Home > Real-World Economics Review > real-world economics review – issue no. 65

real-world economics review – issue no. 65

Issue no. 65, 27 September 2013
You can download the whole issue as a pdf document by clicking here    

In this issue: 

Regression and causation: a critical examination of econometrics textbooks          2
Bryant Chen and Judea Pearl          download pdf 

Diagrammatic economics          21
John Pullen          download pdf 

A plea for reorienting philosophical attention from models to applied economics          30
Gustavo Marqués          download pdf 

A Copernican turn in banking union urgently needed          44
Tom Mayer          download pdf 

A monetary and fiscal framework
for macroeconomic stability in the European Monetary Union         
Thomas Oechsle          download pdf 

The experience of three crises:
the Argentine default, American subprime meltdown and European debt mess          65
Víctor A. Beker          download pdf 

Global output growth: wage-led rather than profit-led?          116
Leon Podkaminer          download pdf  

Striking it richer: the evolution of top incomes in the United States          120
Emmanuel Saez          download pdf 

New Paradigm Economics          129
Edward Fullbrook          download pdf 

Past contributors, submissions and etc.          132

Wikipedia has the beginning of an article on the RWER, http://en.wikipedia.org/wiki/Real-world_economics_review.  It needs much work.  It would be useful if RWER subscribers contributed to this

  1. September 27, 2013 at 11:08 am

    Republicou isso em Gabriel Regae comentado:
    Novo RWER. Me parece interessante pelo menos o último artigo do Fullbrook.

  2. Mark Stahlman
    September 27, 2013 at 3:28 pm

    Since I couldn’t find a comment section for Prof. Fullbrooks’ NEP paper (i.e. the link he published doesn’t seem to work), I’ll ask my question here (and then move it to the paper’s comments when I can) — so, what do you mean by *causally* in your footnote ii (which, to me at least, seems to be the single term on which the entire NEP “structure” rests)? You recall that there are “classically” four causes. So, which of these best describes *emergence*? I suspect that the answer is “material” cause and would like to take this up here — ontologically speaking!

    • Mark Stahlman
      September 27, 2013 at 3:31 pm

      Sorry — for the editor, my name is misspelled (it should be STAHLMAN) and I should have abbreviated Fullbrook’s paper as NPE and not NEP — could you please correct these errors (since I don’t seem to be able to edit it myself)? Thanks!

      • merijnknibbe
        September 27, 2013 at 3:55 pm


        I corrected your name, I’m however not going to correct mistakes in the text.

        Merijn Knibbe

  3. September 28, 2013 at 11:20 am

    This comment is from Robert Locke

    I don’t know if you would like to make this a post in the rwer blog under “Response to the description of New Paradigm Economics” or just keep this a personal communication between us. You decide

    OPE & NPE
    Although I agree with the thrust of your effort to create a NPE to replace an OPE, there is one point I would make about how you state them.
    In the recent RWER article (#65, 27. 09. 2013) you make a comparison between the old physics that neoclassical economics took as a map for its development and the new physics that permits in this sort of mapping a NPE. I do not see why people in economics (a social science) need to connect their discussions of the NPE with physics any more than the people in the OPE did. (see Dreschler, “Understanding the problems of mathematical economics: a ‘continental perspective.’” RWER, #56, 11.04. 2011)
    It could be argued, of course, that this connection is necessary precisely because the neoclassical economists could not be won over to a NPE without using the metaphor of the physical science, i.e., physics. That might be true for them, but it is not true for those of us who are not enamoured with physical science metaphors as a basis for investigating economics. If economics is a “social” science it should operate on human not physical world assumptions.
    For me this means that the NPE should not be based on a shift from an old physics to a new but on a shift from physical science analogies to cultural ones.
    I discovered the need for this emphasis when trying to analyze why Germany outstripped the UK in developing the new high tech industries (organic chemical, electrical, special alloy metal machinery) in the late 19th century. These new industries had a science-technology connection that had its roots in traditions in German higher education that preexisted the high-tech industrial era (1875-1914), ones that did not exist in the UK. In short, educational cultures not market demand much better explain the German response to high tech demand – and the UK failures. {see, Ch. “The Graduate Engineer and Industrial Performance,” in my The End of the Practical Man, (JAI 1984, reprinted in Elsevier, 2006), and Johannes Conrad, Das Universitaetsstudium in Deutschland waehrend der letzten 50 Jahren (Jena, 1884), and George Haines, IV. Essays on German Influence upon English Education and Science, 1850-1919 (New London, Conn., 1969)}.
    If the cultural basis of economic activity is ignored in order to map economics to physics, the study of our economy will suffer.”

