Home > Main > It’s my fault Matt Rognlie misunderstands MMT

It’s my fault Matt Rognlie misunderstands MMT

May 13, 2011

Matt Rognlie was dissing MMT over a few misconceptions. Clearly, He’s misunderstanding MMT.  This is common with mainstream economics people.  They misunderstand the core principles of MMT.

It’s our fault. We don’t explain them very well. I’ve pointed this out before, but if Matt Ronglie and Steve Waldman and Nick Rowe and Paul Krugman aren’t getting it in 1 second, its our fault, not their fault.  These are among the smartest people around – and they can really, really think.

I need to write a series of post that explains the core principles very, very clearly, so there is no potential misunderstanding. We need to do a better job explaining the core principles.

This all leads me to say: I should have started the ADD medication 20 years ago, instead of 9 months ago.

P.S. Matt R. reminds me of Michael Woodford – another economist who has a way of thinking that both accepts what he sees at face value and can ask practical questions about what he sees.  Michael Woodford won a McArthur award, and the most casual overview of his work will show you why.

Michael Woodford asks questions that seem obvious to ask – after he asks them. Nobody else thought to ask them.  Then applies some meta-mathic smackdown that logically flows from the questions he asked, that bear down and destroy the assumptions of the old theory.  It is beautiful to watch. It seems so effortless that anyone could do it, but of course it is not.

Matt R is a lot like Michael Woodford, maybe not in focus or research, but in the way he thinks and asks questions.

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  1. Tom Hickey
    May 13, 2011 at 12:49 pm

    What I get from the MMT professionals is that the problem these people haven’t read the MMT lit that explains this clearly (I and other have cited it to little available in comments. Moreover, they don’t have the financial/accounting chops to get MMT, judging from responses. In addition, they are unaware of Godley & Lavoie’s Monetary Economics, so they don’t realize that MMT is woking in terms of a different macro paradigm based on SFC model and data, rather than specious assumptions.

    There’s a reason that the MMT professionals don’t show up in these debates, or just make a comment or two, because they have learned from experience that the other side is stuck in a deep hole that they don’t even realize they are in.

    BTW, G & L is coming out in paperback in July, which indicates that there is demand for it.

    TC, if you can convince them, more power to you. But I’ll believe it when I see it. They would have to chuck just about everything they have learned, taught, and written in the dustbin of history.

    • TC
      May 13, 2011 at 12:59 pm

      I agree – there are problems beyond just explaining. I’d say that it took me 18 months to digest MMT, and another 12 to get it. Thats a long time. I am a financial professional with a ton of background in money markets and trading.

      We still need a way to better convey MMT. Even if we are able to convince a few economists, we’ve got the public to win over too. I think I have some ability in explaining things in a way that people find easy to understand, and find convincing.

      I hate to say this, but one of my goals is to be the Larry Kudlow of MMT. Ouch – did I say that out loud?

    • Tom Hickey
      May 14, 2011 at 9:42 am

      One of the developers of MMT said to me that he refused to engage people that didn’t understand accounting since there was no point in arguing with them — waste of time. I think that about sums it up.

    • Clonal Antibody
      May 14, 2011 at 3:57 pm

      According to Robert L. Vienneau — the difference between MMT and mainstream economists springs from ME’s reliance on the IS/LM model – in ,a href=”http://robertvienneau.blogspot.com/2009/04/michal-kalecki-economics-is-science-of.html”>Michal Kalecki: Economics Is The Science Of Confusing Stocks With Flows

      He says

      J. R. Hicks invented the IS/LM model to compare and contrast his
      interpretation of Keynes’ General Theory with “classical economics”.
      Franco Modigliani later appended a supply and demand model of the labor
      market. Even later, John Hicks rejected this model.

      Offhand, I can think of three issues with the IS/LM model:

      The
      LM curve shows a stock equilibrium, while the IS curve shows a flow
      equilibrium. Thus, it is not clear to me that they can be graphed on
      the same diagram.
      Both curves are drawn for a given set of
      expectations. If one curve shifts, the expectations upon which the
      other is drawn can hardly remain constant. Thus, both curves must shift
      and the equilibrium point becomes indeterminate.
      The curves
      replicate the separation between nominal and real values that Keynes
      was trying to transcend with his monetary theory of production. Thus,
      the model cannot be a valid representation of the theory Keynes was so
      laboriously trying to express.

      The first point challenges the
      internal validity of the model. The second suggests the model cannot
      empirically predict. The third is a point about the history of economic
      thought and would be expressed better if I remembered better some of
      Keynes post-General Theory work.

      • Clonal Antibody
        May 14, 2011 at 4:01 pm

        The above didn/t quite come out right — maybe we need a preview button as well

        According to Robert L. Vienneau — the difference between MMT and mainstream economists springs from ME’s reliance on the IS/LM model – in Michal Kalecki: Economics Is The Science Of Confusing Stocks With Flows he says

        J. R. Hicks invented the IS/LM model to compare and contrast his interpretation of Keynes’ General Theory with “classical economics”. Franco Modigliani later appended a supply and demand model of the labor market. Even later, John Hicks rejected this model.

        Offhand, I can think of three issues with the IS/LM model:

        * The LM curve shows a stock equilibrium, while the IS curve shows a flow equilibrium. Thus, it is not clear to me that they can be graphed on the same diagram.
        * Both curves are drawn for a given set of expectations. If one curve shifts, the expectations upon which the other is drawn can hardly remain constant. Thus, both curves must shift and the equilibrium point becomes indeterminate.
        * The curves replicate the separation between nominal and real values that Keynes was trying to transcend with his monetary theory of production. Thus, the model cannot be a valid representation of the theory Keynes was so laboriously trying to express.

        The first point challenges the internal validity of the model. The second suggests the model cannot empirically predict. The third is a point about the history of economic thought and would be expressed better if I remembered better some of Keynes post-General Theory work.

        • Tom Hickey
          May 14, 2011 at 4:40 pm

          MMT rejects IS/LM, as does Post Keynesianism in general.

          The theoretical foundation of Post Keynesian economics is the principle of effective demand, that demand matters in the long as well as the short run, so that a competitive market economy has no natural or automatic tendency towards full employment.[7]Contrary to the views of New Keynesian economists working in the neo-classical tradition, Post Keynesians do not accept that the theoretical basis of the market failure to provide full employment is rigid or sticky prices or wages. Post Keynesians typically reject the IS/LM model of John Hicks, which was very influential in neo-Keynesian economics.
          http://en.wikipedia.org/wiki/Post-Keynesian_economics#Introduction

        • vimothy
          May 15, 2011 at 8:31 am

          Outside of introductory undergrad macro classes, ISLM isn’t used in mainstream econ either.

  2. vimothy
    May 13, 2011 at 1:25 pm

    Tom, G&L is a fun textbook. I don’t see what’s so revolutionary about it though. Can you expand?

    • Tom Hickey
      • vimothy
        May 13, 2011 at 1:51 pm

        I’m too busy revising to read another paper right now, but I’ve read the textbook (Mon Econ). Can you just simply expand on the point in your first comment?

