I know what it's like to live in a demand-side world, because I used to live in one. Let me tell you about it. Maybe it's like the world you live in.
I wasn't stupid. I knew that potential output wasn't infinite, so there had to be a supply curve out there somewhere, but we never seemed to be on it. Firms almost always wanted to sell more output, and there were always some unemployed workers who wanted jobs if the firms needed more labour to produce more output. There might be occasional shortages and bottlenecks in particular sectors, but generally speaking output and employment were demand-determined. Supply was almost always bigger than demand.
Sometimes there would be inflation, but inflation could not have been caused by excess demand, because I could see with my own eyes that there was almost always excess supply. Inflation must have been caused by something else. Maybe there would sometimes be inflation in particular sectors due to bottlenecks in that sector, and that inflation might push up costs and prices in other sectors too. Or maybe inflation was due to monopoly power, in labour markets and output markets, that caused wages and prices to rise long before the economy got to full employment potential output and excess demand. Or maybe inflation was caused by conflicting claims over the distribution of income, where the sum of the groups' claims on output added up to 110%, so we got 10% inflation as each group tried to raise its price and nominal income relative to other groups.
Whatever the cause of inflation, it wasn't caused by generalised excess demand, and it didn't seem sensible to reduce aggregate demand to cure it. Even if the cure worked, which wasn't at all obvious since the cure didn't attack the underlying cause, the cure seemed worse than the disease.
So if output and employment were demand-determined, what determined demand? And how could we increase demand? It seemed sensible to divide demand up into demand by households, firms, government, and foreigners. Y=C+I+G+NX. So it was immediately obvious that an increase in G would cause an increase in aggregate demand, output, and employment. Indeed the increase in Y would generally be bigger than the increase in G, because if an increase in G caused an increase in Y, that would cause C to increase too, as households' incomes increased. And probably cause an increase in I too, since firms would invest more if they needed to produce more output to satisfy increased demand.
A cut in taxes was nearly as obvious a way to increase aggregate demand. If you cut taxes households' disposable income would increase, and so would their consumption demand.
Monetary policy was a little less obvious, but we conceded it might work too. If the central bank cut interest rates, that might encourage firms to invest more. But would firms really want to invest more to produce more output, if they couldn't actually sell any more output?
Sometimes we played around with Y=C+I+G+NX, to look at the same thing from a different side. I+G+X=S+T+iM told us that injections had to equal withdrawals, and if we wanted to increase Y we needed to increase injections into the circular flow, or reduce withdrawals.
So, if the cure was so easy, why didn't governments do it?
Well, they did. But sometimes they lost their nerve and chickened out from doing what needed to be done.
Some people would worry about government deficits and debts, even though we knew we owed it to ourselves, except for some of the debt that was held by foreigners.
Some people would worry that increased government deficits might push up interest rates. But they didn't have to, unless the central bank didn't cooperate.
Sometimes there would be a balance of payments crisis. If only we could have persuaded other countries to do the same as us in a coordinated fiscal expansion, or had just let the exchange rate float.
And sometimes governments would fear inflation. But we knew that inflation had to be caused by something else, and that the cure, if it was a cure, was worse than the disease.
I left that world: when I discovered we lived in a monetary exchange economy (like a fish discovering it swims in water); when I saw the Phillips Curve shift in the 1970's; when I discovered Milton Friedman, and learned not only that units didn't matter but that the rate of change of units didn't eventually matter either. But mostly I left that world when I discovered how to do macroeconomics with imperfect competition and learned how to see the world both ways at once. But I think I will leave all that for another post.
Any economist old enough to have learned macroeconomics about 40 years ago, especially in the UK, should recognise my old world.
Worthwhile Canadian Initiative 
We’re about the same age, but I grew up in a supply-and-demand world, where rent control caused housing shortages, and price controls caused gas lines to form and emptied supermarket shelves of meat and paper products. Price floors on farm products and unskilled labor caused surpluses. Taxes and subsidies drove a wedge between buyers’ prices and sellers’ prices. When I started teaching economics in 1980, there never seemed to be enough classes for me to teach, so imagine my surprise when I heard department chairs complaining that they could never find qualified teachers. Yup. Supply and demand made pretty good sense.
One thing that never did make any sense to me was the claim that the government could make us richer by hiring the unemployed to dig holes and fill them in again.
