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"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."

Yes you can, but no it's not informative or in any way interesting.

"For example it explains why large recent increases in B have not lead to large increase in M, because reserve ratios have increased."

That is an excellent example of a just-so story: A purported explanation that obfuscates more than it illuminates. Increasing m is not the reason M hasn't increased. It's a consequence of the fact that M hasn't increased and B has. Pretending that the money multiplier has anything interesting to contribute to thinking about money gives the careless economist a totally back-asswards impression of the causal relationship.

- Jake

from the wiki article on the MM, I read this by Samuelson in 1948

By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves. Result: no 5 for 1, “no nothing,” simply a substitution on the bank’s balance sheet of idle cash for old government bonds.
— (Samuelson 1948, pp. 353–354)

I think Samuelson counts as a mainstream economists, don't you? Where has this idea come from that economists think the central bank can just raise B and M will rise, regardless?

JakeS: "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..."

Thanks. Now I understand.


I think you've gone off track here. Why do you think M has not increased even though B has? I think it's because banks haven't increased lending (for reasons I think we all understand, reasons that are the underlying cause why M has not increased). This shows up as high reserve ratios, and once you have taught students the money multiplier you can explain all this. Before you've taught it, they don't know the difference between M or B or why banks lending creates money and means M!=B and so on.

Consider profits=margins*revenue. If I was to say revenues have increased but profits haven't, because margins have fallen, that analogous to what I'm saying the money multiplier story is doing here - I agree it's not an explanation because you still have to explain why margins have fallen. But of course one still has to teach profits=margins*revenue, it does't obfuscate or cause anybody to get thing ass backwards. And when accounting relations like these can be broken down into further pieces (cash in hard, deposit ratios etc.) these elements are more helpful. You can say, oh, margins didn't rise because this line of expenditure here rose. (and you still have to explain why).

Utterly coincidentally, I wrote a post over the weekend, which went up today (Wednesday) on an idea that pops up, such as in historical anthropology, that seems to go back to Marx, that exchange is about "matching equivalences". Folk who do not get the concept of gains from trade analysing economic behaviour. Sigh
link here NR
(You might like the notion of economics envy.)

Then there are the very strange notions about what mainstream economics covers. David Graeber, for example, claims that non-state bureaucracies is an idea "absolutely foreign to economics". Strange that Oliver Williamson got a Nobel for studying exactly that.

But if you want a really appalling effort at misrepresentation, try the piece linked below. (For example, did you know that Douglass North got his Nobel in part for his analysis of the origin of money? Strange, neither did the Nobel Committee.)
link here NR

[edited to fix typos NR]

That should be "there are the" and "did you know that". Clearly, too tired and time to go to bed ...

[Fixed. Go to bed Aussie! NR]

"Before you've taught [money multiplier], [students] don't know the difference between M or B or why banks lending creates money and means M!=B and so on."

But surely you can say something like: "The central bank announces an interest rate. Banks make loans based on that interest rate (and what they expect that rate will be in the future). If the borrower then moves the money he borrowed to a different bank (or demands cash), then the bank goes to the central bank and borrows the needed cash at the interest rate the central bank announced back at the top of the paragraph."

Then you can add superfluous complications like deposits, the interbank market or reserve requirements later. But this formulation should not mislead students into believing that banks are intermediaries between savers and borrowers. (Though the idea is so widespread in the uneducated public, and sadly even among economists who should know better, that you may want to include a sidebar explicitly stating why it's nonsense.)

- Jake

JakeS: I was going to suggest you see the Simon Wren Lewis post, where he (at least roughly) agrees with you. But then I saw you had already read it.

But something you said caught my eye: (You were arguing against loanable funds theory) "...there is no causal relationship between your decision to not-buy the TV and your neighbor's ability to buy the TV."