        • Tom Hickey
          May 13, 2011 at 2:02 pm

          From the abstract: “This paper sets out a rigorous basis for the integration of Keynes-Kaleckian macroeconomics (with constant or increasing returns to labor, multipliers, mark-up pricing, etc.) with a model of the financial system (comprising banks, loans, credit money, equities, etc.), together with a model of inflation. Central contentions of the paper are that, with trivial exceptions, there are no equilibria outside financial markets, and the role of prices is to distribute the national income, with inflation sometimes playing a key role in determining the outcome. The model deployed here describes a growing economy that does not spontaneously find a steady state even in the long run, but which requires active management of fiscal and monetary policy if full employment without inflation is to be achieved. The paper outlines a radical alternative to the standard narrative method used by post-Keynesians as well as by Keynes himself.”

        • vimothy
          May 13, 2011 at 2:33 pm

          That basically looks like Ch.11 of G&L. But I’m still a bit confused as to what your argument is.

  3. Tom Hickey
    May 13, 2011 at 3:52 pm

    @ vimothy

    I don’t have an argument. I was simply reporting on what I have gotten from MMT professionals about why they refused to participate in blog “debates” with people who are not aware of their position, mispresent it, and then argue against their misunderstanding based on economic theory that MMT rejects because it is not empirically based and does not take national accounting and finance into account.

    As far as MMT is concerned, there is no equilibrium state, the future is uncertain, money matters, especially because it is debt, etc., all of which the mainstream ignores or rejects. Moreover, as G & L point out — read Section E: The Model As A Whole of the paper, it’s short — that, as the abstract says, “The model deployed here describes a growing economy that does not spontaneously find a steady state even in the long run, but which requires active management of fiscal and monetary policy if full employment without inflation is to be achieved. The paper outlines a radical alternative to the standard narrative method used by post-Keynesians as well as by Keynes himself.”

    The mainstream often objects to the narrative style as somehow primitive. G&L presents an SFC model, one like the huge models that Treasuries use, and which Jan Hatzius uses at GS, to show how such macro models are data-based and formalizable based on national accounting principles that are generally accepted. Godley’s SFC sectoral balance macro approach formalizes the narrative in terms of national accounting equations, national accounting rules, and data. Anyone who does not get this will not understand the methodology underling MMT, so MMT professionals conclude that it is a waste of time for to argue with them, especially if they are unwilling to take the time to go through key MMT lit and want to argue in terms of their universe of discourse, the foundations of which MMT professionals reject.

    On the other hand, Bill Mitchell did agree to a debate with Mark Thoma and Thoma refused, saying that it was useless to debate someone that rejected the money multiplier. So it goes both ways. Sort of like trying to organize an ecumenical conference between opposing religious sects.

    • vimothy
      May 14, 2011 at 7:08 am

      Tom, thanks. I misread your comment. I understand what you mean now.

      Does seem like a strange attitude though. We could easily (and justifiably) rewrite your opening paragraph as an equivalent statement from the point of view of a hypothetical neoclassical,

      No mainstream economist will participate in blog “debates” with people who are not aware of their position, misrepresent it, and then argue against their misunderstanding based on economic theory that they reject because it is not empirically based and does not take X, Y or Z into account.

      Shut down any chance of debate and then get back into our self-imposed intellectual boxes.

      You seem to have picked up the (erroneous, in my view) impression that because MMT draws on Godley and Lavoie’s models, this somehow precludes any useful communication between the two schools. A mode is just a model. It’s not the final word on anything. To see a very clear example of what I mean, just open your copy of Monetary Economics and go to the index. Look for the phrase “business cycle”. Weird, eh? It doesn’t appear in the text at all. By extension, I guess MMT doesn’t think that business cycles are important.

      I wouldn’t necessarily expect senior academics to take part in blog debates anyway—there’s something a bit weird about it, like old people kissing—but the idea is that you represent your own position to people who disagree with it or to people who don’t know it. There would be no point in debating someone who conceded all your major arguments before the debate began.

      You think everyone is duty bound to read all the MMT lit before engaging with these guys. I think that’s pretty crazy. But let me ask a few questions that follow naturally from that proposition: Have you read all the MMT lit? Including Monetary Economics? And have you read all the neoclassical lit? If the answer to any of the questions is no, you yourself surely fail to clear the bar that you’ve just set.

      • Tom Hickey
        May 14, 2011 at 9:52 am

        Vimothy, I don’t have to read all the MMT lit or even a majority of it. Even if I did, I am not sure I would be understanding it correctly, because my field is not econ and I don’t have the necessary background.

        I just do my best to get the big picture and memorize responses made previously by MMT developers. They I try to insert them in the correct places.

        I make no pretense of understanding MMT beyond the basics.

        • vimothy
          May 14, 2011 at 10:38 am

          Tom, I’m having trouble seeing how all this fits together coherently. You’re saying on the one hand that neoclassical economics is not scientific, because there is no empirical work being done–and the latter part of that statement is a demonstrably false claim. On the other hand, you’re saying that MMT is more scientific–but you don’t know why, you’re just taking it on faith that somehow it is.

        • TC
          May 14, 2011 at 11:51 am

          Oh come on, Vim! Have a little heart here! As Spongebob would say “IIIImaaaagiiiniaaaaaation”

          But really, on a more precise level, this isn’t a real critique of what we are doing here. The Pre-Copernican idea of a geo-centric universe was well mapped. For decades after people accepted Copernicus and Kepler were correct, it was better to use the old models to find out the exact position of planets on any given day in the future.

          But this model was inherently self limiting. The thinking to make new breakthroughs – such as conceive of the Kuiper Belt and Oort Cloud – was impossible in the old model because the model multiplied complexity due to wildly false assumptions about how the world works.

          I don’t think economics is worthless – I’ve spent much of my life as a trader. Trading is in many ways applied economics. I’ve read more economics papers than I care to admit. Some of them were truly brilliant. But I’ve found so little that seems really, really useful in a practical way.

          In someways, science is great. It discovers stuff. But for humans, engineering is far more useful. Science provides the raw ideas for engineering, so engineers can build stuff to help humans. And that is the problem with modern economics. By starting from untestable and unfalsifiable claims, they provide us engineers with inferior tools and substance.

          Fisher Black – a man I regard as both crank and visionary – was among the most productive people on the planet, because he focused on making practical tools for people to use that slightly advance our understanding. It is impossible to do modern finance without running into his fingerprints over nearly everything.

          He was operating from a faulty understanding of economics. Yet he created useful tools. I always wonder what he could have done if the economics and finance he knew and used was based on reality, rather than reasonable assumptions.

          I don’t claim MMT is perfect or complete, only that it operates from observables. I think that over time, this is a massive strength that cannot be captured by just thinking about it. Modern economics is useful. But we reach the limits of its usefulness all the time. Humans need engineering. Operating out of premises that are not testable limits engineering thinking.

        • Tom Hickey
          May 14, 2011 at 11:18 am

          vimothy @ #12

          What I am saying is that MMT as a macro theory is based on the logic of accounting as its formal system, and reported data as its premises. There are no assumptions in the same sense as neoclassical models. As far as I can see, just about everything in the sectoral balance approach is based on accounting identities and data. Descriptions of aggregate demand are strongly founded by the SFC model.

