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Jacques: there was a big fiscal tightening in Canada in the 90's. According to the KC, that should have caused a massive recession. But it didn't, because monetary policy made sure it didn't.

The saddest thing about the Eurozone right now is that it is precisely the monetary tightening that has caused the fiscal tightening (maybe Greece partly aside).

Nick: I took a brief look at that post and, um, eh. I think your theory of science and hypothesis generation and validation is kind of off (as in, very wrong). This would take us very deeply into the (methodo)logical weeds, but deployment of that argument is, well, evidence for the scientific vacuousness of the concept of "equilibrium time-paths". The reason why, in my nutshelliest nutshell, is that the counterfactual hypothesis space is very large (infinite), and the theorist must provide a reason why we should accept that the defeated presupposition licenses the conclusion, when I can substitute it for any number of other vacated presuppositions and make the same argument. I mean where do I start? All of evolutionary biology shudders at what your argument licences creationists to do, if it were to be applied outside of economics, which is why no other science dares to claim that or to base generalizations on defeated presuppositions. I doubt even social psychology does!

With that, while I will probably break this promise being an addict, I should really bow out for a little bit, to the relieved cheers and satisfaction of many I'm sure! You'd think that with the time I spend doing this sort of thing I should have bothered to become an economist For Reals or something, but then I'd be beholden to that conceptual framework in more ways than one, so I'm still happy to be a snurflenurfle mumblemumbleist instead, despite the fact that I'm procrastinating on my "day" job...

"The usual demand and supply stuff doesn't work for money. Everybody else, from New Keynesians to MMTers, thinks it does. They just draw the money supply curve as horizontal, with the stock of money being determined by quantity demanded at the rate of interest set by the central bank. "

This is a good example of what confuses me about your method of engagement. I want to believe this is anything but a deliberate distortion. Given your discussions with so many MMT enthusiasts over the years, I find it hard to believe you haven't been convinced to modify your view.

Yes, it is an accurate representation of what monetary policy has on the money supply but as you must know, totally ignores the mechanics and drive of fiscal policy on the stock of money.

Sorry if I'm off tune but each time I wander by, it seems as though what defines fiscal and monetary policy remains unresolved at this site.


I wonder if I dare re-post it, with the title: "A critique of Graeber"? Better not!

Why not? It seems quite relevant to that dispute, even though it's not really a critique of Graeber's historical account.

Re: the money multiplier, shouldn't it be taught, at least as part of the MV=PY equation? If you see M as the monetary base, then the multiplier is a factor in V. So the multiplier is what allows you to consider different sorts of stuff as "the money supply", without affecting the basic argument.

anon: "It seems quite relevant to that dispute, even though it's not really a critique of Graeber's historical account."

Thanks. I'm still a bit unsure about its exact relation to Graeber, because I'm not really familiar enough with Graeber's argument. If you could expand on what you said, I would be grateful.

The money multiplier does fit nicely with the MV=PY equation. If you interpret M as the base, then instability in the money multiplier is one of the reasons V is unstable.

The role it all plays in the intro textbook is that we need a downward-sloping AD curve to have a theory of P. And MV=PY is the simplest story of a downward-sloping AD curve in which the central bank can set a nominal anchor. The alternative is to build in some sort of Taylor Rule reaction function for the central bank. But then you need to add in some other story of how the central bank can set an interest rate. And to tell that story, you have to bring in the supply and demand for central bank money anyway. You can't avoid talking about reserves.

Nick, spending the morning trying to avoid marking, so looked for an on-line edition of God and Man at Yale. Found this instead:

http://kwasnicki.prawo.uni.wroc.pl/pliki/CredoSamuelson.pdf - it's Paul Samuelson's musings on how he came to write his 1000 text. Basically what happened was someone came up to him and said:

Eight hundred MIT juniors must take a full year of compulsory economics. They hate it. We've tried everything. They still hate it. We even did a departmental joint product. It was the worst editorial experience of my life. After our senior colleague turned in his chapter, I had to say, "Floyd, this is not a chapter on public finance. It's a chapter against pubhc finance." Paul, will you go on half time for a semester or two? Write a text the students will like. If they like it, yours will be good economics. Leave out whatever you like. Be as short as you wish. Whatever you come up with, that will be a vast improvement on where we are.