In a New Keynesian model, for example, there is indeed a causal relationship. You decide to not-buy the TV, this reduces AD and reduces the central bank's forecast of inflation, so the inflation-targeting central bank sets a lower interest rate, and so your neighbour decides to buy the TV.


sorry to be presumptuous, but I think you seen shortcomings in what you see as the standard story in economics, but you're throwing the baby out with the bath water. For example I think it's important to know that banks can lend first and then go to the central bank to fund that loan later, and yes 1st year macro does skip that point (I can't remember where I first learnt it, but it wasn't in a macro class). But banks don't always go to the central bank. Banks go to great expense to attract savers (deposits). Why do they do that? Intermediation between savers and borrowers is part of what banks do.

Incidentally, I sympathize with your accusation on mainly macro that neoclassical economics has wrongly neglected the role of debt. Right, got to get some work done.


I was made aware of Mas-Collel by Keen but got it myself so that I could check.


I'm sorry but that section fits my characterisation far better than yours. He does not pause and reflect on how ridiculous it is to assume a dictator. He does not say 'we must assume something as silly as this, it must be wrong.' He simply states that it is a necessary condition for the property of aggregate demand we seek to hold, finds a way to fulfill that necessary criteria, then continues.

Very similar arguments can be found elsewhere: in order to satisfy the market demand function, consumer utility must take a very specific form. There are various categories of restrictive assumptions to this. All are unrealistic - e.g. Gorman assuming all consumers are the same - obviously none are as striking as Mas-Colell's.

But what that formulation misses is that "I not-buy a TV and save the money and he borrows to buy a TV" is not equivalent to "I buy a TV and lend it to him." Which in turn is not equivalent to "I buy a TV and he decides to not-borrow the money to buy a TV."

Only the first of those three can contribute to systemic financial instability (unless our loan contract in the second example specifies that he must pay money if he cannot return the TV - in which case the TV can break and we're back to #1).

Because money isn't neutral.

The network structure and magnitude of credit relationships matter, the rate of inflation matters to the rate of defaults in the long run, an economy can have a structural rate of inflation, and an inflation-targeting central bank will (unless it also does other things that New Keynesian models don't even have a language to discuss) not have its eyes on any of these balls.

This is not to say that short-run IS-LM models aren't useful conceptual shortcuts (the long-run models, OTOH, try to force-fit a complex dynamic system into an equilibrium straitjacket). But the reasoning used to derive them is full of epicycles. Presenting them as mnemonic devices backed by black empiricism would be far more useful than trying to put them on Walrasian microfoundations.

- Jake

JakeS: "Presenting them as mnemonic devices backed by black empiricism would be far more useful than trying to put them on Walrasian microfoundations."

I tend to agree with that. Putting a model of a monetary exchange economy on Walrasian foundations is, in any case, let's say "problematic". If we had a single centralised market with a Walrasian auctioneer, we wouldn't be using money. (Clower vs Patinkin). (Or we could think about non-Walrasian microfoundations, even though it's harder.)

Also, Nick, I forgot: a day to read a textbook? Are you Matt Damon from Good Will Hunting?

"But banks don't always go to the central bank."

Comes to the same thing in the end. If you're going to start simple, start with the counterfactual where there are not deposits. It is no more counterfactual than the money multiplier story, and is less likely to lead people up the primrose path.

"Banks go to great expense to attract savers (deposits). Why do they do that?"

Because they make money on the spread between what they pay you and the CB policy rate. And on shipping and handling fees: Just yesterday, I paid about € 3 to change € 66 worth of DKK into SEK, and I pay something like that every time I use another bank's ATM instead of my own bank's. Both of which are very nearly pure profit for my bank.

And because regulators like to use loan/deposit ratios as a shorthand for identifying banks who have an unbalanced growth model. Something that has historically been indicative of a Ponzi bank. And occasionally just for the sake of chasing deposits, because that's what banks do because they do it. There was a hilarious episode in Spain not so long ago where banks were, for weeks and months together, paying depositors more than the Spanish central bank's penalty rate - that is, they were losing money on every € of deposits. And they were still trying to capture market share.