          But I don’t know whether MMT is completely reducible to tautologies and data, since it also brings in Minsky, and I don’t know that anyone has formalized this. This is an area of Post Keynesianism that is still under construction as far as I know.

          BTW, I am not saying that neoclassical econ is unscientific because no empirical work is being done. I am repeating what others have said, that some key assumptions are overly simplistic (“representative agent,” REH) and some key terms are not operationally defined in terms of observables (“natural rate”). This does not necessarily mean that the models are useless —only limited. The logical jump comes in overextending them in making predications about an entire economy, especially wrt policy recommendations.

          What I am asserting is that “hard” sciences are non-reflexive and deterministic, while social studies are reflexive and non-deterministic (as far as we now know), that is, their universe is subject to the influence of psychological feedback and uncertainty. This is a problem for a discipline that presumes equilibrium, for example, as neoliberalism does.

          I would also say that MMT is more empirically based than economic theories based on non-empirical assumptions. I would not say that MMT is “scientific,” strictly speaking, since I don’t think that econ is a science anymore than I think that psychology in its present state is “a science” yet.

        • Tom Hickey
          May 14, 2011 at 12:51 pm

          TC, you took the words out of my mouth. I was getting ready to write something up to that effect, but you have done a better job than I could have.

          Yes, the engineering that follows from a theory is a pragmatic “proof” not only of its practical worth but of its intellectual substance.

        • vimothy
          May 14, 2011 at 1:12 pm

          Tom,

          “What I am saying is that MMT as a macro theory is based on the logic of accounting as its formal system, and reported data as its premises.”

          Accounting is a system of measurement. You can’t base a theory on it. You can use it—and most macroeconomists do.

          “There are no assumptions in the same sense as neoclassical models. As far as I can see, just about everything in the sectoral balance approach is based on accounting identities and data.”

          I’m afraid not. All models are made out of assumptions. The sectoral balances are just a set of identities. Most macro uses this framework of definitions anyway, because it’s used in the national accounts. Theory is everything else. In order to generate change in the variables that are represented by things like the GDP identity, you need to make some further assumptions. Otherwise, nothing happens in your model—because you haven’t said anything about how the variables behave. You’ve just specified what they are.

          You say that the assumptions made by MMT (Godley and Lavoie?) about how the variables behave are somehow more realistic—How? In what sense?

          I don’t agree with the way you’re dividing up the sciences. Plenty of good scientific work can be done, even without the ability to do controlled experiments—see also astrophysics, biology, palaeontology, geology, macroeconomics, etc.

        • Tom Hickey
          May 14, 2011 at 1:28 pm

          vim, scientific theories are constructed of testable hypotheses, not non-empirical assumptions.

        • Tom Hickey
          May 14, 2011 at 1:29 pm

          There is a difference between descriptions, which can be checked against what is described, and assumption that cannot.

      • Tom Hickey
        May 14, 2011 at 9:55 am

        I should add that in my field, one writes a book or papers putting forth a new theory, others are expected to read the literature before criticizing it, and in criticizing it, to provide references. This is how professional debates are conducted.

        • vimothy
          May 14, 2011 at 10:48 am

          That happens in every field–in journals, not in blogs.

        • Tom Hickey
          May 14, 2011 at 11:19 am

          Right, that is why I don’t blog in my field. Waste of time.

  4. wh10
    May 13, 2011 at 5:20 pm

    TC, I like your style with this post.

    Tom, I do think you speak some truth.

    It’s also completely understandable why some of the MMT academics refuse to debate online, but god bless people like Scott Fullwiler who are willing. I think it makes a big difference, and the same goes to the well-versed MMT blogging community such as yourselves.

    I’m fresh out of school and in the first couple months of being exposed to MMT, and I’m nowhere near having absorbed it all, let alone mastered. It’s nice to have you guys around.

    One conflict I find myself in is whether or not to bring these viewpoints up on other people’s blogs before I, myself, have MMT mastered (which could easily be several years, as TC mentions). Of course, introducing alternative viewpoints on the web is not necessarily detrimental to MMT in and of itself, but I feel like it is when I can’t at least achieve a stale-mate in a debate. For example, should I really be challenging Matt R and Nick Rowe on their blogs? I do not want to ruin the credibility of the theory with my poor understanding. I am just so eager to get these alternative perspectives out into the open.

    • Tom Hickey
      May 13, 2011 at 6:08 pm

      WH10, to successfully debate a professional economist you have to be a professional economist that knows economist-speak. These debates are carried out in papers and formal responses. No professional economist is going to be convinced unless driven into a corner have another professional, and in general economics is more like philosophy in the this regard that physical science. Philosophers and economists argue each other back to fundamental principles over which they disagree. Scientists make theoretical predications that are testable through controlled and replicable experiment. In economics, when there is an anomaly that the theory does not explain, then either it is ignored or some explanation is concocted. In other words, the theory is not cannot be falsified by conflicting evidence. Neoliberalism and the GFC is a case in point. It is just ideological nonsense masquerading as science, just as religions pretend that beliefs are facts.

      • wh10
        May 13, 2011 at 6:19 pm

        Tom, not being an economist, why do you trust your own intuition to choose MMT as your preferred brand of economics, when you have incredibly smart people, such at Matt R, etc, going the other way? If it’s true that MMT comes down to this debate over long-term real rate equilibrium (which I need to look into), the debate does not seem as resolvable as disproving the money multiplier, for example. Essentially, both sides seem to be choosing their own ideology, and accusing the other of being more nonsensical.

        • Tom Hickey
          May 13, 2011 at 6:34 pm

          I am not an economist, but I understand enough about science to be able to see through the nonsense that mainstream economics is spouting. Not only can they not show an empirical warrant for key assumption, many of them are demonstrably wrong in the light of social science.

          At their best, they acknowledge the limitations of their models. But then they right ahead and draw conclusions from them as if the model did not have the limitations they acknowledge.

          Why did I go with MMT. As a former trader, I am savvy enough to know enough to be able to recognize when people know what they are talking about and when they don’t. I got into MMT when I was looking for an explanation for the GFC when the mainstream missed it completely and I saw it coming clear as day. I happened upon MMT and it seemed to me that they got it right based on Minsky, on one hand, and through Godley’s sectoral balance approach. This confirmed by own intuitive sense and articulated it in terms of an economic theory.

          I have only disdain for the mainstream, which I consider populated with people that are either deluded or charlatans. Harsh, maybe. But they have contributed to enormous suffering, and much more is to come because of this nonsense, on the one hand, and ideological propaganda for “capitalism,” on the other.

          And it gets worse by the day, I was just reading a report about the Koch brothers not only endowing a program but getting to pick the professors that teach in it. If this flies, it will totally undermine the value and reputation of the economics profession, on one hand, and the American higher education system, on the other. If say “totally,” because it is very tattered already.

        • vimothy
          May 14, 2011 at 10:19 am

          I am not an economist, but I understand enough about science to be able to see through the nonsense that mainstream economics is spouting.

          What a sentence!

          “I don’t anything about the subject, but I know enough to know about science to know that I don’t need to know anything about the subject.”

          I don’t understand how you can write things like that without experiencing any cognitive dissonance.