Mike, supply and demand ruled in micro, but macro always seemed to me to be the real world. And I used to be able to make perfect sense of the claim that the government could make us all richer by hiring the unemployed to dig holes and fill them in again. The unemployed had zero opportunity cost, and even if the holes were useless, the other unemployed that got jobs producing goods for the hole diggers to spend their income on were producing something useful. Better still if the government dug some useful holes.
“I left that world: when I discovered we lived in a monetary exchange economy (like a fish discovering it swims in water); when I saw the Phillips Curve shift in the 1970’s; when I discovered Milton Friedman, and learned not only that units didn’t matter but that the rate of change of units didn’t eventually matter either. But mostly I left that world when I discovered how to do macroeconomics with imperfect competition and learned how to see the world both ways at once. But I think I will leave all that for another post.”
Meh. What has any of that added? I think a shift towards developing harrodian growth models (and ultimately, looking at the world dynamically) and Minskyan financial instability was the shift economics needed. Milton Friedman and the rest was a big step backwards.
@ Mike and Nick:
Man people really don’t understand the sentences John Maynard Keynes wrote. First of all, the digging holes comment was meant to point out that generating demand leads to the production of wealth that wouldn’t otherwise be produced even if incomes generated didn’t initially come from something socially beneficial. Second, very obviously, Keynes would prefer money spend in social useful areas.
Third, and most importantly, his example was an attack on the gold standard. his original comment was about digging holes and throwing bottles of money in them that private individuals would then dig out. this was meant to be a dig at the socially uselessness of the gold standard and how gold mining under a gold standard was essentially doing what Keynes was describing. He was showing how the supply of money was inelastic in that a rise in the price of money (deflation) didn’t bring about the production of more money like neoclassical theory claims about the supply of a traditional (or “normal”) good.
Nick:
The unemployed give up leisure time, training opportunities, job search, and hunting and gathering, all of which are valuable. Where did their pay come from? The government either got it from taxing, borrowing, or printing, so that the new spending by the unemployed was offset by reduced spending elsewhere.
@Mike you’re making the pernicious assumption of full employment.
Nathan: Actually, to us micro guys the phrase “full employment” has no meaning. But whether people in general are employed or not, taking money from working people and paying people to dig holes will make us poorer, not richer.
@Mike: I’ll define what i mean by full employment: zero involuntary unemployment (as in they would prefer to work but can’t find a job or get more hours for economic reasons). That doesn’t include “frictional” unemployment being the time it takes to transition to another job.
“But whether people in general are employed or not, taking money from working people and paying people to dig holes will make us poorer, not richer.”
This is just nonsense. what could you possibly mean that it doesn’t matter whether people are involuntary employed or not? Employing people who want a job but can’t find one gives them a source of income and means producing more output then would otherwise be produced. It is true that the activity of digging holes is not directly productive (something no one claimed or desires as a policy) but it does increase demand and cause the production of more output (ie more real income). it also preserves human capital that would otherwise get destroyed due to hysteresis (in the economic sense).
Second, there is your whole assumption that increased spending has to come from higher taxes. as you yourself pointed out, this can also come from issuing no yield government bonds (you called it “printing money”) and some yield government bonds (treasury securities). Only taxation “reduces spending elsewhere. I want to meet the insane person you know who cuts their spending when they otherwise wouldn’t because they say to themselves “well before i had 10,000 of zero yield bonds so i can spend as i please but now i have 10,000 of yield bonds so i have to cut my spending”.
I must reiterate, no one really wants digging holes to get money (the gold standard), the point is that that can increase output in times of sever underemployment (not to mention the social benefits of lowering unemployment).
poverty is defined as “the state of having little or no money and few or no material possessions”. the whole digging may not be the project you or i want people to be hired to do, but it does increase income and it does increase the material possessions of the society as a whole. If you say that it reduces overall utility because of the leisure time lost, while i don’t know how to interact with someone who thinks unemployment is caused by people who suddenly prefer leisure to employment in droves.
“Some people would worry about government deficits and debts, even though we knew we owed it to ourselves, except for some of the debt that was held by foreigners.
Some people would worry that increased government deficits might push up interest rates. But they didn’t have to, unless the central bank didn’t cooperate.
Sometimes there would be a balance of payments crisis. If only we could have persuaded other countries to do the same as us in a coordinated fiscal expansion, or had just let the exchange rate float.”
