Changing the money meme

October 19, 2019 7 comments

Scientific economics needs more memes: short statements which capture the imagination and stick to the mind of lay people as well as economists. One of the well known memes of classical and neoclassical economics is the definition of money:

Money is:

* A means of exchange
* A store of value
* A unit of account

As such, it’s not bad. But it’s incomplete. The unit of account and the means of exchange do not have to be the same thing. In the olden days, in the Dutch Republic (as well as elswhere), the universal unit of account was the Stuiver and multiples thereof, like the Carolus Guilder of twenty Stuiver. While the means of exchange existed of a bewildering array of Pieces of eight, Guilders, Nobels, Thalers and whatever and sometimes, especially before 1650, even of products like rye which were used to pay ‘monetary’ rents. It’s good to make a clear distinction between the unit of account and the means of exchange! However – this meme is (neo)classical as it implicitly understands transactions as isolated here and now events, without social or historical or political embedding or repercussions. We have to change it. One way to do this is, as sometimes already happens, to add a fourth dimension to the definition, stating that money also is:

* the standard of deferred payments

The debt contracts using the unit of account as the standard of deferred payments tie the individual actors of (neo)classical economics together and, as their balance sheets and projected liquidity statements change, also change the economic nature of these people and companies. This adds a time as well as a social as well as a political dimension to the definition. See, for a depressing example, this story about debt collecting in Coeffeyville, Kansas. Money makes the world go round. And in Coffeyville, debt makes it stop. Other examples are mortgages or commercial credit which open up possibilities but also come with risk. Any money meme should encompass this part of our monetary world.


Resources for recovering academic writers

October 18, 2019 4 comments

from Blair Fix

Hello, my name is Blair Fix. I’m a recovering academic writer.

Let me explain. I’m convinced that a major part of grad school is learning to decipher academic prose. Let’s face it — academic writing is usually bad. It’s dense. It’s jargon filled. It’s often monotonous. In short, academic writing begs the reader not to read it.

So a big part of grad school is learning how to read prose that was designed not to be read. This takes great effort and a healthy dose of masochism. If you’ve learned how to read academese, I commend you.

Having learned how to read academic prose, the next step in grad school is to learn how to write this way yourself. Writing like fellow academics signals that you’re ready to join the guild. Your lofty ideas belong in the academic pantheon.

I’ll use myself as an example. During my master’s degree, I did lots of academic signalling. Check out my master’s thesis. It’s a dense fog of verbiage that’s almost unreadable.

So you finish grad school. Congratulations! You’ve learned to read and write like an academic. What’s next?


Take a hard look at your writing. Is it designed to be read? Or is it designed to be cited? If it’s the latter, then you need recovery. You need to unlearn the bad habits you acquired in grad school. Rather than write for the guild, you must learn how to write prose that is intelligible to the non-expert.

As a recovering academic writer, I’ve spent the last few years (re)learning how to write well. Below is a list of resources that have helped me. I hope they aid your recovery as well. Read more…

On the limited applicability of game theory

October 17, 2019 2 comments

from Lars Syll

Many mainstream economists – still — think that game theory is useful and can be applied to real-life and give important and interesting results. That, however, is a rather unsubstantiated view. What game theory does is, strictly seen, nothing more than investigating the logic of behaviour among non-existant robot-imitations of humans. Knowing how those ‘rational fools’ play games do not help us to decide and act when interacting with real people. Knowing some game theory may actually make us behave in a way that hurts both ourselves and others. Decision-making and social interaction are always embedded in socio-cultural contexts. Not taking account of that, game theory will remain an analytical cul-de-sac that never will be able to come up with useful and relevant explanations.

GT-Fig-16Over-emphasizing the reach of instrumental rationality and abstracting away from the influence of many known to be important factors, reduces the analysis to a pure thought experiment without any substantial connection to reality. Limiting theoretical economic analysis in this way — not incorporating both motivational and institutional factors when trying to explain human behaviour — makes economics insensitive to social facts. Read more…

Some constructive remarks on Wray’s “Alternative paths to MMT”

October 16, 2019 4 comments

from Arturo Hermann

Dear Randall, I appreciate your article “Alternative Paths to Modern Money Theory” and the novel perspective put forth by MMT in respect to the very narrow views of Austrian and neoclassic theories. Starting from this, I would like to make some constructive remarks around the following aspects: 

(I) In the article you stress that (p.6), when there is a “sovereign national currency” (p.5) and flexible exchange rates, “The sovereign currency issuer:

  1.  does not face a ‘budget constraints’ (as conventionally defined). [Later you clarify that “a sovereign government can impose on itself a ‘budget’ and that “this is normal practice and probably a good idea”, but anyway this path seems to be in your view fairly optional.];
  2. cannot ‘run out of money’;
  3. can always meet its obligations by paying in its own currency;
  4. can set the interest rate on any obligations it issues.”

