You will recognise yourself from my description. (Or you will recognise others who fit this description).
You are probably very smart. You are probably very well-educated — either formally, or self-educated, and probably both. You spend a lot of time on the internet reading economics blogs and commenting on those blogs. You maybe even have a blog of your own, where you write about economics topics. You are probably politically engaged. You are probably a lefty, but may be a righty, or someone who is not easily categorised on that political spectrum. You probably think of yourself as a critic of economics, or a critic of what you see as orthodox economics. You are probably sympathetic to what you see as heterodox economics.
But you have never once read a first year economics textbook.
You have probably many times told me, or people like me, that I really really should read something you want me to read.
Well now it's my turn.
I think you really really should read a first year economics textbook.
You have invested so much time in thinking about, reading about, and writing about, economics. Don't you think it would make sense to spend a tiny fraction of that time just reading a standard first year textbook, cover to cover? You could do it in one day. Maybe two, if you go really slowly and carefully. They were designed to be read by an average reader who is probably less smart and less motivated and less knowledgeable than you are. It's gonna be a breeze!
Even if you think you won't agree with it. Even if you think it's going to be all horribly wrong.
Because, at the very least, you will better understand how the people you are criticising view the world.
Because, at the very least, you will better understand the language that is used by the people you are criticising.
Because, at the very least, you will better understand what is and is not an idea that is seen as "heterodox" by the people you are criticising.
Because, at the very least, you would make this blog and other blogs better.
(The final straw that lead me to write this post was reading a comment on another blog which said that "loans create deposits" is a heterodox idea. Every first year textbook I can remember reading contains a description of how loans create deposits.)
This is said with the greatest of respect (and I do mean that, because I really do respect the amount of intelligence and effort some of you are putting in). But also with frustration.
Now, a second plea: does anyone know a free online source for any reasonably good and reasonably standard first year textbook? One that covers much the same topics and in much the same way as any of the best-selling first year university textbooks? Because I know you can pick up old editions of paper copies of the best-sellers for next to nothing, but I also know that people are much less likely to do this.
(P.S. Non-economists may be surprised that I haven't said which textbook I would recommend. That's because it doesn't really matter much. They are all fairly similar in coverage and treatment. And they are almost all good, in my opinion.)
Worthwhile Canadian Initiative 
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 subfield?!!! 😉
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. 😉
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.