Nick Rowe or Nick(olas) Kaldor ??? 🙂
(Except Kaldor wouldn’t agree on floating the rate because of the Kaldor paradox).
But seriously a nice summary of your world – even though I disagree with your viewpoints and fail to understand how you jumped to the other side in the 70s. I guess Friedman had great hypnosis skills 🙂
Have you read the article “What Is Wrong With Monetarism” by Francis Cripps? It’s my favourite all time article summarizing the Keynesian viewpoint (although taking Keynesianism to task as well). Appears in a book titled Monetarism, Economic Crisis and the Third World, edited by Karel Jansen.
I remember those days. The key discovery was that changing the trend rate of inflation (within reason) had no impact on the average rate of unemployment. Old Keynesians and post-Keynesians couldn’t deal with that, and still can’t.
The profession moved on, but whenever the issue of changes in trend inflation seems to go away, the old Keynesians crawl back out of the woodwork.
Nick, when I read your post, for some reason I thought of the Monty Python gas man sketch here . The point being that the demand-side world you remember was only so demand-side – there were all sorts of institutions that constrained supply and limited price movements.
Scott:”The key discovery was that changing the trend rate of inflation (within reason) had no impact on the average rate of unemployment. Old Keynesians and post-Keynesians couldn’t deal with that, and still can’t.”
that just simply isn’t true. perhaps of the “old keynesians”, but certainly not the post-keynesians.
OK Nick, but how do you reconcile your new knowledge with your theory that recessions are everywhere and always a monetary phenomenon with the corollary that you do not believe in supply-side contractions and certainly not that the 1970’s was one?
I say the 1970’s was a contraction. The 1982 “episode” was a contraction too, it was central banks purposefully lowering the money supply and jacking up rates. But the present crisis is not a supply contraction, it is a recession, a demand side phenomenon. Like the old demand-siders you want to see economic slumps as due to one mechanism only, where I say there are two mechanisms.
In my world, there can be supply problems and demand problems and the strategies to resolve the two are very different. The details are different too. Using the wrong strategy in a crisis will only make the problem worse.
Nick, this reads a bit like one of those How I Lost My Hash-pipe and Found God stories which are a staple of certain Christian publications. I’m sure your younger self was a lot more clued-in than you give him credit for. Friedman published his QTM “restatement” in 1956. It’s not at all likely that you first discovered him in the 1970s.
If you want to do justice to the young Nick Rowe, I’d suggest digging out your copy of Clower’s Penguin collection of readings and having a fresh look at what he was actually wrestling with.
I presume that Nick thought the 1956 Friedman was a right wing nut.
The way I tell this story (and not about myself,) is that not only did inflation get worse in the seventies, unemployment was not expecially low.
And then, when inflation was brought down in the eighties, unemployment did not stay exceptionally high.
Personally, during much of that period, I thought Friedman was too “left wing,” proposing a low rate of legalized counterfeiting due to his wrongheaded fixation on a stable price level.
Nick’s point is that measured and ubserved unemployment and excess capacity appears to be consistent with market clearing prices and wages. In my view, in ordinary times, excess capacity is malinvestment. Not because of interest rate issues like the Austrians emphasize but because of changes in the composition of demand more generally. Specific capital goods for import competing industries in the face of more competitive foreign exports, for example. But technological change results in obsolete specific capital goods every day. Some of that umemployment we observe exists even though wages are at market clearing levels, it is just that actual employment is less than equilibrium with vacancies matching unempoyed workers. But some of the unemployment is more like the “malinvestment” in specific capital goods, it is just human capital. While generally people can start over, it is difficult to make this adjustment.
Ramping up demand in aggregate just doesn’t make all of this go away, because the problem is the composition of demand. But I think it leaves lots of room for temporary booms. And more importantly, none of this means that low demand doesn’t cause problems. I do think that it is conceptually possible that they can be solved by a lower growth path of prices, including wages. Before the prices (and wages) make the full adjustments, expansion in demand can fix up the problems, making it unnecessary to make the price adjustments.
The Rothbardian view (which was mine in about 1978,) was that prices and wages should just be flexible enough so the real quantity of money will adjust enough so that real expenditure will adjust to maintain full employment. Whatever the level of nominal demand, prices and wages should adjust so that the unemployment and excess capacity we observe remains due to shifts in the compostion of demand and changes in technology, along with frictinal unemployment where vacancies match unemployment.