    Thanks for your article.

    Robert Locke

  4. September 28, 2013 at 1:27 pm

    On the New Paradigm — A timid step in the right direction.

  5. September 28, 2013 at 4:41 pm

    the reason i see for mapping econ (new or old) to physics is, to keep it simple, because its based on physics—rwer is online. (HINT–computers require math and physics).

    germany did have some wonderful developments. for example, i think modern agriculture is based on a discovery by a german (jewish) scientist around 1900; he also developed nerve gas used in ww1 (obviously based on NEP or german culture) before hitler showed up and finished that career.

    get a grip. (germany has 18% unions; they got income and growth, and also a big neo-nazi movement; chaos theory, keen, minsky, keynes could explain that).

    german higher (eg master race) education; all but heisenberg split from that joint—they tried to get max born back, and he said ‘just say no’.

    its ‘california uber allus’ (punk band, the dead kennedys).

    • Robert Locke
      September 28, 2013 at 6:10 pm

      “some wonderful developments. for example, i think modern agriculture is based on a discovery by a german (jewish) scientist around 1900.”

      Ishi, I think you might be confusing Fritz Haber with Justus von Liebig, who developed a strong relationship between research chemistry in universities and agriculture — and the modern organic chemical industry — those great German firms. Bayer, BASF, Hoechst.

      • September 30, 2013 at 9:09 am

        I dont really know the history (though i actually do have a chemistry degree) but Haber is credited with synthesizing ammonia which is the basis of fertilizer and hence responsible for a huge amount of agricultural products (wikipedia)—so if overpopulation is a problem, we know one possible suspect. He also made chemical weapons used in WW1 (for which he had no apology since his view was a death is a death—i’m agnostic, though i guess one could test this, like wine tasting events); his wife objected and committed suicide.
        BASF of course is also well known for its role in IG Farben who supplied zyklon b to hitler’s gas chambers. IBM is also thought to have seen WW2 as a good profit making opportunity. the welfare/warfare economy — ‘eat or be eaten’ (Iggy Pop)

      • Robert Locke
        September 30, 2013 at 10:47 am

        Ishi, # 9. Widipedia on Liebig. “Liebig improved organic analysis with the Kaliapparat – a five-bulb device that used a potassium hydroxide solution to remove the organic combustion product carbon dioxide.[4] He downplayed the role of humus in plant nutrition and discovered that plants feed on nitrogen compounds and carbon dioxide derived from the air, as well as on minerals in the soil. One of his most recognized and far-reaching accomplishments was the invention of nitrogen-based fertilizer. Liebig believed that nitrogen must be supplied to plant roots in the form of ammonia, and recognized the possibility of substituting chemical fertilizers for natural (animal dung, etc.) ones. Nitrogen fertilizers are now widely used throughout the world, and their production is a substantial segment of the chemical industry. He also formulated the Law of the Minimum, stating that a plant’s development is limited by the one essential mineral that is in the relatively shortest supply, visualized as “Liebig’s barrel”. This concept is a qualitative version of the principles used for determining the application of fertilizer in modern agriculture.

        He was also one of the first chemists to organize a laboratory in its present form. His novel method of organic analysis enabled him to direct the analytical work of many graduate students. The vapor condensation device he popularized for his research is still named a Liebig condenser, although it was in common use long before Liebig’s research began. Liebig’s students were from many of the German states as well as Britain and the United States, and they helped create an international reputation for their Doktorvater.

        In 1835 he invented a process for silvering that greatly improved the utility of mirrors and in 1850 he investigated spontaneous human combustion, dismissing the simplistic explanations based on ethanol due to alcoholism.[citation needed][5]

        Liebig’s work on applying chemistry to plant and animal physiology was especially influential.”

  6. September 28, 2013 at 5:00 pm

    ps fritz haber was the chemist i was referring to—nerve gas actually came later (also from germany).
    lewis carrol (alice in wonderland) judy garland (rainbow, written by another racsit), and jefferson airplane (white rabbit) preceded the dk’s (who i saw get beat up by a competing band).

