« The marginal productivity of geniuses: why Apple's workers earn modest wages | Main | New Keynesian vs Neo-Wicksellian macroeconomics »

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Your question was do they have policy recommendations, not implications. Nevertheless, yes they have (or do) both, the biggest one being of course the employer of last resort program, also known as the job guarantee or the employee buffer stock program. There are many more policy recommendations, for that I'd recommend you visit Mosler's website or even read some of randy wray's papers and many others. and again, no, you are not paying attention.

and yes, the answer is no, we don't accept your method of analysis. Econometrics has its uses, but the way mainstream economics uses it and abuses it and calls it "science" makes a mockery of what science really is.

Rocinante, CHARGE!

Patrick,

I laughed.

A great request but I suspect the economists need an Alan Sokal to attempt for them what he did for physics.
See the list of similar attempts, none about economics so far, http://en.wikipedia.org/wiki/Sokal_affair .

I'd like to throw back a request to the professionals. Reading a book can easily give the impression of understanding without really getting it. Taking a course where you have to apply the ideas is a much safer bet for those us wanting to learn. But doing this in economics is not easy short of going to full time university. Despite econ 101 courses being relatively cheap to deliver online there are very few run in Canada at least. What gives with that? Any urls showing I am wrong would be appreciated.

does anyone know a free online source for any reasonably good and reasonably standard first year textbook?

Yes. I downloaded all of my econ textbooks from file sharing websites or bitTorrent. If you are using a mac, then the best bitTorrent client is micro-torrent. http://www.utorrent.com/

I figure I am paying the marginal cost of production so the econ professor wont mind.

Actually, given this post, I think econ professors would appreciate if the general public torrented textbooks and read them.

DeusDJ, you have failed to convince me to pay attention to MMT. No policy implications/recommendations, nothing to put to the data.

Why would I care whether an intellectually dishonest professor wants to pay attention to MMT or not? I just told you about the ELR and you pretend I said nothing. Another big recommendation is a payroll tax cut. Here are Mosler's recommendations alone:
http://moslereconomics.com/proposals/

and that's just Mosler's, who isn't even an academic. Wray has his own set of proposals/ideas he has written in disparate places.

but as I said, I honestly don't care whether you want to pay attention or not, you asked a question and I answered it, and that's it.

"intellectually dishonest"?

You have one hour to apologise. Otherwise, that will be your last post here.

y: "Is Krugman right or wrong here?"

More right than wrong, because an individual bank (and he did say "individual") that expands loans will usually lose the deposits it creates to other banks and will need to take offsetting action to replace reserves if it doesn't already have some excess it doesn't mind losing. That's because money is special. When people borrow money that does not (normally) mean they plan to hold that money; it normally means they plan to spend it, and the person who gets the money they spend will usually deposit it at some other individual bank. So the first bank will need to borrow from the second bank. But that creates no limit on the aggregate of all banks together, of course. The central bank will need to create some limit on this multiple expansion of loans and deposits, aka the monetary hot potato, if it seeks to control Aggregate Demand and keep the price level determinate. So in the long run (i.e. when the central bank is imposing that limit) what PK said is true even for the aggregate of banks.

Stephen,

MMT, as a school, does not have a single set of policy proposals anymore than NK does.


I have heard the following:

Set the FF rate to zero and keep it there whenever possible. Without speaking for anyone, I don't believe that Scot Fulwiller advocates for this but Bill Mitchell and Randy Wray do. Similarly, Bill Mitchell and other argue that all deficits should be wholly or primarily money financed. If there is a need to raise interest rates, then they would pay interest on reserves rather than sell bonds.

They both generally prefer to use fiscal policy to manage inflation, so they are part of the fiscal theory of price level camp.

Different proposals to do that are an Employer of Last Resort program (ELR) that pays a fixed nominal wage, or a nominal wage that increases with the government desired rate of inflation. The ELR would replace the minimum wage and it would also replace unemployment insurance and any basic income guarantees for those able to work. I've heard proposals to index tax brackets to the government desired rate of inflation, index benefit payments to the same desired rate, rather than the actual rate.

It is though that this would act non-discretionary counter-cyclical tax hikes and tax cuts as well as spending hikes/cuts when the observed rate of inflation deviates from the target rate.

For dealing with excess borrowing if FF are at zero, they argue that strong underwriting requirements such as debt/income limits and enforcing collateral haircuts would prevent out of control borrowing.

They strongly believe that currencies should be allowed to float and that governments should not borrow in any currency other than their own, nor should governments attempt to peg currencies.

In the present crisis, they argue that the Clinton surpluses and the lack of bank regulation were largely to blame, and that now fiscal policy should be the main tool to stabilize demand.

You can read papers at the Levy Institute:
http://www.levyinstitute.org/


Okay, that's a start. Quite frankly, that sounds batsh*t crazy. What behavioural assumptions do you need for that to go through? Are there testable implications of those behavioural assumptions? In particular, are there dimensions in which those behavioural assumptions explain the data better than mainstream approaches?

And no, I am *not* going to check out MMT websites. I've done that, and I can can't get past the "let's all dance around a bonfire of mainstream textbooks" verbiage.

Nick,

At the risk of going off topic

The central bank will need to create some limit on this multiple expansion of loans and deposits, aka the monetary hot potato, if it seeks to control Aggregate Demand and keep the price level determinate.

RIght, but don't interest rates do that? I.e. if each bank has an opportunity cost of 3% per dollar lent, then it will charge a rate of 3% + some premium to all borrowers. Then borrowers borrow as much as they want provided that they can pay that rate.

The CB can increase the rate to 5%, for example, if it wants to reduce borrowing.

Isn't the above argument orthodox? No need to talk about loans and deposits or reserve multipliers to make the price level well defined. Am I wrong?

I once got into huge flamewars because I do not believe that, in equilibrium, loans create deposits. Operationally, a loan creates a deposit, but in equilibrium, a loan may just as well create a bond, because households can then withdraw the deposit and buy bonds. If they all do that, then the banking system's liabilities to the non-financial sector becomes more bond dependent and less deposit dependent. Each individual bank is forced to plug the hole in its balance sheet when a household withdraws a deposit by selling a bond to the non-financial sector, and in this way, households can elect to increase loans by much more than they increase deposits.

Nothing forces an expansion of the asset side of a bank's balance sheet to result in an expansion of deposit liabilities rather than bond liabilities. That would be a function of household preferences and rates, etc -- all the standard stuff you cited.

So I don't think money is special at all in this story. Interest rates are special. I believe money is special because of credit constraints put on households, but not because of any loan/deposit dynamic. To me, money is just one of a number of different claims that the non-financial sector has on the financial sector.

Stan: I'm a great admirer of the Sokal hoax, and I think it was definitely needed there. Because stuff that was total gibberish was being accepted and admired. But my sense is that the fringes of economics are generally not that bad. They are usually at least coherent in some sort of sense. What often happens is that some idea, once mainstream, gets left behind by the main branch of the discipline, and branches off in its own direction. Sometimes, just sometimes, the two branches meet again and re-form. You could argue, for example, that Monetarism was a branch of those ideas that got left behind by the Keynesian mainstream. But Monetarism rejuvenated itself, and rejoined the Keynesian mainstream (or the Keynesian mainstream rejoined Monetarism) to create New Keynesian macroeconomics.

But yes, I do sometimes see individual stuff that is so incoherent it is only worthy of a Sokal treatment.

You can take ECON1000 from Carleton Online (I do the lectures, but am not the instructor).

You know, theology and economics are the only two academic disciplines that use the terms "Orthodox", "Heterodox" and "Blasphemy" with a straight face.

In theology they argue over whether God is God, in economics they argue whether the central bank is God.

Stephen,

The levy institute website just has a bunch of links to working papers. You can search by keyword.

I am not the right person to ask about testable hypothesis and whatnot, as I don't consider myself an expert on MMT. My understanding is that it is a lot of fixed ratios.

I disagree about setting FF to zero and not issuing debt. But I like the ELR program, as well as indexing benefits/brackets to policy rates.

I think there is good stuff there and bad stuff there. But they have done a lot of interesting work vis-a-vis institutional economics. I think Bill Mitchell has written a lot on the geography of unemployment and other empirical work as well.

