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I am now advocating biblioclasm …

So I guess it is time to build those very large bon-fires and burn all the mainstream macroeconomics textbooks that have poisoned the minds of millions of students for years. Mankiw, Blanchard, Barro to name a few. Burn them all. I also think it is time to delete all the computer code that supports mainstream economics models. My long-held belief that these actions would be educative and liberating have been ratified by a recent IMF conference that seems to have concluded that “the macroeconomic models that had been relied upon in the past and had informed major aspects of monetary and macro-policy had failed”. So all the supporting literature needs to be deleted. I am now advocating biblioclasm …

In 1821 the German poet Heinrich Heine wrote a play – Almansor which contained his famous quote which referred to the Spanish Inquisition’s burning of the Koran. He said:

Where they burn books, so too will they in the end burn human beings.

The German is actually – “Dort, wo man Bücher verbrennt, verbrennt man auch am Ende Menschen”.

Heine’s quote was very prescient given the actions by the Nazi’s a century or more late (on May 10, 1933) in the Berlin Opernplatz. German universities had a magnificient intellectual tradition until then. On that night, students and blackshirt storm troopers alike put thousands of books and other literature onto bon-fires because they had been declared “unGerman”.

Heine’s works were among them (he was Jewish). Joseph Goebbels told the students at the time that the aim of the exercise was to wipe out “Jewish intellectualism”. Goebbels said the aim was to ditch the intellectual foundations of the past. The reality was that they wanted to purge the Jewish influence from their literature and dumb it down so students would tolerate Mein Kampf.

But in 2011, I think burning all the macroeconomics textbooks (leaving a few “library” copies for posterity) would be advancing education and helping to destroy an illegitimate tradition. I wouldn’t even call it an intellectual tradition – so impoverished is the body of mainstream economic thinking.

The following picture shows the lunatics pointing at flying saucers over the Berlin sky on May 10, 1933 while the “unGerman” books burned. They were delusional to say the least. I assume they were pointing at something in the sky – what else would explain those hand movements?

So while I hope to spare all the humans involved (send them back to school for re-education) there is a comprehensive need to reform the economic profession and the body of work it professes. Unlike the night in 1933, “burning the books” would be an humanitarian gesture.

The IMF recently held a conference in in Washington, DC (March 7-8, 2011) – Macro and Growth Policies in the Wake of the Crisis – with an assemblage of conservatives as the brainstormers.

Given the gathering it was a surprise that the aim of the conference was to:

The aim of the conference is to distill the policy lessons of the global financial crisis. Participants will focus on six key areas: monetary policy, fiscal policy, financial intermediation and regulation, capital account management, growth strategies, and the international monetary system. They will also seek to make concrete policy recommendations for how to revive sustainable growth while safeguarding macroeconomic and financial stability.

There was no-one present who actually has written anything coherent about the way the monetary system actually operates and the opportunities that the fiat monetary system provides national governments who issue their own currency.

This was a gathering of apologists. Sure Joe Stiglitz was there and he has been critical of the mainstream in recent years (not always – he was the mainstream at one stage). Yes, Dani Rodrik was in attendance but I do not call him a leading macroeconomist – although he is an excellent development economist (with limitations pertaining to his lack of grasp of monetary theory).

But I just love these high level conferences organised by the IMF or the OECD or the like – expensive gatherings, nice food and drink, a lot of self-congratulation, but barely an insight to be shared among the whole gathering.

I have read all the literature now available from the seminar (papers, presentations etc) and my above summary is entirely fair.

But the IMF is learning a trick or two. They cannot conduct themselves as “business as usual” given the scale of the crisis and their role in causing it and prolonging it. So the narrative has changed a little although only marginally.

For example, in February last year I wrote this blog – We are sorry – which discussed a paper released at the time by some senior IMF economists, including IMF Chief Economist Olivier Blanchard – who was also prominent at the recent conference.

The IMF paper was gratuitous to say the least. It didn’t recognise the elephant in the room at all.

