Public Debt: How the classical economists looked upon it (wonkish) – Guest article by Nicholas Theocarakis

Screen Shot 2014-11-28 at 8.37.25 AMWith so much talk about public debt, the so-called debt crisis etc., it is perhaps time to take a close look at the history of the concept; of how public debt was born, on the evolution of its nature and, even more poignantly, of the manner in which economists have interpreted and evaluated its purpose and impact. In this encyclopaedic article Nicholas Theocarakis (colleague, co-author and dear friend) explains. Click here for his paper (which was recently presented as the closing keynote at the 4th ESHET Latin American Conference) and here for a fabulous pdf file offering glimpses of the main texts mentioned.


  • Interesting history…
    Not being an economist, I have a “scholarly” question to the author, but in lieu I would ask of Yianni–unless of course the author is reading this 🙂

    Why is the modern version of Abba Lerner’s Functional Finance, as promoted by the MMT-ers, not included in the paper? Is it considered a mere re-statement of Lerner’s system, or is it “too heterodox”, or is it something else?

    On a related note–since I have only read brief summaries of Lerner’s work—did his system assume a fiat currency or is it built on a gold-backed one?

    • The paper is concerned with how classical economists viewed public debt.Thus it’s only normal for younger schools to not be included.

      Lerner assumed government created paper.

      On a side note, I’d like to repost something about Keynes’ views on functional finance as I don’t consider Mr. Theocharakis’ paper representative of the matter:

      “As Lerner said …, Keynes retracted his characterization of Lerner’s ideas as ‘humbug.’ According to Lerner, ‘in reading … [The Economics of Control] later, at leisure, … [Keynes] found the logic less escapable and the resistances more obvious’ … Keynes admitted to being at least a closet Lernerian in a letter to Lerner (September 1944) congratulating him on The Economics of Control. Keynes wrote:

      I have marked with particular satisfaction and profit three pairs of chapters-chap. 20 and 21, chap. 24 and 25 [where Lerner had discussed functional finance], chap. 28 and 29. Here is the kernel of yourself. It is very original and grand stuff. I shall have to try when I get back to hold a seminar for the heads of the Treasury on Functional Finance. It will be very hard going-probably impossible. I shall have to temper its austerity where I can. I think I shall ask them to let me hold a seminar of their sons instead, agreeing beforehand that, if I can convince the boys, they will take it from me that it is so!

      It was not only in this letter that Keynes retracted his initial remarks about Functional Finance. In 1945, when Keynes again visited the United States, he repeated his praise of Lerner at another Federal Reserve Seminar. In this meeting Keynes spoke in glowing terms of Lerner’s contribution and ‘without any provocation, he held forth a panegyric on Functional Finance’ … Later that evening, at a dinner Alvin Hansen had arranged for Keynes, Lerner and Keynes had another exchange which is also worth noting. Lerner approached Keynes and asked: ‘Mr. Keynes, why don’t we forget all this business of fiscal policy, public debt and all those things, and have some printing presses.’ Keynes, after looking around the room to see that no newspaper reporters could hear, replied: ‘It’s the art of statesmanship to tell lies but they must be plausible lies.’”

      David Colander, “Was Keynes a Keynesian or a Lernerian?” Journal of Economic Literature 22.4 (1984): p. 1574.

      In an open letter to Roosevelt (1943) Keynes said “public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.” (see 4th para) at:

    • @Crossover

      Thank you for your response, I read it a couple of times and am enjoying it immensely. It is very interesting to see the struggle between the enlightenment of progress and the prejudices of tradition clashing mightily even in the minds of the greatest, like Keynes. I will surely enjoy reading more of this story once I find some time.

    • As Crossover has noted Lerner assumed government created paper. In fact, the discussion on public credit in the late 17th-early 18th century was hot on the heels of the discussion on the creation of paper money. I did not discuss the MMT-ers because I had to stop somewhere. Indeed, the treatment of th 20th c my paper is very perfunctory.
      Regarding Lerner’s functional finance and Keynes, there is an excellent article by Tony Aspromourgos in the last issue of HOPE [History of Political Economy] “Keynes, Lerner, and the Question of Public Debt” which I mention in my paper. Tony’s research is so painstakingly meticulous, so that if I wanted to make my paper representative of the matter I just had to provide a summary of his article in my paper. Perhaps I should have done so. I thank, however, Crossover for his comment.

    • @ N. J. Theocarakis

      I just read the Aspromourgos paper. Indeed it is a great story, and excellently told by the author. Thank you for the pointer.

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