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 
JakeS: “I don’t know where you got the “vertical IS curve” stuff from.”
I got it from trying to read and trying to understand MMTers. Then posting a blog in which I said “I think the MMT IS curve is roughly vertical”. Warren M, Scott F., and various other people who are either supporters of MMT of have some familiarity came and commented. Nobody said “You are wrong Nick, the MMT IS curve slopes down!”
You can read it all, plus the comments especially, here.
Hey, that DOES sort of describe me.
Though I have read a few 101-level resources; The Economic Way of Thinking by Heyne/Boettke/Prychitko and New Ideas from Dead Economists by Buchholz were my first texts. Then, when i yearned for something more critical, I moved on to Hahnel’s The ABCs of Political Economy, and then proceeded to Keen (Debunking) and a whole slew of others. Nowadays I am two-fisting Das Kapital like so many forties duct taped to my hands.
That said, I have heard people (e.g., Herb Gintis) say that many of the “heterodox” criticisms boil down to criticisms of the way undergrad-level subjects are taught, while the advanced stuff operates on entirely different principles. As such, I’ve been meaning to go deeper into the “orthodox” end of things.
Now, Mas-Colell is sort of THE grad level all-purpose reference for micro, right? How much of a math background would any of you say I’d need to tackle that bad boy? I’ve taken calculus, and still remember how to integrate, I think. Am I in for a bumpy ride? If so, what is maybe a better way to get a handhold into the graduate-level mainstream stuff?
Thanks in advance!
UnE: Individual demand curve slope downwards because of the weak axiom of revealed preference. SMD applies to the aggregate. It says that, under certain assumptions, nothing guarantees the uniqueness of the equilibrium. (Hence the section title: “anything goes”.) Mas-Colell gets round this by suggesting either a weak axiom for aggregate excess demand or a gross substitution axiom, not anything to do with dictators. Maybe you’re thinking of the Walrasian auctioneer.
Mas-Colell is a pretty hard book, though. If you’re an undergrad, I would pick something else to learn micro from.
JakeS:
Best the MMTers do not generally try to explain what they’re talking about in the IS-LM framework, you can see them – as far as I can tell – offer contradictory explanations of what the IS curve should do. Wray has implied that the interest rate is a variable that can have an impact on income and inflation. If that’s the case and equilibrium exists, there should be an equilibrium interest rate consistent with full employment. On other occasions, they seem to dismiss the effectiveness of the interest rate, or implicitly do so when saying the government budget constraint is inappropriate or misapplied because the interest rate is a policy variable controlled by the central banks.
Not that the people who invoke the GBC aren’t generally wrong. We’re not going to see 10% GDP deficits for health care because something is going to go “boink” before we get there.
I don’t doubt their good intentions, but there’s an inexactness here. The interest rate clearly does matter and clearly has an effect on income and inflation, regardless of whether we’re dealing with equilibrium economics with an IS curve or crazy disequilibrium economics.
*But the MMTers, rather.
Hedlund:” Now, Mas-Colell is sort of THE grad level all-purpose reference for micro, right? How much of a math background would any of you say I’d need to tackle that bad boy? I’ve taken calculus, and still remember how to integrate, I think. Am I in for a bumpy ride? If so, what is maybe a better way to get a handhold into the graduate-level mainstream stuff?”
Can somebody answer Hedlund’s question please, because I am too past it and math-challenged and non-micro to be able to say. My guess is “no”.
Regardless, though, even if you’ve got the brains and math to handle a grad text straight off (and I know many have, because that’s how some grad students do it) I still don’t like it. I think students who wade right into the formal hi-tech theory miss something very important. They miss the big picture intuition. Grab an intro text too.
Mas-Colell is about the worst place to learn the intuition. It’s more proof->theorem->proof style math. If you want to go beyond 1st year texts, I’d pick up Varian’s text.
Nick,
thanks for the links. I’ll have a look at them this evening.