They did not offer any apology:

  1. For being so arrogant that they forced their beliefs in the primacy of monetary policy and the failings of fiscal policy onto policy makers around the World which helped create the conditions for the current economic crisis and has impoverished millions of people and severely damaged entire nations.
  2. For failing to realise that fiscal policy is an important tool that governments can use to stabilise and support aggregate demand and employment. For years they pressured governments to eschew the use of active fiscal policy and in doing so deliberately entrenched high unemployment and the associated poverty. Their ideological obsession with monetary policy was in denial of the evidence before them.
  3. For perpetuating the myth of the Great Moderation and giving credence to the views of blind ideologues such as Lucas, Barro, Sargent, Taylor and others as they strutted the international stage declaring an end to the business cycle.
  4. For supporting an economics profession that has systematically lied to the World about the primacy of a cyclically-invariant NAIRU despite it being unmeasurable and built on flaky foundations. They pressured policy makers to use their misleading estimates of the NAIRY to inflict to construct excessively restrictive monetary policy (and passive fiscal policy) which jeopardised the employment opportunities for millions.
  5. For supporting economists who have written textbooks that systematically lied to students about the way the macroeconomy works with particular focus on the way we have misrepresented banking and money markets and the policy interactions.
  6. For supporting wide-scale deregulation of labour and financial markets and claiming that this would enhance the prosperity of the World. By imposing the blind ideological belief that private markets self regulate and maximise income and wealth if left to do so and pressuring policy makers to go along, the IMF and its kin have allowed the elites to gain greater access to the resources in each nation at the expense of the poor. The deregulation was also a key contributing factor in the crisis.
  7. For inflicting neo-liberal dogma on the poorest nations which has led to millions of children dying from poor health and hunger. The IMF has particularly bullied governments in poor countries to cut back on health spending and food programs with devastating consequences.
  8. For generally restricting economic development in many of the poorest nations by bullying their governments to cut back on education and public infrastructure investment while at the same time pressuring them to give cheap access to their natural resources to predatory first-world corporations who have paid very little in return.

There is a lot to be sorry for but very little recognition from the IMF of any of that.

Given that you might be surprised to read some of the early statements from the conference.

Joseph Stiglitz former World Bank boss then bad boy (he was mildly critical) now good boy (as the IMF try to look reasonable) was one of the co-hosts of the Conference.

He wrote a blog (March 22, 2011) – A Balanced Debate About Reforming Macroeconomics – which attempts to sum up the conclusions of the Conference.

Stiglitz said that:

The most remarkable aspect of the recent conference at the IMF was the broad consensus that the macroeconomic models that had been relied upon in the past and had informed major aspects of monetary and macro-policy had failed. They failed to predict the crisis; standard models even said bubbles couldn’t exist—markets were efficient. Even after the bubble broke, they said the effects would be contained. Even after it was clear that the effects were not “contained,” they provided limited guidance on how the economy should respond. Maintaining low and stable inflation did not ensure real economic stability. The crisis was “man-made.” While in standard models, shocks were exogenous, here, they were endogenous.

Okay – that means that the profession should scrap all the textbook chapters on “inter-temporal optimisation” (which underpins Ricardian Equivalence – the main justification for austerity); all the chapters on banking and money; all the chapters on policy; all the chapters on New Keynesian models; all the chapters on Rational Expectations; all the chapters on Efficient Markets, all the chapters on … sorry we have run out of chapters.

They denied what happened. They have no empirical basis. The profession kidded itself for years that the macroeconomic game was over – that the Keynesian concerns for demand failure and resulting unemployment was solved. The business cycle was dead. All that governments had to do was attend to microeconomic inefficiencies via deregulation and privatisation.

Macro policy was easy – target inflation with monetary policy. Leave fiscal policy passive (that is, imparting a contractionary bias to support monetary policy) and go and play golf!

Their models were very elaborate denials but denials nonetheless.

They told the world that markets – deregulated and free – were “efficient” – which in economics jargon means they deliver optimal outcomes for all – that is, good things come if governments leave markets unfettered. It was an elaborate myth. You will find nothing in any macroeconomic or finance textbook about the kinds of practices that went on leading up to the crisis.

Further, if the governments had have continued following the advice of the mainstream economists once the crisis emerged it would have worsened. The policy remedies would have pushed the world into a second Great Depression.

