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JakeS: "I don't know where you got the "vertical IS curve" stuff from."

I got it from trying to read and trying to understand MMTers. Then posting a blog in which I said "I think the MMT IS curve is roughly vertical". Warren M, Scott F., and various other people who are either supporters of MMT of have some familiarity came and commented. Nobody said "You are wrong Nick, the MMT IS curve slopes down!"

You can read it all, plus the comments especially, here.

Hey, that DOES sort of describe me.

Though I have read a few 101-level resources; The Economic Way of Thinking by Heyne/Boettke/Prychitko and New Ideas from Dead Economists by Buchholz were my first texts. Then, when i yearned for something more critical, I moved on to Hahnel's The ABCs of Political Economy, and then proceeded to Keen (Debunking) and a whole slew of others. Nowadays I am two-fisting Das Kapital like so many forties duct taped to my hands.

That said, I have heard people (e.g., Herb Gintis) say that many of the "heterodox" criticisms boil down to criticisms of the way undergrad-level subjects are taught, while the advanced stuff operates on entirely different principles. As such, I've been meaning to go deeper into the "orthodox" end of things.

Now, Mas-Colell is sort of THE grad level all-purpose reference for micro, right? How much of a math background would any of you say I'd need to tackle that bad boy? I've taken calculus, and still remember how to integrate, I think. Am I in for a bumpy ride? If so, what is maybe a better way to get a handhold into the graduate-level mainstream stuff?

Thanks in advance!

UnE: Individual demand curve slope downwards because of the weak axiom of revealed preference. SMD applies to the aggregate. It says that, under certain assumptions, nothing guarantees the uniqueness of the equilibrium. (Hence the section title: "anything goes".) Mas-Colell gets round this by suggesting either a weak axiom for aggregate excess demand or a gross substitution axiom, not anything to do with dictators. Maybe you're thinking of the Walrasian auctioneer.

Mas-Colell is a pretty hard book, though. If you're an undergrad, I would pick something else to learn micro from.

JakeS:

Best the MMTers do not generally try to explain what they're talking about in the IS-LM framework, you can see them - as far as I can tell - offer contradictory explanations of what the IS curve should do. Wray has implied that the interest rate is a variable that can have an impact on income and inflation. If that's the case and equilibrium exists, there should be an equilibrium interest rate consistent with full employment. On other occasions, they seem to dismiss the effectiveness of the interest rate, or implicitly do so when saying the government budget constraint is inappropriate or misapplied because the interest rate is a policy variable controlled by the central banks.

Not that the people who invoke the GBC aren't generally wrong. We're not going to see 10% GDP deficits for health care because something is going to go "boink" before we get there.

I don't doubt their good intentions, but there's an inexactness here. The interest rate clearly does matter and clearly has an effect on income and inflation, regardless of whether we're dealing with equilibrium economics with an IS curve or crazy disequilibrium economics.

*But the MMTers, rather.

Hedlund:" Now, Mas-Colell is sort of THE grad level all-purpose reference for micro, right? How much of a math background would any of you say I'd need to tackle that bad boy? I've taken calculus, and still remember how to integrate, I think. Am I in for a bumpy ride? If so, what is maybe a better way to get a handhold into the graduate-level mainstream stuff?"

Can somebody answer Hedlund's question please, because I am too past it and math-challenged and non-micro to be able to say. My guess is "no".

Regardless, though, even if you've got the brains and math to handle a grad text straight off (and I know many have, because that's how some grad students do it) I still don't like it. I think students who wade right into the formal hi-tech theory miss something very important. They miss the big picture intuition. Grab an intro text too.

Mas-Colell is about the worst place to learn the intuition. It's more proof->theorem->proof style math. If you want to go beyond 1st year texts, I'd pick up Varian's text.

Nick,

thanks for the links. I'll have a look at them this evening.

If I understand you correctly, you infer a vertical IS curve from the absence of a (non-zero) natural rate of interest in MMT? Well, you don't need a vertical IS-curve to dispense with the natural rate of interest.

You have two knobs you can manipulate to manage aggregate demand: The central bank can destroy (but never create, due to the zero bound) AD by raising interest rates above zero. And the Treasury can spend AD into existence and tax it away. So for a given fiscal position you have a rate of interest which achieves full employment (since capital and raw materials are plentiful - in the forecastable future raw materials will cease to be plentiful and this will complicate the analysis somewhat, but that will be then and this is now). Conversely, for a given interest rate policy, you have a fiscal position which achieves full employment.

Unless you are prejudicing the sovereign's fiscal policy, you have no justification for picking out any particular rate of interest as more natural than any other.

(Oh, and IS-LM doesn't give you runaway inflation or deflation without some spurious auxiliary assumptions like long-run money neutrality.)

[Disclaimer: I'm not a real MMT'er. I just hang out on their mailing list.]

- Jake

um, what about all the non-MMT 'heterodox' schools? Are they so extra-wacky as to not even desrve a critical mention by peeps?

"The central bank can destroy (but never create, due to the zero bound) AD by raising interest rates above zero"

?

Interest on government debt or on reserves potentially adds to AD surely?

Jake: "If I understand you correctly, you infer a vertical IS curve from the absence of a (non-zero) natural rate of interest in MMT?"

No, it was the other way around. I figured that the MMT IS is vertical, and then I inferred there would be no natural rate of interest in that model (which also fit what the MMTers were saying).

I would rephrase your next paragraph this way: if the IS curve is the normal downward-sloping one, and if fiscal policy can shift the IS curve up and down, then the natural rate of interest will depend on fiscal policy. A change in fiscal policy will (generally) change the natural rate. (Because the government saves and invests too.)

"(Oh, and IS-LM doesn't give you runaway inflation or deflation without some spurious auxiliary assumptions like long-run money neutrality.)"

For a given *real* interest rate, it may or may not, depending on the exact nature of the non-super-neutrality (i.e. it depends on which is steeper, LR Phillips Curve or LR AD curve). For a given *nominal* rate of interest, the AD curve slopes the wrong way, and it very probably will give you runaway inflation or deflation, unless the non-super-neutralities are very big.

Mike: "Mas-Colell is about the worst place to learn the intuition. It's more proof->theorem->proof style math."

OK then Hedlund: my recommendation is you don't touch it with a bargepole. Because if there's one thing I do think is very wrong with economics, is that there's far too much of that sort of thing. What the world needs is for more students to learn existence proofs of Arrow-Debreu General equilibrium. NOT!

JakeS,

But what you're describing *is* the natural rate, isn't it? The rate where the IS curve intersects with the full employment/potential GDP curve. Fiscal policy and array of other phenomena can move the IS curve, and other phenomena can move the FE curve, but given those two, there is a natural rate of interest. So the IS curve does need to be vertical for the interest rate to really be dispensed with - for there to be no natural rate.

Something else that's sort of interesting: look at different measurements of the interest rate and growth rate over US history. It's not exactly clear that we do not live in bizarro world.

Edmund: agreed.

When you say "bizarro world" (I prefer the words "weird world") you presumably mean "rate of interest below the growth rate" (both real or both nominal)?

Please please please read my post on Trill Perpetuities. I really liked it, but nobody else did. Sniff.

y: The income effects of paying subsidies to voluntarily idle money are swamped by the curtailment of investment from increasing the required rate of return on investment. So raising interest rates destroys demand. (Except maybe possibly in a debt-deflation spiral, where investment is less interest rate sensitive.)