In that article, Samuelson describes one reason why his text became such a hit - a competing text by a Canadian author, Tarshis, was banned from colleges for being too left-learning during the McCarthy era. Samuelson writes:

I know of these details only because, later, having tasted blood in trying to root
the Tarshis text out of colleges everywhere, some of the same people turned toward my effort. God and Man at Yale by the young Bill Buckley (1951) quoted from some of them; and others of his critiques I could recognize (from the coincidental inexactitudes of the quoted words) were taken from the writings of these earlier critics. The joke is that Buckley's Yale was notorious in those days for its conservative old guard economists (Fred Fairchild, Hudson Hastings, Ray Westerfield, O. Glenn Saxon). I cannot judge Yale's religious orthodoxies and heresies, but its economics at that time was devoutiy orthodox.

Actually late 1940s is just a little bit before McCarthy, which was early 50s. My mistake.

Nick have you skimmed Graeber's essay? His argument boils down to this:

(1) Menger's story is historically false: tribal societies would not barter commodities in spot deals, except occasionally between strangers belonging to separate groups. Instead, they used a gift economy with no formal accounting of credit. Even trade among tribes or social groups would mostly rely on a system of "customary equivalences" among commodities, not money persay.

(2) Because early societies used a gift economy rather than spot barter deals, the "double coincidence of wants" was mostly a no-issue. So money could not emerge as a way of solving this problem.

(3) Graeber argues that, as far as we can tell, money arose together with centralized bureaucracy (at least in the near middle east) as a way of (a) accounting within the bureaucracy itself and (b) enforcing damage awards for injuries and torts; because legal compensation is not the result of a voluntary exchange, having a stable unit of account was comparatively important here.

"there was a big fiscal tightening in Canada in the 90's. According to the KC, that should have caused a massive recession. But it didn't, because monetary policy made sure it didn't."
Real shock (oilprices ) in 89 at the same time John Crow got in his head that 4% inflation would end Western Civ as we know it and it was his sacred duty to do a Ben Tre on Canada ( "we had to destroy the village in order to save it")

Once he had plunged the country into the Great Canadian Slump, the debt hysteria took on . Peso of the North and so on, all with a AAA rating and no problem auctionning TBills.
Then the fiscal contraction took on.
Essentiallt the current Italian story. Start with an unnecessary monetary tightening, frighten yourself into a false budgetary crisis and amplify the catastrophe.
Crow finally woke up and eased money. And we got lucky with an unforeseen export boom.
Two things not on the horizon for Europe.
Even if the model was incomplete, at least KC would have shown the idiocy of the fiscal tightening.

Crow was the first governor not to be renewed, effectively fired. We covered up that sad fact by limiting the successors to one term, losing two very good ones (Thiessen and Dodge) and we will lose Carney, an excellent one who is showing that you can leave Goldman Sachs and no longer work for them (As the joke goes, Tim Geithner never worked AT Goldman...)

Frances: that Samuelson piece is a very good find. I recommend all read it. Especially that bit towards the end, where he talks about the flak he got, first from the right, then from the left, for his textbook. And especially that other bit towards the end where he anticipates that the KC model might become relevant again!

anon: thanks, that's helpful. I had briefly skimmed it. Your summary makes sense to me.

Jacques: the big tightening of fiscal policy was around 1995, IIRC. And John Crow was replaced by Gordon Thiessen in 1994.

Crow was "non-renewed" when the damage of the preceding years became obvious.
Yes, the fiscal tightening took place in 95. There is inertia in the political system.

Nick : So, is it fair to say that your theory of (Menger's theory of) the conceptual origin of money is 'Money (or something like it) is inevitable, because barter is unstable and unscalable'. And Graeber's empirical find is, simply, there is no evidence that barter ever existed in any large market-wide sense.

