In today's episode, we are interviewing Professor Jan Toporowski, who was previously a Professor of Economics and Finance at Soas, an current member for the Council of the Progressive Economy Forum. With over 350 publications, Jan focuses on monetary theory, macroeconomics and finance, serving as a literary executor to economist Mikhail Kalecksky. His book, The End of Finance, Wonderv Financial Instability, eight years before the global financial crisis. Jan has advised government, central banks and international institutions and has been a prominent voice in debates on financial reform and economic policy. Hello Jan, could you please first introduce to our listeners your paper political aspect of full employment in retrospect? Yes, this was an article that was commissioned from me. It's been article looking at a significant paper by Kalecksky, a paper that actually I think is probably his most commonly read paper nowadays because although he was a macroeconomist and theorist in the business cycle, it's this particular one. It's pretty good aspects of full employment that he's most commonly read because Kalecksky argued that capitalist and business on the whole will not want to have full employment because it undermines the power that capitalist have over government and over their workers in their factories. So it's a very political argument and it takes in a lot of the arguments that were used in Kalecksky's time and are still used today about full employment. Arguments such as, well, we need a bit of unemployment in order to keep inflation down. It's too much trouble keeping maintaining full employment and in particular the argument of sound finance which famously argued was that it's an argument that nothing must be done to compromise business confidence because if business confidence is compromised then business will not be investor or refuse to end up be a crisis. It's a political argument that is still made today and I pointed this out, the distinguished economist that I now say will really be need some unemployment to keep inflation down, to keep inflation low or you cannot have it without low inflation which rather contradicts the standard narrative that inflation is controlled by the central bank through monetary policy. I argue in my paper that actually business likes that the economy being regulated by monetary policy, it likes this setup of what's called monetary policy dominance because in the element of monetary policy depends for its effectiveness on business confidence. So it puts the question of employment and economic growth squarely in the hands of business rather than in the hands of government. So for the government to be effective, Gershky argued, it needs to use physical policy. If it's going to be maintain high growth, increases in living standards and full employment. Yes, so that's the argument in general, the same arguments are being cases being made now against full employment as there was in 1943 or be it in 1943 there was a fundamental difference and that was that the readership of the article of Karetsky's article had been through the 1930s and the horrors of mass unemployment and what came with it which is fascism and eventually war. So in my article I actually use it to criticise the simplistic view of cantonism that all we need is a bit of physical policy and we can get full employment. Whereas this is not the case, there are various types of cantonism and in particular there's three cantonism, there's cantonism through armaments, there's cantonism through fascism, there's conservative cantonism where you just do public works and this brings about. You create jobs in this way but it doesn't really touch upon the control that business and finance have over the economy. I think so it's really sounding an interesting paper because it's an interplay between political economy and monetary economics as well as finance and an aspect in business so it really is a melting part of an idea essentially. So kind of moving on to our first question. Kalecki suggested that capitalism must either undergo a crucial reform to adjust itself to full employment or become an outdated system which must be scrapped. Do you think capitalism has the potential to undergo this reform via promoting an enlightened view of capital owner's self-interest or has it proven itself to be unreformable? In his article Kalecki argued that if you're going to maintain a permanent ratio of full employment then you will need to have new institutions and among them I guess would be institutions that take over the function of regulating the labour market, take over that function from business and obviously business will not like this. Business tends to respond by saying, "Oh no, if only you carried out the correct policies that we like though you would get full employment and that it's all because the government doesn't follow correct policies that it happens." Personally I think that the two changes which have occurred since Kalecki's time that have undermined the drive to full employment. One is the mass unemployment that emerged in the 1980s under Thatcher in Britain and Reagan in the United States which undermined the consensus or arose because the consensus around full employment broke effectively. The consequence of this was that it, the disappointment with full employment doesn't lead to people to say, "Oh well we must get back to full employment." But amongst certain sections of society it leads to xenophobia and hemagramed ideologies which is what we see now that the, to some extent once it became apparent that we were not able to do that, we did not have the institutions for regulating the labour market institutions including skills training. So on the immigrants, once economic and political security hit neighbouring countries, the people who are economically disappointed turn to right wing ideologies. And this I think is the big change that it's the rise of xenophobia and nationalism. Yeah and you see that even now in America, in the UK as well it's really reflecting exactly that. So I guess moving on you discussed also how