Rowe: I'm not sure where you got the claim that the rate of interest has no effect on output in MMT. But it comes as a surprise to me (though it is possible that I've missed such a claim somewhere). The claim is (in ascending order of radicalness) that fiscal policy is as useful as interest rate policy in normal times (and obviously more useful in a debt-deflation crisis), through fiscal policy being more useful, to fiscal policy being so useful that interest rate policy is unnecessary.

Though personally, I think that even if interest rate policy could be useful, using the central bank to fiddle with interest rates is a distraction from using it to cut the balls off Ponzi merchants and hostile currency speculators.

Edmund: Sure, you can construct a "natural" rate by assuming inflexible fiscal policy. But that doesn't tell me anything about the economy, it just tells me that you don't like to use fiscal policy actively in your macroeconomic planning.

- Jake

Nick:
20 years ago the Bank of Canada said it wanted a 2% CPI inflation target. And on average, over the last 20 years, CPI inflation has been almost exactly 2%.

The issue isn't whether rates affect the economy. Yes, the CB did a good job of keeping inflation at 2%. Not a very good job at keeping household leverage constant. Not a good job at avoiding asset bubbles.

And each time the CB stimulated the economy, it was residential investment, not business investment, that led us out of the recession, and the CB had to cut rates by more than what it raised them to "stabilize" inflation.

So let's see what happens when rates hit zero, house prices stop rising, and the household sector de-leverages. When households are jumping at the bit to borrow more, but are credit constrained by collateral requirements and debt service to income ratios, a reduction in rates will create more investment and stimulate the economy. When those credit constraints are no longer binding, monetary policy becomes less effective. The next 20 years may be different.

We can also argue that pump priming worked well for two decades, until it stopped working.

I am not saying that we should solely use one tool.

I would also like to see more discussion about inequality and social bargains between firms and workers.

Jake; "Edmund: Sure, you can construct a "natural" rate by assuming inflexible fiscal policy. But that doesn't tell me anything about the economy, it just tells me that you don't like to use fiscal policy actively in your macroeconomic planning."

That's not what I interpret Edmund to be saying. I interpret him to be saying you could (in principle) use *either* fiscal policy *or* monetary policy to stabilise the economy. He didn't say which he prefers.

rjs: OK, but then you are saying something different to what *I interpret* MMT to be saying. Maybe my interpretation is wrong, of course. (Though Mark Thoma once came to the same interpretation too, IIRC). And if my interpretation *is* wrong, so MMTers believe in the same downward-sloping IS curve that everyone else (except crazies like me) believes in, then I find it harder to tell them apart from a more orthodox New/Old Keynesian. They are almost becoming orthodox!

Edmund: "Something else that's sort of interesting: look at different measurements of the interest rate and growth rate over US history. It's not exactly clear that we do not live in bizarro world."

Nick Rowe: "Edmund: agreed.

"When you say "bizarro world" (I prefer the words "weird world") you presumably mean "rate of interest below the growth rate" (both real or both nominal)?"

Seems normal to me. ;)

One man's fish is another man's poisson.

Nick Rowe: "Please please please read my post on Trill Perpetuities. I really liked it, but nobody else did. Sniff."

I liked it, Nick. I like almost all your stuff. :)

Thanks Min!

Yep, the "weird world" isn't so much empirically weird but theoretically weird. The world is wrong!

Nick, I'm mystified by this recommendation. I could say "everyone should read an introduction to the common law" before commenting on what the law should be. Certainly it might be helpful to the quality and tenor of public debate if people had some understanding of what law can and cannot do before giving their views on it. But that's also true of an enormous number of subjects (physics and philosophy having been given as examples here), and it reflects a peculiar fascination with one's own to think that it merits particular study from the world at large. Further, I think one has to be careful before attributing disagreement to ignorance (and I say that with no knowledge about the particular debates you are referencing).

Robert: you may have a lax comments policy on your own blog, but that's not how things work here. Do not return.

If you had a vocab/glossary list of the main concepts (6-8 per chapter) in each of a micro and macro book at just about any level, wikipedia could fill in most of the blanks to the level of detail that this type of reader might be interested in.

Since the type of person you're taking about is presumably already game for scepticism, no warnings are needed that the principles at the intro level are highly instructive, but are often poorly suited to subtle analysis of real world issues due to the numerous simplifications used to make the material tractable.

Nick; to go back to a minor point you touched earlier:
Giffen goods have been identified in regard to tef grain during the 1980's Ethiopian famine
as well as rats having to choose between rooot beer and tonic water.

http://search.yippy.com/search?query=rats%2Bgiffen+good%2B+root+beer&tb=sitesearch-all&v%3Aproject=clusty

I took your ECON1001 course last year, Prof. Rowe. Enjoyed it. While I bought the required text, I found Khan Academy's videos very helpful as supplementary material. Its not exactly the same sequence of learning, but it builds into similar concepts in the end.

http://www.khanacademy.org/finance-economics/banking-and-money?k

Is there an alternative term for the hot potato? Besides pomme de terre chaude.

Edmund: Sure, you can construct a "natural" rate by assuming inflexible fiscal policy. But that doesn't tell me anything about the economy, it just tells me that you don't like to use fiscal policy actively in your macroeconomic planning.

I think it's the word "natural" that's sticking in our respective craws. In terms of what I actually want...I'd like interest rates to be as low as humanly possible and a higher inflation target because I'm a debtor.

When you say "bizarro world" (I prefer the words "weird world") you presumably mean "rate of interest below the growth rate" (both real or both nominal)?

Please please please read my post on Trill Perpetuities. I really liked it, but nobody else did. Sniff.

Yes, exactly. "Weird world" works if we want to go Lovecraftian instead of Superman.

That was an interesting post. Maybe someone could whisper sweet nothings to the Argentinians and convince them to give us a natural experiment?

It surely can't happen here. Literally as I wrote this, a candidate for Senate came on TV calling for us to cut the pay of Senators every time they don't balance the budget. For the love of...

I think it's the word "natural" that's sticking in our respective craws. In terms of what I actually want...I'd like interest rates to be as low as humanly possible and a higher inflation target because I'm a debtor.

And you don't think that you're a debtor because interest rates are so low relative to expected inflation?

No, the binary "COLLEGE - NO COLLEGE" decision was not particularly sensitive to those variables.


I can read a first year economics textbook. I can even understand most of a first year economics textbook. What I can't do is believe a first year economics textbook.

UnlearningEcon: 'Re: marginal productivity. I'm not denying it can be possible to squeeze more out of a fixed amount of capital. But evidence suggests that most of the time firms face constant or falling marginal returns, and so a flat supply curve would be far more realistic assumption.'

Hence we have the whole field of industrial organisation that deals with these kind of things ...

'Your example demonstrates my point, though. Frances actually spoke about this in a recent post - there is no labour MVP in the majority of cases.'

No that’s not right. To quote Frances, 'The sudden drop in the productivity of, say, flour means that the marginal product is - at the point where the marginal product function is discontinuous - undefined'. That’s not the same thing as saying MVP doesn’t exist, a function can be discontinuous and still exist. But this is beside the point, econ provides a methodological framework which you can use to make your arguments, it doesn’t presuppose one form functional form over others.

Without putting words in Frances mouth, I think her statements were a little bit unclear. I think she means to say in some cases VMPL (firm demand for labour in labour market) cannot intersect labour supply because VMPL maybe horizontal, or alternatively downward sloping but gets chopped of (because of constraints to hiring, e.g. no. of stores available). Again, at the risk of repetition, nothing in econ methodology prevents someone from making this kind of argument.

