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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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 (-:
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!