These aspects are true, of course, and lie at basis of most post-Keynesian theories. The central problem is that this picture would apply only in an ideal situation, where public sector, also considered in a supranational dimension as in the case of the Euro*, has a real control over its currency. Read more…

Economics of poverty, or the poverty of economics

October 15, 2019 2 comments

from David Ruccio

Yesterday, the winners of the 2019 winners of the so-called Nobel Prize in Economics were announced. Abhijit Banerjee, Esther Duflo, and Michael Kremer were recognized for improving “our ability to fight global poverty” and for transforming development economics into “a flourishing field of research” through their experiment-based approach.

The Royal Swedish Academy of Sciences declared:

This year’s Laureates have introduced a new approach to obtaining reliable answers about the best ways to fight global poverty. In brief, it involves dividing this issue into smaller, more manageable, questions–for example, the most effective interventions for improving educational outcomes or child health. They have shown that these smaller, more precise, questions are often best answered via carefully designed experiments among the people who are most affected.

As every year, mainstream economists lined up to laud the choice. Dani Rodrik declared it “a richly deserved recognition.” Richard Thaler, who won the award in 2017 (here’s a link to my analysis), extended his congratulations to the Banerjee, Duflo, and Kremer and to the committee “for making a prize that seemed inevitable happen sooner rather than later.” While Paul Krugman, the 2008 Nobel laureate, refers to it as “a very heartening prize—evidence-based economics with a real social purpose.” Read more…

The limits of extrapolation in economics

October 15, 2019 3 comments

from Lars Syll

steelThere are two basic challenges that confront any account of extrapolation that seeks to resolve the shortcomings of simple induction. One challenge, which I call extrapolator’s circle, arises from the fact that extrapolation is worthwhile only when there are important limitations on what one can learn about the target by studying it directly. The challenge, then, is to explain how the suitability of the model as a basis for extrapolation can be established given only limited, partial information about the target … The second challenge is a direct consequence of the heterogeneity of populations studied in biology and social sciences. Because of this heterogeneity, it is inevitable there will be causally relevant differences between the model and the target population.

In economics — as a rule — we can’t experiment on the real-world target directly. Read more…

No, productivity does not explain income

October 14, 2019 8 comments

from Blair Fix

Did you hear the joke about the economists who tested their theory by defining it to be true? Oh, I forgot. It’s not a joke. It’s standard practice among mainstream economists. They propose that productivity explains income. And then they ‘test’ this idea by defining productivity in terms of income.

In this post, I’m going to show you this circular logic. Then I’ll show you what productivity differences look like when productivity is measure objectively. They’re far too small to explain income differences.


Marginal productivity theory

The marginal productivity theory of income distribution was born a little over a century ago. Its principle creator, John Bates Clark, was explicit that his theory was about ideology and not science. Clark wanted show that in capitalist societies, everyone got what they produced, and hence all was fair:

It is the purpose of this work to show that the distribution of the income of society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates. (John Bates Clark in The Distribution of Wealth)

Clark was also explicit about why his theory was needed. The stability of the capitalist order was at stake! Here’s Clark again:

Read more…

MMT: eliding foundational principles in the interests of journalistic simplicity

October 13, 2019 19 comments

from Anne Mayhew

I count myself as one of those friendly critics who applaud several of the major MMT contributions to our understanding of the modern American economy. Among these contributions are the emphasis put on

  • the endogeneity of money;
  • the importance of using of a flow-of-funds approach in analysis of the macroeconomy;
  • detailed descriptions of how the FED (Federal Reserve System) actually operates, details usually missing from texts.

And from these three emphases the central conclusion of MMT is that the availability of space for fiscal expansion is larger than commonly understood. These three emphases are used to construct a forceful rejection of the argument that financial constraints can require austerity in economies with unused non-financial resources. Although much of the analysis has been focused on the U.S. economy, the MMT attack on austerity policies as necessary also has much wider application. This I also applaud.

I am, however, Read more…

Do economic models actually explain anything?

October 12, 2019 7 comments

from Lars Syll

One of the limitations with economics is the restricted possibility to perform experiments, forcing it to mainly rely on observational studies for knowledge of real-world economies.