'I think the observed reality is that oligopolies often offer low price and good quality, whereas small businesses only offer the latter. The point was also the neglect of theories of the second best (I remember a diagram that showed a union and monopoly, but I can't remember what the outcome was. It was so convoluted that even my teacher called it 'a diagram too far.'

Again, I refer you to the field of industrial organisation that deals with these issues.

It’s really frustrating having to rebut essentially charactertures of econ, and this is where I disagree with Nick. For me it’s clear that reading an econ 101 text isn’t sufficient to convey an accurate understanding of economic methodology. People would need to read wider and higher. Unless you’ve read things in the fields of industrial organisation, political economy, political economics (aka positive political theory in polisci jargon), mechanism design, behavioural econ, new institutional econ, evolutionary game theory, experimental econ, international trade, network econ etc. etc. etc. in my opinion your understanding of econ methodology will be limited and biased (not in a good way).


Hedlund: 'That said, I have heard people (e.g., Herb Gintis) say that many of the "heterodox" criticisms boil down to criticisms of the way undergrad-level subjects are taught, while the advanced stuff operates on entirely different principles. As such, I've been meaning to go deeper into the "orthodox" end of things.'

This is exactly what I’m talking about above.

'Now, Mas-Colell is sort of THE grad level all-purpose reference for micro, right? How much of a math background would any of you say I'd need to tackle that bad boy? I've taken calculus, and still remember how to integrate, I think. Am I in for a bumpy ride? If so, what is maybe a better way to get a handhold into the graduate-level mainstream stuff?'

Personally I think it would be tough going through MWG with just calc. You really need what maths students and teachers call maths 'maturity' to make it easier on yourself, preferably at real analysis just because that class is where you start getting comfortable with sets, properties of functions such as continuity, differentiability etc. etc. which is assumed knowledge in MWG.

If you haven’t taken intermediate micro then I recommend The Applied Theory of Price by Deirdre McCloskey (google as Deirdre kindly offers it free online) or Exchange and Production by Armen Alchian. Both are very well written and readable by econ standards. Those books won’t go into the technical details but are great for econ intuition.

If you’re really keen for grad micro I would recommend Advanced Microeconomic Theory by Jehle and Reny just because it provides more intuition for the maths bit than MWG does but combine with an intermediate micro book for econ intuition.

A more mathematically advanced intermediate micro book is Microeconomic Theory by Nicholson et al which is more at the calc level.

The college-no college decision may have been binary, but the amount borrowed was not binary.

If interest rates were 20% on your college loans, then you would have borrowed less, and if not, the lender (one hopes) would have qualified you for less. Tuition costs would have declined, and you would be less in debt today than you are now.

The point being that low interest rates are not a boon to the borrower. What the borrower wants is falling rates, in the sense that they pay $X for tuition, then rates drop and the new equilibrium tuition price is $2X. Then they can re-finance their loan at the lower rate, whereas the new-comers pay the lower rate on 2X of debt. Same principle for house buyers. But falling rates are not a long term sustainable trend.

The college-no college decision may have been binary, but the amount borrowed was not binary.

I've got you - circumstances dictated that the amount was an all or nothing, binary decision as well. You're talking about me personally, so no. That is, I'm not saying personal preferences didn't play a role. I'm sure I could have worked more, at the expense of grades. For my part, interest rates played no role in amount borrowed, but only borrowing. There probably existed a point where I would have just left. I can't say in any reliable way what that point would have been.

If interest rates were 20% on your college loans, then you would have borrowed less, and if not, the lender (one hopes) would have qualified you for less. Tuition costs would have declined, and you would be less in debt today than you are now.

I think college is somewhat special when it comes to interest rates. Do not be surprised if borrowers prove remarkably indifferent to rising rates. Just like I can't reliably say what the point of "no go" would have been, education is one of those products that combine such a vast array of elements that make it an inefficient market - uncertainty of outcome, distance from actual expense, other psychological aspects - to the point that you're going to see completely screwed up outputs. It might be worse than health insurance.

Edmund,

I wasn't really trying to talk about you personally. Don't take any offense. But education is an investment in human capital, and how much people are willing to pay will be sensitive to interest rates.

They will think -- when I graduate, I will be earning $X per year, so can I afford pay $Y in debt service per year? Hopefully :) But even if they are willing to take agree to loans with no thought of repayment, the lender should be thinking in those terms and will refuse to qualify them for a loan that they would qualify them for if rates were lower. And of course how much you are able to pay is a function of the market value of the increase in human capital that the education gave you.

Therefore how much people are willing to pay for an education *is* a function of interest rates. It will also be influenced by other factors, but that's beside the point I was making here.

And medical care is a great example. Of course everyone is willing to pay "whatever it takes", nevertheless if medical care was funded by loans that needed to be repaid when the sick person resumed working, then the price of care would drop when interest rates rose, and vice versa.

Everyone would want falling rates, but we cannot promise falling rates to every generation.

@DeusDJ What exactly is a social provisioning process? Remember, no BS now.

One can use google to look up terms you do not understand, such as "social provisioning process".

rsj: You attribute a great deal of power to interest rates, without ever touching upon margin requirements.

This is a mistake. If you want the central bank to manage the business cycle, you are far better served by countercyclical margin requirements than by countercyclical interest rates. Because interest rates only squeeze out prudent lenders and productive borrowers - Ponzi merchants and lenders who fail to perform due diligence are nearly totally interest rate insensitive. Whereas both are highly sensitive to having to gamble with their own money instead of someone else's.

At the same time, this would avoid letting voluntarily idle wealth accrue seigniorage at the expense of involuntarily idle labor.

"And medical care is a great example. Of course everyone is willing to pay "whatever it takes", nevertheless if medical care was funded by loans that needed to be repaid when the sick person resumed working, then the price of care would drop when interest rates rose, and vice versa."

Or the price would remain the same and more people would be locked out of medical care.

Or the price would remain the same and people would be more in debt. The belief that lenders assess people's creditworthiness before lending... well, that's what Greenspan thought too.

The data is really quite good on this. The only historically observed way to get cheaper, better and more efficient medical care for everyone is to nationalize it. You can fiddle all you like with "market-based solution" - it just doesn't work. "The market" produces bad, expensive and unavailable medical care. Unless you're in the 1 %, of course, but screw the 1 %.

- Jake

JakeS,

Very few countries have fully nationalized medical care (Cuba is a leading example) but most have some sort of nationalized insurance or purchasing system. Although I do sometimes wonder to what extent the ability of the NHS to combine monopsony buying power and therefore lower prices (which I regard as its great virtue) with rapid technological development in medicine is due to the Americans picking up the bill with their mind-blowingly stupid system that combines the worst of all worlds.

Scandinavia also has fully national health care - or used to have before the neoliberal idiots (but I repeat myself) got their ham-fists into it. Universally, the European experience is that the less "market-based" your health care system is, the better it works.

Of course, this may be because the countries with universal health care are also the ones where the civil service has been most able to resist neoliberal "reform." Unsurprisingly, the public sector works better when you don't let oligarchs loot it.

And no, this is not piggy-backing on American stupidity - the excess costs of the American system are almost exclusively caused by the totally unproductive insurance companies. Drug company pork is chickenfeed next to insurance company rent-seeking.