For historical reasons, the deposit-taking business cohabitates with the lending business. But with a modern central bank there's no reason in principle why this has to be so. Banks like that arrangement, however, because it offers a partial hedge against wrong forecasts of the CB policy rate (your deposit business will lose money, but your lending business make money, or vice versa). And because it makes people afraid that they may not be able to get their paycheck if the financial regulator takes a bank out back and shoots it.

- Jake

Unlearning: yeh, maybe I was a little overoptimistic there. But Daniel Kuehn's story (very short), and one of his other commenter's, is so so similar to my own. All 3 of us did it in basically one sitting. And it made all the difference.

I know others here are giving you helpful advice on Varian etc. But somehow,....I disagree, and feel...it's just not the same as that First Year Textbook In One Big Read Experience! Where it all comes together, and you get the Big Picture, even if you query all the details. And everything else, up to Mas-whoever, is just a long footnote plus math appendix. (Slightly unfair to upper year texts, of course.)


so what do you think students take away from that passage? What would you say about it, if you were teaching that class? That's it's A-okay to treat aggregate consumer surplus as a measure of welfare because we can just assume there's a benevolent social planner redistributing before trade and forget about distributional questions?

you presume economists are idiots then find that they are idiots.


I think at this point students are so convinced that assumptions don't matter that it is just glossed over. I don't think economists are stupid AT ALL. Was it George Orwell who said 'that is so ridiculous only a smart person could believe it?'

What is your experience of this in class, anyway?

LOL, when mandos asked on the „kill the euro“ session, “where is genauer?“ I kept my keyboard shut, because that discussion became repetitive and people apparently do not learn anything from each other.

0. “read an intro textbook first”
made me first sympathize a lot. I had these situations, when people come, and want to discuss with me about gravity, and “that we do not really understand it”. You check with them, that they do not even know the 10th grade 1/r^2 law of force, that is actually not on the curriculum for about 75 % of the people, and if you test people over the age of 40, my guess would be that only about 5 % of the population can still recall that by themselves. I tell them that for all practical purpose, we understand gravity perfectly, and there is nothing to discuss. But that I can explain them how good we know it, and that it might be useful, that they read a (quantitative) intro textbook first, and not some “popular science” musings of Stephen Hawkings about string theory and the likes. Then these folks find me arrogant, that I don’t accept them as equal discussion partners, and even doubt my knowledge, despite me telling them about my physics PhD. Pretty interesting experience.
The same folks think that political correctness and majority votes trump scientific truth, that if 10 people including one “forest scientist” tell me that tropical rain forest is a net absorber of CO2, because Greenpeace says so, that I have to accept this, and can not even understand the argument, that “mass conservation” dictates that forest without any significant humus underneath can not be a significant CO2 absorber in the long run.
It would probably be too painful for them, to understand, how severely their stupidity and ignorance limits their intellectual horizon.

1. N-body problem
Now here, the n-body problem illustrates a lot of beautiful things in physics.
Formulas and laws are exact, and there is a very clear direction between cause and effect. The (gravitational) force on a body is a function of its mass, and not just one correlated to the other, in strong contrast to e.g. economics.
That also leads to a lot of exact “conservation laws” mass, energy, impulse, spin. And from those you can derive, that as long as you only consider the 2-body problem, like the earth around the sun, the earth will never ever leave its orbit around the sun, and disappear in the cold, dark rest of the universe. Unfortunately, the same can not be said with the same exact, universal rigidity, we physicists love, as soon as you add a 3rd or more bodies. These systems have, just in principle, the possibility to fly apart, let’s say Venus and mars descent into sun, and transfer their momentum onto the earth, which then exits the orbit, well, yeah, in principle, theoretically, this can not totally be excluded, to happen, far into the future.
But for all practical purposes you can treat the problem of 8 or 9 planets as “weakly coupled” 2-body problems, where the other planets are just weak perturbations, and you can come up with pretty precise predictions with very little calculation effort. And this is very typical for physics and engineering.
“k”, when you refer to some numerical simulation toolkits, you simply don’t understand the problem. If you would have ever tried to calculate / simulate even such a simple thing like only the earth orbiting the sun, in x-y-z-t coordinates, you would be very surprised how fast the numerical errors add up, and produce strange trajectories.
This kind of solving a problem is something “economics” can not even dream of, since none of the “laws” are anywhere near “exact”, not even the accounting “identities”.

