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Sunday 8 July 2012

Heterodox and mainstream macroeconomics: a great divide

                In the blogs I write, I try  - when describing what most macroeconomists do and think - to add somewhere the qualification ‘mainstream’ or something similar. This is because I’m well aware of a strong and longstanding minority who are generally described as heterodox macroeconomists.
                One of the notable things I find about the mainstream/heterodox divide is how strong it is. I think it’s fair to say that most mainstream macroeconomists care little about what goes on in the heterodox world. That was clearly a big mistake when it came to Minsky and financial crises. However, my impression is that sometimes this feeling is mutual. When I have heard or read heterodox economists, what often strikes me is the wholesale rejection of the mainstream.
                Take, for example, a recent post from Lars P Syll which caught my attention for obvious reasons.[1] He writes: “People like Hyman Minsky, Michal Kalecki, Sidney Weintraub, Johan Åkerman, Gunnar Myrdal, Paul Davidson, Fred Lee, Axel Leijonhufvud, Steve Keen – and yours truly - do not share any theory or models with Real Business Cycle theorists or “New Keynesians”". Any theory? Is everything in what has been called the new neoclassical synthesis a waste of time?
                I think this is a bit of an exaggeration. To pick just one example I read recently, Steve Keen in his Minsky model forthcoming in JEBO uses a Phillips curve, which I would say was the defining relationship in New Keynesian theory. His and the New Keynes Phillips Curve are not identical, and of course Keen’s is not microfounded, and they do somewhat different jobs, but still there seems to be some overlap between mainstream and heterodox there. This is hardly surprising. The Phillips curve started life as an empirical discovery. It is neither the invention of New Classical or New Keynesian thought, nor the fruit of heterodox ideas, and so can quite happily be shared.
                What interests me is why the need for such wholesale rejection of the mainstream? I learnt one possible answer when young, which is the appeal of revolution rather than evolution. In Cambridge (UK) in the early 1970s, a significant group of the faculty called themselves Neo-Ricardians, and they too rejected neo-classical theory. Joan Robinson was an inspirational figure for this group, although the key influence was Piero Sraffa. They were strongly attracted to the ideas of the philosopher Thomas Kuhn, who talked about paradigm shifts in science. The mainstream was not going to evolve into something better: it was fundamentally flawed, and therefore had to be overthrown. Attractive stuff for undergraduates – too attractive in my case – but that particular paradigm shift never came.
                A rejectionist strategy is of course unlikely to win friends within the mainstream. Even those quite critical of aspects of mainstream thought and teaching can be exasperated by the rejectionist attitude.  My own view is very similar to that expressed by Diane Coyle in her review of Steve Keen’s ‘Debunking Economics: The Naked Emperor Dethroned’: “I have a lot of sympathy with the details of Professor Keen’s project, but not its ultimate ambition. For in the end I think the Naked Emperor needs to be reclothed rather than dethroned.”
                However, within macro the mainstream is hardly more accommodating. It may advertise that it is open to new ideas, but in practice, to get into good journals, these ideas need to be cast in a rather simplistic microeconomic framework that in all other respects is uncontroversial from a mainstream point of view. In effect this excludes those who have problems with much of that simple micro theory.
                Now many mainstream and heterodox macroeconomists may be quite comfortable with this state of affairs, but in practice it means any radical (but not wholesale) challenge to the mainstream is severely diminished. This is another reason why I would advocate that more macro analysis should start at the aggregate level, rather than be forced to always establish its microeconomic credentials in a formal way. (See here in particular.) The mainstream does need constant challenge, but not just on an ‘all or nothing’ basis.   

[1] I don’t like having what I write described as “pure drivel” (who does), and for that reason I have never used that phrase about someone else’s writing. What seems to have upset Syll is a belief that I thought all macroeconomists signed up to neoclassical theory. It is true that I used the qualifier ‘mainstream’ only once in the post Syll attacks, but to imagine from it or my writing more generally that I believe all macroeconomists sign up to microfoundations (see here), that I am self-congratulatory about mainstream macro today (see here), or that the only debates are about policy (see here), requires a very selective reading. OK, rant over. 