  7. October 6, 2013 at 3:06 pm

    Edward, Regarding your new paradigm. I’m a natural systems scientist who has spent a lot of time on the puzzle of how economics became so detached…

    I certainly applaud your effort to describe a new paradigm for economics, and see your approach as having the right intent and to be quite elegant in how you construct it. It still overlooks why natural systems will invariably depart from even the most faithful effort to describe them mathematically. It’s that 1) natural systems change how they’re organized, and so how they behave, ALL the time, 2) all natural systems originate from a growth process in which they change how they work ever faster, to then change form, and 3) by ignoring #2 the present paradigm is to manage a world of systems that all expand and become ever more unmanageable over time. It’s “impractical”.

    What I think this exposes is a very basic flaw in our conception of nature. It seem to be coming directly from our attempts to define nature conceptually (treating nature as rules that we control), rather than using the rules we find to help us learn about it. What we have is an ever changing world, full of complex living natural and cultural systems we need to interact with, that are inventing new behavior all the time and fundamentally out of our control. From there I’m not sure what would help you understand my approach, as my terminology is likely to ‘sound funny’.

    In general, if investors understood their choices as the leading edge of the advancing form of the economy, steering it in its future directions, and if they were intent on steering it toward being more profitable as a whole, you’d get a self-regulating financial system optimizing its use of the earth, not decimating it. It might take decades of rethinking what we do…, but it would become a pursuit of “sustainable development” as “home making” for the earth, in the interests of all. It’d stop being led by people maximizing the inequity between competitors.

    My blog is a good place to browse, old posts as well as new. http://synapse9.com/signals

    It’s a collection of short subjects on ways to understand the new systems physics I developed to better understand the organization and workings of individually behaving systems.

    • October 14, 2013 at 8:07 pm

      Thank you Jessie for your thoughtful comment. I have visited your blog http://synapse9.com/signals and find it interesting. I found it full of potentially thought-provoking material. But I couldn’t settle on one of your essays that might serve as good introduction to your work and thought. Can you help me out there? Edward

      • October 21, 2013 at 2:06 pm

        Edward, I missed your comment at first. My work is diverse, and may be best explored searching the blog for popular posts or terms of interest and my papers. The origin of my work was a couple years visually studying how the complex organization of air currents always starting with systematic growth that may lead to either disordering or stabilizing. My elemental physics work led to a way to unif the conservation laws, to find a place for deterministic theory in what appears (on close inspection) to be a more opportunistic world [http://synapse9.com/drtheo.pdf].

        Years ago I asked Boulding who else had studied how economic growth systems stabilize to thrive at steady state the way I thought they’d have to, and he pointed to Keynes, so there are a number of things on my site on how Keynes was the first with the idea. Keynes wrote about investment returns needing to be used to sustain rather than continue to increasingly exploit the economy at the approach of limits to growth (Chapter 16 in the General Theory and the Widow’s cup parable). If you use a google site search you get the links in page rank order, [https://www.google.com/search?q=site%3Asynapse9.com+keynes] for example.

        My recent advances have been finding a way to represent that as a switch between two very familiar economic paradigms, from “growth economics” to “home economics”, branching off from Pat Thompson’s surprisingly insightful historical feminist work on that. The main difference between the two being that in “home making” (for women or for men) the returns on investing their lives in the economy are then freely given to the holistic care for the extended needs of their family culture, not to starving their family so they can continually reinvest in exploiting the economy… Pat’s writing is in her books, some excerpts of which I posted on my site [ http://synapse9.com/HestiaRef ]

      • davetaylor1
        October 22, 2013 at 8:48 am

        “Years ago I asked Boulding who else had studied how economic growth systems stabilize to thrive at steady state the way I thought
        they’d have to, and he pointed to Keynes”.

        Interesting, Jessie. I’ve commented here how Keynes anticipated the invention of information feedback control systems. I’m also very much a Boulding fan, having started with his works on managerial organisation, then (beyond the economics), “The Image” and “Spaceship Earth”..

  8. Egmont Kakarot-Handtke
    October 14, 2013 at 10:52 am

    Refers to NEP

    Heterodoxy: Promising or Hopeless?