And, of course, they predicted the euro meltdown as well as the current financial crisis. William Black, a former bank regulator, publishes on Levy and he has written a lot about control fraud in the financial sector.

rsj: "Isn't the above argument orthodox? No need to talk about loans and deposits or reserve multipliers to make the price level well defined. Am I wrong?"

What you have just laid out is the basic New Keynesian/Neo Wicksellian (i.e. orthodox) way of looking at it.

You lost me a little after that bit (maybe I'm tired). But your last bit:

"So I don't think money is special at all in this story. Interest rates are special. I believe money is special because of credit constraints put on households, but not because of any loan/deposit dynamic. To me, money is just one of a number of different claims that the non-financial sector has on the financial sector."

sounds to me very much like an orthodox New Keynesian/Neo Wicksellian position. *I* don't agree with it, but then I'm the one who's heterodox there.

I'm sure I was the incoherent one.

To say it again,

1) the main relevance of loans/deposits is to argue than lending is not reserve constrained, but interest rate constrained. I don't think anyone is saying that lending is unconstrained.

It would be interesting to add collateral constraints, which I think are very important, but I haven't seen that in any major theory.

2) In equilibrium, loans do not create deposits, and the quantity of deposits has nothing to do with the quantity of loans. It has to do with the standard stuff you cited earlier -- interest rates, money demand to smooth expenditure/revenue variability, etc.

Loans create deposits only operationally, but as soon as the loan is made and the deposit is created, the deposit, which is just a claim on a bank, can be replaced by a bond claim on the same bank.

Therefore, in aggregate, a $100 increase in loans can occur with no increase in deposits, or even a decrease in deposits, even though operationally loans create deposits.


Are there people who think intro physics is BS?

Yes, as it happens. Not all of physics, mind you, just bits that seem ideologically inconvenient, like relativity: http://www.conservapedia.com/Relativity. Presumably because "relative" is an inherently liberal word.

sometime is going to have to explain why I should ever pay attention to MMTers

So Stephen, at least, agrees that in principle there are things that other people believe that are so preposterous that it is not worth investigating them. I realize that you are not responsible for Stephen's opinions, Nick, but tell me: do you find it necessary to read first-year texts on astrology? Phrenology? The balance of the bodily humours? And if not, is it not true nevertheless that you have strong beliefs about these subjects?

You will say that it is unfair to compare these things to economics, and I agree. But that is not the test; the issue is what the people who have not read first-year economics texts think is fair. There is, surely, a certain amount of intellectual laziness at fault. But that is not the whole story.

The thing is, as stupid and ignorant as I am, I have tangible evidence in the form of my cell phone that there is some discipline called "physics" that made its microcircuitry possible, something called "programming" that endows it with useful functions, and something else called "chemistry" that is responsible for the marvelous battery that powers it, even though I have no knowledge of these subjects. The people who reject relativity do so in the belief (mistaken, as it happens) that it has no practical application.

So I think it would be a worthwhile initiative if once in a while a post appeared on this blog describing some "success story" from micro-economics, solely for the purpose of demonstrating to the uniformed the usefulness of the subject. It might even inspire someone to read a first-year text.

Phil: How about sticking with your cell phone:

edited to embed link here NR

Phil: "So I think it would be a worthwhile initiative if once in a while a post appeared on this blog describing some "success story" from micro-economics, solely for the purpose of demonstrating to the uniformed the usefulness of the subject. It might even inspire someone to read a first-year text."

I see your point. Like how will a drought affect the supply and demand and price of maize, and all the things maize is used as an input for. Etc. All the cases where we reckon basic economics basically works. But that's where the sample selection bias of blogging kicks in again. We (at least I) want to blog about the controversial stuff, where economists disagree. The last post I did that was in any way like that was my post on Purchasing Power Parity, where I took a really basic crude theory and said, "Hey, even this really crap simple theory sort of works to explain exchange rates". But I could only motivate that post by having a new angle on how to teach PPP.

But I'll think about what you said.

rsj: Let me try it my way:

There's a whole lot of borrowing and lending going on in any economy that has nothing at all to do with banks, or money creation. If I lend you $20, or buy bonds or shares in your company, that doesn't create money. (Except maybe in some indirect way, because everything depends on everything else.)

And yes, I do sometimes see people on the internet saying things that seem (at first glance at least, and I never bothered to enquire deeply) to contradict that, and to say things that would only make sense if ALL loans were in the form of chequeable demand deposits at banks.

A few comments back you said you once got flamed from all directions for saying something. Were you saying what I just said above?

Phil: "So I think it would be a worthwhile initiative if once in a while a post appeared on this blog describing some "success story" from micro-economics, solely for the purpose of demonstrating to the uniformed the usefulness of the subject. It might even inspire someone to read a first-year text."

Here's another one on predictive power of consumer theory:
http://www.freakonomics.com/2008/05/07/the-indiana-jones-of-economics-part-iii/


Nick,

No, the house was arguing that "When a household uses its deposit to buy a bond, the firm selling the bond has the deposit. Therefore deposits are indestructible" etc.

And I was arguing that this only holds when non-financial actors transact with each other.

But if I use my deposit to buy a bond issued by a bank, then the deposit is destroyed. No one else has it, but the liability side of the aggregate banking system shifts, so that there are fewer deposit liabilities and more bond liabilities.

Given that all bonds are substitutable, but banks are much more sensitive to changes in rates than non-levered entities, a small change bond yields will result in a greater quantity shift in net bond demand by banks rather than by non-banks.

Therefore if households want to eliminate excess deposits, they can do so by bidding down rates slightly until banks increase the number of bonds they sell to households, and the result is that aggregate deposits are reduced.

Just as the central bank can drain reserves from the banking system, the financial sector can drain deposits from the non-financial sector, even as the asset side (e.g. loans) is held fixed.

Because of this, the creation of a new deposit does not require a net new loan, and the destruction of a deposit does not require a net loan repayment.

Interest rate adjustments on bonds are an escape valve for reducing excess deposits so that you do not need to rely on inflation as an escape valve to reduce real money balances.

I know you disagree, but does the argument at least make sense?

This was on an MMT blog when someone advocated that the liability side of bank balance sheets should not be subject to market discipline, which is Warren Mosler's mantra.

Practically speaking, they were arguing that banks should not be forced to obtain their funding from the non-financial sector, so that the CB can be a first resort as well as a last resort to cover deposit outflows. The reason for this is if there is a loss of confidence, the bank may experience high rates when selling bonds or trying to attract deposits. This is welfare reducing, so why not take the market discipline out and allow banks to turn to the discount window without any penalty or regulatory scrutiny.

And I was pointing out that market discipline of bank liabilities is crucial for the above escape valvemechanism to work. If banks on the margin don't need to sell more commercial paper or other interest bearing securities to the non-financial sector when they are faced with deposit outflows, but are able to always borrow from the CB as a first resort, then they can, in aggregate force the household sector to hold more deposits than it wants at the current rate, and need never sell bonds to the household sector at all. That is how I define financial repression.

In that case, the hot-potato effect so disparaged on the heterodox side becomes real.

rsj: "I know you disagree, but does the argument at least make sense?"

Yes, and yes! I do disagree, but you have outlined (what I think is) a coherent version of the Law of Reflux. Most economists would basically agree with you. They would tell the story slightly differently from you. Your main mechanism is the spread between the interest rate on bonds and the interest rate on reserves (I think?). Most economists would talk about the spread between the rate on deposits and the rate on reserves. (I'm not sure if it makes much difference).

I think I follow the rest of what you say, and I think it is coherent.

Nick, I'm wondering why you would ask people to read an Econ 101 text? Have you been having debates about the minimum wage? I don't really understand why this comment thread has turned into a discussion about monetary theory. Is there some definition of loans=deposits in Mankiw that you use to derive your theories of money? I think that micro is probably the closest economics gets to a hard science but it's conclusions don't seem to be general enough to be applied to any macro problems currently faced by society.

The neoclassical economists say we should apply micro foundations to macro policy and the people that are against neoclassical economics say the conclusions of micro can not be applied to to aggregate phenomenon for whatever x, y, or z reason that they want. As someone who has an MA in economics I find trying to figure out what monetary/macro theories are true to be an almost impossible task and it has very little to with Econ 101.