If I understand you correctly, you infer a vertical IS curve from the absence of a (non-zero) natural rate of interest in MMT? Well, you don’t need a vertical IS-curve to dispense with the natural rate of interest.
You have two knobs you can manipulate to manage aggregate demand: The central bank can destroy (but never create, due to the zero bound) AD by raising interest rates above zero. And the Treasury can spend AD into existence and tax it away. So for a given fiscal position you have a rate of interest which achieves full employment (since capital and raw materials are plentiful – in the forecastable future raw materials will cease to be plentiful and this will complicate the analysis somewhat, but that will be then and this is now). Conversely, for a given interest rate policy, you have a fiscal position which achieves full employment.
Unless you are prejudicing the sovereign’s fiscal policy, you have no justification for picking out any particular rate of interest as more natural than any other.
(Oh, and IS-LM doesn’t give you runaway inflation or deflation without some spurious auxiliary assumptions like long-run money neutrality.)
[Disclaimer: I’m not a real MMT’er. I just hang out on their mailing list.]
– Jake
um, what about all the non-MMT ‘heterodox’ schools? Are they so extra-wacky as to not even desrve a critical mention by peeps?
“The central bank can destroy (but never create, due to the zero bound) AD by raising interest rates above zero”
?
Interest on government debt or on reserves potentially adds to AD surely?
Jake: “If I understand you correctly, you infer a vertical IS curve from the absence of a (non-zero) natural rate of interest in MMT?”
No, it was the other way around. I figured that the MMT IS is vertical, and then I inferred there would be no natural rate of interest in that model (which also fit what the MMTers were saying).
I would rephrase your next paragraph this way: if the IS curve is the normal downward-sloping one, and if fiscal policy can shift the IS curve up and down, then the natural rate of interest will depend on fiscal policy. A change in fiscal policy will (generally) change the natural rate. (Because the government saves and invests too.)
“(Oh, and IS-LM doesn’t give you runaway inflation or deflation without some spurious auxiliary assumptions like long-run money neutrality.)”
For a given real interest rate, it may or may not, depending on the exact nature of the non-super-neutrality (i.e. it depends on which is steeper, LR Phillips Curve or LR AD curve). For a given nominal rate of interest, the AD curve slopes the wrong way, and it very probably will give you runaway inflation or deflation, unless the non-super-neutralities are very big.
Mike: “Mas-Colell is about the worst place to learn the intuition. It’s more proof->theorem->proof style math.”
OK then Hedlund: my recommendation is you don’t touch it with a bargepole. Because if there’s one thing I do think is very wrong with economics, is that there’s far too much of that sort of thing. What the world needs is for more students to learn existence proofs of Arrow-Debreu General equilibrium. NOT!
JakeS,
But what you’re describing is the natural rate, isn’t it? The rate where the IS curve intersects with the full employment/potential GDP curve. Fiscal policy and array of other phenomena can move the IS curve, and other phenomena can move the FE curve, but given those two, there is a natural rate of interest. So the IS curve does need to be vertical for the interest rate to really be dispensed with – for there to be no natural rate.
Something else that’s sort of interesting: look at different measurements of the interest rate and growth rate over US history. It’s not exactly clear that we do not live in bizarro world.
Edmund: agreed.
When you say “bizarro world” (I prefer the words “weird world”) you presumably mean “rate of interest below the growth rate” (both real or both nominal)?
Please please please read my post on Trill Perpetuities. I really liked it, but nobody else did. Sniff.
y: The income effects of paying subsidies to voluntarily idle money are swamped by the curtailment of investment from increasing the required rate of return on investment. So raising interest rates destroys demand. (Except maybe possibly in a debt-deflation spiral, where investment is less interest rate sensitive.)
Rowe: I’m not sure where you got the claim that the rate of interest has no effect on output in MMT. But it comes as a surprise to me (though it is possible that I’ve missed such a claim somewhere). The claim is (in ascending order of radicalness) that fiscal policy is as useful as interest rate policy in normal times (and obviously more useful in a debt-deflation crisis), through fiscal policy being more useful, to fiscal policy being so useful that interest rate policy is unnecessary.