  1. I am not wedded to all of Keen’s criticisms of economic theory – he may well have taken some wrong turns. However, I don’t think they are necessary to dismantle neoclassical economics. Your ‘don’t throw the baby out with the bathwater’ attitude is fairly common, but I feel that neoclassical economics is flawed from the ground up. This essay identifies exactly what that ‘ground’ is, though offers only limited critique:

    1. Paul Krugman have answered to this blog and seem to disagree in much with Simon Wren Lewis i saw to my surprice!

    2. No mention of the elephant in the room, which is why the models did not see a crisis coming.

      Krugman's paper fits right into my characterisation: the only reason the crisis occurred was a one off 'friction' - patient savers versus impatient borrowers and various moral hazards in the financial system. If only we remove those, capitalism will be stable!


    3. As Professor Lars Pålsson Syll writes in "Dumb and dumber in modern macroeconomics"
      "So – here we go!

      The purported strength of new-classical and new-Keynesian macroeconomics is that they have firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing “forward-loooking” individuals.

      To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations – without ever presenting neither ontological nor epistemological justifications for this claim – has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations"

    4. And here is Paul Krugman´s answer to Lars Pålsson Syll:

    5. Professor Lars Pålsson Syll writes in "The nodal point of the macroeconomics debate"
      16 July, 2012

      "This summer both Oxford professor Simon Wren-Lewis and Nobel laureate Paul Krugman have had interesting posts up discussing modern macroeconomics and its alleged needs of microfoundations.

      Most “modern” mainstream neoclassical macroeonomists more or less subscribe to the view that microfoundations somehow has lead to better models enabling us to make better predictions of future macroeconomic events...Yours truly basically side with Wren-Lewis and Krugman on this issue, but I will try to explain why one might be even more critical and doubtful than they are re microfoundations of macroeconomics.

      Microfoundations today means more than anything else that you try to build macroeconomic models assuming “rational expectations” and hyperrational “representative actors” optimizing over time. Both are highly questionable assumptions.

      The concept of rational expectations was first developed by John Muth (1961) and later applied to macroeconomics by Robert Lucas (1972). Those macroeconomic models building on rational expectations-microfoundations that are used today among both “new classical” and “new keynesian” macroconomists, basically assume that people on the average hold expectations that will be fulfilled. This makes the economist’s analysis enormously simplistic, since it means that the model used by the economist is the same as the one people use to make decisions and forecasts of the future.

      Macroeconomic models building on rational expectations-microfoundations assume that people, on average, have the same expectations. Someone like Keynes for example, on the other hand, would argue that people often have different expectations and information, which constitutes the basic rational behind macroeconomic needs of coordination. Something that is rather swept under the rug by the extremely simple-mindedness of assuming rational expectations in representative actors models, which is so in vogue in “New Classical” and “New Keynesian” macroconomics. But if all actors are alike, why do they transact? Who do they transact with? The very reason for markets and exchange seems to slip away with the sister assumptions of representative actors and rational expectations.

      Macroeconomic models building on rational expectations microfoundations impute beliefs to the agents that is not based on any real informational considerations, but simply stipulated to make the models mathematically-statistically tractable. Of course you can make assumptions based on tractability, but then you do also have to take into account the necessary trade-off in terms of the ability to make relevant and valid statements on the intended target system. Mathematical tractability cannot be the ultimate arbiter in science when it comes to modeling real world target systems. One could perhaps accept macroeconomic models building on rational expectations-microfoundations if they had produced lots of verified predictions and good explanations. But they have done nothing of the kind"

    6. As the osteopath at the professional football club, Hamburger Sport Verein, I'm working with professional athletes on a daily basis. Over the last two months we have integrated the NES mihealth device to support our players - and we have experienced remarkable results. Our players recover faster and feel much more relaxed before games. They even want to use the NES mihealth device themselves at home.

  2. I'd say that this hits is about right. In my view, economists are playing on the same field with the same rules and the argument is over the refereeing, which one side sees rightly as biased, as you point out. As result,heterodox economists feel unfairly marginalized and react as might be expected. No surprise there.

