provide an emergency or regular credit line to the Treasury. The fourth is for the Federal Reserve to provide funds indirectly to the Treasury through financial institutions. The federal government uses (or has used) all of these techniques.”

⁶¹ As Paul DeGrauwe recently put it, the central bank will never let down the sovereign in trying times (see http://www.youtube.com/embed/0vijSOR2B8s?start=1554).

⁶² At least, when it comes to the relation between domestic saving and investment (for related arguments, see Bell and Wray 2000). Unfortunately, when extended to the open economy, many heterodox economists do fall into the trap, arguing that “foreign savings” must “finance” current account deficits. There is a “cottage industry” pushing “Thirlwall’s Law” which supposes that financing current account deficits constrains domestic “affordability.” This makes no more sense than arguing that domestic savings “finance” domestic investment.

⁶³ See Wray (2008) for an analysis of the contributions of Vatter and Walker toward our understanding of the Domar problem.

⁶⁴ See Robert Skidelsky and Edward Skidelsky (2012) for Keynes’s views, which are quite different from the neoclassical views of the insatiability of human “wants.” Keynes argued that wants need to be adjusted, so that they become desirable. Current wants are neither good for individuals, nor for society. We must promote a change in desires, so that what is desired is actually desirable.

⁶⁵ See Foster (1981c).

⁶⁶ See Wray (1991b). In the early 1990s, I facetiously proposed speculative bubbles in Martian oceanfront condo futures as a solution. (See here for an update, including discussion of the recent recognition by Krugman and Summers that secular stagnation might be a problem, www.economonitor.com/lrwray/2013/12/09/when-robots-make-drones-the-brave-new-world-of-secular-stagnation-2/.)

⁶⁷ See Bell and Wray (2000, op.cit.).

Additional information

Notes on contributors

L. Randall Wray

L. Randall Wray is a senior scholar at the Levy Economics Institute of Bard College. The author thanks Mila Malyshava for her research assistance, Pavlina Tcherneva and Eric Tymoigne for their comments, as well as the editor and a referee of this journal for their suggestions. An early version of this paper was presented at the University of Denver during the J. Fagg Foster award ceremony in April 2014. The author is grateful to the participants of the seminar for their comments, too.