Though personally, I think that even if interest rate policy could be useful, using the central bank to fiddle with interest rates is a distraction from using it to cut the balls off Ponzi merchants and hostile currency speculators.
Edmund: Sure, you can construct a “natural” rate by assuming inflexible fiscal policy. But that doesn’t tell me anything about the economy, it just tells me that you don’t like to use fiscal policy actively in your macroeconomic planning.
– Jake
Nick:
20 years ago the Bank of Canada said it wanted a 2% CPI inflation target. And on average, over the last 20 years, CPI inflation has been almost exactly 2%.
The issue isn’t whether rates affect the economy. Yes, the CB did a good job of keeping inflation at 2%. Not a very good job at keeping household leverage constant. Not a good job at avoiding asset bubbles.
And each time the CB stimulated the economy, it was residential investment, not business investment, that led us out of the recession, and the CB had to cut rates by more than what it raised them to “stabilize” inflation.
So let’s see what happens when rates hit zero, house prices stop rising, and the household sector de-leverages. When households are jumping at the bit to borrow more, but are credit constrained by collateral requirements and debt service to income ratios, a reduction in rates will create more investment and stimulate the economy. When those credit constraints are no longer binding, monetary policy becomes less effective. The next 20 years may be different.
We can also argue that pump priming worked well for two decades, until it stopped working.
I am not saying that we should solely use one tool.
I would also like to see more discussion about inequality and social bargains between firms and workers.
Jake; “Edmund: Sure, you can construct a “natural” rate by assuming inflexible fiscal policy. But that doesn’t tell me anything about the economy, it just tells me that you don’t like to use fiscal policy actively in your macroeconomic planning.”
That’s not what I interpret Edmund to be saying. I interpret him to be saying you could (in principle) use either fiscal policy or monetary policy to stabilise the economy. He didn’t say which he prefers.
rjs: OK, but then you are saying something different to what I interpret MMT to be saying. Maybe my interpretation is wrong, of course. (Though Mark Thoma once came to the same interpretation too, IIRC). And if my interpretation is wrong, so MMTers believe in the same downward-sloping IS curve that everyone else (except crazies like me) believes in, then I find it harder to tell them apart from a more orthodox New/Old Keynesian. They are almost becoming orthodox!
Edmund: “Something else that’s sort of interesting: look at different measurements of the interest rate and growth rate over US history. It’s not exactly clear that we do not live in bizarro world.”
Nick Rowe: “Edmund: agreed.
“When you say “bizarro world” (I prefer the words “weird world”) you presumably mean “rate of interest below the growth rate” (both real or both nominal)?”
Seems normal to me. 😉
One man’s fish is another man’s poisson.
Nick Rowe: “Please please please read my post on Trill Perpetuities. I really liked it, but nobody else did. Sniff.”
I liked it, Nick. I like almost all your stuff. 🙂
Thanks Min!
Yep, the “weird world” isn’t so much empirically weird but theoretically weird. The world is wrong!
Nick, I’m mystified by this recommendation. I could say “everyone should read an introduction to the common law” before commenting on what the law should be. Certainly it might be helpful to the quality and tenor of public debate if people had some understanding of what law can and cannot do before giving their views on it. But that’s also true of an enormous number of subjects (physics and philosophy having been given as examples here), and it reflects a peculiar fascination with one’s own to think that it merits particular study from the world at large. Further, I think one has to be careful before attributing disagreement to ignorance (and I say that with no knowledge about the particular debates you are referencing).
Robert: you may have a lax comments policy on your own blog, but that’s not how things work here. Do not return.
If you had a vocab/glossary list of the main concepts (6-8 per chapter) in each of a micro and macro book at just about any level, wikipedia could fill in most of the blanks to the level of detail that this type of reader might be interested in.