    The other issues are both methodological and substantial, having to do with stated assumptions and presuppositions that act as hidden assumptions. These issues could be resolved through debate but aren't, and even when they are, heterodox economists complain that the result is often ignored by the mainstream, e.g. the Cambridge capital debates.

    Most serious, though, is the heterodox charge that the mainstream doesn't accept counter-evidence and falsification, and cites the failure to foresee the global financial crisis as well as the failure to either explain it n retrospect or propose a fix that works. They also cite evidence that heterodox economists like the late Wynne Godley did predict it, explain it and show how to fix it in terms of his approach to monetary economics.

    I am not an economist but I pay attention to economics because it is a policy tool and affects everyone in the world. I a concerned that the mainstream appraoch, including its marginalization of heterodox approaches, is counterproductive.

    I would also add that major challenges to the way of doing economics that is prevalent are coming from life and social scientists that are concern, like the rest of us, that economics is a failure as a policy tool because it is operating out of an 18th century mindset that doesn't take into account advances in evolutionary science, cognitive science, and behavioral science.

    As a professional philosopher, I am also concerned about the philosophical foundations of economics that shows up as a lack of logical rigor masked by mathematical rigor, and insufficient appreciation and economics is as much social and political philosophy ass it is policy science. I see a lot of the conflict among groups and schools as being philosophically based rather than over scientific disagreements.

    1. "I am not an economist but I pay attention to economics because it is a policy tool and affects everyone in the world."

      I wished more people would be aware of that.

    2. I noticed that Professor Lars Pålsson Syll, answered to this article: "Wren-Lewis still doesn’t get it right!"

  3. "What interests me is why the need for such wholesale rejection of the mainstream?"

    This is because heterodox economists really think that mainstream economics has almost nothing to do with how the world works and how it should run.

    Take for example Krugman's recent experience with Keen highlighted how money is exogenous in Krugman's models. This is not a small thing. The difference is profound.

    It's a bit like Aristotle and Galileo.

    The difference between mainstream economics and heteredox economics - Post Keynesian in particular is irreconcilable.

  4. I'd also note that the fundamental difference between mainstream and heterodox economics is that the former supposes that, in the absence of various real world 'frictions', the economy would function like a smoothly oiled machine. NKs and NCs only differ on which of these 'frictions' are necessary to model the economy.

    Heterodox economists, on the other hand, believe that the economy is fundamentally unstable. It is not necessary to add frictions. Minsky thought the financial sector would destabilise itself; Keynes (the real Keynes) thought that uncertainty led to systemic underemployment; people who reject marginalism believe firms often have arbitrary and incorrect strategies.

    Personally, just from glancing at those two paragraphs one obviously seems more reasonable and reflective of the real world. But maybe that's just me.

    1. Sorry for shameless plug, but I follow up on this here:

  5. Just spent 3 days in Toronto with Steve Keen and I can tell you that his Phillips Curve is quite a bit different from the standard neoclassical one. He points out that Phillips had an engineering background and intended a far more dynamic model rather than the standard static one used by neoclassicals. Saying that Keen is like the neoclassicals because he uses a Phillips Curve is in fact a bit like saying the neoclassical Keynesians are equivalent to Keynes himself. You'll have to find another "just one example," in other words.

    Scott Fullwiler

  6. The main reason why no one in the mainstream takes heterodox economists seriously is because their most vocal advocates are crude, self serving and childish. The most vocal heterodox economists are people like Lars, Keen, Randall Wray, Robert Murphy and the like. These people all have one big thing in common - their writing style and communication skills are an abomination and they've discredited themselves with certain audiences because they're flat out rude and immature. They can't discuss mainstream economics without being insulting or childish. Who wants to be associated with that?

    It's hard to take people seriously when they can't even communicate in a manner that shows that they take themselves seriously.

    1. Unfortunately, if they aren't rude, crude, self-serving and childish, no one pays any attention to them.

    2. "They can't discuss mainstream economics without being insulting or childish. Who wants to be associated with that?"

      The simple fact is that this isn't true. Everybody projects a certain 'unreasonable' tone onto their opponents, and a more reasonable one onto their allies. I think you need to approach these things with an open mind.