        • Tom Hickey
          May 14, 2011 at 10:30 am

          vim, did you read what Matt R wrote? He convicted himself. No need to anything about the subject to see that.

          He was apparently so embarrassed at the way the things were going on that score that he bailed on a bogus excuse.

          Same with “representative agent” models. Social scientists are ROFL over that, as well as REH. Those assumptions to make the model work are curve fitting exercises. I am not saying these models are wrong. They are just models. It’s the use of the model that is problematic, when conclusions are drawn that greatly exceed what the model shows. That is a logical jump, and the mainstream makes it all the time. They even admit that their model is simplistic, just a thumbnail, and then they go right ahead and draw sweeping conclusions from it, for example, in making policy recommendations.

          I did not think this up. Many others have pointed it out, and I can understand such arguments without understanding the intricacies of econ.

        • vimothy
          May 14, 2011 at 11:35 am

          “Did you read what Matt R wrote? He convicted himself. No need to anything about the subject to see that.”

          Really—what did he convict himself of? And, you don’t need to know anything about the subject to evaluate what he said?

          “He was apparently so embarrassed at the way the things were going on that score that he bailed on a bogus excuse.”

          The guy’s a PhD student isn’t he. Maybe he’s just got a lot of stuff to do.

          “Same with “representative agent” models. Social scientists are ROFL over that, as well as REH.”

          It’s interesting that you think that about representative agent models. A representative agent is just the average or typical agent for any given sector (e.g. representative consumer, representative firm). This is obviously quite unrealistic. It’s a simplification to make the model easier to use. But it’s instructional to compare this simplification to the ones that Godley and Lavoie make. Rep agents? No, they just do away with agents all together. There are no individuals whatsoever in their models. There is no future, no uncertainty, just aggregate flows. In other words, they make further simplifications. You say that social scientists “ROFL” at the REH. But rational expectations is just another modelling strategy, like everything else. Godley and Lavoie don’t even bother with an expectations formation process (obviously, since there are no individuals in the models)—when then want to introduce “uncertainty” into the model, they do this by using lags. But this is not true randomness—the models are ultimately deterministic.

        • Tom Hickey
          May 14, 2011 at 12:45 pm

          If I were to answer specifically, I’d be repeating myself so I’ll answer generally.

          This is starting to look like debates I encounter in philosophy — empirically undecidable.

          I think that there several subtexts here. First, economics is not a “normal science,” which is obviously from the debates among the schools. The very foundations are in question.

          The second point follows from the first. Economics is normative (prescriptive) as well as descriptive. I find it interesting that professional economists that are liberal are generally Keynesian, and ones that are conservative are either neoliberal or Austrian. Could some bias be entering here?

          Thirdly, there is a controversy over whether macro is distinct from micro. Some hold that macro is scaled up micro, and others hold that macro is distinct, having it own methodological approach. Clearly, the resulting theories will be at odds, given this disagreement.

          In addition, it is well recognized that economics as presently practiced is largely assumption-based and that many key assumptions are not empirically derived. How is this different from philosophy?

      • TC
        May 13, 2011 at 6:32 pm

        Its the difference between logical and scientific thought. They are very similar, but not the same. I have to give kudos to the Austrians – they recognized right away the tension between economics and scientific thought. Unfortunately, they chose logic over science.

      • wh10
        May 13, 2011 at 6:48 pm

        Thanks for your reply, it helps to see where people like you are coming from.

        At this point, I am running with MMT based more on gut intuition rather than a comprehensive, rigorous academic understanding. Which bothers me, but I will continue learning.

        Would you agree though, if MMT vs mainstream comes down to this issue of the long run equilibrium real rate, there is no scientific answer per se, and it becomes a choice of what you believe in more? It makes so much sense something like this could be the crux of the issue. It’s the hidden first principle you alluded to earlier, for which there is no definitive justification.

        • Tom Hickey
          May 13, 2011 at 7:30 pm

          I regard that as minor, actually. My objection to the mainstream is based on their methodology, which is chiefly logical and mathematical rather than scientific. While the logic is fine, the premises are either false, nonsensical, or untestable. It is ideology and the ideology is designed to advance vested interests.

          MMT is descriptive of how the monetary system works. It uses SFC modeling based on conventional national accounting identities and reported data. Therefore, the theoretical conclusions it draws are based on empirically derived data as premises and the accounting format as the logical form.

        • Peter D
          May 13, 2011 at 9:29 pm

          wh10, great question to ask of Tom. I am not an economist either and am bothered by the same things as you are. And I am also running with MMT based on gut and a certain liberal bias, I admit.
          I do take comfort in the fact that Economics is neither scientific nor mathematical and thus even the best economists out there are still babies groping in the dark.

        • May 14, 2011 at 1:14 am

          Hi WH, You said:

          “Would you agree though, if MMT vs mainstream comes down to this issue of the long run equilibrium real rate, there is no scientific answer per se, and it becomes a choice of what you believe in more?”

          As I argued in my replies to Matt, if he cannot specify testing for the long-run real rate, then whether or not it exists is a metaphysical question. The answer to this question makes no observable difference.

          Now, Matt claims that the existence of a long-run equilibrium real interest rate constitutes a constraint on Governments sovereign in their own currencies that renders them capable of running out of money. Surely, if this posit of his does exist then if he could measure it should have predictive value in determining when a Government sovereign in its currency will run out of money. Even if Matt could show that one such Government ran out of money involuntarily, then there would be a possibility that his long-term real interest rate was at play. But where is that one example?

          Putting this another way, the MMT conjecture that a Government sovereign in its currency cannot run out of money is a very bold conjecture, because it would take only one counter-example to falsify it.

          Now let’s say the current situation continues and that the central conjecture of MMT is never falsified in spite of the existence of many Governments sovereign in their own currency over many years, and also that Matt insists that his conjecture about the existence of a long-term equilibrium real interest rate is still untestable. Then which conjecture would you say was more deserving of the title scientific truth? Matt’s posit, still untestable, or MMT’s conjecture, which is tested everyday?

          I think the problem with your statement above is that you’re letting Matt hook you into his basic assumption and then further assuming that to justify MMT we have to invalidate his posit. But that is backwards. it is our conjecture that is testable and his is not. So his is the philosophical assumption and ours is the scientific hypothesis.

      • vimothy
        May 14, 2011 at 9:31 am

        Tom,

        “Scientists make theoretical predications that are testable through controlled and replicable experiment.”

        Yes, but so do economists. There’s a huge amount of applied work being done all the time. Every student has to do large amounts of econometrics. In fact there is a much greater emphasis placed on applied work in economics than in any other social science.

        It’s not a science that lends itself to controlled experiments particularly easily (*), but then, neither is astrophysics.

        And—I’ve got to ask—is there a large applied MMT literature?

        (*There is experimental economics: http://en.wikipedia.org/wiki/Experimental_economics)

        • Tom Hickey
          May 14, 2011 at 9:47 am

          It is not possible to do many replicable experiments in social sciences, let alone economics, because of the ethical issues. In macroeconomics, the experiments cannot be designed and repeated because they are on the national scale. Economists don’t get to design replicable experiment with economies. Moreover, economic data is approximate at best.

          Yes, you can try to come close to doing this, but in science, close is no cigar.