The problem is not that the people you disagree with have not misunderstood Econ 101, it's just that there is no unified methodology to macro like their is in microeconomics. The conclusions you draw are determined by the assumptions and definitions you set out with. Every economist (or economic theorist, for bloggers without formal training) thinks that the particular theory they have carved out is the truth but in aggregate these theories create a kind of tragedy of the commons wherein the is a failure of any reasonable amount of consensus. While I consider every blog I read a person who has given economics serious though, the aggregate of my google feed looks like a complete gong show of a macroeconomic circus.

It's hard to take your criticIsm of the uninitiated seriously when in reality they could spend a significant amount of time acquiring a degree in economics and still would not be any closer to conforming to the economic assumptions that you seem to think are hiding out in the secret texts of Econ 101. Trust me, lots of people who do not agree with Econ 101 have read and understand Econ 101. You might not think its too much to ask for a lay person to read a single text but why should they focus on economics. There are tons of disciplInes they would benefit from reading a 101 text of any field, but considering the majority of people don't go to university it would seem that they would have a hard time processing the information in a 101 book.

No, I am not joking. Please name a policy implication. And it is a testament to years of seeing this bumph on the internet that I have to ask the question.

And I take it that the second paragraph is a long-winded way of saying "no".

As far as I can tell, the main policy proposal at the moment would be to raise spending or cut taxes to speed the process of private sector deleveraging and bring about full employment. Sell bonds if you wish to give potential bondholders interest income, but that would be the only reason to issue them. Otherwise, just spend new money.

Ian: "Trust me, lots of people who do not agree with Econ 101 have read and understand Econ 101."

I know that. That's OK. Those aren't the people I was addressing. I was addressing the people who think they know what's in Econ 101 but don't.

"You might not think its too much to ask for a lay person to read a single text but why should they focus on economics. There are tons of disciplInes they would benefit from reading a 101 text of any field,.. "

This wasn't addressed to people who aren't especially interested in focusing on economics. It was addressed to people who are already focusing a lot of their time on economics, and are obviously very interested in economics.

It must indeed seem strange that so much of the comments has been about one very particular topic in macro. And it is strange. But I thought this would happen. Partly that's because of the particular example I used. But mostly because that's where a lot of the debate is. And there's something about money, and especially money and banking, that really does serve as a candle to moths. And I think it's because, deep down, money really is weird! So monetary economics really does attract the weirdos. Ummmm, like me!

Well Mr Rowe, your "hot potato" post has me thoroughly befuddled and confused about its policy implications. Hats off. Have any New/Post Keynesian economists seriously tried to address the phenomenon, beyond hand-waving the situation away with the assumption of perfect knowledge?

Edmund: I have to confess I'm about as befuddled and confused by it as you are. I reckon I'm onto something, and it must have some sort of policy implications, but I can't get my head straight on them yet. Scott Sumner also asked about the policy implications, and I had to say I didn't yet know. But I do think it means we *can't* just think of monetary policy as setting a rate of interest and ignoring what's happening to the supply of money itself.

New Keynesian economists (and some Monetarists) counter by saying that any excess supply of money would immediately be returned to the commercial banks. (rsj would say the same thing, in a slightly different way). But I'm not sure if that seriously addresses the issue, and I do think it might implicitly be assuming some sort of perfect knowledge.

It's still all a work in progress. But I think you can now see why I can't yet write it all down in one simple post.

The problem with mainstream economics is that its theoretical underpinnings are often either suspect or demonstrably false. What was originally metaphor gradually becomes objectified in a sort of Platonic zoo. Mathematical methods are then used to manipulate these objects or "representative agents" conforming to them, and the result is portrayed as the analog of a physical science.

Mirowski has written several books about different aspects of the history of this intellectual stew, and there's no point in my trying to summarize hundreds of pages of analysis that in turn cite hundreds of thousands of pages of source material.

I'm not without hope. It was interesting to see the recent discussion of the problems with microfoundations and the earlier discussion of debt. This might actually represent progress - rare in the blogisphere.

Wow, a lot of comments!

Many free books are available at en.bookfi.org and libgen.info. In particular, they have fairly recent editions of Blanchard's textbook, which is what I use when I teach macro.

Which, yeah, other point: I probably fit Nick's profile of the undereducated econ blogger, but I teach macro. Sometimes at elite colleges, even.

I agree that people who object to the state of economics are often undereducated about the specifics of the state of economics. But they aren't wrong. Orthodoxy really ,really sucks. I teach it. I don't know what else to teach. But god, it is bad.

I skipped the micro section, first time I read a text, big embarrassing mistake. Ended up recreating, indifference curves. " multidimensional cube, bounding a spherical search space"

rjs,
"And, of course, they predicted the euro meltdown as well as the current financial crisis."

Well, MMT took credit for first predicting it, but that doesn't necessarily make it true:

http://www.economonitor.com/lrwray/2012/06/25/paul-mcculley-mmt-won-declare-victory-but-be-magnanimous-about-it/

The recent fiasco, however really started with this article in the WSJ:

http://blogs.wsj.com/eurocrisis/2012/07/23/who-warned-about-the-euro-first/

Of course, nobody really expects the WSJ to get its facts straight.

Well, almost nobody. That led to these self-congratulatory post by Randall Wray:

http://www.economonitor.com/lrwray/2012/07/24/who-first-warned-about-the-euro-the-wsj-weighs-in/

Which was countered by Thomas Palley:

http://www.thomaspalley.com/?p=290

Replied to by Randall Wray:

http://www.economonitor.com/lrwray/2012/07/26/on-the-supposed-weaknesses-of-mmt-response-to-palley/

And the reply replied to by Thomas Palley:

http://www.thomaspalley.com/?p=298

Let me start with Palley's most recent post and see if I can set the record straight:

Thomas Palley:
"Randy Wray and Mat Forstater, two leading contributors to the MMT School, have replied to my recent blog on the MMT controversy. Their replies warrant a brief response.

I agree that it does not matter very much who first identified the euro’s potential for failure. Along with other Keynesians, MMT-ers were early to identify the euro’s structural flaw – namely, its conversion of the financial status of national government into provincial government status via removal of government’s power to access money creation through a government controlled central bank. In many ways Warren Mosler (1995) is the godfather of interest in this issue.

I also fully agree that neither Bayoumi and Eichengreen (1994) nor Martin Feldstein (1997) predicted the problem. They argued the euro was not an optimum currency area (OCA), while Feldstein argued it would also fall apart, amidst political turmoil, for that reason. This is an argument every member of the economics profession was familiar with. However, the entire mainstream profession failed to foresee the economic mechanism whereby the euro has been slowly disintegrating - bond market driven higher interest rates and bond market imposed limits on expansionary fiscal policy which governments are powerless to do anything about because of absence of a central bank willing to intervene on their behalf.

There are two big takeaways from all of this. First, it was heterodox economists, as a group, rather than mainstream economists who identified the flaw...."

The spectacle of heterodox economists beating each other up to see who can take credit for first predicting the correct mechanism of the euro's collapse is amusing, especially since Optimal Currency Area Theory (OCA) anticipated it...all the way back in 1969.

Peter Kenen in his own words:

"The third implication pertains to the need to use national fiscal policies to cope with the imperfect fit between the single monetary policy of monetary union and the needs of its individual members. At one time, I believed that a monetary union should be accompanied by some sort of fiscal union. Indeed, my 1969 paper on OCA theory said so and made two related points.

First, the income-based federal tax system in the United States cushions the effects of expenditure-switching shocks, because it leads automatically to fiscal transfers from households and firms in prosperous regions to households in firms in depressed regions. Second, this method of cushioning the effects of shocks is clearly superior to either built-in or discretionary stabilisation at the regional level. Interregional transfers via the federal fiscal system are not likely to have large effects on the fiscal stance of the federal government. Therefore, they are not likely to cause significant changes in stocks of government debt. If instead regions or states had to conduct contra-cyclical fiscal policies, those in depressed regions would have to borrow and issue debt, and they might find it hard to do that when faced with long-lasting shocks."

http://cep.lse.ac.uk/pubs/download/CP147.pdf

The paper Kenen is referring to is "The Theory of Optimum Currency Areas: An Eclectic View", in Mundell and Swoboda (eds), Monetary Problems of the International Economy, Chicago University Press, 1969.