    3. This observation was made years ago in AXEL LEIJONHUFVUD's witty essay "Life Among the Econ"
      Excerpt below:
      'The basic division of the tribe is seemingly into castes; within each caste, one finds an elaborate network of status relationships. An extremely interesting aspect of status among the Econ, if it can be verified, is that status relationships do not seem to form a simple hierarchical “pecking-order,” as one is used to expect. Thus, for example, one may find that A pecks B, B pecks C. and then C pecks A ! This nontransitivity of status may account for the continual strife among the Econ which makes their social life seem so singularly insufferable to the visitor.
      Almost all of the travellers’ reports that we have comment on the €con as a “quarrelsome race” who “talk ill of their fellow behind his back.”'

    4. I know nothing about economics, main or hetero, but I do know that the writing on, say the rwer blog is, as you pointed out, an abomination (and their graphics suck big time).
      On the other hand, the writing of most hetero economists (how long before some smart aleck grad student has a talk with homo- and hetero- economists in it ?) ain't that great either.

  7. If NKs started modelling money and banking in a stock flow consistent way theyd be the first to yank the baby out of the bath of boiling water in which they left it - rather the global financial crisis crept up on them like on a crab in kettle.

  8. I am tired of seeing heterodox economists claim they "predicted" the crisis. Anyone who is familiar with the work of most Austrian economists, Circuitists or Modern Monetary Theorists knows that they always think the system is unstable. They always have a gripe about the system. I can pull quotes from leaders of all of these schools showing that they have been fear mongering about "instability" for 20 or 30 years. Then a crisis hits and they start claiming they were right all along. Never mind that they had to be wrong for a decade or longer before that.

    1. See James K. Galbraith, Who are these economists, anyway?

    2. "Anyone who is familiar with the work of most Austrian economists, Circuitists or Modern Monetary Theorists knows that they always think the system is unstable."

      Maybe that's because the system is unstable?

      I actually agree with you about 'there will be a crisis' x 100 until there is one. But you can't lump them all in together - post-Keynesians generally have the mechanics of the crisis down to a tee, Keen being the foremost example.

    3. All human systems are chaotic.

      -- Moi

  9. I am glad to finally see some reasoned discussion of the heterodox v. neoclassical debate.

  10. If heterodox economists are more polite and less controversial with predictions. Won't that make them even easier to ignore? As if it's ok to be polite but completely wrong about something. I would call that willful ignorance.

    "I'm not going to listen to you about the house collapsing until you calm down and talk politely."

  11. Agree with Frederick to some extent. Who sees the events described and responds "WE WON!"? I know that Mike Norman isn't a real economist, but this video is just an exaggerated version of the irritating uncientific egoism that permeates the econ blog environment.

    1. Sort of like thinking that all of the economists (bar a few) that have gone before have gotten it all completely wrong, and only YOU have been smart enough to Debunk it all, because you were the only one who ever studied dynamical systems.

      ("YOU" being someone who wrote a book titled "Debunking Economics", not the above Anonymous, of course)

    2. "Mike Norman isn't a real economist"

      Really? His title at John Thomas Financial is "chief economist."

    3. Wray is even worse than Norman. He says to "declare victory, but be magnanimous about it". What an arrogant jerk. He was describing the USA in a "contained depression" in 1993 before the greatest economic boom in modern history. Does that deserve being magnanimous also? And Norman - this guy said the housing bubble didn't even exist in 2006. Right at the peak. We're talking about two of the worst calls in the history of economics. What a joke. MMTers are the worst of the heterodox bunch. They're simply unbearable in their undeserved arrogance.

    4. As far as I can see, mainstream economists are socialized to, at best, not care about the truth value of their statements. For example, "Sort of like thinking that all of the economists (bar a few) that have gone before have gotten it all completely wrong, and only YOU have been smart enough to Debunk it all, because you were the only one who ever studied dynamical systems."

      Steve Keen quite explicitly says he is not very original. He builds on the works of generations of scholars who have studied economics. He quite explicitly cites Richard Goodwin and John Blatt on dynamical systems and economists.