    Edward Fullbrook has undertaken the task of distilling from numerous contributions to the real-world economics review a synopsis of the core tenets of present-day Heterodoxy (2013, p. 129). This is a good thing. However, he unfortunately characterizes a motley of opinions as NPE, New Paradigm Economics. There is at the moment nothing that deserves the title of a heterodox paradigm in the sense of Kuhn(1). What is more, Kuhn has argued “that there are no, nor can there be any, paradigms in the social sciences.”

    What we have before us resembles more a manifesto than anything else. The first item in the compilation, pluralism, confirms this impression.

    A paradigm/theory/model makes assertions about the world (is deterministic, consists of atoms, expands inflationary, etcetera) or parts of it (society consists of antagonistic classes, of utility maximizing individuals, is ruled by an invisible hand, etcetera) and implicitly or explicitly insists that this view is the correct one. A paradigm/theory/model without a truth claim is a contradiction in terms.

    Hence pluralism is a meta-claim that cannot be used by any specific paradigm. Heterodoxy is not the arbiter and by no means in the position to decide that, for example, classical, Marxian, neoclassical or Keynesian approaches are, in the name of pluralism, legitimate constituents of economics – understood as a science. Just like astrology, geo-centrism, or creationism cannot claim to be part of a pluralistic physics or biology. Note that Dawkins refuses to discuss with creationists about evolution. Science constitutes itself by proper demarcation from nonscience (cf. Popper, 1980, p. 34).

    Physics is pluralist at the cutting edge of research as long as the matter has not been settled according to accepted criteria (logical and material consistency, cf. Klant, 1994, p. 31). There is no pluralism, though, with regard to the Law of the Lever. To compare economics, which has not yet got hold of something analogous to the Law of the Lever, with cutting edge physics is preposterous.

    The defining characteristic of Heterodoxy is, trivially, the rejection of the neoclassical approach. The rejection is borne either by a well-founded conviction or at least the distinct feeling that there must be something better. Hence Heterodoxy epitomizes the promise to eventually come up with a superior alternative. This is what makes Heterodoxy attractive. In Lakatos’s terms, Heterodoxy is to be understood as the progressive research programme and Orthodoxy as the degenerating research programme.

    Heterodoxy therefore consists of a destructive and a constructive part. However, both parts are not symmetric:

    “… there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell, 1980, p. 1)

    Heterodoxy was very successful with debunking (cf. Fullbrook, 2004; Keen, 2011) but it cannot be said that it was equally successful with construction.

    “There is no alternative that is so obviously superior that it would justify everyone abandoning the current orthodoxy.” (Hausman, 1992, p. 255)

    To explain this unacceptable state of theoretical affairs at least in part it is useful to study New Paradigm Economics in more detail. The methodological comment starts with a noncontroversal assertion:

    “Whether you can observe a thing or not depends on the theory which you use. It is theory which decides what can be observed.” (Einstein, quoted in Fullbrook, 2013, p. 130)

    However, this consensus is immediately contradicted in Section 3 which claims that Heterodoxy “priorizes the empirical over apriorism.” Einstein was as clear as possible that this is the wrong priority.

    “… any attempt logically to derive the basic concepts and laws of mechanics from the ultimate data of experience is doomed to failure.” (Einstein, 1934, p. 166)

    This is exactly what J. S. Mill said long before with regard to economics.

    “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of “abstract speculation.”” (Mill, 2004, p. 113-114)

    Being an apriorist, Einstein of course never denied the crucial role of the empirical.

    “Experience can of course guide us in our choice of serviceable mathematical concepts; it cannot possibly be the source from which they are derived; experience of course remains the sole criterion of the serviceability of a mathematical construction for physics, but the truly creative principle resides in mathematics. In a certain sense, therefore, I hold it to be true that pure thought is competent to comprehend the real, as the ancients dreamed.” (Einstein, 1934, p. 167)

    Is there any indication that physicists will abandon the deductive method in the future and instead turn to pluralism?

    “Some day, when physics is complete and we know all the laws, we may be able to start with some axioms, and no doubt somebody will figure out a particular way of doing it so that everything else can be deduced.” (Feynman, 1992, p. 50)

    Was Einstein blind to the pitfalls and limitations of the deductive method which indeed have paralyzed the neoclassical approach?