Krugman has cited Kenen as the prophet of eurodoom on his blog no less than six times:

http://krugman.blogs.nytimes.com/?s=kenen

This is just more evidence to me, that when it comes to accusations by heterodox economists about the lack of awareness by other economists about what heterodox economists have accomplished, the shoe is clearly on the other foot.

Mark,

Stephen asked for concrete examples of what he could get out of MMT. I tried to provide some, but this was not meant to say that no other school predicted or warned about the current problems.

Without getting into who predicted what first, my impression is that prior to the crisis, the primary concern of mainstream macro folks was the U.S. trade deficit, and the risk of a sudden depreciation of the dollar. At the same time, heterodox folks were warning that the Clinton surpluses were extremely harmful, that the balance sheet position of households was deteriorating, that bank lending was out of control, and that the Euro project was a frankenstein creation in which there was a central bank but not a central fiscal authority, supposedly because we didn't fiscal policy anymore to manage the economy -- a central bank was deemed sufficient. The heterodox people were screaming bloody murder at this project, for obvious reasons that have nothing to do with whether the EMU is an optimal currency area, but have everything to do with whether there is a lender of last resort or a credible fiscal stabilizer.

Which is not to say that you can't find a published paper expressing concern about the above issues -- Schiller did a great job at predicting bubbles -- but the consensus, IMO, was echoed by Cochrane, who wrote that "no one is ever harmed by purchasing an MBS", and by Greenspan, who argued that private sector balance sheets were fine, or by Summers, who advocated for more financial de-regulation and argued, in general, that banks would look out for their own interest and lend prudently.

I think part of the problem of mainstream macro is the assumptions of utility maximization make it hard for them to imagine people who do not behave optimally. In the late 70s and early 80s, on the heels of white flight from the urban core, 20% vacancy rates were common in cities across the U.S.. Why wouldn't the market clear? It would clearly be in the interest of landlords to rent their property rather than have it sit empty. And yet they let it sit idle. It would be in the interest of banks to not blow themselves up with risky lending, and homeowners have no interest in being foreclosed upon. Yet it happens on a systemic basis. Over and over again.

Rather, the concern was over government, which for some reason in academic thought, is the only entity that doesn't optimize and so we are allowed to imagine what happens when it acts irrationally. I believe this is why there was great concern over the "twin deficits", but little concern over the balance sheet of households and financial firms, which were after all engaging in voluntary transactions that we must assume are welfare enhancing.

Obviously that's my own reading, but it does point to the core issue at hand, namely that the assumptions embedded in basic models leave little room for non optimal behavior and so close the door to a lot of important descriptive analyses that were allowed by the profession prior to the rational expectations revolution.

Perhaps this is why many econ profs choose to blog -- to engage informally in the type of discursive work that heterodox economists are still able to do professionally (in whatever tiny space is still open to them), but which are difficult for mainstream economists to embed in a fully optimizing model. It is much easier for an essayist to say "Banks are crazy, and this is going to cause trouble", but there was a time when economists could say that without being subject to ridicule. At least now mainstream economists can blog about it even if they don't have a worked out model.

For example, I really enjoyed the house bubble series that Stephen has been writing on his blog, but he wasn't the one testifying to Congress, whereas Greenspan was. Perhaps the U.S. should have imported more Canadian economists -- we would certainly benefit from their banking system.

MMT fails badly, empirically, in Canada over the last 20 years (for example).

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%. There are only two ways to explain this fact, if MMT is true:

1. Despite everything that was being said about debt and deficits, by Finance Ministers and Prime Ministers, about the big spending cuts in 96, and Harper's GST cuts, etc etc, Canadian fiscal policy was actually secretly being used to target inflation at 2%, and that is why fiscal policy needed to change massively over the last 20 years. A massive conspiracy by successive Liberal and Conservative governments to hide the true reason why they did what they did with fiscal policy. And no obvious political reason why they would lie to cover up the true reasons they kept changing fiscal policy.

2. It was an amazing fluke, and the Bank of Canada got really really lucky.

Neither explanation sounds plausible to me.

The Economist refers to 'market monetarism' as 'heterodox'.

http://www.economist.com/node/21542174

y: that's neat! Yep, in some ways The Economist is right. "Heterodox" and "orthodox" are rather fuzzy concepts, that keep changing their meaning (well, strictly, their reference, rather than their meaning) and this makes them not very useful. Which is why you rarely hear economists use those terms. They are mostly used by people who describe themselves as "heterodox".

rsj: "Perhaps this is why many econ profs choose to blog -- to engage informally in the type of discursive work that heterodox economists are still able to do professionally (in whatever tiny space is still open to them), but which are difficult for mainstream economists to embed in a fully optimizing model."

I like that. I think you are onto something there. (Or maybe I've just got a sample of one!) We can say things, and think things, on a blog post, that we couldn't say or think if we had to fit it within the self-imposed "rules" of journal articles. We silence ourselves.

"Can you please read a first year textbook?"

Yes I can as soon as one is co-written by a sociologist.

Robert: OK then. This guy is a sociologist. You can read his textbook.

There’s a quote from Twain that summarises my experience with economics:

"When I was a boy of fourteen, my father was so ignorant I could hardly stand to have the old man around. But when I got to be twenty-one, I was astonished at how much the old man had learned in seven years.

I used to be pretty invested in the idea that the economics mainstream was out to lunch. I was an English Lit graduate who read a lot of heterodox stuff, especially post Keynesians (also Marxists and Austrians). I knew that mainstream models were invalid—they were too mathematical, or not mathematical enough; they assumed that everyone was rational and omniscient; they were “ergodic” (which, I learnt from Paul Davidson, was bad); they drew on something called “loanable funds”. And so on.

There were so many ways in which the mainstream was wrong, I found it kind of remarkable that the situation had ever reached the point it had. Why didn’t someone say to economists, “Look, your theories are rubbish and your effect wholly negative—please leave the field to those that understand it”? It was so obvious that only a conspiracy or something equally sinister could explain it.

Then I decided to go back to university to study economics, with the ultimate, if vague, goal of doing some post Keynesian stuff somewhere. I had a lot of arguments with my lecturers. If only they understood how banks work! Etc, etc. I was probably pretty insufferable.

Gradually, though, I came to realise that—quelle surprise—the image of mainstream economics that I’d built up was a caricature. It turned out that I was mostly just completely ignorant of it. I also discovered that economists were real people, and that they had given a lot of thought to the same things that I was troubled by. Some of them were even quite good at maths!

vimothy: that's a great story. And my guess is that you are very much not alone. (I know at least one of the very best Canadian economists who says he started out as some sort of Trotskyist).

And people like you, I think, end up being the very best economists. Because you have really thought about it, and not just recited what you were told. Students like you are both: a PITA to teach; and by far the most rewarding to teach. At the opposite end of the spectrum we get the student who says, not "That's wrong prof! (And here's why)" but "Do I have to learn this? Will it be on the exam?"

What I worry about is that over the years, we will attract fewer and fewer students like you, and more and more who just want a job, and can't find one in math or physics.

'I think part of the problem of mainstream macro is the assumptions of utility maximization make it hard for them to imagine people who do not behave optimally'.

If instead of macro you meant the whole of economics, I don’t think utility maximisation is the problem.

'In the late 70s and early 80s, on the heels of white flight from the urban core, 20% vacancy rates were common in cities across the U.S.. Why wouldn't the market clear? It would clearly be in the interest of landlords to rent their property rather than have it sit empty. And yet they let it sit idle. It would be in the interest of banks to not blow themselves up with risky lending, and homeowners have no interest in being foreclosed upon. Yet it happens on a systemic basis. Over and over again.'

I don’t know the answer to this but I think if you just rely on econ 101 it doesn’t make any sense. However if you start to use tools from new institutional economics, political economy, networks economics etc. which still relies on utility maximisation you might get more satisfactory answers. The problem isn’t utility maximisation, it’s the superficial use of utility maximisation.

"This wasn't addressed to people who aren't especially interested in focusing on economics. It was addressed to people who are already focusing a lot of their time on economics, and are obviously very interested in economics."

I think at this point in time people who are interested in economics pretty much encompasses everyone, or at least more people then ever before. A lot of these people do not necessarily have the ability to read Mankiw in a day and properly process its conclusions. They are going to rely on mainstream books, the internet, and mainstream news media. It obviously sucks that policy in a democracy can be determined by uneducated voters but I think you greatly underestimate the effort required by the average person to understand the topics that you have become familiar with over the years.