    5. The 1992-2001 period was not the greatest boom in modern history. The fifties and sixties come closer, present day Chinese growth even more so. However, 'the greatest bubble' might do the trick.

  12. By the way, not exempting Krugman, Delong et al. from accusations of egoism.

    1. You should start your search for personality and character flaws amongst the myriad of neo-classical economists who promote erroneous theories despite significant empirical evidence to the contrary.

    2. Indeed.
      That would aslo be my biggest criticism of Steve Keen, who seems to prefer knocking lumps out of Krugman, rather than openning up on the Freshwater idiots.

    3. There are plenty of people opening up on freshwater idiots, and it allows people like Krug, Delong and Thoma to slip through as the 'reasonable' ones, when in reality they are part of the same movement that sees capitalism as broadly stable, wages as basically always too high, 'globalisation' as some great, self perpetuating phenomenon, free trade and sweatshops as unquestionably 'good', and will shout 'lump of labour fallacy' at anybody who suggests some sort of decrease in lifetime hours worked.

    4. Spot on Unlearingecon!It´s not about knockin down on the policies that Krugman ,Wren Lewis etc. more decent New Keynsian suggest,their mostly very sane and compassionate.But the important
      issue is, if their models contiunes to be the core belief,in economics,well then we have to go on with blowing up new speculaive bubbles for a long time,followed by severe recessions,causin great pain for a large majority of people.The profund Flaws in their models are the reason we in this Debt Deflationary Recession!So yes as long the so stubbornly stick to those models,they must tolerate to be critized,of course in a civil respectful manor!

  13. I think there is already a well accepted and popular way of trying to do macro including policy conclusions without microfoundations: the SVAR and its cousins SVECM,SFAVAR etc...some of the identification schems of SVAR's can in fact be mapped into old style simultaneous equations models I think. Then there's the quasi random experiment approach where you try to identify some exogenous events using narrative evidence. And the problem is of course that results for things such tax cut multipliers are all over the map in these studies, and the identification schemes can always be debated, so it's not clear we've really gone past Chris Sims' Macroeconomics and Reality paper with this approach.
    I think the reason why in parallel the DSGE approach has become almost a must if you're not doing the VAR style analysis for example, is that given that we all know whatever model you might have of the economy is anyways going to be 1) false, 2) subject to some arbitrary identifying assumptions and 3) too simplistic to remotely capture the complexity of the economy anyways, it's nice to know more about what type of things motivate agents in the model that you must have in the back of your head when making an argument (preferences) and what kind of constraints do they face, and it had better be the case that their decisions are coherent with these basically accounting constraints. I think many mainstream macroeconomists thinky you can learn usually learn more about an argument or claim by looking at preferences and constraints (including production functions) and the initial model description than reading loads of non mathematical texts perhaps with a few aggregative equations here and there. Hence, the bias in journals towards accepting those kinds of papers. Or if you don't want to do a microfounded model, just do a VAR or VECM or factor model (and if linearity is a problem, then by all means do a regime switching VAR, or add polynomial terms for example though eventually you'll need some clever way to restrict coefficient values if you don't want massive standard errors).
    By the way, the claim by Keen that modern macro ignores the endogenous money perspective somehow completely misses the fact that most of those models assume endogenous money that just responds automatically to demand for it (it's called the cashless economy, it's really just a cash in advance constraint that's always satiated). As for ignoring financial balance sheets, that was true in many models, but there have been many DSGE models where balance sheets and the flows of debt are important for more than 10-15 years now and building and analysing such models has turned into a growth industry in recent years.

    1. A VAR is a multi-dimensional running average. That's it.

  14. It would be nice to have some competent and open-minded economist list the few economic assumptions, theories, conclusions and recommendations that can be considered as more or less undisputed (apart from lunatics).

    (Just in case you're looking for a theme of a future blog post...)

  15. The fact that so many varieties of economics are battling each other (and have been doing so for years and sometimes decades) with none of them decisively triumphing seems to me a pretty good indication that we are ready for a revolution and that no amount of tinkering with existing paradigms will work.