The old monetarist view was that the demand for money stays on an almost costant growth path, and so, keeping the M2 measure of the quantity of money on a constrant growth path will keep nominal expenditure on output growing on a constant growth path. There would be no need for prices or wages to shift off of their growth path to keep real expenditure consistent with full employment.
Interest rates can’t have much effect on the demand to hold money, so saving, investment, deficits, and the like, which plausibly impact credit markets and market clearing interest rates have no impact on nominal spending on output as long as the quantity of money stays on a stable growth path. Or so “we” monetarists told ourselves.
While the Rothbardian view was that prices and wages should adjust if needed, the claims that these changes in nominal expenditure would be rare because the demand for money won’t change much were somehwhat important.
But that argument stopped fitting the facts. There is no measure of the quantity of money whose demand stays on a more or less constant growth path.
I favored targeting the price level for many years. Adjust the quantity of money however much is needed to accomodate changes in the demand to hold money and keep the price level constant. Suddenly, concerns whether the demand to hold money is impacted by interest rates became pointless. Do you mean the interest paid on money or the interest rate on other assets? So what? We need a monetary regime that keeps the quantiy of money equal to the demand to hold money at a stable purchasing power. Hayek’s Denationalization of money and Greenfield and Yeager’s Black-Fama-Hall payments systems promised just that.
But what of “supply shocks?” Does it really make since to force the prices of everything else down because there is a bad harvest? It was really George Selgin that convinced me. Not that there is any advantage to a trend deflation in final goods prices, but rather than trying to keep final goods prices on a stable growth path in the face of shifts in productivity, and especially supply shocks to particular markets.
The market moentarist answer is to target nominal GDP and to change the quantity of money however much is needed to keep nominal GDP on target.
While that was my position since the early nineties, I must admit that the apparent success of the Fed in using some kind of quasi-Taylor rule pretty much shut me up. Sure, I still prefered zero inflation to 2%. But they seemed to be doing a pretty good job in adjusting the quantity of money to the demand to hold it.
Then, they screwed up in 2008 and haven’t fixed the problem yet. It is time for a change.
Kevin: “Nick, this reads a bit like one of those How I Lost My Hash-pipe and Found God stories which are a staple of certain Christian publications.”
LOL. That was about the style I was aiming for! (The former, by the way, is still buried deep in the ventilation system of a 1967 Landrover, I think.)
“Friedman published his QTM “restatement” in 1956. It’s not at all likely that you first discovered him in the 1970s.”
Come on, I’m not that old! I couldn’t read in 1956! A-level economics 71-73 (pretty sure I was in the same class as the economics editor of the Grauniad, BTW). Some economics courses (it wasn’t my major) as undergrad 73-77, where IIRC I read some of Friedman’s ideas second-hand in my own readings. Then properly introduced to QTM etc. 77-78 doing my MA, then PhD. Clower’s penguin is on my office desk, I think. I’m still wrestling with it.
Determinant: “OK Nick, but how do you reconcile your new knowledge with your theory that recessions are everywhere and always a monetary phenomenon with the corollary that you do not believe in supply-side contractions and certainly not that the 1970’s was one?”
Same as (almost) everyone else (RBC people aside). Booms and recessions are demand-side fluctuations around a supply-side that doesn’t fluctuate much.
Thanks Ramanan. Yep, in part, this post was a “I too was a sinner like you before I lost my hash pipe and discovered God”. But it was also a conjecture on my part. Because I really wasn’t sure if my old sinful beliefs are roughly the same as those of current “Post Keynesians”. It helps to be able to get some idea of where people on both sides are coming from. A bit less miscommunication.
Nathan: I think you have given me the title for my eventual follow-up post: “Why the Aggregate Supply curve isn’t really an aggregate supply curve”. I think a lot of confusions really are semantic, in part.
I wish I had something good to contribute today, I don’t. Hang in there Nick at some point these things will become more clear.
The issue is whether figuring out that markets are imperfect (often very much so) leads to you understand that we need societal agents such as government to get socially acceptable results. That the supply side is constrained (at least in terms of the absolute supply of labour) is a reasonably sensible conclusion. The issue is how to get the most out of the stable supply side that we have and not to expect miracles of supply side expansion.