As Stiglitz says – there wasn’t anything surprising about this crisis (he didn’t say that but the intent is the same) – it was “man-made” – created by my profession – which is blind to reality and the senior occupants corrupted by corporate kickbacks who regularly made policy pronouncements that favoured certain firms or sectors while failing to disclose they were receiving “payments” in one form or another from the same firms/sectors.

I hope you all see the film – Inside Job – which documents this corruption.

The crisis was easy to identify more than a decade before it finally revealed itself in all its destructive fury. But you would have been blind to it coming if you practiced mainstream macroeconomics and finance.

Stiglitz went on to say that there:

… was even remarkable consensus about many elements of policy in responding to the crisis: fiscal policy can work; we need to be wary of empirical studies based on circumstances markedly different from the current situation (where households are overleveraged, where interest rates have reached the zero lower bound, etc.).

Reinhardt and Rogoff – join the inferno! In the current debate, many commentators have mis-applied this book in an attempt to justify the imposition of austerity. It was actually a study of a very narrow circumstance – government borrowing in foreign currency – and as such hardly applies to the advanced world. It also conflated monetary systems as if the differences didn’t matter.

The point is that you cannot draw conclusions about the US or Australia by examining the issues faced by Greece, which is a member of the EMU.

Further, the mainstream obsession with the ineffectiveness of fiscal policy (Ricardian Equivalence arguments) and/or the obsession that expansionary fiscal policy was inflationary – is out – it seems! So lecturers tear up all your lying notes and delete those PowerPoints and tell the goddam truth for a change.

Stiglitz says that:

Perhaps the major failing of some of the earlier models was that, while the attempt to incorporate micro-foundations was laudable, it was important that they be the right micro-foundations. This crisis, like so many earlier crises, was a credit crisis; but few of the macroeconomic models modeled credit; neither banks (perhaps particularly surprising in models used by central banks) nor securitization was typically incorporated into the analysis. While in normal times, credit and money may be highly correlated, this is not so in the usual times surrounding crises, which is when we need to turn to models for guidance. Fortunately, there has been a great deal of modeling of banks and credit creation; the task ahead is to incorporate the insights of these models into the kinds of macro-models being used by policymakers.

The attempt “to incorporate micro-foundations” in macroeconomic models was not laudable because they were the wrong foundations. The attempt to impose the financial constraints that an individual consumer or household faces when constructing their spending and saving decisions onto sovereign currency-issuing governments was a fabrication that has had devastating effect on the willingness of governments to fulfill their responsibilities to sustain high employment and price stability.

I refer here to the myth that there is a government budget constraint which is a central part of the neo-liberal attack on government intervention.

The way the mainstream macroeconomics textbooks build their flawed narrative is to draw an analogy between the household and the sovereign government and to assert that the microeconomic constraints that are imposed on individual or household choices apply equally without qualification to the government.

The narrative then shifts, without explanation, from an ex post sum that has to be true because it is an accounting identity, to an alleged behavioural constraint on government action.

The GBC is always true ex post but never represents an a priori financial constraint for a sovereign government running a flexible-exchange rate non-convertible currency.

The GBC literature emerged in the 1960s during a period when the neo-classical microeconomists were trying to gain control of the macroeconomic policy agenda by undermining the theoretical validity of the, then, dominant Keynesian macroeconomics.

The neo-classical attack was centred on the so-called lack of microfoundations (read: contrived optimisation and rationality assertions that are the hallmark of mainstream microeconomics but which fail to stand scrutiny by, for example, behavioural economists).

This was a very technical debate but the whole agenda was total nonsense and reflected the desire of the mainstream microeconomists to represent the government as a household and to “prove” analytically that its presence within the economy was largely damaging to income and wealth generation.

Anyway, just as an individual or a household is conceived in orthodox microeconomic theory to maximise utility (real income) subject to their budget constraints, this emerging approach also constructed the government as being constrained by a budget or “financing” constraint. Accordingly, they developed an analytical framework whereby the budget deficits had stock implications – this is the so-called GBC.

So within this model, taxes are conceived as providing the funds to the government to allow it to spend. Further, this approach asserts that any excess in government spending over taxation receipts then has to be “financed” in two ways: (a) by borrowing from the public; and (b) by printing money.