    It is also not true that economic debates go on forever without being resolved. For instance, many senior Austrian economists predicted that the huge expansion in the Fed's balance sheet would lead to runaway inflation. I don't think many of them would stick to that prediction now. One Austrian, Vijay Boyapati, has already abandoned a fundamental assumption (common actually to all schools of economics) viz. the idea of money multiplication through the agency of fractional reserve banking.

    On the other hand, the large monetary expansion recommended by the likes of Paul Krugman has not so far resulted in a recovery. We can only hope that the Fed will accept his recommendation and loosen up even more, not in the interests of the economy but in the interests of testing economics.

    By the time this recession is through, I am sure many shibboleths held by all schools of economics will be abandoned.

  16. It seems that main stream economics not only didn't see the crisis coming but their ignorance of it's underlying mechanics (banking and private sector debt dynamics) actually lead them to exacerbated the problem. We've since seen them deny it had anything to do with them, that it was impossible to predict, attempt to crow bar the reality of debt into their own broken models (c.f. Krugman) while insisting banks don't matter, change a hammer (QE) for a jack hammer (cf. market monetarists) and all the while doing their best to ignore the guys who predicted the crisis based on models of how the real world of banking and debt works.

    The latest ruse seems to be to pretend the word "Minsky" has always be a common feature of their vernacular - like anyone would be fooled.

    As a layman I've been utterly shocked and not a little disgusted.

    1. Who are you kidding? Heterodox economists didn't "see it coming" either. The heterodoxy is always negative. Steve Keen is always negative. Robert Murphy is always negative. Randall Wray is always negative. These people don't make "predictions". They make political projections referring to what they don't like about the current structure of the system. And when a crisis occurs they come out and proclaim they were right all along. Never mind that all of these people were negative for decades and decades before the crisis occurred.

      Don't fall the myth that heterodox economists "predicted" the crisis. They didn't.

    2. "Who are you kidding? Heterodox economists didn't "see it coming" either."

      "Don't fall the myth that heterodox economists "predicted" the crisis. They didn't."

      This is either ignorance or deliberate deception. Keen's predictions were based on a reality based model of capitalism where growth is driven by private debt. The exponential increase of private debt, coupled with the fact that it was going into assets rather than real production, meant a crash was inevitable, something demonstrated by all of capitalism's history.

      I suggest you do some research before spouting such imperious nonsense. You can start here:

  17. Benedict@Large9 July 2012 at 23:47

    I can't count the number of times I've commented on articles by mainstream economists, pointing out some mistake in their accounting. Places where money simply appears out of nowhere (eg, the money multiplier) or disappears into some black hole (eg, loanable funds), never to be seen again. These are not complex mistakes. Accounting in roughly its current form has been around for centuries. Indeed, every business is required to do it, and none argue that its principles are controversial. The number of times I've been graced with even a disagreeing response? Zero.

    Why do I so easily dismiss mainstream economists? Perhaps it is because the feel they only have to defend their work from themselves.

    1. I have analytically disproved the idea of the money multiplier in my book "The General Theory of Money".

      For someone with a background in physics (with its laws of conservation of mass + energy, linear momentum etc) the idea of a closed system being able to create money (which is what the multiplier theory amounts to) rings false instantly. Economics needs some fundamental laws and I would suggest beginning with the Law of Conservation of Money.

    2. Thank you Philip, for pointing this out. The biggest problem I see with mainstream economic theory is a general lack of awareness of closed-system dynamics.

  18. Help. 'Microfounded' should mean: founded in the aggregation of individual reactions, like the National Accounts. But 'microfounded'in the neo-classical sense isn't micro founded at all. It's the ad hoc imposition of inconsistent (Arrow paradox), ill-defined, unmeasured variables like 'utility' upon economic models.