of Kalecki, criticize other economists for their obstinate ignorance for failing to recognize how full employment can be financed and attributing their resistance to their close connection with banking industry and political beliefs. So to what extent do you think this is a fair characterization of other economists at the time who may have simply disagreed with him? Do you think modern economic thinking is also shaped by political or business interests? The Kletzky's argument here is rather ad hominem and you know, probably an academic should say, "Oh no, this is so you know, you should stick to the actual arguments." I would say that finance, business and finance have huge financial resources which they prepared to put in to finance and think tanks, a media that forms opinion and I think that this is certainly the case. The business point of view is much more prominent than it actually should be because for reasons which I will come on to, I think that very often this is not good analysis but it relies on people having strong reactions to particular scenarios. Very little of the analysis that comes out of the think tanks is actually comes out of a serious consideration of how the economy works and it's this lack of thinking about how the economy works that I think is probably the main flaw in the way in which economics is taught in too many universities today. I think it's relevant how these things are occurring in the economy but they're also moving, shaping our education in a way as well. I think that's very interesting and a good observation as well. So now moving on to the next paper which is debt management and the fiscal balance. Could you introduce this one for our listeners as well? Yes, this is a paper which I wrote because I had been working on Kerritsky's monetary and financial economics which he tended to shamelessly to discard but it's nevertheless quite important in particular his ideas on financial control and these were very much influenced by the ideas of financial control that had a debt management that were around in the 1930s because of the debt problems in Europe and that became much more prominent during the war in the UK. Kerritsky was in researching at Oxford during the war and writing commentaries on war finance. So he knew the insights of how a major fiscal effort like conducting war could be financed and he showed that this is quite easy to do providing the government uses its instruments of control over the monetary and financial markets and this wasn't just Kerritsky. It was a practical necessity in the time. It was advocating this as well and it came out later on in the Radikliffe report. It's perfectly possible to maintain quite high fiscal stimulus providing that the government conducts proper debt management operations. In my article I argue how those debt management operations should be conducted but it's very very important that the taxation should become more progressive as government debt rises in order to avoid the deflationary effects of taxation. And that's the essential argument in paper. I think this paper is particularly relevant currently as a lot of Europe and America is going through things exactly that you point to. So kind of talking something about more present. So in September 2022, UK government bonds crashed after a budget announcement, nearly bringing down pension funds. Your work argues that how governments manage their debt, not just how much they borrow, can create exactly these kinds of crises. So what did the UK get wrong in your opinion? What do you think got wrong was that there was very little preparation for the announcement of the major tax cutting budget of this trust. And that preparation should have included the debt management. Debt management in the sense of priming the market, making sure the market had enough liquidity to absorb government debt. And then the second stage of this kind of debt management is making sure that long-term securities are issued in order to finance into the market to make sure that the government doesn't have a drain on its cash flow through the kind of drain on cash flow that arises with short-term borrowing. It's a technical issue. What then happened in 2022 was that the government bond market fell away and the pension funds found that they were unable to cover their liabilities through those bonds. I think that it was a major flaw, but it also arose because the central bank and the government still thinks of monetary policy as simply exchanging buying and selling securities or setting a rate of interest. And then buying and selling securities to maintain that short-term overnight rate of interest, this is not enough. They need also to control the whole yield curve. Something that's quite unique in your answer was how obviously the policy itself matters, but priming the public to these policies is also really important so they can react in a timely manner. I think that's a really unique point that you brought up in how monetary policy is much more than people assume it to be. And I think kind of moving on from there, if you were advising a finance minister today facing high debt, which a lot of countries are, and rising interest rates, what should their debt management strategy be, and how does your answer differ from potentially what the IMF would say? Yeah, months would be that you need to have an instrument for regulating the liquidity of the market for long-term government securities, and through that the market belonged to long-term securities in general. Now, the way to do that is through yield curve control, they need an institution that will on a day-to-day basis, buy and sell long-term securities in order to keep the prices of long-term securities stable. This is the way to do it. Now, this momentous will, of course, throw their hands up in horror and say, "Oh, no, but you're doing this. You're expanding the money supply if you buy long-term securities." That's not necessarily the case. If you do this through what's called in central bank circles, operations, risk, issuing short-term bills, using the proceeds of those bills to buy long-term securities, you're not actually adding to the money supply. You're simply using the money that's already