You can see that the approach is a gold standard approach where the quantity of “money” in circulation is proportional (via a fixed exchange price) to the stock of gold that a nation holds at any point in time. So if the government wants to spend more it has to take money off the non-government sector either via taxation of bond-issuance.

However, in a fiat currency system, the mainstream analogy between the household and the government is flawed at the most elemental level. The household must work out the financing before it can spend. The household cannot spend first. The government can spend first and ultimately does not have to worry about financing such expenditure.

From a policy perspective, they believed (via the flawed Quantity Theory of Money) that “printing money” would be inflationary (even though governments do not spend by printing money anyway. So they recommended that deficits be covered by debt-issuance, which they then claimed would increase interest rates by increasing demand for scarce savings and crowd out private investment. All sorts of variations on this nonsense has appeared ranging from the moderate Keynesians (and some Post Keynesians) who claim the “financial crowding out” (via interest rate increases) is moderate to the extreme conservatives who say it is 100 per cent (that is, no output increase accompanies government spending).

So the GBC is the mainstream macroeconomic framework for analysing these “financing” choices. In fact, the GBC is nothing more than an accounting statement. It has to be true if things have been added and subtracted properly in accounting for the dealings between the government and non-government sectors.

But it has been continually used to justify the imposition of voluntary constraints and fiscal rules and fiscal consolidation processes and all the rest of the lies that divert attention from the main responsibility government has for ensuring people have jobs and income security.

Please read my blog – There is no solvency issue for a sovereign government – for more discussion on this point.

Also my blog – On voluntary constraints that undermine public purpose – covers this ground in more detail.

I particularly liked Stiglitz’s admission that the IMF Conference failed to discuss (or “only mentioned briefly”):

The fact that countries with central banks that were not independent performed so much better than some of those that were—partly because the latter were “cognitively captured” by the financial markets that they were supposed to regulate—should perhaps lead to rethinking of doctrines concerning central bank independence.

I covered the sham of central bank independence in this blog – Central bank independence – another faux agenda.

The IMF Chief Economist Olivier Blanchard, himself a textbook writer (yes one to throw on the pile) also has written about the recent IMF conference. I will analyse what he said in detail in another blog.

In one blog leading up to the Conference (March 4, 2011) – Rewriting the Macroeconomists’ Playbook in the Wake of the Crisis – Blanchard wrote that the obvious and revealed effectiveness of fiscal policy in reducing the crisis to a recession and saving the world from another depression was only because “interest rates reached the lower bound”.

That tells me he hasn’t learned very much from the crisis. There is no “special case” for fiscal policy. It works always! The central bank can set whatever interest rate it likes and expansionary fiscal policy will still add to net spending (and vice versa). A sovereign government, in charge of its own fiscal policy can always increase employment if there is idle labour – always!.

Fiscal policy is also not constrained by the external sector (there’s my red rag – where’s the bull!).

Blanchard also thinks we should still worry about public debt levels. Again, he hasn’t learned much.

But he calls for a “wholesale reexamination” of the “principles” upon which mainstream economics is based. The first thing that economists should abandon is the New Keynesian framework which dominates teaching and research.

Please read this blog – Mainstream macroeconomic fads – just a waste of time – to see how intellectually arid this model is.

In our recent book – Full Employment abandoned – we consider the New Keynesian models in detail and concluded:

  • The so-called micro-foundations of New Keynesian models are not as robust as the various authors would like to claim;
  • The so-called Keynesian content of the models should be taken with a grain of salt;
  • The rationale these models provide to justify their claim that tight inflation control leads to minimal labour market disruption is highly contestable. The only reasonable conclusion is that the approach has no credibility in dealing with the issue of unemployment and cannot reasonably be used to justify aggregate policy settings.

There are no saving features of the New Keynesian research program. None of the NK models handle “money” in a way that remotely corresponds to the dynamics and operational realities of a modern monetary economy based around a fiat currency.

The alleged advantage of the New Keynesian approach is the integration of real business cycle theory elements (inter-temporal optimisation, rational expectations, and market clearing) into a stochastic dynamic macroeconomic model. But it is obvious that notwithstanding the air of rigour, the New Keynesian results are always conjunctions of abstract starting assumptions and ad hoc additions to provide a semblance of engagement with reality.