I think people could be persuaded if there was a strong conensus in the field but considering that there seems to be very little consensus on the important economics of our time people will continue to fall into reading material that confirms their biases.

Welcome to the internet Nick :)

vimothy, so is the explanation that all those post-Keynesians are just dumb?

DavidN: "The problem isn’t utility maximisation, it’s the superficial use of utility maximisation."

Not to really disagree, but I would put it a little differently. Utility maximisation by itself tells you almost nothing. You need to say something about the "structure" of the game within which utility maximising individuals interact. And if you change that structure, you get very different results.

Ian. OK. But the people I was talking to aren't just interested in economics the way most people are. I think they are really really interested, and spend a lot of time reading and thinking. (I could be wrong of course!)

This is an entertaining thread, and its original premise was noble, but it seems to be turning into a brawl between heterodox and mainstream economists. Had this discussion occurred five years ago, i.e. prior to the financial crisis, it would have been a pretty one-sided debate. In early 2008:

- Canada hadn't experienced a recession in 17 years;
- Inflation was properly anchored at 2%;
- The unemployment rate was below 6(!) percent;
- The federal debt was falling thanks to healthy annual surpluses, etc.

In other words the economy was performing exceedingly well, and in no small part this was due to decisions made in the early 1990s by policy-makers following mainstream economic thought (e.g. liberalizing trade, targeting inflation, raising taxes and cutting spending to balance the budget, etc). However, when the U.S. financial crisis hit, which dragged the whole world economy down, this somehow opened the door to people who believed that the entire foundations of economics had to be reconsidered.

Balderdash. As someone who viewed the battle from the trenches, the crisis simply shone some light on areas that economists weren't focusing enough attention on, in particular the linkages between financial markets and the macroeconomy. Some macro models have attempted to include housing and stock prices, but I certainly haven't seen any that incorporate derivatives, which is what exacerbated the U.S. housing price correction. The challenge going forward seems pretty clear: Building on existing economic foundations, economists need to build models that incorporate financial innovations and developments. You'll notice that, since the financial crisis, a lot of first-year textbooks have added chapters on the role of financial markets in economics (Chapter 23 of the 7th edition of Parkin & Bade is an example), but these often do not flow nicely with the rest of the book.

In retrospect, the challenge of incorporating financial markets into macro models would have been easier had Economics Departments in the 1960s not ceded the field of Finance to Business Schools, which resulted in parallel literatures in Finance and Economics. In the last few years some attempt has been made to bring them closer together, but there's still a lot of work to be done.

This post shouldn't have been controversial.

I echo requests for more reading of basic economics, more reading of philosophy, and I would like to add one more to the mix...

Everyone should read at least one book on either mathematical logic or a book on geometry that pre-dates "the new math."

Nick,

I agree with that. To continue with W.Peden’s theme, I find it telling that macro seems to cop it big from the 'heterodox' but not micro and the various subfields. Why aren’t there subfield equivalents of heterodox? (Or maybe they already exist under the umbrella sociology, marxism, and management studies).

Greg: You're late to the party!

From my (imperfect) knowledge of the finance being done in business schools, it is usually from the individual firm's perspective, or from a very partial equilibrium perspective. When it is from a general equilibrium perspective, it's a micro-theoretic perspective, rather than a macro-money perspective. Right? So if we want to look at the interaction between financial markets, business cycles, and monetary policy, it's probably gonna have to be done by macro/money economists.

Ryan: "This post shouldn't have been controversial."

Yep. But it was very controversial to some readers. Dear UnlearningEcon says I make him want to swear! (I think that says more about him than it does about this post. But oh well. "First they swear at you..."). Of course, as always, we get a sample selection bias in the comments. People who read it and think "OK" are much less likely to comment. Those who get angry are more likely to comment.

Wh10,

No, I don't think so, and I don’t think that I suggested as much. It's more that I was dumb. (Maybe I still am—you will have to use your judgement.)

I don’t think that thinking about these things in terms of who is dumb and who is smart is particularly helpful, though.

If one economist asserts X and another asserts not-X, then it’s clear that they can’t both be right. Now, you could say that whoever is wrong is ipso facto stupid, but that introduces a personal element into the discussion that needn’t be there. Economics is complicated and it’s hard to prove things decisively (outside of your model). This means that everyone has to live with a bit of uncertainty about their favourite theories.

Since no one gets to be decisively right, no one gets to be decisively wrong either. So there ought to be things you can learn from Marxian economics or Austrian economics as well as from recursive macro or asymptotic theory or whatever. Why wouldn’t there be? They’re all just tools and you should use them to build up something that makes sense to you personally.

My problem was that I came to conclusions before I really looked at the facts. In other words, I heard from one side of the debate but not the other. Everything that I read confirmed my biases. I deliberately sought out books and papers that would do. But I didn’t know very much about mainstream economics, and so couldn’t really put what I was hearing from the prosecution into any kind of context.

None of this implies that any post Keynesian is “dumb”. But if you want to understand DSGE models, then it seems obvious to me that it would be better to go to Harold Uhlig, say, rather than Bill Mitchell. Of course, if you want to understand Mitchell’s research, then there’s no point wasting your time with Uhlig. Or, why not read them both? I like to think my intellectual universe is big enough to contain both Uhlig and Mitchell, and more besides.

I can imagine that the same is also true of climate science: If you want to understand it (I don’t), it would probably be a good idea to hear from the climate scientists themselves as well as from Stephen McIntyre. But who knows. It’s a crazy mixed up world and perhaps I really knew a lot more when I knew a lot less…

Economists seem to transfer the expectations they have for their own models and predictions onto their own kids. Maybe this is why you never hear of them ...
As the son of the economist who initiated the Cambridge Growth Project with Richard Stone in the 1950/60s I found the expectation too great so I dropped out in the 1960s never to drop back in again.
When I was 50 I decided to take a couple of OU courses in economics and had to read some text books. I found that micro-economics was a subject that I had always been interested in during the previous 35 foolhardy years with out realising it.
I agree that people who talk about economics would be well-advised to read some text books; even if they think much of it is nonsense that doesn't fit with the real world, it would show them that all along they have been talking about politics or political philosophy but definitely not economics.

DavidN: You calling macro a *sub*field?!!! ;-)

The one other subfield where there is still a major heterodoxy is the theory of capital and interest. There are still Cambridge UK/Neo-Ricardians around. But they don't have as high a profile as money/macro schools.

(I'm leaving out the Austrians, because they are a bit different. More like revolutionaries who wouldn't take "Yes" for an answer, and who kept on fighting in the jungle despite winning all their major battles. ;-) )

"The idea that banks just act as intermediaries between savers/lenders and spenders/borrowers is about long run equilibrium."

That is also wrong. The loanable funds theory isn't true of the long run either.

Can you recommend one that isn't horribly written? I've spent some time with this one and this one and found myself wondering if economics bachelor degrees have any writing courses as breadth requirements.

Nick, I've read (and repeatedly re-read) large chunks of many, but will do as you ask.

Just ordered Mankiw's 2003 Principles of Microeconomics from Abebooks for $3.63 with free shipping.

I figure if I'm gonna go through the exercise, I should choose an author from "the dark side"...

vimothy,

Your last three paragraphs are irrelevant to the question. The rest just sounds like a very diplomatic way of saying they are dumb to believe so strongly in their view of the world. It would be one thing if we were living in a world where both sides were recognizing the validity of each others' viewpoints all the time, but clearly we are not.

i.e., when the rubber meets the road, both sides vociferously argue against the other side's position.

dsquared: I have now learned that dsquared disagrees with the loanable funds theory as applied to the long run. OK.

Yes, there are different theories of the determination of interest rates in the long run. Loanable funds is one of them.

Well, I guess that I don't understand the question, then. What is the question? Why would the explanation be that "all those post-Keynesians are just dumb"?

jbrown: "That the idea that banks lend out of reserves is wrong. That the money multiplier based on the reserve rate is wrong. That the idea that there is a supply of loanable funds that determines interest rates is wrong."

Nick Rowe: "The funny thing is, I think that all those ideas are both right and wrong. It depends. It depends on what the shock is. It depends on whether we are talking short run or long run. It depends on what monetary policy the central bank is following. Etc."