- Jake

vimothy, WARP is routinely violated as soon as you move to higher than three or four dimensions.

As it must be, because constrained optimization problems are non-polynomial in the number of dimensions. Which means that they are not computationally tractable in any real-world application.

And that leaves entirely to one side the fact that utility optimization as a model of human behavior has been abandoned in every self-respecting social science for the next best thing to a full century.

- Jake

@vimothy

"UnE: Individual demand curve slope downwards because of the weak axiom of revealed preference. SMD applies to the aggregate. It says that, under certain assumptions, nothing guarantees the uniqueness of the equilibrium. (Hence the section title: "anything goes".) Mas-Colell gets round this by suggesting either a weak axiom for aggregate excess demand or a gross substitution axiom, not anything to do with dictators. Maybe you're thinking of the Walrasian auctioneer."

No?

"Let us now hypothesise that there is a process, a benevolent central authority perhaps, that...redistributes wealth in order to maximise social welfare." - p 116-118

Gross substitution itself isn't realistic anyway.

@davidN

Here's Frances:

"Together, they produce a hole in the ground. What is the "marginal productivity" of the worker? Of the shovel? It's like the sound of one hand clapping - it's impossible to tell what each member of the production process contributes.

[Update] Another way of putting this is that the very idea of a marginal product only makes sense with certain types of production functions, ones for which it is possible to make small adjustments in the quantity of each input used."

This fits my characterisation far more clearly than yours.

Your comment is incredibly evasive and does nothing to prove your position that I am attacking a caricature of economics. Economics teaches diminishing marginal productivity. It teaches it at all levels. If it takes my criticisms on board, then why haven't they filtered down to the lower levels yet? How long will it take? It's really as simple as making the supply curve flat, and realising that modelling production as commodities plus land plus labour makes much more sense than invoking some abstract substance called 'capital.'

It should please you know that I've read well beyond econ101 textbooks. But as I said before, why does none of this stuff filter down? Economics is stationary. It doesn't evolve. Responses to critics dance between 'that is wrong/unimportant' to 'we have incorporated that.' When it is shown that even at a high level, such as Mas-Collel, neoclassical economics remains ridiculous, you defer to different places, hoping to shut your critics out because they cannot possibly know every single paper that has attempted to shoehorn said objection into the neoclassical paradigm. But the core remains unscathed.

There are fields of economics that don't really rely on marginalism. Fine - keep them. But don't reference them when marginalism is criticised, as they are not relevant.

Unlearning: Lets make an extreme assumption: assume all inputs must be used in fixed proportions. Let's also assume increasing returns to scale. Then the Marginal Cost curve slopes down. And since this firm obviously cannot be a perfectly competitive firm, it will have monopoly power face a downward-sloping demand curve and Marginal Revenue curve. And it will maximise profits at a point where MR=MC (FOC), and where MR cuts MC from above (SOC).

We still need marginal analysis, even under those assumptions.

You assume that the monopolist (or indeed any large organization) maximizes profit. Anybody who has spent more than ten seconds examining (or working within) large, complex organizations knows that this is a complete fiction. Large organizations make pricing decisions as they make all decisions: Politically.

Sure, production must, overall and in the long term, be remunerative. But this is a much looser constraint on firm behavior than maximizing profits.

This touches upon the core problem with the central tradition: It elides (or, less charitably, obfuscates) the inherently political nature of the discipline: Economics is politics, money is a token of political power, prices are an outcome and an instrument of power struggles, banking is a governance function, and the contemporary systems of industrial organization and international trade are built on a foundation of feudal lordship and colonial tribute, respectively.

Any theory of economics which neglects political power in its description of the determination of production and transaction is simply not dealing with the world the rest of us live in.

- Jake

Any theory of economics which neglects political power in its description of the determination of production and transaction is simply not dealing with the world the rest of us live in.

*BEEP* *BEEP* *BEEP* We have a winner.

Jake: OK. We need to look inside the firm, and stop treating it like a profit-maximising black box. Let's do that. When we look inside the box we see people maximising their own desiderata. And if they are maximising, there's gonna be a margin.

Nick,

But firms simply don't operate at the margin in reality. Substantial evidence suggests they just use an arbitrary markup on their costs.

For heaven's sake Unlearning Economics,

that excerpt you cite from Mas-Colell is not about the existence of downward sloping demand curves. It's about when we can use the consumer surplus of a representative consumer as a measure of societal welfare. The real point being that in the absence of such redistribution, you can't reach conclusions about societal welfare based on aggregate consumer surplus because there are distributional questions to think about. The introduction to the section should have given you a clue, it starts:

"When can we compute meaningful measures of aggregate welfare using the ad function ... more specifically, when can we treat the aggregate demand function as if it were generated by a fictional representative consumer whose preference can be used as a measure of aggregate societal welfare?"

how did you come to misunderstand this? my guess is that you didn't read the original but discovered it quoted in a presentation by Steve Keen I found by google the excerpt you quoted, lecture 2 here:
http://www.debtdeflation.com/blogs/lectures/

you are very fond of complaining when mainstream economists suggest their heterodox critics might not fully understand what they are talking about and complain of their arrogance. Now there are very many economists who really know their stuff and have a lot of worries about existing approaches, some of whom are trying to extend and repair what exists (say Gabaix) [Link fixed, I think, NR] and others who propose alternative approaches (say Howitt). Then there are heterodox internet warriors who only learn economics up to the point where they think they are in a position to rubbish it, and whom will never understand it properly because they are never willing to consider its merits. I think that's actually arrogant.

I am only somewhat familiar with your output, but from some examples like this one, and I think I have seen you show evidence of misunderstanding of the money multiplier, partial-equilibrium models to give two more examples, you might perhaps want to take a more humble approach regarding your own grasp of the subject.

They say economists aren't good at forecasts but here's one. I expect you to respond to this with bluster and continue your quest to rubbish economics without doubting your own grasp of it.

Jake: 'Any theory of economics which neglects political power in its description of the determination of production and transaction is simply not dealing with the world the rest of us live in.'

See Microeconomics: Behavior, Institutions, and Evolution by Samuel Bowles especially Chapter 7 Exchange: Contracts, Norms, and Power. By the sounds of it you will love that book.


UnlearningEcon: 'There are fields of economics that don't really rely on marginalism. Fine - keep them. But don't reference them when marginalism is criticised, as they are not relevant.'

On the contrary every single economic field I know uses 'marginalism' because it’s a mathematical concept and in econ we use maths. Any time we represent something with a function and that function is differentiable for at least some parts where it is defined we get 'marginalism'. This isn’t class warfare, it’s math.

'This fits my characterisation far more clearly than yours.' I stand by my comment, I believe Frances wasn’t clear about when MVP exists. Again this is just maths.

'Your comment is incredibly evasive and does nothing to prove your position that I am attacking a caricature of economics. Economics teaches diminishing marginal productivity. It teaches it at all levels. If it takes my criticisms on board, then why haven't they filtered down to the lower levels yet? How long will it take? It's really as simple as making the supply curve flat, and realising that modelling production as commodities plus land plus labour makes much more sense than invoking some abstract substance called 'capital.'

If you look at my comments on the Apple post I actually claim that VMPL could be flat (at least until you hit physical constraints), not downward sloping. Nothing in econ methodology stops me from making that assertion. Again it’s maths.