    The greatest failur of neo-classical economics might well be the absense of any meaningfull statistic of 'utility'. While we do have the flow of funds and the National Accounts and the labour market accounts and interest rate statistics and M-1 and M-2 and M-3 and even divisia money and Austria money, which all have well defined definitions and operationalisations, a meaningfull statistic of utility (individual or social) is entirely lacking. There is a reason for this: people who look at consumer behavior, read for instance the "Consumer behavior and marketing strategy" from Paul Peter and Olson, have to state that empirical research often reveals that people often even do not know what they are doing - let alone why they are doing it. There are no transitive preferences. Example: the model of the housing market of the Dutch CPB, which assumes a representative consumer, in effect implying that every household in the Netherlands has acces to the mortgage market and therewith fundamentally misunderstanding the market. The arrow paradox states that if we throw in some other differences (age, family size) no transitive function is possible - which is exactly what consumer researchers find. The CPB idea that we have to increase rents to make people more inclined to buy a house is therewith not only silly - but outright ideological rigged, in favor of people owning the houses. There is no such thing as 'utility'.

    Merijn Knibbe

  19. Simon, I don't think you can deny that Kuhn like paradigm shifts do happen. The very fact that you call your blog Mainly Macro proves this.

    Prior to Keynes there was no Macro only Micro. In the 70s maybe Joan Robinson didn't have the revolution she sought but the Monetarists and Lucas did.

    I think you kind of give heterodox economists a little too short a thrift-they aren't all motivated by simple perversity in a desire to be unconventional or rebel.

    Nor is there necessarily a preference for revolution instead of evolution.

    It may just be that-as Unlearning Econ has suggested-they see the current paradigm as being in some ways irreedemable. On the other hand implicit in the heterodox position is a desire to win the world over and indeed one day be the mainstream themselves.

    I have no real background in Econ-just a couple of basic College classes-Macro 101 and Micro 101-I am however very much an interested layman.

    I came into this with no necesary prejudice for one side or the other-mainstream or heterodox.

    I find a lot of the mainstream interesting but they have to my mind a tendency to put the right models over the right results.

    They have no problem with results that plainly contradict empirical reality. It's almost like they're teachers who don't care if you say 2+2=5 as long as you follow their steps.

    To me certain things mainstream can't explain. Like I read over at Billy Blog-Bill Mitchell an MMTer- the other day the idea that the Voclker disinlation had a long term hysterisis effect on employment. That the VI was not wholly a positive-at best you mught hear it hurt employment in the short term but never the long term as Billy suggests is something you never will hear from a mainstream Macro guy. So certain stylized facts mainstream seems to me to simply ignore.

    1. "Simon, I don't think you can deny that Kuhn like paradigm shifts do happen. The very fact that you call your blog Mainly Macro proves this."

      Your comment is well taken on Kuhn's philosophy on Paradigm shifts - which I think is taking place also in higher education, addressed in a conversation with Sanford Shugart.

  20. One more point I should make Simon- mainstream Macro will naturally tend to be defensive in the face of heterodox theories, as their very existence suggests there's some serious inadequacy in the mainstream view.

    So it's hard for the two to be friends. I do think that even a heterodox economist should at least understand mainstream so to know better where the real fault lines and points of contestation lies.

    Otherwise he'll say things that will get him into controversty and he'll be perplexed as to why.

  21. Simon Reynolds11 July 2012 at 09:39

    Very enlightening discussion. What is frustrating to an interested non-economist is that it appears to be so difficult to find true answers to (what appear to be) simple questions, such as:

    If I receive a loan from a bank, is it the case that:

    a) the bank needs already to have deposits to cover the loan amount prior to making the loan (deposits create loans, "banks can't create money out of thin air") or,

    b) the bank gives me the loan (based on it's calculation of my creditworthiness) and then looks for funding later by borrowing from other banks or the central bank (loans create deposits, "banks can create money out of thin air")?

    A "mainstream" view is given by Paul Krugman. A "heterodox" view is given by Scott Fullwiler. See below. These views are completely opposed -- one is true, the other is wrong. The real working of macroeconomics must be very different depending on which one is true. There is no difficult maths here – no high order partial differential equations to solve, no matrix algebra. For what it's worth, I can't find a flaw in Scott Fullwiler's detailed argument.