Since the type of person you’re taking about is presumably already game for scepticism, no warnings are needed that the principles at the intro level are highly instructive, but are often poorly suited to subtle analysis of real world issues due to the numerous simplifications used to make the material tractable.
Nick; to go back to a minor point you touched earlier:
Giffen goods have been identified in regard to tef grain during the 1980’s Ethiopian famine
as well as rats having to choose between rooot beer and tonic water.
http://search.yippy.com/search?query=rats%2Bgiffen+good%2B+root+beer&tb=sitesearch-all&v%3Aproject=clusty
I took your ECON1001 course last year, Prof. Rowe. Enjoyed it. While I bought the required text, I found Khan Academy’s videos very helpful as supplementary material. Its not exactly the same sequence of learning, but it builds into similar concepts in the end.
http://www.khanacademy.org/finance-economics/banking-and-money?k
Is there an alternative term for the hot potato? Besides pomme de terre chaude.
Edmund: Sure, you can construct a “natural” rate by assuming inflexible fiscal policy. But that doesn’t tell me anything about the economy, it just tells me that you don’t like to use fiscal policy actively in your macroeconomic planning.
I think it’s the word “natural” that’s sticking in our respective craws. In terms of what I actually want…I’d like interest rates to be as low as humanly possible and a higher inflation target because I’m a debtor.
When you say “bizarro world” (I prefer the words “weird world”) you presumably mean “rate of interest below the growth rate” (both real or both nominal)?
Please please please read my post on Trill Perpetuities. I really liked it, but nobody else did. Sniff.
Yes, exactly. “Weird world” works if we want to go Lovecraftian instead of Superman.
That was an interesting post. Maybe someone could whisper sweet nothings to the Argentinians and convince them to give us a natural experiment?
It surely can’t happen here. Literally as I wrote this, a candidate for Senate came on TV calling for us to cut the pay of Senators every time they don’t balance the budget. For the love of…
I think it’s the word “natural” that’s sticking in our respective craws. In terms of what I actually want…I’d like interest rates to be as low as humanly possible and a higher inflation target because I’m a debtor.
And you don’t think that you’re a debtor because interest rates are so low relative to expected inflation?
No, the binary “COLLEGE – NO COLLEGE” decision was not particularly sensitive to those variables.
I can read a first year economics textbook. I can even understand most of a first year economics textbook. What I can’t do is believe a first year economics textbook.
UnlearningEcon: ‘Re: marginal productivity. I’m not denying it can be possible to squeeze more out of a fixed amount of capital. But evidence suggests that most of the time firms face constant or falling marginal returns, and so a flat supply curve would be far more realistic assumption.’
Hence we have the whole field of industrial organisation that deals with these kind of things …
‘Your example demonstrates my point, though. Frances actually spoke about this in a recent post – there is no labour MVP in the majority of cases.’
No that’s not right. To quote Frances, ‘The sudden drop in the productivity of, say, flour means that the marginal product is – at the point where the marginal product function is discontinuous – undefined’. That’s not the same thing as saying MVP doesn’t exist, a function can be discontinuous and still exist. But this is beside the point, econ provides a methodological framework which you can use to make your arguments, it doesn’t presuppose one form functional form over others.
Without putting words in Frances mouth, I think her statements were a little bit unclear. I think she means to say in some cases VMPL (firm demand for labour in labour market) cannot intersect labour supply because VMPL maybe horizontal, or alternatively downward sloping but gets chopped of (because of constraints to hiring, e.g. no. of stores available). Again, at the risk of repetition, nothing in econ methodology prevents someone from making this kind of argument.
‘I think the observed reality is that oligopolies often offer low price and good quality, whereas small businesses only offer the latter. The point was also the neglect of theories of the second best (I remember a diagram that showed a union and monopoly, but I can’t remember what the outcome was. It was so convoluted that even my teacher called it ‘a diagram too far.’
Again, I refer you to the field of industrial organisation that deals with these issues.