“…taking money from working people and paying people to dig holes will make us poorer, not richer.”
It doesn’t take a lot of mental gymnastics (even if your brain is flabby from only eating and not exercising) to understand the complete ludicrousness of the above statement. My mind, perhaps naturally as a CEO, wanders over this situation: “business is suffering from a lack of demand and, therefore, not hiring. Nor are conditions good for capital investment. So we all just sit around twiddling our thumbs waiting for something, anything to happen as over-indebted consumers sit there, wages go nowhere, and demand stays slack”. And then I think of this statement and my mind naturally says “well, even if we tax people leaving them a tiny bit less disposable income and employ people digging mythological holes and filling them in again, at least the aggregate of these people have more money to spend than the tiny bit we took from many who won’t alter their consumption patterns at all and who will turn around and spend it producing multiplier effects that, even at the margin, translate into a bump in demand.”
But maybe some of you live in nicely insulated academic worlds and aren’t really operating on the ground like most of us. I wish you’d all just shut up sometimes because you’re not helping at all. It’s like watching people debate how many angels can dance on the head of a pin again. Really, have we not progressed at all since the middle ages?
To be fair to the Medieval Scholastics, the “How many angels can fit on a pin?” question is actually a perfectly good philosophical question to flesh out the problem of the extensionality (or lack thereof) of the mind-
http://en.wikipedia.org/wiki/How_many_angels_can_dance_on_the_head_of_a_pin%3F
It’s an example of how genuine but difficult questions can be simplified into more concrete intellectual problems, which is a perfectly legitimate and good procedure in economics as well as in philosophy.
how many hot potatoes can you juggle on the head of a pin?
Honestly, y, while Peden is musing upon that the rest of us will produce goods and services. When the zombie apocalypse happens, perhaps Penden will be like veal from lack of real work, and tender.
Nick: beautiful post! I read it screaming inside waiting for just the punchline you made.
In the Old Keynesian model, holding the rate of interest constant, the balanced budget multiplier is one. One hole in the ground, if that’s what G is spent on, nothing more.
Jon: thanks! You an old Brit too?
Scott: yep. The Friedman Phillips Curve was a big part of it. But there was always that ambiguity in Friedman between two readings of the Phillips Curve: from output to inflation, or from inflation to output. Was the Phillips Curve an aggregate supply curve?
Bill: “While that was my position since the early nineties, I must admit that the apparent success of the Fed in using some kind of quasi-Taylor rule pretty much shut me up.”
Similarly, I was never really comfortable with seeing the interest rate as a short-term target for monetary policy, but the success of the Bank of Canada in adjusting the interest rate to keep inflation on target pretty much shut me up too. Hey, it seemed to work fine, so perhaps I should stop worrying whether all the angels could fit on the interest rate pin. Then 2008, and especially the Fed.
Nick Rowe,
“Was the Phillips Curve an aggregate supply curve?”
Is it?
Skyman123,
I didn’t say I mused on it at all. I just said that it’s a genuine question. Incidentally, academia is a service industry; academics just pretend it isn’t, and from the point of view of a student sometime it really isn’t.
W Peden: “”Was the Phillips Curve an aggregate supply curve?”
Is it?”
Not, IMO, in the normal sense of “supply” curve, even for the Long Run PC. But then there isn’t a normal sense of “supply”, under imperfect competition.
Nathan: “@Mike: I’ll define what i mean by full employment: zero involuntary unemployment (as in they would prefer to work but can’t find a job or get more hours for economic reasons). That doesn’t include “frictional” unemployment being the time it takes to transition to another job.”
Is that a useful definition of “full employment” if we are talking about aggregate demand (fiscal and/or monetary) policies? To say the same thing another way: can AD policies actually get us to “full employment” in that sense? (I mean sustainably or on average, or, even if they had perfect foresight of shocks, because we know they will make mistakes on either side.)
Ramanan: “Have you read the article “What Is Wrong With Monetarism” by Francis Cripps?”
I can’t remember. I may have done. There were lots of articles with titles like that in the 1970’s.
OK. I just read what I could of it on Google books (not all pages available). OK, he wrote it in 1983? Two points:
1. Like old Brits in the 1960’s and 1970’s, he’s hung up on balance of payments constraints. This is beating a dead horse. I take flexible exchange rates as my maintained assumption, like a good Canadian (Canada broke with Bretton Woods fixed exchange rate system, with the full support of Milton Friedman).