But still — the idea of performing laboratory experiments holds a firm grip of our wish to discover (causal) relationships between economic ‘variables.’ Galileo's falling bodies experimentIf we only could isolate and manipulate variables in controlled environments, we would probably find ourselves in a situation where we with greater ‘rigour’ and ‘precision’ could describe, predict, or explain economic happenings in terms of ‘structural’ causes, ‘parameter’ values of relevant variables, and economic ‘laws.’

Galileo Galilei’s experiments are often held as exemplary for how to perform experiments to learn something about the real world.

Galileo’s heavy balls dropping from the tower of Pisa, confirmed that the distance an object falls is proportional to the square of time and that this law (empirical regularity) of falling bodies could be applicable outside a vacuum tube when e. g. air existence is negligible. Read more…

Radically misleading calculations

October 11, 2019 4 comments

from Geoff Davies

The point of a theory or model is to provide a useful guide to understanding the world. People like Paul Krugman are fond of claiming simple equilibrium models provide a useful first cut or first approximation to understanding. Others put their faith in more elaborate equilibrium models. But do equilibrium models, simple or elaborate, offer any useful guidance to actual economies, or are they perhaps radically misleading? Is this

a useful guide to this? Read more…

Taxing financial transactions is more strategic than taxing high wealth

October 11, 2019 16 comments

from Dean Baker

Presidential candidate Joe Biden is considering to propose a financial transactions tax as part of his campaign for the Democratic nomination, according to a recent report from The Washington Post. This is big news for those of us who have long advocated such a tax.

Sen. Bernie Sanders has taken the lead on this issue among presidential candidates, including a financial transactions tax — also known as an FTT — as part of his plan for making college tuition free. Several other candidates also support a financial transactions tax, but if the Democratic Party’s leading centrist candidate endorses the tax, it would mark a new degree of acceptance within the mainstream of political debate.

Interestingly, Sen. Elizabeth Warren is not among those supporting a financial transactions tax. This is certainly not due to a reluctance to challenge the interests of the wealthy. Senator Warren has proposed an ambitious wealth tax that would tax wealth above $1 billion at the rate of 3 percent a year. While there are good reasons for wanting to tax the very rich, a financial transactions tax is almost certainly a better economic policy and would have much better political prospects. Read more…

What is MMT?

October 10, 2019 15 comments

from L. Randall Wray

MMT provides an analysis of fiscal and monetary policy that is applicable to national governments with sovereign currencies. We argue that there are four essential requirements that qualify a national currency as sovereign in the sense in which we use the term:

  1. the National government chooses a money of account in which the currency is denominated;
  2. the National government imposes obligations (taxes, fees, fines, tribute, tithes) denominated in the chosen money of account;
  3. the National government issues a currency denominated in the money of account, and accepts that currency in payment of the imposed obligations; and
  4. if the National government issues other obligations against itself, these are also denominated in the chosen money of account, and payable in the national government’s own currency.

There is a fifth, important, consideration, which concerns the exchange rate regime and follows from the fourth requirement above. Strictly speaking, if a country adopts a gold standard or “dollarizes” it does not have what we define as a sovereign currency because it has agreed to exchange its currency for gold or dollars at a fixed exchange rate. Its obligation really is to deliver gold or dollars in payment. On the other hand, Read more…

Teflon economics

October 10, 2019 7 comments

from Lars Syll

At least since the time of Keynes’s famous critique of Tinbergen’s econometric methods, those of us in the social science community who have been impolite enough to dare to question the preferred methods and models applied in quantitative research in general and economics more specifically, are as a rule met with disapproval. Although people seem to get very agitated and upset by the critique — just read the commentaries on this blog if you don’t believe me — defenders of received theory always say that the critique is ‘nothing new’, that they have always been ‘well aware’ of the problems, and so on, and so on.

So, for the benefit of all mindless practitioners of economics — who don’t want to be disturbed in their doings — eminent mathematical statistician David Freedman has put together a very practical list of vacuous responses to criticism that can be freely used to save your peace of mind:

Read more…

An ideology called consumerism

October 9, 2019 3 comments

We are guided by an ideology so familiar and pervasive that we do not even recognise it as an ideology. It is called consumerism. It has been crafted with the help of skilful advertisers and marketers, by corporate celebrity culture, and by a media that casts us as the recipients of goods and services rather than the creators of political reality. It is locked in by transport, town planning and energy systems that make good choices all but impossible. It spreads like a stain through political systems, which have been systematically captured by lobbying and campaign finance, until political leaders cease to represent us, and work instead for the pollutocrats who fund them.