I'm looking at that Howitt paper. In the beginning, at least, it talks a scientific language similar to one that I understand well. But I see this bogglesome quote right at the beginning:

Now the first reaction of many economists upon first hearing about this methodology is that all economic models with an explicit micro-foundation, which is to say almost all models that one sees in mainstream macroeconomic theory, are “agent-based”. Some even have a multitude of heterogeneous agents (see Krusell and Smith, 1998 and Krebs, 2003, among others). So what’s the big deal?

The big deal, as Tesfatsion has emphasized on many occasions, has to do with autonomy.
An agent in a rational-expectations-equilibrium model has a behavioral rule that is not
independent of what everyone else is doing. In any given situation, her actions will depend
on some key variables (prices, availability of job offers, etc.) or the rational expectation
thereof, that are endogenous to the economic system. These variables will change when we
change the agent’s environment, and hence her behavior cannot be specified independently of
the others’. The household, for example, in a market-clearing model of supply and demand
cannot choose what quantity to demand until told what price will clear the market. Likewise
the agent on a Lucas island (a Phelps Island with rational expectors) cannot choose how
much to sell until informed of the stochastic process determining aggregate and relative
demand fluctuations.

The problem with assuming non-autonomous agents is that it leaves the model incomplete,
and in a way that precludes a deep analysis of the coordination problem.

And my reaction is total astonishment (bold mine). I always knew that economists like to use techniques that they call "agent-based". But I had always assumed that they knew it was a big deal, and presumably tried to take into account, the fact that the agent they are trying to model "has a behavioral rule that is not independent of what everyone else is doing." That's basic to, e.g., artificial life/swarm intelligence, where these kinds of agents are taken seriously. But is Howitt claiming that it doesn't occur to other economists that this is missing from their models? Really?

And we're supposed to engage with any of this seriously?

My bogglement continues:


Now under certain assumptions about common information, someone endowed with
enough information could figure out on her own what the market-clearing price is going
to be, or what the rational expectation of the price level is, and in this sense could act autonomously
even in a rational-expectations equilibrium framework.

Note that I'm not mocking Howitt here, or anything. I am simply incredulous that Howitt feels he needs to deal with and dismiss (in the way that academic paper intros do) the idea that it is reasonable to assume that models using agents with "common information" at all reflect reality.

Every economist should download and play around with NetLogo for a few weeks first, before they ask me to read one of their intro textbooks.

Reading further (but I won't spam with more quotes), I think what y'all need isn't some education in thermodynamics, which is what some people recommend as a cure for economism, but actually something like a real education in cognitive science, machine learning, neural networks, swarm intelligence, etc.

"OK. We need to look inside the firm, and stop treating it like a profit-maximising black box. Let's do that. When we look inside the box we see people maximising their own desiderata."

No you don't.

Because one of the budget constraints you face as a real human being living in the real world is that you must develop your strategy in as small a number of computations as practical while subject to Knightian uncertainty about the future. Which means that there is an ocean of decision-making heuristics that perform better than attempting to compute the constrained optimization solution. Any rational person looking to better his lot in life would immediately discard constrained optimization as a strategy that only works in cutesy textbook examples with separable utility functions and less than five variables.

And that's even leaving aside the fact that as soon as you start discussing politics, you're leaving the part of the game which has a unique solution. Indeed which can ever have a unique solution. You can't formulate a game theory model of Nomic.

- Jake

@luis

"that excerpt you cite from Mas-Colell is not about the existence of downward sloping demand curves. It's about when we can use the consumer surplus of a representative consumer as a measure of societal welfare. The real point being that in the absence of such redistribution, you can't reach conclusions about societal welfare based on aggregate consumer surplus because there are distributional questions to think about."

Well unless I have misread, he considers this a necessary condition for the treatment of individual demand as aggregate demand:

"For it to be correct to treat aggregate demand as we did individual demand...there must be a positive representative consumer. However, although this is a necessary condition for the property of the aggregate demand that we seek, it is not sufficient. We also need to be able to assign welfare significance to this fictional individual's demand function."

He continues - I won't quote at too much length.

"I am only somewhat familiar with your output, but from some examples like this one, and I think I have seen you show evidence of misunderstanding of the money multiplier, partial-equilibrium models to give two more examples, you might perhaps want to take a more humble approach regarding your own grasp of the subject."

You must substantiate your arguments better than this. I have yet to see evidence that economists actually know what is taught on their own courses. Your comments on mainly macro simply deny my direct quote from a textbook.

@DavidN

"On the contrary every single economic field I know uses 'marginalism' because it’s a mathematical concept and in econ we use maths. Any time we represent something with a function and that function is differentiable for at least some parts where it is defined we get 'marginalism'. This isn’t class warfare, it’s math."

And criticisms on economics focus on how prices cannot be calculated without first knowing income distribution. You can try to shout me down and gloss over it by using/referencing maths all you like, but you still haven't engaged it. If case the fields you dismissively reference also use marginalism, they are also vulnerable to the same criticisms.

I also acknowledged that in my recent CCC post the paragraph on partial equilibrium was poorly constructed. I demonstrated a similar argument in the comments more rigorously, so attack that if you wish to show that I 'do not understand partial equilibrium.'

JakeS,

"Of course, this may be because the countries with universal health care are also the ones where the civil service has been most able to resist neoliberal "reform.""

A curious way to describe Britain.

At the current rate, Britain won't have universal health care by the time the next election rolls around.

- Jake

JakeS,

No.

@DavidN: Thanks. I've read some of McCloskey's work already; that sounds like just the ticket for now.

@Mike Moffatt: Ditto, thanks. Varian does seem to be another name that crops up a lot.

JakeS, as a Brit I can tell you that is 100% complete bullshit.

(In fact, in Scotland, we haven't had much change of our health service, which is devolved, since Thatcher.)

Let's stop spitting bile at each other for a brief interlude. Can somebody recommend me what you consider to be (doesn't have to be free):

(1) A good introductory textbook

(2) A good intermediate textbook

(3) A good advanced textbook.

UnlearingEcon

I'm not sure, but I'd say

1 & 2 - Mankiw, Pindyck/Rubinfeld, Varian.

3) Mas Collel? But no idea, really.

Nick, As it happens, I followed your advice several years before you gave it. When the financial crisis hit in 2008, I thought it would make more sense to read a macro textbook than economic analyses from journalists. I bought Paul Krugman's intro macro text (a rather expensive choice), and spent a couple of days reading it. Result? A superficial understanding, and the conviction that, as Krugman himself admits in his blog, "macro is hard". And as a sign of respect, I would not argue with a real economist like you without a lot more study on my part. My guess is that it would take two or three years of full-time study, minimum, for a smart person to have a chance at contributing to the pure economics of blogs like yours.

However, I believe your suggestion would have a far greater benefit if it were directed at journalists, because as a group they have a big impact on public opinion and policy. Many of them have reported on topics like sovereign debt and austerity measures without seemingly any understanding of the economics. And they must bear some responsibility for the climate of opinion that has allowed bad policy to be adopted without a fight. For example, why didn't Cameron and Osbourne get a rougher ride from the press when they imposed austerity? Martin Wolf can't do it all on his own. Somebody should set up a program to donate a macro textbook and weekend course for every journalist in need.

Now let me turn the tables. Economic policies are only put in force by politicians leading political parties voted in by citizens in countries with specific histories and cultures. And these politicians are advised by civil servants and academics employed by local institutions with their own histories and dynamics. For example, the fate of the Euro and its shocks upon the world economy now largely hangs on German politics. How many macro economists have directed some of their time to researching the German political and institutional situation, instead of just considering it a black box that will produce some sort of incomprehensible but decisive output?