2. He assumes monetarists assume perfect competition. In 1983 (when he wrote that paper) perfect competition was all that macro-modellers could manage to do. In 1985 I wondered whether the main tenets of monetarism would survive relaxing the assumption of perfect competition, and managed to build a macro model with imperfect competition, and taught myself that (by and large) they did. The seminal paper by Blanchard and Kiyotaki came out in 1987. Nowadays this is standard. New Keynesian models of the Phillips Curve are explicitly built on imperfect competition. Actually, something like a Friedmanite expectations-augmented Phillips Curve is a helluva lot easier to build if you assume imperfect competition. It’s hard to make it work right under perfect competition.
@Nick: I think it is a useful definition of full employment, and no I don’t think traditional “pump priming” can get us there on a sustainable basis. This was Minsky’s major point in the 1960’s (and later) and i think he was vindicated spectacularly. This is one reason why a direct jobs program is supported by Minskyans and Chartalists (but i don’t think you want to get into that). To really preserve high to full employment on a permanent basis you need automatic stabilizers, not discretionary policy. I think the job guarantee is a good automatic stabilizer but i can imagine a case for some others that would work well (but i don’t think as well).
Nathan: Did you ever see my old post where I (indirectly) discussed it?
It’s maybe useful to distinguish between the JG as a macro monetary/fiscal automatic stabiliser/nominal anchor (like an artificial gold mine) as discussed in my post, and as a micro policy designed to reduce the natural rate/NAIRU.
Many micro policies could (in principle) reduce the natural rate/NAIRU. Which particular micro policies would work depends on your theory of the natural rate/NAIRU. Efficiency wage? Monopoly union? Adverse selection? Frictional/search? Etc. You really need a theory of the natural rate to tell you which micro policies would work to reduce it, and whether the benefits would exceed the costs.
The concept of “full employment” that is most useful for macroeconomic AD policy may be very different from the concept that is most useful for micro policy.
Nick Rowe,
What do you think all of this fuss about an endogenous money supply has been about?! You talk about how you discovered Friedman, but if you’ve read Moore’s papers and book in particular and know that the money supply is endogenous like the rest of us do, then you would know that Friedman has been utterly discredited. Everything he did was simply wrong. Look, his writing was flawless, and brilliant…I know why he attracted minds like yourself. But he was wrong.
the natural rate of interest is 0
DDJ: Oh God. (Pours himself an Irish.) Did that comment really move the conversation forward? Is this post about endogenous money? Do you mean the same thing by “endogenous” that I might mean by “endogenous”?
Tell, you what, have a read of my recent post which is about modern monetary theory of inflation targeting central banks (which is what modern central banks do), in which the stock of money is very much endogenous.
DDJ: “the natural rate of interest is 0”
This raises an interesting and important question: why does MMT seem to attract people like DDJ?
@ Nick: as you know, I don’t accept the theoretical basis of the non accelerating inflation rate of unemployment. I think there are all sorts of unemployment rates consistent with all sorts of inflation rates and the ad hoc nature of the neoclassical treatment of institutions (through transaction costs, unions, minimum wage policy etc) is highly problematic.
Have you seen the latest literature around the NAIRU? it’s a joke. they have revised their estimates to say that the PIIGS NAIRU was much higher since the crash and Germany’s was lower (the u.s is only a percentage point higher then it was before).
I don’t think one needs any kind of natural unemployment rate theory to discs these phenomenons, although one should have an integrated dynamic economic theory.
Nathan: agreed that the theory underlying the SR Phillips Curve is the weakest of all important areas in economics. (The Calvo fairy is mathematically tractable, but other than that……). But one does come back to the idea that the units shouldn’t matter. We get the same rate of unemployment whether we measure prices in dollars or in cents. Sure, we cannot tell what the natural rate is, certainly not in real time, and even barely in hindsight. Which is one main reason why we shouldn’t use AD policy to try to target it.
Whose kid is DDJ? Can they keep him on a tighter leash?