        • studentee
          May 14, 2011 at 9:53 am

          some of experimental economics shows that micro foundations of neoclassical are bogus, some not so much. macro-level econometrics is still based on non-replicable experiments

          the political stakes are much, much lower in astrophysics

          “And—I’ve got to ask—is there a large applied MMT literature?”

          there are like ten mmt economists. brave of you to ask though, vims

        • TC
          May 14, 2011 at 10:19 am

          There are so few economists working in paradigm. They do lots of great work, but they are so few.

        • vimothy
          May 14, 2011 at 10:23 am

          But hypothesis testing is the criteria that Tom was advancing, not me.

        • vimothy
          May 14, 2011 at 10:27 am

          “Yes, you can try to come close to doing this, but in science, close is no cigar.”

          What other subjects do you wish to exclude from the domain of “science”? Are you proposing that we take out the other social sciences and the observational science as well? Or just economics?

        • Tom Hickey
          May 14, 2011 at 10:36 am

          :What other subjects do you wish to exclude from the domain of “science”?”

          This is a hotly debated subject in phil of sci. I tend to go with Kuhnians holding that if there is not a normal paradigm there is not a science. Such subjects are still “lores.”

  5. Peter D
    May 13, 2011 at 9:20 pm

    It is both MMTers fault and their fault. It now looks to me safe to say that none of us understands economics (Joe Stiglitz is sitting next to me – he made me type this…) But, seriously, they don’t ask the right question and we don’t emphasize the right things. And the reason is because we all have our own woefully limited understanding of our models, only the shadows on the cave’s walls and thus we really don’t know in advance what are the right questions to ask and what are the right things to emphasize. But a a result of this funny Kabuki dance we do converge onto something.
    One idea that I see underpinning a lot of MMT thought but being under the surface, is a rejection of interest rates role in equilibrating consumption and savings. I think there is very little, if any, inter-temporal consumption-saving optimization with respect to interest rates going on. Saving desires come first, vehicles for savings are chosen later. Almost nobody defers consumption when interest rates go up. Am I wrong about this? Am I wrong about this being a hidden tenet of MMT?

    • Tom Hickey
      May 13, 2011 at 9:58 pm

      It’s actually not hidden at all. MMT and Post Keynesianism explicitly reject the IS/LM model as “bastard Keynesianism.” MMT and Post Keynesianism are based on aggregate demand.

      Interest rates don’t affect saving and investment in the way that most economists say they do, in spite of the evidence. Moreover, as currency monopolist, the government controls interest rates, whereas the model presumes that rates are market determined.

      • wh10
        May 13, 2011 at 10:55 pm

        Tom, can you provide some references for the evidence against the effect of interest rates on saving and investment?

        • Peter D
          May 13, 2011 at 11:02 pm

          wh10, how about this

          Our findings for the business sector are quite different from the usual story. Chart 2 compares the profitability of business capital to the inflation-adjusted return on Treasury bills, and the correlation is negative
          […]
          The evidence in Charts 1 and 2 suggests that the housing market can be stimulated by easy monetary policy, at least in the short run. But the link between monetary policy and the business sector is much weaker, and our data are consistent with the view that, holding constant the rate of inflation and the amount of banking regulation, monetary policy does not have a discernible effect on the cost of business capital.

        • Tom Hickey
          May 13, 2011 at 11:09 pm

          Low interest rates are supposed to increase investment, and high interest rates are supposed to increase saving. Right now interest rates are at historical lows and have been for several years, but investment is low and saving high.

          Similarly, interest rates tend to increase in booms, but saving is low and investment high.

          The model seems reasonable enough, but like a broken clock it is only correct twice a cycle.

          Monetary policy at ZIRP was ineffective, so the Fed went to QE to increase liquidity, supposedly to get the banks to lend to businesses for investment.

          But investment is a response to rising demand, and when the public is saving to repair balance sheets, demand lags — unless government stimulates demand with fiscal deficits. Deficits have not be large enough to offset the demand leakage to saving and net imports. So even with very loose monetary policy, business is not investing — to the consternation of monetarists, but as MMT predicts.

        • Tom Hickey
          May 13, 2011 at 11:14 pm

          Good find, Peter D

          Prof. Mulligan states, “The evidence in Charts 1 and 2 suggests that the housing market can be stimulated by easy monetary policy, at least in the short run.”

          Well, interest rates are at historical lows and have been for some time, and the housing market is in the tank and headed into a second leg down.

        • TC
          May 14, 2011 at 9:45 am

          You could also look at this as being another test of MMT style claims against the normal theory of crowding out.

          http://wp.me/p1b5Ih-1s

          This would be thrown out as not well specified by most economists. But this is the traders crucible and not the economists crucible for a reason.

  6. May 14, 2011 at 1:48 am

    There’s an interesting comment by Karl Popper in The Self and Its Brain on two corresponding methods of criticizing an assertion. The first deduces logical consequences from an assertion and tries to find consequences which are unacceptable. According to Karl Popper almost all scientists criticize assertions using this method. The second method tries to show that an assertion isn’t demonstrable because it doesn’t follow intuitively certain premises. He says that almost all philosophers use this second method of criticism.

    I think Matt Rognlie tries to use both methods to criticize the MMT claim that insolvency isn’t possible for Governments sovereign in their own currency. First he attacked this proposition by pointing to empirical data which he thought was in conflict with the hypothesis. When he was informed that the data weren’t relevant. He fell back on the idea that the proposition was false because it was contradicted by the intuitively plausible (to him) premise that there is a long term equilibrium real interest rate. This second criticism fits the method used by philosophers, but not by scientists. That’s why the discussion came down, for Matt, to a difference in basic assumptions about whether such a rate exists.

    But for me, and I’ll bet others, the discussion came down to the presence of much evidence that tests, but fails to falsify MMT, while there’s no evidence for his claims because by his own admission they don’t give rise to testable consequences.

    • May 14, 2011 at 1:49 am

      Sorry, I forgot to give the following link to Popper’s statement on p. 173 of The Self and Its Brain: http://www.amazon.com/reader/3540083073?_encoding=UTF8&%2334%3B=&query=&%2334%3Btwo%20corresponding%20methods=

    • Tom Hickey
      May 14, 2011 at 9:39 am

      Joe, it’s understood in science, which economics apparently is in Matt’s view, that key terms must be defined operationally. If not, then they are nonsense from the scientific standpoint. So I don’t think that Matt is off the hook at all. It’s his “aether.”

      But the issue he is arguing involves the IGBC, which MMT rejects. See Scott’s paper on interest rates and fiscal sustainability.

      • May 14, 2011 at 10:29 am

        I agree Tom and didn’t think I was implying that Matt was off the hook. As my comments at his site made clear, I think that instead of doing science, he’s doing something very akin to religious or at least metaphysical speculation. Science does have its roots in metaphysics, of course, and metaphysics still contributes ideas to it everyday. However, I don’t think Matt has transcended metaphysics yet in his thinking about long-term equibirium real interest rates, and won’t do so until he develops some ideas about measurement and testing.