This indicates an important weakness of the New Keynesian approach. The mathematical solution of the dynamic stochastic models as required by the rational expectations approach forces a highly simplified specification in terms of the underlying behavioural assumptions. This severely compromises the models and they are unable to say anything meaningful about the actual operations of central banks.

As a consequence the New Keynesian models have no empirical credibility.

So why would anyone be surprised that conceptual thinking and policy design based on the New Keynesian paradigm would fail badly when the system was in crisis.

If you abandon the New Keynesian structures then there is very little remaining of mainstream macroeconomics these days. But that will be essential if the profession is to restore some semblance of credibility.

I have some models and a framework available if anyone wants to consult me (-:

Conclusion

1. Burn the f…..g evil books!

2. Delete all the code supporting the redundant, wrong and evil macroeconomic models that economists use to advise policy makers.

3. Bar all the mainstream economists from advising public policy makers in the future until they have been through a thorough de-conditioning process and written new PhD length accounts of why their prior beliefs turned out to be erroneous at best, devastatingly desctructive on average.

4. Scrap the OECD and the IMF.

5. That is enough for starters and … today!

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    This Post Has 41 Comments
    1. Pulp. Instead of burning, why not send them back to be pulped? It’s more eco-friendly. Pulp fiction back to pulp.

      Seriously, why would we throw away the Protocols of Zion? Keep ’em, I say. Delusion and lies are part of human history. So we keep mainstream macroeconomic books too, we keep ’em in the same section of our library where we’d put Dan Brown, Ayn Rand, or I Was Abducted By A Flying Saucer.

    2. It would be’ a godo start to protest. It would love do in the premises of Bank of Italy afterthe lagest outrageus statements by Mario Draghi on Euro.

    3. Given that I’ve yet to see an economist make an accurate prediction, I would have thought that was sufficient evidence to show that the models they use are useless.

      If the weather models we use were so useless for so much of the time we’d have sacked all the weather forecasters by now. Why haven’t economists suffered the same fate?

      Modelling complex systems is difficult – particularly when you have humans involved. So the only sensible approach to policy is to design an improvement based on theory and try it, but with a solid back out plan should the theory turn out to be a load of rubbish.

    4. Stiglitz said that:
      The most remarkable aspect of the recent conference at the IMF was the broad consensus that the macroeconomic models that had been relied upon in the past and had informed major aspects of monetary and macro-policy had failed. They failed to predict the crisis; standard models even said bubbles couldn’t exist—markets were efficient. Even after the bubble broke, they said the effects would be contained. Even after it was clear that the effects were not “contained,” they provided limited guidance on how the economy should respond.”

      They [central bankers] must absolutely be independent and not what so ever under democratic scrutiny and possible to be sacked by the public if they fail. They are solely flawless civil servants that merely and nothing else is absolutely impartial technocrats that only have the people’s wellbeing as objective.

      Ben Bernanke have been there together with Greenspan for a long time, partners in crime, despite that he did get a new appointment by Obama and EU will for sure appoint just another Trichet/Duisenberg that will continue trumpet about structural adjustment of the working class over and over again.

    5. Dear Vassilis (at 2011/03/23 at 19:58)

      Yes, “Pulp. Instead of burning, why not send them back to be pulped? It’s more eco-friendly. Pulp fiction back to pulp.” I agree. We have to be green these days.

      You will note I also said we should keep a full complement of these texts in libraries for posterity. I am not scared of what is in these books (as were the Nazi’s of the material in the books they burned).

      best wishes
      bill

    6. bbc.co.uk/news/business-12816898:
      “Net debt, which is the sum of all borrowing, was £875.8bn, the ONS said. That is equivalent to 58% of GDP or total economic output.
      This time last year, the total was £729.9bn, or 50.8% of GDP.
      “The public finance numbers for February were significantly worse than expected,”

      “The British Chambers of Commerce said it was “important that the government perseveres with its tough approach”.
      However, it did offer a cautious warning.
      “Such measures will not suffice on their own,” said David Kern, BCC chief economist. “The strategy will only succeed if the austerity measures are backed by effective policies that enable businesses to create jobs and deliver growth.”