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the US government, the bulk of their contracts. But what's happening now is that they are commercial operations. And if you have a manufacturing company engaged in a field where there's rapid technological progress, you have a problem of what to do with the technology that's now out of date. Since it was the subject of my first article, one of the first articles I ever published, the standard way in which commercial companies deal with this is that they dump this old technology on developing countries. If you look at the current industry in India, that's what they've got. The same thing is clearly happening now with the armaments industry. You can make the connection between the way in which European countries have been squeezed to buy American equipment and the way in which the State Department is pushing its defense contractors to switch much more towards electronic and drone technology. And I think that's really interesting in how countries are being squeezed in Europe. It's really going through it, especially currently in the past few years. But pivoting away from Europe a little bit, China is building its own military industrial complex, while Western Allies remain dependent on US suppliers. Does this give China a structural economic advantage, keeping all the demand effects domestic, while the West fragments them across borders? Yes, this is true that China is keeping the demand effects domestic. But they do also import significantly, for example, aircraft carriers from South Korea. The other thing that China shows is the way in which the whole thing can go wrong if there's a flaw in the Chinese system, is because they are so keen on spending on the latest technology up to date technology that this gives rise to corruption. And if you look at the background of the senior figures in a Chinese military that had been removed in the last couple of years, they've all been associated with the particular military command that deals with new technology. And why is that? Well obviously, because that's where all the money is going, and that's where all the money is. So it's a fine balance. Yes, that kind of Keynesian operation, but also ensuring that it doesn't degenerate into corruption. And then of course, everything, the value of the defense value of this equipment is not necessarily the value of it in terms of domestic economic stimulus. The domestic economic stimulus from buying drones is much smaller than buying huge aircraft carriers. Yeah, absolutely. Well, this is a problem with the British elements industry. There is a serious problem of keeping, how do you keep this clean in particular because they don't just, in relation to the British government, it may be clean, but not in relation to some of the foreign governments that buy British elements. Yeah, very interesting. I think now we'll move on to the last bit about podcasts, which is your career. So you've spent much of your career reviving my co-collectives, ideas, and economists who arguably saw capitalism more clearly than Keynes, but remains far less known. What drew you to Kalecki and why do you think mainstream economics still ignores him? Okay. Well, this is a question that goes right back to the start of my career. I, the first job that I ever had was in fund management for the Church Commissioners for England. I got a job there after finishing my first degree in Political Science and Sociology at Birmingham University. And on the strength of the fact that I've done one course in economics, the Church Commissioners pulled me into their stock exchange investments department. And I arrived there and found that shortly after I arrived there was the all-priced shock of 1973 accompanied by Richard Nixon taking the daughter of the gold standard. It was followed by a stock market crash, a secondary banking crisis, property crash inflation and muscle employment took off. I was really intrigued by all of this. I started doing a degree in Masters degree at Butler College. This was at the time the really, really interesting place to study because of the kind of, not just because of the syllabus, but the range of teachers that we had there, including at least one Lawrence Harris. So I was taught by, you know, another, another dissidence. But the kind of economics that was taught, the mainstream economics that was taught was very general equilibrium. I remember, and this was questioned in the classes. I remember a very distinguished professor and now a CBE saying, "Well, you know, we do this in general equilibrium because if you look outside, there is general equilibrium in the world. The economy is in equilibrium." And I used to come to these lectures, they were evening lectures and work. So come to these lectures, shell shocked from the latest, you know, carry on at the stock market, brokerage houses, going bust. Banks having to be rescued. I was sitting there thinking, "What kind of a world does this man live in? Does he know what's going on?" And of course, he didn't. And I remember going down in the library, the supereconomics library at Bergerberg at the time. And I picked up this booklet of essays by Michael Cullid's skill on essays on business cycle theory. As I started reading it, I found, "My God, you know, this guy really knows what's going on. Why does he know what's going on?" Because he knows that the whole thing changes. There's a business cycle that are processes which disrupt the economy and process, which cause the economy to boom, and processes which give rise to processes that disrupt the economy. So that was effectively how I discovered Cullid's skill. Unfortunately, the mainstream still committed to general equilibrium theorism. I mean, even their substitute for business cycle theory, which, you know, the dynamic ecstochastic general equilibrium isn't really properly a business cycle theory. It doesn't identify the processes that cause economic change. And this is why I think mainstream economics really needs to wake up towards going on in the real world. Yeah. I think I learned this thing to you. Think about the backdrop that was occurring while you were pursuing your master's education.