    “If then it is the case that the axiomatic basis of theoretical physics cannot be an inference from experience, but must be free invention, have we any right to hope that we shall find the correct way?” (Einstein, 1934, p. 167)

    Economists have not yet found the correct way. This is not attributable to the deductive method as such but to its clumsy application.

    As always when they are clueless, economists turn to physics (Mirowski, 1995), and always they miss the point. Heterodox economists are no exception.

    “… progress entails a movement away from faith-based to empirical-based economics” (quote from Fullbrook, 2013, p. 130).

    My impression from the NPE compilation is that Edward Fullbrook is currently too much occupied with a rather hopeless rearguard of Heterodoxy.

    “Many people have a passionate hatred of abstraction, chiefly, I think, because of its intellectual difficulty; but as they do not wish to give this reason, they invent all sorts of others that sound grand. They say that all reality is concrete, and that in making abstractions we are leaving out the essential. … Those who argue in this way are, in fact, concerned with matters quite other than those that concern science.” (Russel, 1961, p. 626)

    (1) http://en.wikipedia.org/wiki/Paradigm

    Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science,
    1(2): 163–169. URL http://www.jstor.org/stable/184387.

    Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.

    Fullbrook, E. (Ed.) (2004). A Guide to What’s Wrong With Economics. London:

    Fullbrook, E. (2013). New Paradigm in Economics. real-world economics review,
    65: 129–131. URL http://www.paecon.net/PAEReview/issue65/Fullbrook65.pdf.

    Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge:
    Cambridge University Press.

    Keen, S. (2011). Debunking Economics. London, New York, NY: Zed Books, rev.

    Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT:
    Edward Elgar.

    Mill, J. S. (2004). Essays on Some Unsettled Questions of Political Economy, chapter
    On the Definition of Political Economy; and the Method of Investigation Proper to
    It., pages 93–125. Electronic Classic Series PA 18202: Pennsylvania State University.
    URL http://www2.hn.psu.edu/faculty/jmanis/jsmill/Unsettled-Questions.pdf.

    Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University

    Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical
    Mirror: On the Break-Up of a Vision, pages 1–16. Cambridge, New York, NY,
    Melbourne: Cambridge University Press.

    Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne,
    Sydney: Hutchison, 10th edition.

    Russel, B. (1961). The Basic Writings of Betrand Russel, chapter Limitations of
    Scientific Method, pages 620–627. London: Routledge.

    • merijnknibbe
      October 14, 2013 at 4:52 pm

      Very interesting comment. However – estimation of data often already requires quite some conceptual and abstract thinking. To understand data you sure have to know theory and concepts. But not just the external theory and concepts, also the internal theory and concepts. Ideally, the external and internal theory and concepts should match, in economics they often don’t. DSGE models often use data which are not consistent with the model itself (i.e. the difference between ‘consumption’ defined as ‘the purchase of an item’ and consumption as a kind of ‘use/ownership of this item’). The first is consistent with an estimation of the flows of money, work and income. The second with an idealized concept of household behaviour. The point: to make sense of the data you will have to know the context and you will have to use models which are at least up to a point consistent with them. Simple empiricism just doesn’t exist.

  9. Robert Locke
    October 21, 2013 at 5:28 pm

    “As always when they are clueless, economists turn to physics (Mirowski, 1995), and always they miss the point. Heterodox economists are no exception.

    Fullbrook’s NPE is a mirror imagine of OPE. He even lays it out that way, With the points emphasized in NPE alongside those of OPE. Why tie the discussion of the NPE to a paradigm that tries endlessly to map the social science on the physical sciences? Heterodox economics ARE an exception. They reject the notion that NPE should be mapped on the physical sciences. They yearn for a definition of economics, like that of Seligman (“economics is a study of the social conditions necessary for the sustenance of life.”) That will not lead you to a narrow group of academics preoccupied with the application of the principles and methods of physical sciences to economic process but to a broad participation of those involved in the economy in its study (artisan, industrial workers, bureaucrats, engineers, labor leaders, etc.). That’s not science because science is disinterested and the people involved in the economy express legitimate-self-interest in how it operates and for whom.