It’s really frustrating having to rebut essentially charactertures of econ, and this is where I disagree with Nick. For me it’s clear that reading an econ 101 text isn’t sufficient to convey an accurate understanding of economic methodology. People would need to read wider and higher. Unless you’ve read things in the fields of industrial organisation, political economy, political economics (aka positive political theory in polisci jargon), mechanism design, behavioural econ, new institutional econ, evolutionary game theory, experimental econ, international trade, network econ etc. etc. etc. in my opinion your understanding of econ methodology will be limited and biased (not in a good way).
Hedlund: ‘That said, I have heard people (e.g., Herb Gintis) say that many of the “heterodox” criticisms boil down to criticisms of the way undergrad-level subjects are taught, while the advanced stuff operates on entirely different principles. As such, I’ve been meaning to go deeper into the “orthodox” end of things.’
This is exactly what I’m talking about above.
‘Now, Mas-Colell is sort of THE grad level all-purpose reference for micro, right? How much of a math background would any of you say I’d need to tackle that bad boy? I’ve taken calculus, and still remember how to integrate, I think. Am I in for a bumpy ride? If so, what is maybe a better way to get a handhold into the graduate-level mainstream stuff?’
Personally I think it would be tough going through MWG with just calc. You really need what maths students and teachers call maths ‘maturity’ to make it easier on yourself, preferably at real analysis just because that class is where you start getting comfortable with sets, properties of functions such as continuity, differentiability etc. etc. which is assumed knowledge in MWG.
If you haven’t taken intermediate micro then I recommend The Applied Theory of Price by Deirdre McCloskey (google as Deirdre kindly offers it free online) or Exchange and Production by Armen Alchian. Both are very well written and readable by econ standards. Those books won’t go into the technical details but are great for econ intuition.
If you’re really keen for grad micro I would recommend Advanced Microeconomic Theory by Jehle and Reny just because it provides more intuition for the maths bit than MWG does but combine with an intermediate micro book for econ intuition.
A more mathematically advanced intermediate micro book is Microeconomic Theory by Nicholson et al which is more at the calc level.
The college-no college decision may have been binary, but the amount borrowed was not binary.
If interest rates were 20% on your college loans, then you would have borrowed less, and if not, the lender (one hopes) would have qualified you for less. Tuition costs would have declined, and you would be less in debt today than you are now.
The point being that low interest rates are not a boon to the borrower. What the borrower wants is falling rates, in the sense that they pay $X for tuition, then rates drop and the new equilibrium tuition price is $2X. Then they can re-finance their loan at the lower rate, whereas the new-comers pay the lower rate on 2X of debt. Same principle for house buyers. But falling rates are not a long term sustainable trend.
The college-no college decision may have been binary, but the amount borrowed was not binary.
I’ve got you – circumstances dictated that the amount was an all or nothing, binary decision as well. You’re talking about me personally, so no. That is, I’m not saying personal preferences didn’t play a role. I’m sure I could have worked more, at the expense of grades. For my part, interest rates played no role in amount borrowed, but only borrowing. There probably existed a point where I would have just left. I can’t say in any reliable way what that point would have been.
If interest rates were 20% on your college loans, then you would have borrowed less, and if not, the lender (one hopes) would have qualified you for less. Tuition costs would have declined, and you would be less in debt today than you are now.
I think college is somewhat special when it comes to interest rates. Do not be surprised if borrowers prove remarkably indifferent to rising rates. Just like I can’t reliably say what the point of “no go” would have been, education is one of those products that combine such a vast array of elements that make it an inefficient market – uncertainty of outcome, distance from actual expense, other psychological aspects – to the point that you’re going to see completely screwed up outputs. It might be worse than health insurance.
Edmund,
I wasn’t really trying to talk about you personally. Don’t take any offense. But education is an investment in human capital, and how much people are willing to pay will be sensitive to interest rates.