      Everything will be fine if just “we” get more (tax cuts), even if everyone else get less it will do wonders for the (our) economy.

    7. @Benedict@Large,

      I thought MMT was not about politics. In my view (and please correct me if I’m wrong!) you can apply the principles of MMT with righ-wing policies just as well as with left-wing ones.

      I’m an MMT newbie but from what I understand (mainly thanks to Bill), most if not all advanced countries currently suffer from a lack of demand. What their governements need to do to ensure that people have a chance to participate to wealth creation (by getting a job or starting successful businesses) is boost the aggregate demand.

      Whether they boost demand by implementing the Job Guarantee proned by our dear host here (in my view on the left side of the polical spectrum), or by an approach more in the likes of buying lots of goods and services from private companies in order to provide something benefical to the public (on the right side of the political spectrum), is a matter of polical (and efficiency) considerations.

      But at the end of the day, in a context where the private sector does not want to spend and exports are negative, governments have to spend more to support demand and make use of the idle resources (people!) available. For governments sovereign in their own fiat currency, the resulting increases in government deficits is just a measure of the support provided by the governments, they should not be a concern. For the EMU well, they seem to be doomed. It’s a shame because, being French, I have grown attached to the Euro and the whole European citizenship feeling that it symbolises (I live in the UK and I somehow can’t get used to using British pounds even after 3 years… weird uh?).

      I do not know who Dean Baker is, but just by reading the title of the article you linked, I assumed that the body would be filled with mainstream propaganda advocating deficit reduction regardless of the context. I was surprised to find that what he describes in there is a (very non efficient and needlessly complicated) fusion of the Central Bank and the Treasury coupled with stopping the flow of risk free interest bearing assets graciously offered to private financial institutions. To finally completely miss the point with his claims about inflation and bak reserves indeed, although I do not see why you describe it as veering hard-right.

      BTW, I think a JG is a good choice because it is, in my opinion, by far the most efficient way of improving the well being of all, starting with the ones who need it most.

    8. You can see that the approach is a gold standard approach where the quantity of “money” in circulation is proportional (via a fixed exchange price) to the stock of gold that a nation holds at any point in time. So if the government wants to spend more it has to take money off the non-government sector either via taxation of bond-issuance.

      The government borrowing is followed by government spending!

      MUNDELL, R. A. (1961), THE INTERNATIONAL DISEQUILIBRIUM SYSTEM. Kyklos, 14: 153–172:

      The decline of automaticity dates from the first attempts of central banks to adjust the domestic supply of notes to accord with the needs of trade (the banking principle) instead of the requirements of external equilibrium (the bullionist principle); and although these attempts have their origin far back in history, the abandonment of the bullionist principle became widespread only after the revolution in Federal Reserve policy during the 1920’s, and especially after legal or de facto recognition in post–World War II years of full employment as a primary goal of public policy. [footnote]

      [footnote] The adjustment of the money supply to accord with the “needs of trade” is quite different from the adjustment to achieve “full employment without inflation,” but both methods imply that the “bullionist principle” is abandoned.

      (boldening: mine)

      Not a fan of Robert Mundell of course, but he has a point. In fact, the “banking principle” was always followed. If there are gold losses due to balance of payments issues, the government and the central bank would control demand, not money.

    9. @Ramanan,

      How can the government borrow before spending?

      The private sector needs to own the currency before being able to lend it to the government. If the government does not issue currency first (by spending it) then how can the private sector lend something it doesn’t yet have?

    10. Benedict, of course MMT principles can be applied in any policy setting to the degree that they are operational descriptions and accounting identities.

      For example, a right-leaning demand approach through fiscal policy might be to increase military spending, and the JG might be military conscription. :)

    11. I thought MMT was not about politics.

      I don’t think it is, and that’s it’s attraction. It says how things work, and properly separates political decisions into their own discrete realm.
      Mainstream economics, acting as a handmaiden to power, says how society has to work, which is a bit rich, as they can’t even explain economics.
      In the UK, economics is used as an excuse for a particular, egregious set of policies. Mainly because there is no justification (or mandate) for them.