        • TC
          May 14, 2011 at 10:39 am

          Economics had bad timing. When the basics of economics were being debated and considered, there was no measurements of the important parts of the economy. They made stuff up that made sense – makes sense – without any way to check it. Then, by the time we started to get some data, there was an established tradition of “how to do economics”

          Unfortunately, the version of “how to do economics” has a huge helping of “make untestable claims” woven into it. Back when economics started, this wasn’t a problem. Nobody was doing much testing anyway, because there was no data.

          The first line in the Wikipedia entry for Adam Smith.

          Adam Smith was a Scottish social philosopher and a pioneer of political economy.

  7. May 14, 2011 at 12:46 pm

    My conclusion from this exchange is that MMT’s bold public statements are belied by its much subtler and less sweeping arguments.

    MMT argues that the government does not face a meaningful budget constraint. The primary line is this: since a government has the ability to create money, it can always pay any bills that come due. Of course, if the government creates a great deal of money, the public has to be willing to hold that money, in exactly the same way that it has to be willing to hold bonds. Granted, it’s not possible to sell money in the same way you sell a bond—you have to exchange it for goods and services. But this certainly can happen: in aggregate, the private sector may want to lower its level of real money balances, and will do so by attempting to trade these balances for goods and services. The resulting excess demand pushes up prices and creates inflationary pressure. If the government wants to avoid inflation, it will be forced to mop up the supply of base money via taxation—and thus, fundamentally, the ability to tax is a constraint on the ability to spend, just as mainstream economists claim.

    I think that most MMT advocates recognize this possibility at some level, which is why they occasionally append the qualifier that it is impossible for excess government debt to lead to inflation “when there is an output gap”. Sure. Since the mechanism by which excess debt (issued in the form of money) leads to inflation involves excess demand, it cannot coexist with a demand-driven output gap. This does not mean that the government is free from any budget constraint; instead, it merely shows that the negative consequences of trying to escape that budget constraint will not occur during a recession caused by lack of demand.

    For instance, suppose that the government spends greatly (without raising a commensurate amount of money in taxes) during a recession. It must go into debt to finance this spending; suppose that it is issues this debt in the form of money. Once the recession is over, what does it do? The debt is still there, but now excess money will lead to inflation (since there is no slack in demand anymore). Of course, it’s possible that there won’t be inflation, if the public is willing to hold that money on its balance sheet. But the exact same thing is true for bonds—and if MMT claims that the ability to print money is central to the government’s capacity to escape any budget constraint, it must offer some argument that couldn’t apply equally well to bonds.

    There is some maximum level of government debt that the public is willing to hold, and beyond that any attempt to issue more debt in the form of money will lead to inflation whenever there is not an output gap. I don’t see any way that MMT manages to refute this.

    Maybe MMT doesn’t even disagree. But then many of you need to change your public statements, from the very strong “the government is not bound by any budget constraint” to “unless we are willing to accept an arbitrarily high level of inflation, the government is bound by a budget constraint, but the adverse consequences of trying to escape this budget constraint can never coexist with an output gap”. And that is a sufficiently weak statement that I think most mainstream economists would agree with it.

    • TC
      May 14, 2011 at 2:18 pm

      Hi Matt,

      Until recently, Bill Gross – the largest bond manager in the world – was going around saying that we’d be broke soon. We have an ongoing political debate in the United States about going broke.

      While this debate here between MMT and most economics is quite subtle, the debate in the real world is not. I don’t see many economists going out there letting people know we cannot go broke during this recent debate.

      We have the Pete Peterson Institute that talks incessently about going broke, and of course, “This time it’s different”. And even Paul Krugman just said we have to abide by GBC, because of the no Ponzi assumption.

      But we can’t go broke. There is not any way for us to go broke. This doesn’t stop people from saying it in the larger debate over, and over, and over again.

      I will apologize to you about wild claims. I make them – I think they are a bit funny and get people riled up. For people like you, they seem preposterous – but that is because you’re smart and knowledgable and curious and a host of other things that make these statements seem crazy.

      “There is some maximum level of government debt that the public is willing to hold, and beyond that any attempt to issue more debt in the form of money will lead to inflation whenever there is not an output gap. I don’t see any way that MMT manages to refute this.”

      exactly – check out Keith Moon economics.
      http://traderscrucible.com/2011/05/14/the-tc-curve-keith-moon-economics/

      I really think the MMT framework is more useful for thinking about the real world. But it doesn’t explain everything, and there are only a few people working within the model. I’d guess some or even most of the questions you’d ask have not been addressed from within the framework But then you ask good questions…

      • wh10
        May 14, 2011 at 3:23 pm

        To echo TC, MMT provides a very clear framework for thinking about fiscal and monetary policy. You claim this revised statement is weak, but are you observing the confusion that is occurring in Congress, the media, finance, and mainstream economics with regards to the budget deficit?

        Everyone is focusing on debt:GDP ratios and vague notions of “insolvency” without addressing the main issue: INFLATION. Even the CBOs model, “which is often cited as the benchmark proof of an ‘unsustainable path,’ claims inflation will stay where it is now. Gigantic ratios of debt to GDP go right along with steady growth, full employment, and low inflation…” (http://www.levyinstitute.org/pubs/pn_11_02.pdf)

        They don’t get it. S&P doesn’t get it. Most economic commentators don’t get it.*

        Bottom line, there needs to be more clarity of thought in the deficit debates, and MMT provides a strong foundational framework for this debate. MMT clearly demonstrates insolvency is never an issue, whereas inflation is, but only once the output gap is closed, as you have noted.

        If people want to argue we should be reducing the deficit today, even amidst extremely high unemployment and low to normal inflation, well, fine. But actually show why! Show us where you see inflation going and why!

        *Recently, Greg Mankiw, author of one of the most popular undergrad economics textbooks, wrote this terrible propaganda piece in the NYT http://www.nytimes.com/2011/03/27/business/27view.html . Not once does he use the word “inflation,” instead referring to vague notions of “not being able to pay the debt” (ie insolvency), the need for the government to save for the future and debt burdens left to grandchildren, and the loanable funds framework for government debt, all of which Scott Fullwiler refutes, years ago, in an academic manner in “Fiscal Sustainablity and Interest Rates.” Mankiw’s rhetoric is so terribly confused and misleading. If you need a scathing critique of this article from the MMT perspective, see Dr. Mitchell’s reply http://bilbo.economicoutlook.net/blog/?p=13985#comments . I don’t agree with his abrasive approach, but nonetheless, his points stand.
        Mankiw actually fesses up a bit in this follow on article http://www.nytimes.com/2011/05/08/business/economy/08view.html?scp=1&sq=mankiw&st=cse . Mitchell responds again with some answers – http://bilbo.economicoutlook.net/blog/?p=14429 .

        • TC
          May 14, 2011 at 3:31 pm

          Exactly.

          If you ask Mankiw if we can go broke, yes or no, he’d answer yes.

          But we cannot. And the fact we cannot has hugely different implications for economic life than assuming we can. It has hugely different implications for the responsibilities of government.

    • Tom Hickey
      May 14, 2011 at 4:32 pm

      Matt, thanks for pursuing this. You seem to be saying that if nongovernment decides it does not want to hold bonds then this will be inflationary (at some point). MMT disagrees with this, holding that government liabilities are equivalent, other than term, and very few people hold bonds to maturity. In practice there is no hard and fast separation between reserves/deposits and tsys, since tsys are so highly liquid. Tsys are a temporary parking place for large sums earning some interest while they await use.