…so on the one hand we shouldn’t try to target it, but on the other hand we should assume its there and be content to leave unemployment at a certain level…gotcha! btw, fine, maybe your post doesn’t have much to do with endogenous money per say, and more inflation expectations(sorry, when I think Friedman I immediately think exogenous exogenous rather than expectations augmented PC). I need to look at your recent post before I respond again. Regardless, if you believe in endogenous money then it makes little sense to speak of monetary policy(ie money growth) with respect to inflation expectations and drawing some LRPC with some NAIRU…
And I would like to know what you’re thinking in terms of why MMT/PK attracts people like me? I would answer that maybe because we don’t make models based solely on expectations…rather we’d like to see what the real world looks like first and create a theory based on the empirical data…like understanding that stagnating and declining incomes is important (see this pathetic paper: http://www.frbsf.org/publications/economics/letter/2012/el2012-11.html).
unfortunately I’ve been off the leash for a while now, you and others will have to deal with my sometimes uneducated self at times 😉
on the topic of administered prices and neoclassical theory I will return later
BTW, a couple of years back I asked this question of MMTers. I never really got an answer. What is their theory of the Phillips Curve? You can’t do a 1970’s flashback (Kevin’s hashpipe is not precisely correct, I now realise) as if the constraint was still balance of payments, fixed exchange rates and gold reserves. The world has moved on. Everyone now (Eurozone aside) automatically assumes countries have flexible exchange rates and inflation targeting (or similar). It’s a bit like coming across those Japanese soldiers hiding in the jungle, still fighting WW2. The CPI standard has replaced the gold standard. So, what determines the CPI? How does the CPI, and its rate of change, relate to output and employment?
btw, maybe the existence of an NAIRU attracts people like Nick Rowe to neoclassical economics? IMO: it makes the real world solutions much more easier to come go grips with; allows you to make formal models that excludes a great many variables; allows one to believe in the enticing proposition that if you really understand economics, you would understand that what sounds intuitive isn’t actually the optimal solution; and that unemployment is not a policy variable but is one that is largely out of our hands at the NAIRU, and hence its justified.
ok, big straw man obviously, and you are a little unorthodox so its not fair to you at all, but it was fun.
DDJ: It’s my job to deal with uneducated (in economics) people. No worries there.
Let me educate you a little. Saying “The natural rate of interest is 0%” is a sensible thing to do if: you say it when it’s relevant to the discussion at hand; you explain what you mean by that; you give some sort of explanation why you believe it to be true. You did none of those things. People like Scott F or Warren M would have done those three things. That’s the most important thing you could learn from them.
Now read my post and also learn that monetary policy is not the same thing as a target for the rate of growth of the money supply. The latter is just one very particular type of monetary policy. Most modern central banks target inflation, not the growth rate of the money supply. If you are going to be a Modern Monetary Theorist, you need to understand modern monetary policy. Whether inflation targeting is a good monetary policy is another question.
I don’t have a direct answer to your question, but i would like to point out that the original William Phillips was a dynamic engineer with a much more complicated and versatile concept of the relationship between inflation and unemployment. It was only afterwords did the neoclassical economists (eg Solow and Samuelson) get their hands on it and, in typical comparative static fashion, simplistically state that “when inflation is high, unemployment is low and vice versa”.
I would also like to point out I actually think your characterization of the “mmt” position presented in blogs is pretty fair. It has been one of the more frustrating things for me, whom you could call “an advanced student”, that they have spent no time on heterodox microeconomics nor even on the work of their colleague at UMKC Fred Lee. I generally follow the full cost pricing analysis he has helped resuscitate. If you want more adequate treatments of pricing theory and “supply” in a Post-Keynesian tradition, his work is where I’d go (indeed am going).
Phillips early papers:
http://www.jstor.org/stable/2549721?seq=2
http://www.jstor.org/stable/10.2307/2226835
Sample Fred Lee paper:
http://www.jstor.org/stable/2662703
“This raises an interesting and important question: why does MMT seem to attract people like DDJ?”
It’s also interesting how Market Monetarism attracts people like Morgan Warstler, who has repeatedly referred to Warren Mosler as a “tard,” and is a regular at Sumner’s blog. He and Scott have a nice rapport.
I’ll take DDJ over that miserable misanthrope any day.
Mike Sproul
“The unemployed give up leisure time, training opportunities, job search, and hunting and gathering, all of which are valuable. Where did their pay come from? The government either got it from taxing, borrowing, or printing, so that the new spending by the unemployed was offset by reduced spending elsewhere.”