Nick, I am curious about this short term vs long term idea of loanable funds. Where is the crossover point? What marks it or determines it?

Thanks. :)

Kuri: "...and found myself wondering if economics bachelor degrees have any writing courses as breadth requirements."

Ouch! Ummm, no, we often don't, and maybe we should, and some of us do worry about this.

Maybe this one? But then I'm sort of biased.

Steve: "Nick, I've read (and repeatedly re-read) large chunks of many, but will do as you ask."

Then you have already (if the chunks collectively were big enough) done what I would ask. But it's great to hear that anyway!

wh10: I thought vimothy's reply was a very good one!

Mick: "Economists seem to transfer the expectations they have for their own models and predictions onto their own kids. Maybe this is why you never hear of them ..."

Though farmers (my family are farmers) are a bit the same! My kids, like the kids of other economists I know, don't seem especially interested in economics. Not sure if that's a problem or not.

I Googled your Dad's Cambridge Growth Project. Wow! Source of both CGE and stuff like Godley/Marc Lavoie?

Min: "Nick, I am curious about this short term vs long term idea of loanable funds. Where is the crossover point? What marks it or determines it?"

Very loosely:

1. The "Long run" is when prices have had time to adjust to monetary shocks.

Or

2. The long run is when monetary policy is good enough that there are no monetary shocks so prices don't need to adjust to monetary shocks.

That's when most macroeconomists would say (something like) the (real) rate of interest is determined by desired (national) saving and investment. Equivalently, the real interest rate must be set so that desired expenditure (demand for goods) equals the level of output consistent with inflation remaining steady at the target.

vimothy, yesterday: "Never. Going. To. Happen."

Nick, in response: "I can only hope you are wrong. We can but try. If one person follows my plea, it has been worthwhile."

We now know it was worthwhile! (Maybe not all the people who most needed the advice, but I'll count my little successes where I can find them!)

Ha ha ha! I'm happy to concede, but Steve & Kuri both seem to have read textbooks already, so were they really the subject of your post, Nick?

Nick,

that's an interesting interpretation of Krugman's position, but if we focus on what he actually said, then he is simply wrong.

"any individual bank does, in fact, have to lend out the money it receives in deposits" - No they don't.

"Bank loan officers can’t just issue checks out of thin air" - Yes they can.

"like employees of any financial intermediary, they must buy assets with funds they have on hand" - No they must not.

Krugman is clearly expressing the view that banks have to receive funds before they can lend them out. This implies that if they have more reserves, then they are able to make more loans. But according to the BIS, this simply isn't how it works:

"...the emphasis on policy-enduced deposits is misplaced. If anything the process actually works in reverse, with loans driving deposits... the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. Under a fiat money standard and liberalized financial system, there is no exogenous constraint on the supply of credit except through regulatory capital requirements. An adequately capitalized banking system can always fulfil the demand for loans if it wishes to."

https://docs.google.com/file/d/0B2bjqNteRwUoOU9yak81SDBRcEtLZG1sXy1nUFc2QQ/edit

http://www.nakedcapitalism.com/2012/04/scott-fullwiler-krugmans-flashing-neon-sign.html

Nick: come one. Everyone gets wound up and this post was incredibly presumptuous. A lot of my followers were also frustrated by your post - I don't think you realise how it comes off, even though, in fairness, you try to be nice in it.

In any case, this has veered off into endogenous versus exogenous money. How surprising! I see that nobody has attempted to argue with my examples that show clearly that, yes, economics really can get that bad.

First there is a mountain, then there is no mountain, then there is.

y: well as I said, my initial reaction on reading Paul Krugman's post was to write a post saying "this is wrong". (And my response right now to that bit you quoted was "more right than wrong", rather than "right".). But in writing my post, I ended up in the same place eventually anyhow, and said that.

Trouble is with the MMT guys, they really do seem to think that the long run is just a succession of short runs. Which is why I wrote this post as a followup.

That BIS quote is deeply flawed in the same way.

"...the emphasis on policy-enduced deposits is misplaced. If anything the process actually works in reverse, with loans driving deposits..."

Of course it actually works in reverse, most of the time, unless monetary policy is really stupid. We need to know what would happen if there were some exogenous shock to monetary policy coming from the central bank, but that doesn't mean that most exogenous shocks do in fact come from the central banker waking up one morning, having a brainwave, and deciding to loosen monetary policy just for the hell of it, when nothing else changes. At least, we hope not. See my previous post on just this subject.

". the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. Under a fiat money standard and liberalized financial system, there is no exogenous constraint on the supply of credit except through regulatory capital requirements. An adequately capitalized banking system can always fulfil the demand for loans if it wishes to."

Nonsense. It's the job of the central bank to impose that constraint, and sensible central banks DO impose that constraint, by following something vaguely like a Taylor Rule, in order to keep inflation on target (or something similar). We do NOT live in a world with a "fiat money standard". We (at least Canadians do) live in a world with a CPI standard, where the central bank targets CPI inflation.

And I wrote another follow-up post to explain that too.

(Actually, you could say that my sequence of posts there, plus the posts on burden of the debt, collectively form a total demolition of the MMT perspective.)

Simon Wren-Lewis, where I caught your original comment, now has a post entitled "Kill the Money Multiplier!".
Just want to say this has been fun. Thank you.

Unlearning: "Nick: come one. Everyone gets wound up and this post was incredibly presumptuous."

OK. No worries. I admit I get a bit wound up at times too.

"I see that nobody has attempted to argue with my examples that show clearly that, yes, economics really can get that bad."

It's been a very long comment thread, and a bit tiring for me. I will try to go back to your examples. (Of course, there are times when I too think that economics really can get that bad! Probably not the same times as you though.)

BTW: Nobody has yet responded to my devastating empirical critique of MMT in a comment earlier this morning, either. (But you're not an MMTer, are you?)

wh10,

"vimothy, so is the explanation that all those post-Keynesians are just dumb?"

You don't have to be dumb to be wrong.

y,

"But according to the BIS..."

From the link-

"The views expressed in (BIS papers) are those of their authors and not necessarily the views of the BIS."

Turns out that a humanities education has some benefits: it trains one to jump to the fine print.

Peden, now you're getting at it. What are the possible reasons in your mind?

wh10,

Reasons for what?

W Peden: You, representing the Artsies, definitely win that one. I hadn't thought about the difference between BIS and the authors either. I should have done.

wh10: Aha! You are asking (I think) an *epistemological* question! Over to you, W Peden!

jbrown: and thank you! Damn, now I'm going to have to get into a fight with Simon Wren-Lewis!

1. Despite everything that was being said about debt and deficits, by Finance Ministers and Prime Ministers, about the big spending cuts in 96, and Harper's GST cuts, etc etc, Canadian fiscal policy was actually secretly being used to target inflation at 2%, and that is why fiscal policy needed to change massively over the last 20 years. A massive conspiracy by successive Liberal and Conservative governments to hide the true reason why they did what they did with fiscal policy. And no obvious political reason why they would lie to cover up the true reasons they kept changing fiscal policy.

Well shoot - James Galbraith has been cited as an MMT economist, but he wouldn't claim that the interest rate channel is ineffective. Dean Baker's basically on board with all the working pieces, and he still thinks interest rate manipulation can regulate aggregate demand. I think that's generally accepted. It's in Wray's MMT primer too. I'm not sure about Bill Mitchell's writings, because he seems to write 10,000 words about the same thing and leave me unedified.

More or less, I think their IS curve still slopes down and that their LM curve is flat, even if they're not using those terms. What makes it unusual is the claimed irrelevance of bond issuance, the focus on sectoral balances, and the Godley-esque models with a fully fleshed out financial sector used when they're not just philosophizing on the internet.

Edmund: "More or less, I think their IS curve still slopes down and that their LM curve is flat, even if they're not using those terms."

Aha! I'm now learning more from you per word than in a lot of my reading of MMT. Because I was definitely under the impression that their IS curve was vertical, to a rough approximation. In other words, I understood them to be saying that the IS could as likely slope either way, because the income effects from interest rate changes were as likely as not to be bigger than the substitution effects. And I actually wrote a post saying that that is how I interpreted the MMT position, and IIRC, they basically confirmed it.