      This has been hotly debated subject on MMT blogs. Some have argued that no bonds would increase inflation. MMT economists deny this. They are not concerned with any inflation resulting that fiscal policy cannot handle. Moreover, going to no bonds could be handled through maturity instead of the cb buying all the bonds in a short period. But even in the latter case, there would be a one-off adjustment.

      Some MMT’ers recommend going to no bonds and setting the overnight rate to zero, Bill Mitchell for instance. Warren Mosler would allow issuance of T-bills up to 3 mo. (Scott Fullwiler would retain tsy issuance and rate setting.) The argument here is that tsys are operationally unnecessary in the present monetary system and therefore constitute a subsidy for bondholders. They are also unnecessary for controlling inflation, which is properly done fiscally in the MMT view.

      Why no inflationary pressure? Because inflation results from spending on goods when there is no output gap, but funds that were held in tsys do not necessarily flow to consumption when tsys are sold. If the funds flow to investment, they increase output capacity, and if they flow into other asset classes, they do not contribute consumption.

      This is key, I think, because MMT is based on fiscal policy wrt aggregate demand, and it challenges any view favoring monetary policy based on interest rates, which MMT regards as a blunt instrument for policy purposes. Conversely, expenditure and taxation can be tightly targeted and applied through automatic stabilization, and fixed up ad hoc where automatic stabilization proves insufficient.

      To summarize the position of MMT regarding fiscal policy, the appropriate fiscal balance is always determined by changes in the domestic private desire to save and foreign saving in USD. The government fiscal balance is the inverse of the nongovernment balance to maintain output by identity, that is, the sectoral balances sum to zero. If the government fiscal balance does not accomodate the domestic private desire to save, then net exports have to rise in offset, or the domestic private sector cannot meet its saving goal. Basically, the MMT view is that government has to accomodate the domestic private desire to save and that net imports is favorable in real terms. As I understand them, MMT economists hold that government is able to achieve full employment with price stability, along with net imports.

      In the US, the domestic private sector generally wishes to save (private dissaving is unsustainable), and other countries desire to save in USD because it is the global reserve currency. So the US general case in the MMT view is government running a budget deficit offset the demand leakage to saving.

      The largest bone of contention now seems to be whether using the sectoral balance approach and functional finance to close the output gap and return to full employment while the US is running such a large trade deficit is fiscally sustainable. MMT says that inflation is not a problem while there continues to be an output gap and if the fx rate drops, depreciating the dollar, then exports will rise relative to imports.

      Basically, the MMT position is that the only constraint is the availability of real resources, to which the inflation constraint is related also. While inflation can be dealt with through fiscal policy, the availability of real resources is dependent on investment and productivity. As long as real resources are available. which is the case with an output gap and idle labor, then government should act to ensure that these resources are employed. Otherwise, the cost of foregone opportunity, which can never be recaptured, is huge. The way to act is to increase effective demand by injecting net financial assets through a fiscal deficit. MMT economists differs over whether to favor lowering taxes (Mosler) or increasing spending (Mitchell).

      Cutting the deficit to address the debt/GDP ratio is the wrong way to go. First, this is to forget the denominator. Secondly, according to MMT economist debt/GDP is essentially a meaningless metric under the present monetary system.

    • May 15, 2011 at 2:11 am

      MMT doesn’t claim that there are no real world, political, or value constraints on what Government decides to spend. When it says there’s no Government Budgetary Constraint (GBC) it is saying that there is no constraint on the fiscal capacity of Government to spend what it must to accomplish its policy goals. You’ve made a comment similar this one at your blog. So, at this point, I’ll repeat my reply to that one.

      Here’s the problem: why should individuals be more willing to accept holding government debt in the form of money rather than bonds? They are both government liabilities. If you think that the government can fund itself by printing massive amounts of money, you have to assume that the public will be okay with holding that money as a store of value—which might be true to a point, but is similarly true with bonds.

      I think you’re still missing the MMT point. A Government sovereign in its own currency never “funds” its spending. It just spends. The public always needs some money, because people can only pay their tax liability with dollars. Bonds won’t do. Gold won’t do. Oil won’t do. Only dollars will do.

      If the public finds dollars less attractive because the Government has spent too much, the effect of that is to drive prices up. It is not to make the Government run out of money, or to impose a budget constraint, unless Congress loses its nerve and won’t appropriate funds needed by Government. If this occurs we are talking about a political constraint and not one of financial capability. Remember the MMT claim is that a Government sovereign in its own currency can’t become insolvent. It says and claims nothing about political error or stupidity.

      In you latest formulation, you’ve pointed out that too much spending can lead to inflation and that the desire to avoid or contain inflation represents a budgetary constraint on the Government. and you say:

      Okay! So there is an effective constraint on government spending: if issuing debt in the form of money leads to inflation, you’ll need to pull money out of the system, and to do so you need taxation. My claim is that this is a situation that will inevitably occur if the government runs up too much debt; thus the ability to tax is a constraint on government spending.

      I think you’re really fuzzing up the issues here. MMT economists agree with what you’ve said just above including the idea that money is debt, and that too much spending will cause inflation. For example: Randy Wray’s piece here:

      http://www.newdeal20.org/2010/07/20/deficits-do-matter-but-not-the-way-you-think-15355/

      is very clear about this.

      However, in making the above argument, you’re shifting the ground of what people are arguing about. The politicians, Pete Peterson, the Hooverians, the deficit hawks, and even the deficit doves, are all making the claim that the Government can run out of money and be forced into insolvency.

      The argument is that deficits that are too large, and debt-to-GDP ratios that pass a particular level, can cause the bond markets to raise interest rates or even decide not to buy Treasury securities. So, they claim, the Government won’t be able to borrow money to meet its obligations, and the Government will literally run out of money for lack of lenders.

      It is this argument that MMT claims is false for Governments sovereign in their own currency. Your reply above doesn’t touch the issue of whether Government faces this kind of insolvency constraint. MMT’s position is that it doesn’t.

      There is no level of the national debt, or the deficit, or the debt-to-GDP ratio that can render the Government insolvent or destroy its capacity to spend the money it needs to spend to buy goods and services for sale in Dollars. So, the President is wrong when he says we can run out of money, as is Pete Peterson, or anyone else who says so.

      Now, what you’ve just said above is what MMT people are continuously saying: specifically that Government spending has to be evaluated in light of its anticipated consequences. One of these possible consequences is inflation, and, of course, when Government spending is likely to create demand-pull inflation it is to be avoided unless avoiding it results in consequences that are even worse than inflation. So yes, the Government has spending constraints; but these are not related to solvency or an incapacity to spend. They are related to the effects of contemplated spending and whether these effects fulfill the public purpose or have negative consequences we need to avoid.