They will think — when I graduate, I will be earning $X per year, so can I afford pay $Y in debt service per year? Hopefully 🙂 But even if they are willing to take agree to loans with no thought of repayment, the lender should be thinking in those terms and will refuse to qualify them for a loan that they would qualify them for if rates were lower. And of course how much you are able to pay is a function of the market value of the increase in human capital that the education gave you.
Therefore how much people are willing to pay for an education is a function of interest rates. It will also be influenced by other factors, but that’s beside the point I was making here.
And medical care is a great example. Of course everyone is willing to pay “whatever it takes”, nevertheless if medical care was funded by loans that needed to be repaid when the sick person resumed working, then the price of care would drop when interest rates rose, and vice versa.
Everyone would want falling rates, but we cannot promise falling rates to every generation.
@DeusDJ What exactly is a social provisioning process? Remember, no BS now.
One can use google to look up terms you do not understand, such as “social provisioning process”.
rsj: You attribute a great deal of power to interest rates, without ever touching upon margin requirements.
This is a mistake. If you want the central bank to manage the business cycle, you are far better served by countercyclical margin requirements than by countercyclical interest rates. Because interest rates only squeeze out prudent lenders and productive borrowers – Ponzi merchants and lenders who fail to perform due diligence are nearly totally interest rate insensitive. Whereas both are highly sensitive to having to gamble with their own money instead of someone else’s.
At the same time, this would avoid letting voluntarily idle wealth accrue seigniorage at the expense of involuntarily idle labor.
“And medical care is a great example. Of course everyone is willing to pay “whatever it takes”, nevertheless if medical care was funded by loans that needed to be repaid when the sick person resumed working, then the price of care would drop when interest rates rose, and vice versa.”
Or the price would remain the same and more people would be locked out of medical care.
Or the price would remain the same and people would be more in debt. The belief that lenders assess people’s creditworthiness before lending… well, that’s what Greenspan thought too.
The data is really quite good on this. The only historically observed way to get cheaper, better and more efficient medical care for everyone is to nationalize it. You can fiddle all you like with “market-based solution” – it just doesn’t work. “The market” produces bad, expensive and unavailable medical care. Unless you’re in the 1 %, of course, but screw the 1 %.
– Jake
JakeS,
Very few countries have fully nationalized medical care (Cuba is a leading example) but most have some sort of nationalized insurance or purchasing system. Although I do sometimes wonder to what extent the ability of the NHS to combine monopsony buying power and therefore lower prices (which I regard as its great virtue) with rapid technological development in medicine is due to the Americans picking up the bill with their mind-blowingly stupid system that combines the worst of all worlds.
Scandinavia also has fully national health care – or used to have before the neoliberal idiots (but I repeat myself) got their ham-fists into it. Universally, the European experience is that the less “market-based” your health care system is, the better it works.
Of course, this may be because the countries with universal health care are also the ones where the civil service has been most able to resist neoliberal “reform.” Unsurprisingly, the public sector works better when you don’t let oligarchs loot it.
And no, this is not piggy-backing on American stupidity – the excess costs of the American system are almost exclusively caused by the totally unproductive insurance companies. Drug company pork is chickenfeed next to insurance company rent-seeking.
– Jake
vimothy, WARP is routinely violated as soon as you move to higher than three or four dimensions.
As it must be, because constrained optimization problems are non-polynomial in the number of dimensions. Which means that they are not computationally tractable in any real-world application.
And that leaves entirely to one side the fact that utility optimization as a model of human behavior has been abandoned in every self-respecting social science for the next best thing to a full century.
– Jake
@vimothy
“UnE: Individual demand curve slope downwards because of the weak axiom of revealed preference. SMD applies to the aggregate. It says that, under certain assumptions, nothing guarantees the uniqueness of the equilibrium. (Hence the section title: “anything goes”.) Mas-Colell gets round this by suggesting either a weak axiom for aggregate excess demand or a gross substitution axiom, not anything to do with dictators. Maybe you’re thinking of the Walrasian auctioneer.”