Cheers.

Varian's undergraduate micro book covers (not in order), axioms of revealed preference, the assumptions underpinning marginalist consumer and producer behavior (well-defined, transitive, convex preferences), the Lagrange multiplier method of solving constrained optimization problems, Pareto-efficience and Hicks and Slutsky-compensation. Plus a few more that I don't remember.

If more than half of the previous paragraph is Greek to you, Varian is worth a read, because it is very well written.

Mankiw's first-year textbook is, in my experience, eminently skippable. Go straight to a proper macro book like Sørensen and Whitta-Jacobsen, Introducing Advanced Macroeconomics: Growth and Business Cycles. Mankiw does nothing for you that Varian and Sørensen et al don't do better.

- Jake

Introductory and intermediate kind of overlap. Bernanke was good.

It seems there are maybe two kinds of "advanced" books as well. Romer's Advanced Macroeconomics was used in undergraduate courses at my college, but shows up as introductory material in graduate macro courses as well. Then there's Woodford's Interest and Prices, which is quite a bit more advanced than Romer.

If everyone read Bernanke, then picked up a mathematical methods book (Chiang is good), then read Romer, the blogosphere would be awesome. I wish it were a requirement for everyone who wants to write for the WSJ, NYT and Washington Post.

I look forward to seeing (for free, damn it) what Wray and Mitchell have to offer.

I've got textbooks but they deny reality many times over. I have a hard time believing your ones are any better but I guess it's best to have access to the best of the bunch.

Varian has been recommended a few times. I'll look into that.

UnlearningEcon:

Deirdre McCloskey, The Applied Theory of Price, it’s free online on author’s website.

Micreconomics: Behavior, Institutions, and Evolution by Samuel Bowles.

Pathetic. Someone comes here saying that, if you want me to take your claim of reading a book seriously, that you need to point to real world examples of your theory in action, just as in other disciplines. Nick Rowe then says that "wow, that's an interesting point and I'll have to think about it". If a longtime neoclassical economist/a brilliant deductive thinker cannot come up with one example off the top of his head, you know there's something wrong with the discipline. Of course there are no real world examples as every heterodox economist has pointed out, and in fact there are hundreds of example where it has been a complete and utter failure, including this past crisis. Of course neoclassical economics has not been designed to predict crises but to be a cheerleader of the system. Students are taught to be cheerleaders. Long ago people like Marx and Veblen pointed out that as an economist if you're not trying to find areas where the system will fail (and having theories that lead to it) then you're simply not conducting science. Nick Rowe is a cheerleader. People like vimothy are cheerleaders. Vimothy, or excuse me, "vimothy", if you expect us to take your claim seriously that you entered neoclassical economics as a critic and came away a believer, then you are 1)a complete fool or 2)a liar. I happen to think you're a liar.

unlearningecon: dear lord...please do not follow their recommendations, do-not-read varian

W. Peden:

Note the comments of a Sraffian, Franklin Serrano regarding the accuracy of MMT regarding the euro:

" I am sraffian so I can say this with a lot of detachment. There are a large number of big problems with the Euro and of course a number of different people have written about some of them many years ago. From what I learned from Godley, even Kaldor in the 1970s had already warned that if the UK joined the common currency, Britain risked becoming the "Northern Ireland of Europe" But what really matters is that the EXACT and SPECIFIC form this particular crisis has taken , namely, a banking crisis in a few countries leading to fiscal problems and from there to the euro denominated government debt bond yields getting out of control due exclusively to the uncooperative attitude of the european central bank. This has been said clearly only by MMTers (and in particular Mr. Mosler who mentioned banking problems). Even today only very few other people like John Eatwell and Roberto Frenke, for instance,l understand this.Almost everybody else is confusing some other actual or potential problems of the euro , specially current account and regional imbalances, that are important in themselves but certainly DID NOT cause THIS crisis. The key point in MMTs "victory" is not forecasting per se. It is the fact that the correct understanding of sovereign money is the only way to understand what is going on now. The euro sovereign debt crisis is a total misnomer. Had these countries truly sovereign money and debt this crisis could not have happened. Simple purchasing of government bonds in the secondary market by the national central bank (or even the ECB if it wanted to ) would do the trick (no need to say melodramatic things about "monetisation")."

Case closed. BTW, what MMT did? It's called science. I hope one day you get acquainted with it.

DaRkJaws,

You are giving heterodox people a bad name. I know from personal experience that both Vimothy and Nick are generous and intellectually inquisitive.

I know from the many posts I've read that both Nick and vimothy are willing to engage in any discussions that have the word "heterodox" in it, for sure. I'll give them that much credit. But vimothy is certainly not "generous". Nick is a nice man and generous. But it doesn't change the fact that he's a cheerleader for the system, whether he's a willing or unwilling participant. That's why neoclassical economics was invented, as a response to Marx. If pointing out the truth hurts then so be it, and I am certainly doing what other heterodox people have stated many times (meaning I'm not giving it/them a bad name)

But it doesn't change the fact that he's a cheerleader for the system, whether he's a willing or unwilling participant.

His interest in monetary disequilibrium puts him really quite far outside the mainstream. It's a gigantic critique of mainstream macro.

at most it makes him a radical member of the mainstream, and not even the type that critiques it but makes slightly different assumptions using the same models. Members of heterodoxy do not accept the modeling techniques nor the economics itself that the mainstream works on. We state things in completely different terminology, for completely different reasons (for the most part)

DaRkJaws: Your attack on vimothy is well outside the bounds that are customary on this blog. Stop now.

DaRkJaWs, I think vimothy's story is totally believable. I spoke with this "heterodox" guy, http://scholar.harvard.edu/marglin , and he's seen it happen all throughout his career.

@wh10,

I think you first start out complaining about unrealistic assumptions, but then when you try to write down a model that describes how you think things should be, you find yourself needing to make all sorts of compromises in order to get anywhere. And I guess you have to decide whether those compromises are worth any insight that you arrive at as a result of making them.

For some people, it's a no brainer to make those compromises because the insight of an interesting model is worth the compromise in realism. And then, those same voices of criticism that spurred you to try to tackle the problem in the first place become somewhat annoying, or at least redundant, because you've considered these things already and are more interested in getting something tractable than in endlessly pointing out flaws. Next thing you know, you look pretty orthodox.


rsj: I rather like that comment.

from what I remember vimothy used to make very harsh criticisms of MMT and heterodoxy in general, that doesn't sound like someone who converted from heterodoxy to orthodoxy...it's one thing to protect mainstream economics, and another to attack heterodoxy

Edmund: "His [Nick's] interest in monetary disequilibrium puts him really quite far outside the mainstream."

And I don't have a clue how I can model it. See rsj @9.29

rsj, do the compromises need to be made because no one is smart enough to model the complexity/realism?

DaRkJaWs, I think he just sees his old, ignorant self in lots of commenters, is embarrassed by it, and wants to rectify it in an aggressive way.

rsj: There are ways to simplify the treatment down to the point where it is at least numerically tractable, and can provide some practical insight, without crippling it by forcing it into an equilibrium straitjacket and force-feeding it constrained-optimization agents.

It won't be analytically tractable. But neither is the weather, and we can still model it. The fascination with analytical tractability - to the extent that you see papers prefacing numerical work with an apology for failing to dumb the model down to the level where it becomes analytically tractable - is not gainful for the profession.