So, both agree that a barter economy might never haver existed. All well and good, no conflicts here, no disagreement.

What about the time when there was no barter and no money. Graeber says credit existed, bureaucracies existed and these are key to understaidng the origin of money. What is your take on these pre-pre-historical times?

Hey Nick.
"I think I understand one important thing about money creation that only very few economists understand."

If its not a secret would you mind explaining what that is?

"They just draw the money supply curve as horizontal, with the stock of money being determined by quantity demanded at the rate of interest set by the central bank. That's what I used to think too, though I never thought about it much. Now I think that's wrong."

Again, could you explain what about that you think is wrong?

Looking forward to the explanations if you have time. Big fan of the site and the interesting discussions here and very much appreciate the time you spend answering questions/comments here. I've learned a lot. Hoping to learn a bit more if you'll indulge me.

Jacques is right, Nick. Ottawa was a poster-child for it. Contraction in the Public Service was counterbalanced by expansion at Nortel, which was sending its products to the United States. Without the US market we would not have been able to pull off the austerity effort without far more pain.

Now Nortel is gone and we have to ramp up the Public Service....

I want an Intro Course to show students "how to think like an economist," but I also want some time devoted to the limitations of such thinking. I used to teach the course with David Friedman's *Hidden Order* and Robert Frank's *Choosing the Right Pond*, so they could see how the same methodology - rationality plus equilibrium - could give you very different political-economic visions. But the methodology itself -whether wielded in support of libertarian or left-liberal politics - ought not to be accepted uncritically. So I would assign Dickens' *Hard Times*. The students hated the Dickens, so I dropped it and substituted Amartya Sen's "Rational Fools." I wanted them to understand how the phenomenon of "commitment", as Sen uses it, by which he means "counter-preferential choice" is a deep critique of the conception of rationality that economists use. Unlike the behavioral critique, which simply documents all the ways people make mistakes in maximizing, a Senian critique says that human beings are more than utility maximizers. As the late lamented David Foster Wallace puts the point in a discussion of Dostoevsky, "[Dostoevsky’s] concern was always with what it is to be a human being—that is, how to be an actual person, someone whose life is informed by values and principles, instead of just an especially shrewd kind of self-preserving animal." I don't think this deep critique cuts either right or left, but I think we do a disservice to our students by not exposing them to it. The fact is that most of them when they come to us are already "thinking like economists" in important respects: they are cynical about the possibility of principled behavior, they are sure that behind every alleged "value" lies a preference, they are nihilistic about normative authority. The have been brought up, after all, in the age of "sophisters, calculators and economists."

At an AEA meeting one year long ago, there was a session on "Teaching the Principles Course" I attended, which was really just advertising for two new texts by the presenters, one of whom was Robert Frank. (The text he was introducing is the one I have used in the Micro split ever since - it's a great book.) Frank talked about how the book encouraged the students to be economic naturalists, and to apply the economic way of thinking to everything they came across. I asked a question: suppose a student comes to your office hours and thanks you for teaching him the EWT. He was in a long-term relationship and felt that he owed his partner loyalty, but that after learning that sunk costs shouldn't play any part in guiding one's choices, he decided , given that the net benefit of the relationship going forward was negative, that he owed his partner nothing, and was dis-loyal. Frank seemed genuinely at a loss for a response and after the session sought me out to talk more about it.

Kevin Quinn,

"I don't think this deep critique cuts either right or left"

I'd be inclined to say that, linked with some solid premises about dispersed knowledge and ephemeral preferences, it cuts from the right or at least from the libertarian perspective. A Hayekian outlook still makes a lot of sense if you abandon the psychological egoist leftovers in economics. Any beneficient grand concentration of power is surely made even more problematic if you take the tidy neoclassical picture with a grain of salt, and the clean-cut cases of state intervention suggested by the neoclassical framework become debatable.

Ritwik: I think I will postpone that question, because I may do a post on this.

Rev Moon: I keep forgetting my old blog posts. I only vaguely remember writing this one, but it lays out my views on this:


Determinant: "Without the US market we would not have been able to pull off the austerity effort without far more pain."