  10. November 27, 2013 at 3:04 pm

    Putting money where “goodwill” is
    Romar Correa [Department of Economics, University of Mumbai, romarcorrea10@gmail.com]
    A response to
    A Copernican Turn in Banking Union
    Thomas Mayer “A Copernican turn in Banking Union”, real-world economics review, 27 September 2013, issue no.65, pp.44-50

    It is one thing to pray for a renaissance in thinking in monetary matters, quite another to deliver a blueprint for alternative monetary arrangements. Kudos to Thomas Mayer for providing a revolutionary but closely-argued macroeconomic schema for the EU.

    100% reserve banking, also called narrow banking, harks back to centuries before the Chicago School, Professor Mayer informs us. The well-known propagator was Milton Friedman and, and from a completely different perspective, Hyman Minsky was to embed the institution in his model for preventing “it” happening again. The serious attention to the proposal despite its origins in competing worldviews I take as support for the vibrancy and complexity of the heterodox economics programme. In the usual format, the innovation goes with “firewalls” separating deposit-issuing banks from financial institutions. Professor Mayer’s banks, on the other hand, have a hierarchy of separate correspondences across sides in their balance sheets and the problem of floor crossing, therefore, remains. It is not clear how safe deposits will not be used to retire risky debt.

    Judging by the footnotes, it seems that Professor Mayer’s impulses flow from the Austrian school. It is not difficult, therefore, to note a gap in the reasoning when it comes to Central Banks (CBs hereafter) holding government debt. By so doing, Professor Mayer claims, government money will be unbacked.

    We approach the subject from the other end, the stock-flow-consistent macroeconomics pioneered by the late Wynne Godley and developed by scholars at the Jerome Levy Institute, New York. Even otherwise, the following is an important post Keynesian identity.
    G – T ≡ S – I.
    In words, the government deficit equals the private sector surplus. It is for the evidence to support the causal arrow flying from the right-hand side to the left through the cycle. In dynamic terms, and with the addition of an equation or two, the relation is the basis for built-in stabilization policy. It is only with the inclusion of behavioural parameters and so-called stock-flow norms that the stability properties of the system can be worked out.

    In the simplest case, in the period under consideration a government deficit can be financed by fiat money,
    ΔH = G – T.
    In terms of our discussion, the (increment in) high-powered money is backed by the private sector surplus. Finally, banks are required to hold a proportion, rho, of their deposits as reserve requirements with the CB. That is,
    H = ρM,
    with ρ = 1 in the case of 100% reserve banking. The sparse accounts now are

    Assets Liabilities
    ΔH ΔM

    Central Bank
    Assets Liabilities
    ΔH ΔH

    The novel term in the balance sheet of Professor Mayer’s CB is “goodwill” in place of ΔH as the asset. The item is supposed to move in one direction only. However, it is not difficult to conceive, even independent of the cycle, a shrinkage in the balance sheets across the board, and the corresponding dilution of CB moral capital. For instance, since fees on items on the balance sheets above are implicitly controlled by the government, bank profits will emerge from non-cash operations. One lesson from Glass-Steagall is that bank managers will look wistfully at the greenbacks on the other side of the regulatory fence. Secondly, customers might be not be attracted by deposits whose rate of return is dominated by other assets. Many claim that commercial banking is dying. Also, Professor Mayer believes that CBs can influence investment activity by changing premia/discounts on deposits. However, we know that bounds of zero or infinity on interest rates are necessary but not sufficient to generate/dampen growth in output and employment. Nowhere is the adage that pulling is different from pushing on a string more applicable than in matters of financial incentives. It is precisely when animal spirits are dim, for instance, that government expenditure of the appropriate scale and quality can ignite activity. Prof Mayer, furthermore, seems to suggest that CBs, through these price (dis)incentives, can move banks (up) down habitats in his balance sheets. Austrians, old and new, would frown at the presumption that organs of government possess the information required to calibrate private sector plans. Indeed, what thought to the motivation of banks to chuck it all up and go off-balance sheet? At the same time, stick, if not carrot, can be applied to government expenditure as well. The CB can decline to monetise deficits that are not the outcome of employment-generating schemes, environmentally-friendly infrastructure projects, and so on. The profession has long moved from regarding G in the macroeconomic equation as consisting of dead-end activity like digging holes in the ground and then filling them up. Post Keynesians have been writing up portmanteaux of projects not excluding social welfare schemes that have clear employment-generating and multiplier effects.

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