- Jake

rsj, do the compromises need to be made because no one is smart enough to model the complexity/realism?

We can debate whether compromises or basic methodology are wrong, but I think that's ultimately the problem - both a conceptual problem, a problem of investigating and identifying all the needed elements and relationships, and finally of sheer computing power. Looking into Soviet central planning illustrates the last point.

[link embedded here NR]

Neat part quoted:

Truly intractable optimization problems — of which there are many — are ones where the number of steps needed grow exponentially 2. If linear programming was in this "complexity class", it would be truly dire news, but it's not. The complexity of the calculation grows only polynomially with n, so it falls in the class theorists are accustomed to regarding as "tractable". But the complexity still grows super-linearly, like n3.5. Expanding the problem size by a factor of a thousand takes us not a thousand times as long, but about 30 billion times as long. Where does this leave us?

A good modern commercial linear programming package can handle a problem with 12 or 13 million variables in a few minutes on a desktop machine. Let's be generous and push this down to 1 second. (Or let's hope that Moore's Law rule-of-thumb has six or eight iterations left, and wait a decade.) To handle a problem with 12 or 13 billion variables then would take about 30 billion seconds, or roughly a thousand years.

Naturally, I have a reason for mentioning 12 million variables:

In the USSR at this time [1983] there are 12 million identifiably different products (disaggregated down to specific types of ball-bearings, designs of cloth, size of brown shoes, and so on). There are close to 50,000 industrial establishments, plus, of course, thousands of construction enterprises, transport undertakings, collective and state forms, wholesaling organs and retail outlets.
-- Alec Nove, The Economics of Feasible Socialism (p. 36 of the revised [1991] edition; Nove's italics)
This 12 million figure will conceal variations in quality; and it is not clear to me, even after tracking down Nove's sources, whether it included the provision of services, which are a necessary part of any economy.
Let's say it's just twelve million. Even if the USSR could never have invented a modern computer running a good LP solver, if someone had given it one, couldn't Gosplan have done its work in a matter of minutes? Maybe an hour, to look at some alternative plans?

No. The difficulty is that there aren't merely 12 million variables to optimize over, but rather many more. We need to distinguish between a "coat, winter, men's, part-silk lining, wool worsted tricot, cloth group 29--32" in Smolensk from one in Moscow. If we don't "index" physical goods by location this way, our plan won't account for the need for transport properly, and things simply won't be where they're needed; Kantorovich said as much under the heading of "the problem of a production complex". (Goods which can spoil, or are needed at particular occasions and neither earlier nor later, should also be indexed by time; Kantorovich's "dynamic problem") A thousand locations would be very conservative, but even that factor would get us into the regime where it would take us a thousand years to work through a single plan. With 12 million kinds of goods and only a thousand locations, to have the plan ready in less than a year would need computers a thousand times faster.

...

I said before that increasing the number of variables by a factor of 1000 increases the time needed by a factor of about 30 billion. To cancel this out would need a computer about 30 billion times faster, which would need about 35 doublings of computing speed, taking, if Moore's rule-of-thumb continues to hold, another half century. But my factor of 1000 for prices was quite arbitrary; if it's really more like a million, then we're talking about increasing the computation by a factor of 1021 (a more-than-astronomical, rather a chemical, increase), which is just under 70 doublings, or just over a century of Moore's Law.

Edmund, that was really interesting, thanks.

Yep, it is a fascinating piece. I never realised just how massive the computing power needed would be, even compared to the massive power of modern computers.

And remember, they made loads of really extreme simplifying assumptions just to get to that point.

We are trying to model the behaviour of people who are as smart and complicated as we are. PLUS, we are not just trying to model the SUM of individuals' behaviour, we have to model all the interactions between them as well.

There was some talk in the blogosphere a few months back, about the "n-body problem" in physics. I didn't understand it all. AFAIK (I may be wrong on this) physics can solve the "2 body problem" (Newtonian mechanics) but has runs into problems for numbers bigger than 2 (is that right????). Economics has the "7 billion body (world's population) problem". And the interaction between people is a lot more complicated than the interaction between Newtonian objects.

Let's get realistic about our ability to (ever) build realistic models.

The best we can realistically hope for is some sort of rough heuristic.

Nick: "physics can solve the "2 body problem" (Newtonian mechanics) but has runs into problems for numbers bigger than 2"

I wouldn't say that. Here is a list of rigid body physics simulation software toolkits. You may be thinking about the fact that systems with more than two degrees of freedom may have *chaotic* solutions, meaning that computation/specification errors increase exponentially in time so they're intrinsically unpredictable in the long run. That's a different issue from computational tractability. Rigid body simulation is at worst n^3 in the number of degrees of freedom. (Yes, I used to be a physicist).

Edmund,

Strictly speaking, that's all correct. But if it was true in practice, the capitalist system wouldn't function either. Yes, I understand that the computation is distributed across the economy, but there is no way that each firm is actually carrying out their bit of that exact computation, somehow computing the correct price of their good as a function of all the other goods in the economy. In reality each firm makes very rough heuristic decisions based on the price of their inputs and those of their competitors. Wash and repeat. So the equivalent aggregate computation is mostly just linear in the number of products. The bottom line of Spufford's novel, I think you'll agree if you've read it, is that the failure of the soviet system was not one of computation, but rather a failure of politics. Capitalism succeeds to the extent that it aligns incentives with maximum output (the second welfare theorem), not by its ability to distribute computation.

K: I got my info from Wiki here. But I didn't really understand it.

I think you might have misunderstood Edmund's point. Whether or not the market economy is actually solving the problem we would want it to solve (The First Theorem of Welfare Economics) is a separate question. Regardless of this, the market economy can be thought of as "trying" to "solve" some "problem", and that problem is likely to be at least as complicated as the central planner's problem. (That's what I thought Edmund was saying anyway. And if Edmund wasn't saying it, I will.

UE

yes you have misread (misunderstood). The "property of the aggregate demand that we seek" is to do with welfare measures, not the slope of demand curves.

It turns out you have also quote selectively from that textbook on mainly macro, giving the false impression it says the money multiplier M=mB is a causal mechanism whereby increases in B will increase M because m can be treated as a constant. In fact it says that m moves around. Which is correct.

DaRkJaWs,

"That's why neoclassical economics was invented, as a response to Marx."

I hear Georgists making the same sort of claim. In both cases, the historical dates don't match up: even the first volume of Capital was not published until 1867. It's implausible that Carl Menger, who began the Grundsätze in that same year, could have (a) read the first volume of capital within 1867, (b) fully understood its implications, and (c) seen how marginal utility would demolish Marxism's credibility (which didn't yet exist) in the economics profession. Even more problematically, I know of no evidence that Carl Menger read Marx at all in the 1860s (or later?). As for Jevons, he had the basic idea of marginal utility worked out by 1860, so it's rather unlikely that he was responding to a work published in 1867.

That leaves only the possibility that the neoclassicals were responding to Marx's pre-Capital output, again implausible: there were more than enough major classical economists to respond to. Which figure would loom larger in Jevons's mind: a failed German revolutionary or David Ricardo?

(As for the Georgist claim, Henry George did not have his "revelation" about land until 1871, i.e. about the time that the core works of the neoclassical revolution were being published, and Progress and Poverty was not published until 1879.)