      In short, I don’t know any MMTers who don’t agree that good economic policy will sometimes cause us to constrain spending. But these constraints should be self-imposed based on our estimates of what the effects of spending are likely to be. They will not be constraints based on magic levels of national debt numbers beyond which we must not go, or magic debt-to-GDP number limits compiled from comparing large numbers of nations with grossly different currency regimes on all fours in an attempt to induce specious generalizations about all economic systems

    • Peter D
      May 17, 2011 at 11:28 pm

      Seems to me that Neil Wilson nailed it when he said that the difference between mainstream and MMT is that the former thinks the govt needs to pre-fund its spending while MMT says it can always post fund it, if needed. The difference is huge. The govt might never need to fund its spending if it leads to economic growth or is simply hoarded. It also seems futile trying to predict effects of your spending as opposed to addressing them as they come along. Would you drive your car based on some very imperfect “models” of what the road conditions will be in half a mile as opposed to actually adjusting your driving to road conditions as they occur?

      • Peter D
        May 17, 2011 at 11:29 pm

        Which is not to say that spending should not be evaluated against likely outcomes, of course.

        • TC
          May 18, 2011 at 11:08 am

          There is definitely a tension between reacting to current observable problems and longer term problems. The issue is that because the current dominant thinking includes using something that cannot be known, the discussion over what to do is the equivalent of a discussion about religion after 3 beers. Not only that, the actions we’re taking now do not seem to have much impact on the long term worries because they can never have impact on the long term worries.

          Think about this: Walter Mondale ran on raising taxes due to worries about the debt in 1980 – when the Debt to GDP was at multi-generation lows. People were screaming about the U.S. going broke even when debt was at the lowest levels of the last 90 years. Literally, there is no right answer in the current model, so people get to make up whatever they want.

      • TC
        May 18, 2011 at 9:32 am

        I should have said “WARNING, WARNING! OUT OF PARADIGM THINKING!” lol

        I don’t really have good answers about the shifts. The shifts you talk about are real – and while MMT would say “no effect”, people who aren’t in paradigm – thats 99% of the planet – think differently. Of course it will cause shifts in portfolio preferences due to misguided thinking. But because that’s the dominant meme,we can expect shifts in portfolio preferences. Even if the king has no clothes, as long as people say how beautiful the gown is, then well, it kinda pays to go with it rather than lose your head.

        At least until the kid shouts “The king is naked!”

        I like to lob bombs out there to get people thinking.

  8. Tom Hickey
    May 14, 2011 at 12:57 pm

    Matt R. is back at his place commenting on The Fallacies of MMT.

    http://mattrognlie.com/2011/04/29/mmt-fallacie/#comment-352

  9. Clonal Antibody
    May 15, 2011 at 10:18 am

    vimothy :
    Outside of introductory undergrad macro classes, ISLM isn’t used in mainstream econ either.

    But remember Nick Rowe and his attempts to understand MMT started with the ISLM — and his whole attempt to understand MMT was based on this starting premise

    • TC
      May 15, 2011 at 8:12 pm

      Yep – exactly. First thing he did was try to jam MMT into ISLM. It’s underneath nearly a century of research, but it is there.

      • Clonal Antibody
        May 15, 2011 at 10:23 pm

        See Steve Keen’s latest criticism of neoclassical economics – A dynamic monetary multi-sectoral model of production

        I cover the myriad flaws in neoclassical macroeconomics in much more detail in Keen 2011b; suffice it to say here that, far from it being unwise to “throw the baby out with the bathwater”, neoclassical macroeconomics is a deformed baby that should have been drowned at birth. The Great Recession will hopefully prove to be the Biblical economic flood needed to finally sink this superficially appealing but fundamentally flawed vision of how the macro-economy functions.
        .
        .
        .
        .
        The flaws of neoclassical macroeconomics are almost too numerous to enumerate, but the key weaknesses are:

        1.
        Treating a complex monetary market economy as a barter system;
        2.
        Assuming that the macro-economy is either in equilibrium (partial or general, perfect or imperfect), or that it will return to equilibrium rapidly if disturbed;
        3.
        Modeling the entire economy using “applied microeconomics” and ignoring social class, when the Sonnenschein-Mantel-Debreu conditions (Sonnenschein 1972; Sonnenschein 1973; Kirman 1989; Shafer and Sonnenschein 1993) establish that, as Kirman put it:

        “we may well be forced to theorise in terms of groups who have collectively coherent behaviour. Thus demand and expenditure functions if they are to be set against reality must be defined at some reasonably high level of aggregation. The idea that we should start at the level of the isolated individual is one which we may well have to abandon” (Kirman 1992, p. 138);
        4.
        Obliterating uncertainty from macroeconomic theory with the absurd proposition that a rational individual is someone who can accurately foresee the future—which is what “rational expectations” really means;
        5.
        Persisting with a simplistic “money multiplier” model of money creation when the empirical evidence against this model is overwhelming (Holmes 1969; Moore 1979; Moore 1988; Kydland and Prescott 1990); and
        6.
        Ignoring the pivotal roles of credit and debt in the macro-economy.

        All these flaws are absent from the non-neoclassical rump—especially in the work of Minsky. But what the rump lacks, in comparison to the neoclassical mainstream, is a coherent mathematical expression of its model that is widely accepted within that school. In this paper I contribute to the development of such a model (though I appreciate that my model is a long way from being accepted by my peers) using a modeling framework—which I call Monetary Circuit Theory (MCT)—that, in contrast to the neoclassical litany of sins above:

        1.
        Treats the economy as inherently monetary;
        2.
        Makes no assumptions about the nature of equilibrium and models the economy dynamically;
        3.
        Models behavior at the level of social classes rather than isolated agents;
        4.
        Presumes rational but not prophetic behavior: people in social classes act in what they perceive as their best interests given information available, but do not attempt to forecast the future state of the economy (and they cannot do so in any case, because of the well-known features of complex systems);
        5.
        Models the endogenous creation of money by the banking sector in a pure credit economy (later extensions will incorporate fiat money creation by governments); and
        6. Gives credit and debt the pivotal roles in economic theory that the Great Recession has shown they have in the real world.
        .
        .
        .
        .

    • Tom Hickey
      May 15, 2011 at 8:21 pm

      Krugman, THERE’S SOMETHING ABOUT MACRO

      http://web.mit.edu/krugman/www/islm.html

      Now you might say, if this stuff is so out of fashion, shouldn’t it be dropped from the curriculum? But the funny thing is that while old-fashioned macro has increasingly been pushed out of graduate programs – it takes up only a few pages in either the Blanchard-Fischer or Romer textbooks that I am assigning, and none at all in many other tracts – out there in the real world it continues to be the main basis for serious discussion. After 25 years of rational expectations, equilibrium business cycles, growth and new growth, and so on, when the talk turns to Greenspan’s next move, or the prospects for EMU, or the risks to the Brazilian rescue plan, it is always informed – explicitly or implicitly – by something not too different from the old-fashioned macro that I am supposed to teach in February.
      Why does the old-fashioned stuff persist in this way? I don’t think the answer is intellectual conservatism. Economists, in fact, are in general neophiles, always looking for something radical and different. Anyway, I have seen over and over again how young economists, trained to regard IS-LM and all that with contempt if they even know what it is, find themselves turning to it after a few years in Washington or New York. There’s something about primeval macro that pulls us back to it; if Hicks hadn’t invented IS-LM in 1937, we would end up inventing it all over again.

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