of these finance institution needing help and things like that, I think it connects to your book, the end of finance, which came out in the 2000 warning about financial inflation and instability. So eight years before the global financial crisis. So when the crisis finally hit, what questions did it raise for you about how economics engages with the real world? Well, in particular, I was, I'm a sounds rave, I was in writing that book by my acquaintance with Hanna Minsky, I actually knew him a little bit and I thought that he's someone that was lasting neglecting. I mean, the real problem with the way in which economics engages with the real world is, comes about because since the 1950s, economics has been is about predicting particular variables. For example, inflation, you know, what's inflation targeting, but it's all about predicting inflation. And when things go wrong, but things went wrong at the bank of England when they were predicting wrongly, what did they do? They got in Ben Bonanqui to look, to check over them, they're, they're modeling. Actually, what we have in the real world is not an interplay of variables. That's not, that's not what happens. What we have are market and financial processes. And in particular, this maybe goes back to my, my background in banking and finance, the circulation of money. We have to understand the circulation of money. And this is not done in, in economics, but we need to understand those processes in, in order to know how they will play out. And this leads me to my disagreement with the standard narrative about the 2008 crisis, which it comes across in all the books as a crisis of semi-referred dual activity around the trading of subprime mortgages. Because that was the story that went out into the media. The media likes news of conspiracies and frauds. Yes, I mean, there was incompetence, possibly an element of knowing that they were trading rubbish, but still trading it, because that's what you're paid for. I actually, as subsequently transpired, the whole problem was one of the liquidity in the capital markets. Comes back to the point that I made earlier, the central banking needs to keep an eye on the liquidity in the capital market. And this had been overlooked in all the hubris about inflation targeting, which was attributed to successful interest rate setting, whereas in actual fact, it's just simply due to cheap Chinese imports. So yes, that's, I think this idea that we just need to model correctly is, Israel, no, it needs to go beyond modeling. It needs to understand economic and financial processes. So it's been saying, studying economics and isolation and implementing economic theory and isolation is not the correct way to approach real life issues, really have to consider the financial market and how financial markets were, where does the money come into it, into the, and what happens as it circulates through the financial market, the concept of market processes you find a lot in the Austrians are very keen on this kind of analysis, but their concept of market processes is really the way in which it is all about entrepreneurs because Austrian economics worships entrepreneurs, whereas I actually mean what are the procedures that are going on in the markets that give rise to certain effects that we see, in particular, that what's behind all those variables that the model has no character. Yeah, that's really, really interesting and hope that a lot of finance is starting to be implemented in economic theory in the future and hopefully on listen as well. I think our final question to really wrap up this podcast is, it's something we ask all our guests, what advice do you have for future economists, those who may be listening, students like us, what's your one piece of advice for them? First of all, I would say, read widely in particular in the business press, but also be humble in the face of people's lived experience. And you know, this is where I'll be very personal. Economists do not spend enough time looking at how people on the lowest incomes live. And I feel it's very personally because I spent my earliest years in a displaced persons camp. This was like a refugee camp, there were refugee camps which were set up all over Europe for people fleeing from prison camps, concentration camps and so on. So as I've gone through my career, I've ascended the sort of the social hierarchy. And I do think that a lot of the mediocrity of that I see in economics is, it comes about because of this inability to understand what's happening for me people. And I can't help, but in this context quote, one of my favourite quotations from Adam Smith, from his essay on the theory of moral sentiments, that this disposition to admire and almost to worship the rich and the powerful and to despise or at least to neglect persons of poor and mean condition, though necessarily both to establish and to maintain the distinctions of rank and the order of society is at the same time the greater and the most universal cause of the corruption of our moral sentiments. And I want to say that it doesn't just corrupt our morals, it also corrupts our perceptions. The problem with the road with the rich and the powerful is that they're prone to delusions of success. Look at the rich and the powerful, they'll be by Donald Trump or Elon Musk. They don't have, they are enthralled by their own success. And this means that they don't see things clearly. A calling to Adam Smith, the most general cause of this inability to perceive or these delusions is vanity and self-regard. If we listen only to such people, then it imports into economics the delusions that attribute success in business and politics to personal qualities and unique insights of the rich and the powerful, rather patronage, inheritances from their parents and the impersonal forces that drive the economy. So we should listen too much to people who are rich and powerful. And then I think education also matters, finally I'm in my final point, education also matters. Why? Because the reason why unemployment and insecurity leads to fascism and extreme right when you fuse rather than dispassionate analysis of social economic problems is because of lack of education. And this is an education at the most basic level, not just at universities. So even at like a six-fold path of nature, even at six-fold classes,
introduce people in sixth forms to what's going on in the community. That's very important. Yeah, I think that was a great answer really coming from your lived experience and thank you so much for that. Thank you very much for inviting me. Thank you for listening to this episode interviewing Professor Jan Topirovski. If you found this episode interesting please tune into other episodes and to be notified of new episodes follow us on Instagram @beveragereport. Any suggestions or feedback is welcome to our email at the
[email protected]. Thanks for listening.
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