    Paul Krugman (in an online debate with Steve Keen) says here:

    "As I read various stuff on banking — comments here, but also various writings here and there — I often see the view that banks can create credit out of thin air. There are vehement denials of the proposition that banks’ lending is limited by their deposits, or that the monetary base plays any important role; banks, we’re told, hold hardly any reserves (which is true), so the Fed’s creation or destruction of reserves has no effect.

    This is all wrong, and if you think about how the people in your story are assumed to behave — as opposed to getting bogged down in abstract algebra — it should be obvious that it’s all wrong.

    First of all, any individual bank does, in fact, have to lend out the money it receives in deposits. Bank loan officers can’t just issue checks out of thin air; like employees of any financial intermediary, they must buy assets with funds they have on hand. I hope this isn’t controversial, although given what usually happens when we discuss banks, I assume that even this proposition will spur outrage."

    Scott Fullwiler replies here:

    "Krugman demonstrates that he has a very good grasp of banking as it is presented in a traditional money and banking textbook. Unfortunately for him, though, there’s virtually nothing in that description of banking that is actually correct. Instead of a persuasive defense of his own views on banking, his post is in essence his own flashing neon sign where he provides undisputable evidence that “I don’t know what I’m talking about...

    Yes, I will argue here that banks either individually or in the aggregate are not limited by their deposits and the monetary base doesn’t constrain bank lending, but my argument as well as that of the endogenous money crowd in general (MMT, horizontalists, circuitistes, etc.) has nothing to do with whether or not banks “hold hardly any reserves.”

  22. And then there's this…

    Currently re Z.1 L.4 June 7, 2012 total outstanding credit is around $54.6 Trillion.

    Total currency existing in the non-government is about $5 Trillion ($16 T National Debt minus $10.5T bonds held by the public).

    How did a possible maximum of $5T in deposits create $54T in debt if money wasn't created out of thin air?

    Not offered as a proof, just a head-scratcher.

    1. Think of 11 people called ABCDEFGHIJK

      All number below is in $trillion:

      A have 5 in cash.
      A loans B 5 cash. Total money 5 debt 5 cash
      C loans D 5 cash. Total money 10 debt 5 cash
      D loans E 5 cash. Total money 15 debt 5 cash
      E loans F 5 cash. Total money 20 debt 5 cash
      F loans G 5 cash. Total money 25 debt 5 cash
      G loans H 5 cash. Total money 30 debt 5 cash
      H loans I 5 cash. Total money 35 debt 5 cash
      I loans J 5 cash. Total money 40 debt 5 cash
      J loans K 5 cash. Total money 45 debt 5 cash
      K loans A 5 cash. Total money 50 debt 5 cash

      Now its $55 trillion of money whereof $5 trillion is in cash. All debt has been created be reusing the original $5 trillion of cash.
      The money has not been created from air - but from reusing the original $5 trillion of cash.

      This may be an example but this is how its works in the real world but with each loan being much smaller but with a lot more loans. By reusing the cash, debt money can be created.

  23. Simon Reynolds Steve Waldman answers a lot of your questions here

    I'm like you. I'm an interested layman. I have no necessary preference for heterdox over mainstream but it does seem that some questions mainstream just ignores.

    I have to say I've become over time more convinced about the MMT ideas on things like endegenous money and deposit creation.

    Another thing as I mentioned above is an understanding of the true costs of the Volcker disinlfation. I'm not aware of any mainstream economist acknowledging that

  24. Simon Reynolds11 July 2012 at 18:54

    Thanks for the info paul, and good tip, evilsax, re Steve Waldman.

    I've read the interfluidity post but I'm none the wiser. Waldman says, amongst many wise things I'm sure: "The bank’s role is to transform questionable promises into sound promises. It is a kind of adapter of promises, or alternatively, a guarantor."

    I'd just like to know the answer to this question: if I borrow £1000 from my bank and spend the money, does this mean that someone else has £1000 less to spend? Does it mean that I have spent the money instead of someone else?

    Krugman says yes (I think), Fullwiler says no (I think).

    Or does it depend on the bank and the lending mechanism -- sometimes yes and sometimes no?

    I too think that MMT has more of the right answers.

  25. I don't think it means you spent the money rather than someone else. In a way it will be spent again and again.


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