But maybe I was basing my interpretation too much on Bill Mitchell, or some subset of them??

"What makes it unusual is the claimed irrelevance of bond issuance, ..."

Can you expand on that please? Oh, do you mean they think that Open Market operations are irrelevant? (But they still think central banks can set interest rates?)

I will definitely read a textbook when Mitchell-Wray comes out.

Can you expand on that please? Oh, do you mean they think that Open Market operations are irrelevant? (But they still think central banks can set interest rates?)

As far as I can tell, so long as the central bank is paying interest rate on reserves to provide an interest rate floor, they generally think a deficit financed by new reserves is no more inflationary than one that is offset by a bond issue. Let me see if I can find a corroborating post.

Here we go. Fullwiler examines deficits that are funded with "new money", with bond sales to banks and with bond sales to non-bank private actors.

This is where the rubber hits the road:

Finally, that the non-bank private sector is holding Treasuries rather than deposits in Figure 3 does not somehow constrain its spending. Rather, just as current holders of deposits could choose to convert their new wealth to time deposits instead of spending, individuals holding Treasuries (which are essentially time deposits at the Fed) could opt alternatively to leverage their wealth (and Treasuries happen to be highly valuable as loan collateral). Indeed, whether holding deposits or Treasuries, with greater net wealth and net income flows provided by a government deficit, the non-government sector might logically be more likely to spend than without the deficit while also appearing more creditworthy to banks (who again themselves are never constrained by the quantity of reserve balances or deposits in the amount of lending or money creation they can engage in). In any event, in the presence of a government deficit, spending by the non-government sector is in no plausible way constrained by the fact that it currently might be holding Treasuries instead of deposits.

http://neweconomicperspectives.org/2009/11/what-if-government-just-prints-money.html

Treasurys are assumed to be money-like enough that it makes no difference to the private sector to hold them or hold money, or that purchases of Treasurys by the private sector are only conducted with funds that they would have held onto anyway. At least, that's what I think is going on here.

Although they clearly do think that without interest on reserves, monetary operations with bonds need to be conducted in order to hit an interest rate target.

Thanks, Nick! :)

Now off to read Wren-Lewis. ;)

Are there people who think intro physics is BS? "WTF? There's no such thing as a frictionless vacuum. Why is there a Nobel Prize for this sh*t?"

That's because physics and economics are not comparable.

From these comments, physicists are glad that blogging wasn't invented during the 20's-30's (during the great quantum revolution) as there are now still enough internet crackpots twisting quantum physics into their own platform (science fiction, religion etc.)!

Simultaneity: it would be interesting to take a poll of fourth year undergrads (seniors) to see how many do not believe in this. Do you think it's the students, the profession, or the way economics is taught that this would be a hard concept to understand? (Not sure if you were implying this, or that it is actually taught in Econ 101, but most econo-bloggers have forgotten it ...).

Simultaneity: it would be interesting to take a poll of fourth year undergrads (seniors) to see how many do not believe in this. Do you think it's the students, the profession, or the way economics is taught that this would be a hard concept to understand?

For my own part, it was always made clear that there were probably a wide array of reinforcing or countervailing actions and reactions taking place, but you ultimately need to decide - hopefully with empirical evidence - which overwhelm the others. Otherwise you can't say that if the Fed tweaks X, then Y and Z go __, ceteris paribus.

I have been reading and commenting on this blog, off and on, longer than I think most of the other commenters have been. ie, I remember it's original inception before Stephen started acquiring co-bloggers. This post fits me, of course, to a T. (Aside from the fact that I took a high school economics course a long long time ago, but I don't think that counts...)

But the thing is, as long as I have been reading here, and numerous other econ blogs, the most I can get from this post is a *yawn*, honestly. I lead a busy life (doing other things that use, apparently, some of the tools that economists use), but I take matters of economic policy to be important to me. I have considered, from time to time, taking the advice Nick is offering, even before he offered it.

The truth is, though, that for me to invest the time (surely more than a day!) to acquire the formal introduction that Nick is recommending requires some justification. And that justification has to come from the things I see. And in years of reading and arguing about this stuff, it's true, I really don't see the need to spend that time. It's rare than an economist's arguments, brought down to the lay level as surely you are sometimes doing, makes me go "ah, he's right, maybe I *am* an ignorant rube, I should spend that time!"

I also read blogs on other academic and scientific topics, and I can safely say that I am very much willing to give experts in those fields a level of deference that I am not willing to give to economists. That is the core issue here. Why do us critics give other fields deference that we will not give economists? Until I see a reason to give that deference, I don't see why I need to take Nick's advice.

Now you may ask why I continue to bother to engage with economists. I do because, despite their protestations, I think they're overconfident and have an outside influence on debates that will ultimately be settled by "gut moral feeling". It is the gut moral feeling that is ultimately at issue here.

As for my high school economics course experience, I can't remember what book they used (it was in Ontario, and there was a book), but my now-vaguely-remembered principal reaction to it was that it was laughably wrong, and seemed tailor-made to fit a political agenda I already knew I disagreed with. I hung out with the nerd crowd, of course, and some of them had budding "Uebermensch" tendencies if-you-know-what-I-mean, and I definitely knew what I found abhorrent. No one has ever convinced me that economics as described even by well-intentioned econ prof bloggers doesn't fit tightly with that worldview, no matter how the exponent may regard him/herself.

That might explain my nonchalance even in the face of this exhortation. And I definitely do believe that one needn't know *everything* about something in order to criticize it. Some things have to prove their face value before I proceed.

Edmund: thanks. I understand you on that topic very clearly. But I still can't understand that passage from Scott F. Their position, as you interpret it, sounds very similar (the same?) as the New Keynesian position.

Min: Simon Wren-Lewis is good on that topic. I left a comment there. Not really a fight between him and me. More a difference of emphasis and interpretation.

jt: "Do you think it's the students, the profession, or the way economics is taught that this would be a hard concept to understand?"

I think it is a hard concept to understand. It's one of those concepts that (for once) is easier to understand in pictures or math, and very hard to express in words. And bloggers use mostly words. And the readers of blogs see words, and most of them think in words.

It's not easy to explain supply and demand in words, but the picture is a lot easier. (But many first year students don't think in pictures, or in math, which is a problem).

Peden, why do they so strongly believe in theories that are wrong in your opinion, in your opinion?

Yet another way of putting my response is: at this point I see mainstream (or whatever you want to call it) economics as, at best, somewhat orthogonal to the problems I want to see solved, because it apparently views things that I consider to be ends to be mere means. That may be a problem with my definitions of ends and means, and quite possibly my own tendency towards utopianism may be at fault---a discussion for another time, I'm sure.

But, unfortunately, because of this, there are places where economists interfere with the developments I want to see happening by their contributions to the discussion and their influence, however to-them meagre, over policy. Consequently, I have to decide how much I need to engage with them and their ideas to mitigate this interference/distraction, especially with everything else going on in my life. So the extent to which I'm going to follow Nick's advice is the extent to which I consider the inner substance of first-year economics as being relevant to my concerns.

wh10,

Evidence and logic, in general (at least as much as people who get things right). The evidence in science is sufficiently ambigious and slight that multiple people, thinking logically, can come to different conclusions, especially if they begin with different assumptions.

One of the biggest single signs of the complexity of the spontaneous order is how easy it is for reasonable, well-informed people to disagree about it.

Nick,

Edmund: thanks. I understand you on that topic very clearly. But I still can't understand that passage from Scott F. Their position, as you interpret it, sounds very similar (the same?) as the New Keynesian position.

It's really similar, and not made clearer by the tendency to not write out behavioral equations. I think there's also a full-on disavowal of the intertemporal government budget constraint.

Would New Keynesians say the same thing about deficit financing? That is, so long as the central bank can meet its target rate with interest on reserves as a floor, it doesn't matter if the government finances its deficit with bonds or reserves? Now, I do know a New Keynesian model needn't contain money or government spending differentiated by financing at all, but I'm not schooled enough to know if the topic is touched upon in a consistent way.

I'm still trying to learn where the MMTers are coming from. There's a great deal of respect for Godley, so I've been slogging through his book with Lavoie in my spare time. The approach is quite a bit different from any other macro I've been exposed to, although the intro says it's somewhat akin to what Tobin was up to.