The Ricardians and other supporters of pre-Marxian classical economics can make a good case that neoclassical economics was a response to them. Marxists and Georgists cannot. Of course, this doesn't affect the truthfulness of any of these schools of economics, and regardless I find Marxism much more plausible than Ricardianism or Georgism.

Incidentally, you are a perfect example of how the idea of "honest disagreement between intelligent people about complex systems" is actually a radical idea. I'd say that's the most important fact about science, though I don't have to assume that you're unfamiliar with science or an idiot or a charlatan in order to think that you haven't grasped this fact, because the scientific mindset is also complex.

I think you first start out complaining about unrealistic assumptions, but then when you try to write down a model that describes how you think things should be, you find yourself needing to make all sorts of compromises in order to get anywhere. And I guess you have to decide whether those compromises are worth any insight that you arrive at as a result of making them.

I find it interesting that no one has considered that the answer might actually be "no". Which it almost certainly is.

The Ricardians and other supporters of pre-Marxian classical economics can make a good case that neoclassical economics was a response to them. Marxists and Georgists cannot. Of course, this doesn't affect the truthfulness of any of these schools of economics, and regardless I find Marxism much more plausible than Ricardianism or Georgism.

Perhaps, but it's prominence today clearly is a tool of class warfare.

Luis:

I really don't see it from my reading, but to be honest it doesn't matter. The fact is that he *still* assumes a benevolent dictator redistributes resources prior to trade.

And no, I didn't quote selectively. Endogenous theory doesn't simply say 'the money multiplier is not stable.' It rejects it completely. Please get more clued up about MY position before you start accusing me of dishonesty.

Mandos,

"Perhaps, but it's prominence today clearly is a tool of class warfare."

I don't know what the function of the word 'clearly' is in this sentence.

"The fact is that he *still* assumes a benevolent dictator redistributes resources prior to trade."

NO HE DOESN'T, HE SAYS THAT IF YOU WANT TO USE AGGREGATE CONSUMER SURPLUS AS A MEASURE OF SOCIETAL WELFARE YOU NEED TO ASSUME THAT.

anybody who wasn't solely intent on rubbishing economics would realise this is an economist pointing out that you cannot use aggregate consumer surplus as a measure of welfare unless you make an unrealistic assumption, thereby warning economics students not think aggregate consumer surplus can be straightforwardly used to measure welfare, because doing so ignores distributional questions (that would only not matter in the presence of a benevolent dictator redistributes resources prior to trade).

You might also want to acknowledge your error in the original list of dumb things economists do, and ask yourself what else you have misunderstood.

"Endogenous theory doesn't simply say 'the money multiplier is not stable.' It rejects it completely"

Right. You "reject" M=mB when m is a free parameter. M/B="NaN".

Edmund: (a) Reducing the constrained optimization problem to a linear programming requires so many assumptions about the shape of the utility function that you might as well just throw away the utility function and go straight to behavioral heuristics. Which have the commendable property of being directly observable.

In fact, you might as well throw out the utility function anyway, because it's pure Jesuit reasoning: The only two things utility functions do for you are to let you pretend that you don't need to study the real behavior of real people (because the whole narrow class of utility functions which are mathematically tractable give roughly the same results), and obfuscate the normative decisions about whose desires are more important for society to pursue (by, effectively, imposing the implicit assumption that it is as great a problem for society when a rich man is yachtless as when a poor man is breadless).

You get a much richer model, as well as one more grounded in the reality of things, by dispensing with optimization and replacing it with behavioral heuristics. At no loss of computational power. (But at great cost in survey effort and econometrician-hours to actually observe and codify the common behavioral responses to stimuli.)

(b) Expecting Moore's law to hold for another century is just silly. We're already beginning to see transistor and integrated circuit miniaturization exit the exponential regime. We don't have quite enough data to fit a logistic growth curve to it with any confidence yet, but we can say with great confidence that from here on out growth will not be exponential, unless there is a breakthrough comparable to going from radio tubes to transistors. And as someone who has dabbled in the underlying physics of optical and quantum computers, I can assure you that the answer to that question is "no."

(For that matter, thirty more orders of magnitude is just silly - it would give you a transistor you could fit between the second and third electron orbital of the hydrogen atom.)

Rowe: The three-body problem (and, by induction, the n-body problem) is an excellent example of a problem which one can prove has no analytical solution, but which is none the less sufficiently computationally tractable that we can do a flyby of the moons of Saturn with an unguided probe. And sufficiently tractable using complexity theory that we can determine which orbital paths are stable on a 15 bn. yr time scale. Unsurprisingly, they're the ones the observed planets (counting the trans-Martian asteroid belt as a planet) are in. More surprisingly, there are no other metastable orbital paths on that time scale. So we can say with great confidence that you cannot squeeze in an extra planet or two inside the orbit of Neptune.

But actually warfare is probably a better example: You can never have "mathematical battle planning," because you can't make a formal model of the enemy (at least not without an true human-equivalent AI) that the enemy cannot exploit if he gets hold of it (which he will). That doesn't mean you can't study warfare or that the general who has studied warfare more diligently will not have an advantage over the equally intelligent general who has not.

Similarly, the central banker who has studied economics should have an easier time taking a sledgehammer to the knees of hostile currency speculators than an untrained intern fresh out of high school. The fact that central bankers lack either the conceptual tools or the political will to even imagine kneecapping hostile currency speculators indicates a severe failing in the economics profession.

Peden: Menger was a third-rate crackpot (sorry, eccentric - he was rich) living in a third-rate backwater ex-empire. That he came up with marginalism some years before the blowback against robber baron capitalism began in earnest does not mean that the... enthusiasm with which such ideas were promulgated in the following years was not a response to that blowback. You had trade unionists before Marx as well, but it would be silly to claim that the trade union movement was not a response to Marx (or rather, to Engels, who did most of the propaganda legwork).

Of course this only torpedoes your argument against neoclassical economics being a political front for the opposition to reform of early industrial capitalism. It would require a serious historical study (which I do not presume to undertake) to actually settle the question one way or another.

- Jake

UnlearningEcon:

Have you actually gone through and read MWG or are you quoting from someone else who has (presumably Steve Keen)?

"Right. You "reject" M=mB when m is a free parameter. M/B="NaN"."

M/B = M/B. No more, no less.

It's simply not an interesting ratio. At all. Ever. Defining the "money multiplier" is as useless as defining the variable "centimeter of rain in Scotland divided by the number of sheep in Transnistria and calling it the "hydro-wool multiplier." Sure, nothing in the algebra prevents you from doing it, but that doesn't mean it has any place in rational theory.

So there's no reason to give it a name or a symbol, because it shouldn't show up in any equation anywhere else, outside a few very specialized econometric reports. If you are seeing the "money multiplier" in an equation, and you're not reading a BIS report on the statistical properties of monetary aggregates, then it's odds-on that the author has bought a ticket to the loanable funds crazy train. So there is certainly no call for writing about it in any but the most recondite of textbooks.

This has been another edition of Occam's Razor: Economics edition.

- Jake

Jake,

yep it was a cheap crack. The point is that you can still understand how M/B depends on things like the reserve ratio, which is one of the components in m, and that is interesting and informative. For example it explains why large recent increases in B have not lead to large increase in M, because reserve ratios have increased. That's true and interesting. The textbook money multiplier really just treats reserve ratios, cash-in-hand etc. as exogenous, although there might be some discussion of why they might vary. If you wish to construct a theory of endogenous money, you are just endogenising B and m, you are not doing away with the money multiplier.

interesting and informative? I need an editor.

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