    12. Non-technical summary of the Mundell-Laffer Hypothesis I by Jude Wanniski. (There are three parts.) Interesting for their view of international trade but also interesting for a conservative view of what happened in the ’70’s.

      Benedict, according to Warren Mosler, Laffer understands the operational descriptions of MMT, so it is interesting to see what a person on the right has done with this knowledge to promote a rightist agenda.

    13. Bills says “…IMF Chief Economist Olivier Blanchard, himself a textbook writer (yes one to throw on the pile)…”

      I recently skimmed some sections of an undergrad intro to macroeconomics textbook by Olivier Blanchard (published 2003 or so). Some of the content surprised me, given how critical MMTers are of the “mainstream.”

      For example, Blanchard was very clear that governments don’t “save up”, that the cost of current government spending is its opportunity cost with respect to how the resources could otherwise be used, and that debates over government deficits and debts are a veil over the political struggle between the mix of public and private spending. And when he explained Ricardian Equivalence he stated clearly that there is very little evidence for it in the real world.

      I also skimmed an old photocopied pamphlet about modern money from one of the federal reserve banks that someone once gave me. Even it seemed acknowledge that in modern times the central bank provides unlimited extra reserves as needed after lending occurs and thus that lending is not reserve constrained at a macro level. (Though admittedly that section was more of an appendix to the discussion of the traditional textbook money multiplier, so casual readers would be left with the wrong impression.)

      It seems that while the neo-liberal views that Bill so effectively shreds are a vocal majority (given the influence of power and politics into economics outside of academia), perhaps most actual economics students are taught something at least a bit closer to the MMT-clarified reality??? (Yes I know there are still plenty of things all of them get wrong, e.g., the nature of alleged dangers of long term government deficits).

    14. The US doesn’t look like reducing their deficit anytime soon, and Quantitative Easing only changed long dated debt to short dated debt, so I am positive that the US Treasury gets MMT way better than people want to appreciate.

    15. Tom, it’s also interesting the article considers their hypothesis as yet another Copernican revolution.
      That’s probably the only thing all economists share: they consider themselves Copernicus, but live in a world where the universe revolves around themselves.

    16. Tom Hickey: “Non-technical summary of the Mundell-Laffer Hypothesis I by Jude Wanniski. (There are three parts.) Interesting for their view of international trade but also interesting for a conservative view of what happened in the ’70′s.”

      Interesting, Tom. Thanks. :)

      Just wondering:

      Mundell-Laffer recommendation: “Whenever a foreigner holding, say, $100 showed up and demanded an equivalent amount of gold out of the Treasury hoard, the Federal Reserve would know it had mistakenly issued 100 too many dollars. By contracting the money supply in that amount, the Fed would only have to sit back and wait: Somebody else in the world, needing 100 dollars in order to make a transaction and finding the world was short by that amount, would come to the Treasury with the equivalent amount of gold and demand dollars.”

      Can we generalize that to an argument in favor of a Job Guarantee? I. e., if some worker comes and demands $100 for a day’s work (the going rate), the gov’t knows that it has mistakenly issued 100 too few dollars. So it issues $100 to pay the worker for his work. :)

    17. MamMoth,

      Your much loved sciences are not exactly without laughs either.

      In String Theory and M_theory for example you have scientists arguing about how many dimensions there are in a world which can never be proven to exist.

      At the very best String Theory can become a logically consistent set of equations which can never be empirically tested due Heisenbergs Indeterminacy Principle.

      Aether theories, Phlogiston………

      And lets not forget Isaac Newtons favourite “Alchemy”.

      I think that lots pretty close to astrology.

    18. How many of these models only work when an economy is aggregate supply constrained (they don’t work when an economy is aggregate demand constrained)?

    19. “they consider themselves Copernicus, but live in a world where the universe revolves around themselves.”

      That at least explains why the mathematics is so unnecessarily complex :-)

    20. Alan: Your much loved sciences are not exactly without laughs either.

      True. But you should regard String Theory as mathematics not physics.
      Now mathematics has proved that not every true (or false) statement can be proved. That’s a humble discipline.
      Newton is remembered by his gravitational law and differential calculus, not for his talent as alchemist that eventually killed him.
      The point is that there will never be a scientific revolution that will compare itself to the Keynesian (or austrian, or MMT) revolution.