No?
“Let us now hypothesise that there is a process, a benevolent central authority perhaps, that…redistributes wealth in order to maximise social welfare.” – p 116-118
Gross substitution itself isn’t realistic anyway.
@davidN
Here’s Frances:
“Together, they produce a hole in the ground. What is the “marginal productivity” of the worker? Of the shovel? It’s like the sound of one hand clapping – it’s impossible to tell what each member of the production process contributes.
[Update] Another way of putting this is that the very idea of a marginal product only makes sense with certain types of production functions, ones for which it is possible to make small adjustments in the quantity of each input used.”
This fits my characterisation far more clearly than yours.
Your comment is incredibly evasive and does nothing to prove your position that I am attacking a caricature of economics. Economics teaches diminishing marginal productivity. It teaches it at all levels. If it takes my criticisms on board, then why haven’t they filtered down to the lower levels yet? How long will it take? It’s really as simple as making the supply curve flat, and realising that modelling production as commodities plus land plus labour makes much more sense than invoking some abstract substance called ‘capital.’
It should please you know that I’ve read well beyond econ101 textbooks. But as I said before, why does none of this stuff filter down? Economics is stationary. It doesn’t evolve. Responses to critics dance between ‘that is wrong/unimportant’ to ‘we have incorporated that.’ When it is shown that even at a high level, such as Mas-Collel, neoclassical economics remains ridiculous, you defer to different places, hoping to shut your critics out because they cannot possibly know every single paper that has attempted to shoehorn said objection into the neoclassical paradigm. But the core remains unscathed.
There are fields of economics that don’t really rely on marginalism. Fine – keep them. But don’t reference them when marginalism is criticised, as they are not relevant.
Unlearning: Lets make an extreme assumption: assume all inputs must be used in fixed proportions. Let’s also assume increasing returns to scale. Then the Marginal Cost curve slopes down. And since this firm obviously cannot be a perfectly competitive firm, it will have monopoly power face a downward-sloping demand curve and Marginal Revenue curve. And it will maximise profits at a point where MR=MC (FOC), and where MR cuts MC from above (SOC).
We still need marginal analysis, even under those assumptions.
You assume that the monopolist (or indeed any large organization) maximizes profit. Anybody who has spent more than ten seconds examining (or working within) large, complex organizations knows that this is a complete fiction. Large organizations make pricing decisions as they make all decisions: Politically.
Sure, production must, overall and in the long term, be remunerative. But this is a much looser constraint on firm behavior than maximizing profits.
This touches upon the core problem with the central tradition: It elides (or, less charitably, obfuscates) the inherently political nature of the discipline: Economics is politics, money is a token of political power, prices are an outcome and an instrument of power struggles, banking is a governance function, and the contemporary systems of industrial organization and international trade are built on a foundation of feudal lordship and colonial tribute, respectively.
Any theory of economics which neglects political power in its description of the determination of production and transaction is simply not dealing with the world the rest of us live in.
– Jake
BEEP BEEP BEEP We have a winner.
Jake: OK. We need to look inside the firm, and stop treating it like a profit-maximising black box. Let’s do that. When we look inside the box we see people maximising their own desiderata. And if they are maximising, there’s gonna be a margin.
Nick,
But firms simply don’t operate at the margin in reality. Substantial evidence suggests they just use an arbitrary markup on their costs.