2. The Sokal hoax and related things
What Sokal demonstrated, is that in a lot of Social science studies “political correctness” and the right “progressive” attitude replaces any meaningful content. Especially since they could not just be ashamed of it and keep their mouth shut. Hard science people assumed that all along, but this was final proof.
But in the meanwhile we also had a couple of incidents, where people in real science were found cheating, over interpreted data far beyond reason, and also engaged in meaningless ramblings, just dropping the right words, concepts, without adding anything meaningful (“Bogdanov affair”). One guy (“El Naschie”) even managed to run a full Elsevier Journal for a while. Apparently he is still running his show in his homeland Egypt. A lot of (more experimentally oriented) physicists say, this is the typically result of “research fields” where basically a (near) complete lack of experimental results like in elementary particles is replaces by ever wilder theories (string theory, m-theory), where even 30 years later nobody has any idea how to prove/ disprove anything and what some people like Woit characterize as “not even wrong”. But combine it with the “intelligent cripple” meme, leave out any equation and real data, and you can sell “popular science” books like fresh bread.
Now, do you see the close parallels to what Paul Krugman does? Carefully avoiding any contact / measure to the real world in his papers? Based on what real world fact could you falsify any of them? You can’t. Ever heard of Sir Popper?

3. Lots of equations & a big computer = understanding a problem?
Whenever I see this as a physicist / engineer I get a big laugh out of it, and then I feel sorry for these people. First you understand the underlying mechanisms exactly, and then you can put it together in larger simulations of finite elements, but only if there is a need because of weird geometries, or really complex dynamics. In the very most real world cases, you have a very few dominant factors, which give you good first order approximations of “the solution”.
It was one of the few important impacts of Hayek to rant against the folly of this soviet “central planning” while it was all the rage with the economists of that time.
And while we are at that, people calculated planet and star trajectories, used vapor pressure / temperature curves and equations to built steam machines long before they knew the “microfoundations” Newtons laws or even knew about atoms and their mechanics.
All those “philosophers of science” who later on want to define how real science progresses, are pretty hilarious.
The current German pope actually did read Paul Feyerabend “Against Method: Outline of an Anarchistic Theory of Knowledge”, who I warmly recommend as an antidote against those orthodox charlatans.
Sooo, I was pretty open to how things work in economics, read the text book Felderer-Homburg for macro and Gärtner-Lutz for exchange rates (German books, and well, the level more like US PhD) I was pretty disaapointed by the 3 or 4 Krugman books, pretty expensive, very low level, 80 % of the content was the same, and very rarely any real world data. One of the rare cases, where I didn’t buy and just borrowed them from the library.

More is following in maybe 2 hours, or tomorrow.

genauer, whether you can treat planetary motion in the solar system as eight weakly coupled two-body problems or you need to drag out the big chaos theory guns depends very much on what time scale you are operating on. Dragging out the Poincare plots is silly if you're planning a space mission. Not so much if you're modeling on an astronomic time scale.

Likewise, if you're modeling the current Eurozone crisis, all you really need to pay attention to is the demand deficiency created by German wage dumping, and how it interacts with a currency peg. You can pretty much disregard all issues internal to the victim countries, because their inability to dump wages faster than Germany dominates any internal merits or dysfunctions they might happen to have. But if you're trying to formulate a sustainable growth strategy for Southern Europe, not just proving that the Bundesbank is staffed by crazy people, then you need to look at those countries in detail.

Tl;dr: Make it as simple as possible, but no simpler.

- Jake

@Luis Enrique

Nan means "not a number". It does not mean "variable".

what I forgot about the n-body problem, the historical context.

I dont see this mentioned anywhere, but I think this was driving this significantly.

As long as you just see the Sun going up every day and down, and assume some godly force behind that, you don't have to worry about this going on forever.

In the moment