In such a system, individual choices are lost in the noise. Attempts to organise boycotts are notoriously difficult, and tend to work only when there is a narrow and immediate aim. The ideology of consumerism is highly effective at shifting blame: witness the current ranting in the billionaire press about the alleged hypocrisy of environmental activists. Everywhere I see rich westerners blaming planetary destruction on the birth rates of much poorer people, or on “the Chinese”. This individuation of responsibility, intrinsic to consumerism, blinds us to the real drivers of destruction.

The power of consumerism is that it renders us powerless. It traps us within a narrow circle of decision-making, in which we mistake insignificant choices between different varieties of destruction for effective change. It is, we must admit, a brilliant con.

It’s the system we need to change, rather than the products of the system. It is as citizens that we must act, rather than as consumers. But how?

George Monbiot in today’s Guardian

Central Bank History (3/5) 1914-1980

October 9, 2019 Leave a comment

from Asad Zaman

This series of posts is based on a single lecture (Lecture 13 of Advanced Macro II) exploring the evolving functions of Central Banks through time. It goes through a vast amount of material in a very short time, and hence is a very sketchy treatment. This is the 3rd post,  which deals with the period from WW! to the 1980s.  read more

Tribalism in Science (and Economics)

October 8, 2019 43 comments

from Blair Fix

If you ask the average person what ‘science’ is, they’ll probably answer something like ‘it’s what we know about the world’. To the lay person, ‘science’ is a body of facts.

To the trained scientist, however, ‘science’ means something different. It’s not a body of knowledge. It’s a method for determining what’s true and what’s not. To determine the way the world works, science appeals to evidence.The ideal of science is beautifully summarized by the motto of the Royal Society: nullius in verba. It means ‘take nobody’s word for it’. In science, there is no authority. There are no gods, no kings, and no masters. Only evidence.

In this post, I reflect on how ‘taking nobody’s word for it’ cuts against some of our deepest instincts as humans. As social animals, we have evolved to trust members of our group. Among these group members, our instinct is to ‘take their word for it’. I call this the ‘tribal instinct’.

Read more…

RWER issue 89: Modern monetary theory and its critics

October 8, 2019 1 comment

Has wealth gone digital?

October 6, 2019 4 comments

from Blair Fix

A revolution is underway around us and it’s called the digital. And it’s changing everything. More than 80% of wealth is now non-material.

— Charles Foran in Just don’t say his name: the modern left on Karl Marx’s place in politics (41:30)

Both critics and cheerleaders of capitalism claim it has. The critics see non-material wealth as a problem. Digital wealth, they say, is fictitious. It’s lost touch with reality.

The cheerleaders of capitalism see the same thing as a boon. Non-material wealth, they say, will decouple the economy from physical constraints. So the economy can grow forever!

Which side is right?

Neither, in my opinion.

Instead, both sides misunderstand the nature of wealth. Wealth is not becoming non-material. No. Wealth has always been non-material. So the digital revolution isn’t changing the nature of wealth. It’s just laying bare the facts that have always been there.

What is wealth?  Read more…

The primary problem with mainstream economics

October 5, 2019 20 comments

from Lars Syll

Jamie Morgan: To a member of the public it must seem weird that it is possible to state, as you do, such fundamental criticism of an entire field of study. The perplexing issue from a third party point of view is how do we reconcile good intention (or at least legitimate sense of self as a scholar), and power and influence in the world with error, failure and falsity in some primary sense; given that the primary problem is methodological, the issues seem to extend in different ways from Milton Friedman to Robert Lucas Jr, from Paul Krugman to Joseph Stiglitz. Do such observations give you pause? My question (invitation) I suppose, is how does one reconcile (explain or account for) the direction of travel of mainstream economics: the degree of commonality identified in relation to its otherwise diverse parts, the glaring problems of that commonality – as identified and stated by you and many other critics? Read more…

Understanding statistical distributions

October 4, 2019 Leave a comment

from Asad Zaman

In line with the pedagogical mission of this blog, I will be writing up a sequence of posts which explain the concept of a statistical distribution. As has been pointed out by numerous authors, a fundamental mistake in understanding concepts of uncertainty and probability was made in the early 20th Century, when views of Keynes and Knight were rejected, and ideas of Ramsey, De-Finetti, and other subjectivists were accepted. To set things right, we have start from scratch, and build up the concept of probability on new foundations.  read more