PLEASE tell me this is a parody! (How does printing money take money from anybody? – And I didn’t see the bit about conscripting the unemployed – my impression was that taking the government job was voluntary.)
Nathan: thanks. Yes, Bill Phillips was a far more sophisticated thinker than the simple “Hey look, there’s a curve here!” view would make him out to be.
Understanding the MMT position is really not easy. It would be unfair of me to say they should ditch the name “MMT” and call themselves “That 70’s Show”, but there would be some truth in it. It is not an obviously stupid position to say that macro took a wrong turn in the 1970’s, and to say we need to go back there and try to take a different path forward. (After all, you could argue that Milton Friedman did something similar.) But their saying that their critics are still thinking in some sort of Gold Standard/fixed exchange rate terms is really tilting at some defunct 1960’s windmill. It’s the Phillips Curve that is the constraint on monetary policy. It’s the CPI (or whatever) standard, not the gold standard.
(And the next time one of them resorts to some sort of false modernism, and talks about science progressing one funeral at a time, I think I will repeat my dirty crack about “That 70’s Show”.)
dilletaunted: touche. Morgan does grow on you over time, though. Very very slowly. Actually though, I see him more as a troll on Scott S’s blog, who has very slowly been partially converted to MM by Scott.
If you understood the monetary operations MMT describes then you would not be talking about hot potatos.
But I must admit, and u must too kristjan, that talking about and visualizing hot potatos is so much more appealing, especially to those that want to give themselves authority.
Kristjan: If you make an assertion like that, and fail to explain how it is related to the conversation here, what you mean, and why you believe it, you are not moving the conversation forward. It just comes off as wildly defensive flailing about, trying to change the subject by laying down a red herring.
DDJ: one more thing you need educating on: you are now holding a conversation in my living room. I am your host. Mind your Ps and Qs.
Both of you: go read Nathan above to learn how to hold a proper conversation that is actually useful.
“I would answer that maybe because we don’t make models based solely on expectations…rather we’d like to see what the real world looks like first and create a theory based on the empirical data”
This kind of talk really worries me. It’s not that I think empirical data is bad or the real world is unimportant. It worries me because it assumes that there is a non-theoretical stance from which economic phenomena (or any phenomena) can be observed scientifically and we can somehow infer theory from these non-theoretical observations.
Theories tell us what data to look for, what sort of data to construct, what sort of observation methods don’t affect the observed, and what constitutes significant patterns across the data. There is no way of “seeing what the real world looks like” prior to that, and any attempt to do so opens up the possibility of a very harsh dogmatism because one confuses observations based on one’s own assumptions with indisputable “real world” data. It brushes over the first challenge in scientific methodology: what you see depends on where you sit.
(It also worries me because of the assumptions about models e.g. I can’t think of any models I’ve read that were based solely on expectations.
Nick Rowe: I am envious of your patience and politeness.
The great thing about blogs is that anyone can participate in the debate and people can be completely anonymous if they so wish. This is also one of the worst things about blogs.
You end up with people going around making all sorts of simplistic statements and misrepresenting other people’s views. This happens on occasion with MMT. I’m interested in it personally but don’t know enough to be able to give a proper account of it. Anything I say is simply my own dumb opinion. I’d be horrified if people thought my occasional simplistic MMTisms were authoritative accounts of MMT.
I’d say a lot of people who might not otherwise be on economics blogs are interested in MMT because of a) the financial crisis and b) the sovereign debt crisis. MMT seems to provide clear insight into both and clear policy options for solving both.
Also MMTers often say things which are basically true and that others completely ignore. Such as, a state that issues it’s own currency can’t ‘run out of money’, and that the real constraint on budget deficits is inflation. Statements like this are appealing because they make most of what passes for informed debate in the media seem like total nonsense. Other statements such as deficit spending with newly-created money not necessarily being any more inflationary than deficit spending with bond issuance, are more difficult to grasp at first but pretty mind blowing once you get it. Then there’s the fact that banks really do create money, also pretty awesome for someone like me.
Personally, I was really struggling to understand what the hell was going on from 2008 onwards until I came across MMT, but that might not be saying much (I’m in arts, not economics). But there is a lot more to MMT which is questionable. I think you make really great and important comments, Nick, and I appreciate the fact that you take the time to critique the MMT crowd. I think ‘that 70s show’ might be a bit harsh though – there’s much more to it than that.