      OK, comparing economics to astrology might be unfair. Astrology is probably self-consistent after all…

    21. Right, MIn. The principle is similar. Both Laffer and MMT understand that the issue is managing funds wrt real resources so that real resources are always efficiently and effectively deployed through markets. The difference is wrt policy. MMT takes employment and price stability as norms, positing that they lead to optimal economic performance and more equitable distribution, while Laffer takes capital accumulation, economic growth, and military power as norms, relying on “trickle down” for distribution. These are based on different visions of persons in society. Supply-siders and demand-siders are both willing to use fiscal to promote their policy goals. So VP Cheney could asset that Reagan (following Laffer) showed deficits don’t matter. On the other hand, traditional fiscal conservatives want to balance the budget in the belief that this is fiscally responsible and that fiscal discipline will inspire confidence.

    22. String Theory is an ambitious attempt at describing Particle Physics and General Relativity. To some extent, methods of String Theory methodologies have found applications in particle physics itself which is an immensely successful field. Heisenberg’s uncertainty principle applies to all particle phenomenon.

      There is something called the magnetic moment of the electron – the theoretical result has been shown to be accurate to the 11th place of decimal! (and only experimental setups haven’t been more accurate to verify it to higher decimal places.)

      Poor comments on science here.

    23. Tom Hickey: “For example, a right-leaning demand approach through fiscal policy might be to increase military spending, and the JG might be military conscription”.

      An apt illustration. But in point of fact (and without detracting from that) exactly the same policy approach would be adopted by any government regardless of political complexion of a country under or threatened by military attack. Britain in WWII for example – coalition government, “war socialism”, rationing, direction of labour…(the polar opposite of “right-leaning”).

    24. Ramanan:”There is something called the magnetic moment of the electron – the theoretical result has been shown to be accurate to the 11th place of decimal!”

      You’re not implying, I hope, that economic predictions aren’t capable of comparable degrees of accuracy?

    25. I think the main difference is that physics is studied by physicists not economists.
      If Newton were an economist his colleagues would still be arguing about the deflation of the apples height or the inflation of its weight.

    26. Tom Hickey: “Both Laffer and MMT understand that the issue is managing funds wrt real resources so that real resources are always efficiently and effectively deployed through markets. The difference is wrt policy.”

      Thanks, Tom. :)

    27. MamMoth,

      William Whewell was not only amoung the leading experts on Newtonian physics he was also an economist and took the subject very seriously.

      His good friend Charles Babbage was also very interested upon the subject and wrote a most influential book on the subject.

      Considering the influence these two had on the development of science in the 19th Century I find your comments quite a distance from reality.

    28. MamMoth,

      For the record Newton developed the fluxional calculus not the differential calculus.

      The differential calculus was invented by Fermat and formalised by Leibnitz.

      How can a man of science like yourself not know this ?

    29. Jeez, Alan, as a defender of defunct theories (DDT) – contributing to this thread of making curious statements on science, I must point out (a) Einstein’s statement: “General Relativity is an aether theory.” (b) Phlogiston = valence electrons

    30. Dear William Mitchell,
      My son is a high-school junior considering studying economics in college. Can you recommend any econ professors in the USA that have a similar outlook as yours? If so, please note their institutions? Thank you for your article in The Nation and for your response (hopefully) to this query. Philip Boche, Los Angeles.

    31. Alan:
      For the record Newton developed the fluxional calculus not the differential calculus.
      The differential calculus was invented by Fermat and formalised by Leibnitz.
      How can a man of science like yourself not know this ?

      Not really, but it doesn’t matter. Please note that there is a difference between science and the history of science, two different disciplines. It’s probably the kind of nitpicking economists relish, not me.

    32. Mammoth,

      Nothing to do with History. It’s about method.

      The fluxional calculus is founded on the premise that mathematical quantities are generated by motion. The velocity of this motion is a fluxion and the mathematical quantity generated is the fluent. The fluents and fluxion were always inverse concepts; specifically, Newton was only concerned with the indefinite integral.

      The differential method is purely analytical.

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