For heaven’s sake Unlearning Economics,
that excerpt you cite from Mas-Colell is not about the existence of downward sloping demand curves. It’s about when we can use the consumer surplus of a representative consumer as a measure of societal welfare. The real point being that in the absence of such redistribution, you can’t reach conclusions about societal welfare based on aggregate consumer surplus because there are distributional questions to think about. The introduction to the section should have given you a clue, it starts:
“When can we compute meaningful measures of aggregate welfare using the ad function … more specifically, when can we treat the aggregate demand function as if it were generated by a fictional representative consumer whose preference can be used as a measure of aggregate societal welfare?”
how did you come to misunderstand this? my guess is that you didn’t read the original but discovered it quoted in a presentation by Steve Keen I found by google the excerpt you quoted, lecture 2 here:
http://www.debtdeflation.com/blogs/lectures/
you are very fond of complaining when mainstream economists suggest their heterodox critics might not fully understand what they are talking about and complain of their arrogance. Now there are very many economists who really know their stuff and have a lot of worries about existing approaches, some of whom are trying to extend and repair what exists (say Gabaix) [Link fixed, I think, NR] and others who propose alternative approaches (say Howitt). Then there are heterodox internet warriors who only learn economics up to the point where they think they are in a position to rubbish it, and whom will never understand it properly because they are never willing to consider its merits. I think that’s actually arrogant.
I am only somewhat familiar with your output, but from some examples like this one, and I think I have seen you show evidence of misunderstanding of the money multiplier, partial-equilibrium models to give two more examples, you might perhaps want to take a more humble approach regarding your own grasp of the subject.
They say economists aren’t good at forecasts but here’s one. I expect you to respond to this with bluster and continue your quest to rubbish economics without doubting your own grasp of it.
Jake: ‘Any theory of economics which neglects political power in its description of the determination of production and transaction is simply not dealing with the world the rest of us live in.’
See Microeconomics: Behavior, Institutions, and Evolution by Samuel Bowles especially Chapter 7 Exchange: Contracts, Norms, and Power. By the sounds of it you will love that book.
UnlearningEcon: ‘There are fields of economics that don’t really rely on marginalism. Fine – keep them. But don’t reference them when marginalism is criticised, as they are not relevant.’
On the contrary every single economic field I know uses ‘marginalism’ because it’s a mathematical concept and in econ we use maths. Any time we represent something with a function and that function is differentiable for at least some parts where it is defined we get ‘marginalism’. This isn’t class warfare, it’s math.
‘This fits my characterisation far more clearly than yours.’ I stand by my comment, I believe Frances wasn’t clear about when MVP exists. Again this is just maths.
‘Your comment is incredibly evasive and does nothing to prove your position that I am attacking a caricature of economics. Economics teaches diminishing marginal productivity. It teaches it at all levels. If it takes my criticisms on board, then why haven’t they filtered down to the lower levels yet? How long will it take? It’s really as simple as making the supply curve flat, and realising that modelling production as commodities plus land plus labour makes much more sense than invoking some abstract substance called ‘capital.’
If you look at my comments on the Apple post I actually claim that VMPL could be flat (at least until you hit physical constraints), not downward sloping. Nothing in econ methodology stops me from making that assertion. Again it’s maths.
I’m looking at that Howitt paper. In the beginning, at least, it talks a scientific language similar to one that I understand well. But I see this bogglesome quote right at the beginning:
And my reaction is total astonishment (bold mine). I always knew that economists like to use techniques that they call “agent-based”. But I had always assumed that they knew it was a big deal, and presumably tried to take into account, the fact that the agent they are trying to model “has a behavioral rule that is not independent of what everyone else is doing.” That’s basic to, e.g., artificial life/swarm intelligence, where these kinds of agents are taken seriously. But is Howitt claiming that it doesn’t occur to other economists that this is missing from their models? Really?
And we’re supposed to engage with any of this seriously?
My bogglement continues:
Note that I’m not mocking Howitt here, or anything. I am simply incredulous that Howitt feels he needs to deal with and dismiss (in the way that academic paper intros do) the idea that it is reasonable to assume that models using agents with “common information” at all reflect reality.
Every economist should download and play around with NetLogo for a few weeks first, before they ask me to read one of their intro textbooks.
Reading further (but I won’t spam with more quotes), I think what y’all need isn’t some education in thermodynamics, which is what some people recommend as a cure for economism, but actually something like a real education in cognitive science, machine learning, neural networks, swarm intelligence, etc.