When monetary policy responds appropriately to a fiscal tightening, interest rates fall and/or the real exchange rate depreciates. So you get increased investment and/or increased net exports. And that's what happened in the mid 1990's. The US market for Canadian-produced goods didn't suddenly appear by magic.

Kevin: thinking through all the above comments, the one critique of Intro economics that hits home is I think Noahopinion's. There's not enough empirical/applied stuff. That only gets taught in upper years. The "economic naturalist" approach *might* be one sort of solution to that problem, aside from being interesting in its own right. Dunno.

I'm not sure about the benefits of teaching "deep critiques" in Intro. Most students will also be taking courses in other disciplines that give a very different perspective on human nature and social interaction. And I'm not sure how many would benefit from our own (possibly quite pathetic) deep critiques of ourselves. We might be better off just trying to immerse them in the economic perspective, saying "here's how economists approach the question; you will get a different approach in sociology, poli sci, English, etc."

My own preferred deep critique would be about the means-end dichotomy. But I'm really not confident about my own ability to explain that to first year students. If I can succeed in teaching all of them supply and demand, I think I'm doing well. Economists do have a comparative advantage in teaching the economic perspective, and I'm not sure how good many of us would be venturing outside our "core competence".

W Peden: my hunch is that a deep critique would lead more towards some sort of Oakshottian conservative perspective. Not sure though.

Nick: Thanks for the comments. I remember several great posts you have done on the means-end dichotomy that I did indeed put in my mental file under "deep critiques." And I agree that Oakeshotte or Roger Scruton's *The Meaning of Conservatism* on the right, perhaps Alasdair McIntyre and Michael Sandel on the left would be the upshot of the kind of critique I had in mind. In my own case, it was the eminently Worthwhile Canadian philosopher Charles Taylor whose work, especially *Sources of the Self*, awoke me from my dogmatic slumber, as it were. (-;

kevin: From the little I have read of him, mostly ages ago, I like Alasdair McIntyre's stuff, and agree it's a good deep critique of our approach. I never knew he was a lefty!

Stephen Marglin teaches an intermediate-level course at Harvard, new this year, called "Keynes' General Theory." I'm taking it right now. Only about 20 people are enrolled. The course is essentially a critique of New Keynesianism that follows the argument in Marglin's upcoming book Resurrecting Keynes: The General Theory as it might have been had Keynes reflected on it for 75 years.

Marglin also teaches an introductory course called "Critical Economics," which attempts to teach the bare bones micro and macro while simultaneously critiquing them both. Needless to say, it attempts to do too much, and in any case it doesn't count for concentration credit in the economics department.

That's some background.

Now about the Ec 10 walkout. It identified a legitimate problem in Harvard's economics department (and in most North American ones, for that matter): an economics major is allowed to, and indeed most do, graduate from Harvard with no understanding of the intellectual history of the discipline and no exposure to legitimate critiques of New Keynesian economics, such as Marglin's.

After three or four years of studying economics at Harvard, most students emerge believing that the basic models they've learned are sound. Most go further than that and take Hicks and Modigliani to heart, using them to inform their worldviews when they go to the polls, run for office, or do market research for Goldman Sachs. The problem is that they've never been introduced to critiques of these models; they have no choice but to assume that the standard models are the best ones out there, because they know of no others. (If you expect students to construct their own critical models, you should consider the effects of having the same paradigm being drilled into your head for three or four years. Better yet, you should get to know your students a little better ;-))

The issue, then, is not simply whether Mankiw's course inculcates a certain political ideology. There are liberal New Keynesians just as there are conservative ones. The issue is that economics students are made to learn econometrics and calculus but none of the critiques of the New Keynesian paradigm, which, as far as they're concerned, is sound by assumption. This is hard to justify on pedagogical grounds.

So the smug student that Frances Woolley cites, who wrote that "there’s plenty of (New) Keynesian theory to come in the second semester of Ec 10," completely misses the point.

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