Unlearning: Let me take your 3 core examples:

"- To satisfy the conclusion that demand curves slope downwards, Mas-Colell assumes that a benevolent dictator redistributes resources to maximise social welfare prior to trade."

I am aware of one empirically verified example of a Giffen Good -- I think it was rice in that very poor village in China. I haven't read a first year textbook that makes that assumption you tell me Mas-Colell makes. First year textbooks talk about substitution effects and income effects of a price change.

"- The neoclassical theory of decreasing marginal returns assume that when a extra labourer is added, either the existing capital reassembles terminator 2 style into slightly less productive capital, the extra guy does whatever is needed without capital (usually completely ridiculous such as digging hole with his hands), else he fetches lemonade and cheers the rest on."

I used to work as a "lorry driver's mate" in the UK. When labour is cheap relative to capital goods, then hiring someone like me to help the driver load and unload, etc., was profitable and efficient. I have heard that lorries in India used to have (maybe still do) several driver's mates.

Even when some inputs do need to be combined in fixed proportions, neoclassical theory can easily handle this case. What is the marginal product of man+shovel combo on a given amount of land? That determines the demand curve for man+shovel combos, then we stack their two supply curves up vertically to solve for the two factor prices simultaneously. In fact, it is the classical cost of production theories of value and distribution that fall flat on their faces in cases of fixed proportions. E.g. if workers produce sheep, but each sheep produces a combo of wool+mutton, how do you apply the Labour Theory of Value to determine the value of wool relative to mutton? (No Kiwi jokes please!) You can't.

"- Combinations of any sort - workers, big firms - reduce efficiency/social welfare (economists sometimes use one or the other, but it basically means 'more q less p).' Again you never see it stated like that, but it's true. At the core monopolies are presumed to have no obvious advantages (though elsewhere economies of scale are taught)."

Yep. And maybe the first year textbooks are telling us something important and right there? Though they usually discuss exceptions, like the economies of scale case you mention, where the merits and demerits of various ways of dealing with natural monopolies are discussed. And then there's the case of monopsonistic labour markets, which some texts discuss.

Edmund: " I think there's also a full-on disavowal of the intertemporal government budget constraint."

Yep. I follow them on that topic. That's because I had read Abba Lerner years ago, and they are basically following his Functional Finance doctrine. Warren Mosler espouses the old "we owe it to ourselves" canard, which I dealt with in an old series of posts (when PK and Dean Baker repeated the same thing!). That's only true under Ricardian Equivalence, which of course they hate, so they have an internal contradiction there. More generally, you could justify their position on the IGBC if you assumed the interest rate less than the growth rate, like in the Samuelsonian Exact Consumption loan model. And if their IS curve really is vertical, the equilibrium interest rate really is indeterminate, so the central bank can set it to whatever it likes, so that's all internally consistent.

"Would New Keynesians say the same thing about deficit financing? That is, so long as the central bank can meet its target rate with interest on reserves as a floor, it doesn't matter if the government finances its deficit with bonds or reserves?"

AFAIK yes, roughly speaking. But there is a difference in the term structure of bonds and reserves, which may matter in some models, with risk-aversion, etc. (But most NK models only have a one-period rate of interest, so you can't really tell the difference).

"There's a great deal of respect for Godley, so I've been slogging through his book with Lavoie in my spare time."

I haven't read that book, but Marc Lavoie is a "semi-colleague" (Carleton and U of Ottawa have a joint economics PhD program), so I have a rough idea of the work Marc does.

W.Peden,

fair point. However the facts remain the same regardless..

OK, MC isn't a first year textbook it is a PHD textbook. But that is even *more* of an indictment because economists always assert that objections are incorporated at a higher level.

And it's not about demand curves sloping upwards or giffen goods. There is no need to invoke these, or behavioural nigs, or speculation. It has been shown, through this theorem:

http://en.wikipedia.org/wiki/Sonnenschein%E2%80%93Mantel%E2%80%93Debreu_theorem

...that only a demand curve for one person and one good can have the shape shown in D-S diagrams. Once you extrapolate up to the market level, goods interact an you get the income & substitution effects. You can assume these away with the Hicksian compensated demand function, but they return when you add more than one consumer. This has been acknowledged but assumed away by a number of economists in a number of ways - Mas-Collel choose a dictator.

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.

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.

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.'

DeusDJ, no MMT is not that. MMR: http://pragcap.com/how-is-mr-different-from-mmt is that. MMT is maybe some of this, but with a huge amount of other theories, ideological baggage and behavioural assumptions (that most MMTers don't have the intellectual honesty to admit) on top. If you want a pure, unbiased look at the operations of the monetary system, use MMR.

As for Micro, Micro is fine. And it's not all marginal utility, I mean I literally got taught behavioural micro in my postgraduate micro course, not in a separate behavioural module, in the core micro course. And most modern micro research involves extensive empirical analysis, perhaps through experimental economics or through modern microeconometrics.

And the state of empirical economics is doing very well in most areas apart from macro, which ironically you consider to be the best: http://ftp.iza.org/dp4800.pdf

The absence of an intertemporal government budget constraint is based on two arguments:

- By observing that the government not-printing money today does make the government more able to print money tomorrow (and vice versa). It may make it less able to, if the thing it not-spent on today was planting trees for paper. Then you say "inflation!" But that's an instantaneous budget constraint, unless you believe in the quantity fallacy of money.

- By observing that the goods the government buys are, at the margin, mostly labor, and labor does not keep. In the real world there are no little gray men smoking rose petal cigars and running a time-savings bank where the unemployed can store their man-hours for later use.

The Treasury rate, of course, can be set by the central bank. For all maturities. There is nothing particular about the overnight rate which makes it uniquely suited for interest rate policy operations. So yes, the government can always set the Treasury rate for any and all maturities to zero, if it wants to.

At the core of this last argument is a distinction between return on credit and return on equity. The two are not the same, and economists confuse them at the peril of talking nonsense. Credit is an expression of political power, whereas equity is, in a capitalist economy, (closely related to) capital stock. The former can be created for free in any volume by any credible political power-broker (such as the central bank, or, in systems where there is no central bank, any bank), and this power-broker can then accrue seigniorage from it. The latter requires actual capital plant, and the owner accrues return to capital.

The notion that the rate of seigniorage on credit has any necessary relationship with the return on capital is a self-congratulatory folkview promulgated by lazy money and its managers.

I don't know where you got the "vertical IS curve" stuff from. It is not required to obtain the instantaneous rather than intertemporal government budget constraint. But I'll take a stab in the dark and guess that it's your summary of the MMT argument against the efficacy of Quantitative Easing.

In which case you forgot to state a domain assumption: The full argument is that in a debt-deflation event, such as which we are currently experiencing, replacing interest-paying Treasury bonds with reserves will reduce private sector income and not stimulate lending.

I think this is wrong, because QE et al doesn't just take away interest income from the private sector - it also depresses the long-maturity end of the yield curve, which should have a stimulating effect on investment. But it is not crazy-talk to find it non-obvious that fiddling with the long-maturity rates during a serious credit collapse will be effective.

In particular, it is not crazy-talk to claim that the slope of the IS-curve depends on where you are in the business cycle. And if the IS-curve does become steeper during the downward leg of the business cycle, it is not totally unreasonable to argue that the IS curve might be nearly vertical in a serious credit crash. I'm skeptical, but it's not a stupid conjecture.

- Jake

More generally, you could justify their position on the IGBC if you assumed the interest rate less than the growth rate, like in the Samuelsonian Exact Consumption loan model. And if their IS curve really is vertical, the equilibrium interest rate really is indeterminate, so the central bank can set it to whatever it likes, so that's all internally consistent.

Ah, yes. I like trotting out the implications of Samuelson's model in conversations about the budget - partially because I want people to enjoy cocktail parties less.

As an aside, I Googled functional finance and the government budget constraint to see how the former deals with the latter, and what's the second thing to come up? Why of course, a post you already wrote on the subject.

The Canadian initiative is once again more than worthwhile.

UnlearningEcon,

...that only a demand curve for one person and one good can have the shape shown in D-S diagrams.

And what is confusing about that is there is virtually no product where your demand will resemble the canonical curve. If anything, a step function is more appropriate.

The comments to this entry are closed.

Search this site

  • Google

    WWW
    worthwhile.typepad.com
Blog powered by Typepad