Winner of the New Statesman SPERI Prize in Political Economy 2016

New! Lecture on 23rd May at Bush House, 44-46 Aldwych on my book 'The Lies We Were Told' with discussion from Rachel Shabi and Aeron Davis. Book here.

Thursday, 1 May 2014

Looking for the flimflam

According to Thomas Palley, Paul Krugman and my defence of mainstream economics is “pure flimflam”. The definition of flimflam is ‘nonsensical or insincere talk’ or ‘a confidence trick’. Nonsensical I guess is possible, but insincere or a confidence trick it most definitely is not. But I guess this no worse than ‘pure drivel’, which is how Lars Syll once described one of my posts.

Despite all this, I would like to have a debate about macroeconomics with heterodox economists, and have tried to initiate one in the past. A debate that gets beyond generalities (and name calling), and talks about actual macroeconomic mechanisms and what policy makers should do. This is because I’m genuinely puzzled about what I am doing that heterodox economists find so wrong.

According to Thomas Palley, New Keynesian economics “retained the nonsense of marginal productivity distribution theory while discarding the foundations of Keynesian economics”. We “use price and nominal wage rigidity to explain cyclical unemployment”. Now I admit to not being terribly concerned about what Keynes really meant, but I’m at a loss to see marginal productivity distribution theory at the centre of New Keynesian theory. What New Keynesian theory does need is that falls in real interest rates stimulate aggregate demand (i.e. some form of IS curve), and in the basic model this comes from changing the intertemporal pattern of consumption. Is that wrong? What explains cyclical unemployment is real interest rates being at the wrong level. Movements in wages and prices get us out of a recession because they lead the central bank to reduce real interest rates. At the zero bound they cannot do that, and in those circumstances wage and price flexibility could make things worse. Is that wrong?

Now it is true that the standard New Keynesian model assumes a labour market that clears, but a model that replaces this with labour market imperfect competition would not behave very differently. That is what I actually teach. Equally the basic New Keynesian model assumes rational expectations, but if we want to change this to a case where agents make predictable errors that is easy enough to do. I also teach this to undergraduates. (For a pretty good guide to what I teach, see this paper by Carlin and Soskice. I use their textbook.)

Which brings us back to teaching. As I said in my original post, I would like to make students aware of heterodox critiques, but I want to point out where in my mainstream account that critique would enter. (I think what I teach is pretty close to how many central bankers think, if not the rest of 'my tribe'!)  I believe I can do that for what I call anti-Keynesians (freshwater or whatever), although I remain at a loss as to how flexible prices can get us out of a liquidity trap when central banks target inflation (see here and here). So where (in terms of macroeconomic mechanisms) do I locate the heterodox (post-Keynesian or whatever) critique of New Keynesian analysis? This is not an insincere or trick (flimflam) question.   


  1. well to pick up on the marginal productivity distribution idea, you write that "movements in wages and prices get us out of a recession ..." but maybe a heterodox critique here would be that wage and prices do not move as the model assume, required for policy makers to engineer an exit from recession in the fashion you describe? Whether they would then go on to say that lowering interest rates does not help receovery in recessions, I do not know.

    An aside. I like this from the "tribe" post you linked to: "A give-away signal of a tribe member is that they will deny the religious nature of their tribe". Presumably the only way to demonstrate you are not a tribe member is to say you are a tribe member.

    1. On the aside, I'd add that it is a good job he has not noticed the funny way we shake hands.

  2. Paul Krugman's excuse for mainstream economics not predicting the crisis is that it failed to notice the rising importance of shadow banking. I'm not sure if you agree with that.

    Using even a very basic post-Keynesian analysis would have illustrated some of the dynamics and dangers of rising debt income ratios. You don't have to understand the mechanics of shadow banking to have noticed what was going on with debt levels.

    I think the question is not whether New Keynesian analysis can cope with looking at such things - I'm sure it can. The question is why was so little attention paid to it beforehand. I suspect that the reason is that use of reference agents doesn't naturally suggest looking at things like debt, which by its very nature requires heterogenous agents.

    My problem with the mainstream stuff is not that I think it is wrong - just that an excessive reliance on it at the expense of alternative approaches gives too narrow a perspective.

    1. Heck, there's also no excuse whatsoever for not having noticed the dynamics of shadow banking. Anyone who had money in a money market fund -- and most tenured economics professors are rich enough that they probably do -- need only have read the damn annual reports mailed to them every year, in order to notice that something hinky was going on.

    2. I'll go further: mainstream economics consistently pays no attention to the insights and warnings of Bill Black. Black, coming from a background of professional regulation and criminology, is firmly in the institutionalist tradition of economics, if you think about it, but is simply ignored by the mainstream because -- what? They don't like to talk about fraud and crime?

      When there's massive fraud and crime going on -- when fraud is *actually the standard business model* of the largest banks in the US (as Bill Black has laid out in great detail) -- you really cannot ignore it. And yet most economists ignore it completely. This is flim-flam -- the abetting of fraud.

      Mr. Wren-Lewis, you are an essentially decent person. Try including a fraud factor in your models; assume that firms are (a) running cartels and (b) actually cheating their workers and customers, i.e. not giving them what they promise. Then assume that workers and customers know this but have few alternatives.

      Do your models have *any* way of including this? If they do, what predictions do you get? Are those predictions accurate? Some of the heterodox are quite capable of making models which make accurate predictions of what will happen based on this situation.

    3. The problem in predicting the current great depression was not the models used by mainstream economists, it was psychological. During a time of plenty, with the great recession almost 80 years in the past, it is very hard for an economist (or anyone else) to adopt the position that the world is heading towards a new great contraction. In the kind of situation we were in during the early 00's, it was hard to even imagine that another recession (much less a great depression) was in the making.

      After all, what if your model is wrong? All economic models are abstractions and involve simplifications, none of them are correct in all situations. Perhaps you've made a mistake? Maybe the economy has changed so much that these old models are no longer useful?

      Yet despite all this, there were several mainstream economists who looked at the debt data and predicted a recession. As Joseph Stiglitz writes in "Freefall", there was a group of economists (that got together during the various annual gatherings) who were not only bearish about the economy but also shared a set of views about why things were about to go sour. He himself repeatedly predicted a crisis in his speeches at Davos during the years before it happened.

      Then there were other mainstreamers such as Kenneth Rogoff and Morgan Kelly who, when persuaded to look at the debt numbers, realized that things were about to get very bad.

      In short: it's easy to criticize in hindsight, but the problem was not with the model but rather with the kind of mindset that existed before the crisis. The models predicted a depression but (many of) the economists did not.

  3. Dear Simon,

    Thanks for your response. I have posted a counter titled "Looking for flimflam: some hints on where to find it" on my website at



    1. Dear Tom. I was going to put these responses as a comment to your post but could not see how. So my apologies to any other readers who will have to flip back and forth.

      (1) Honesty in Labeling. New Keynesian theory allows central banks to focus on movements in aggregate demand in analysing what will happen to output and employment in the short run. Is that so different from what the General Theory implies?

      (2) Fresh/salt as extremes. I agree: if people think that, they are wrong. I suspect a one dimensional view about what macroeconomists think is too simplistic anyway

      (3) Marginal productivity theory. I think this may be a digression. The simplest New Keynesian model ignores capital – that is why I talked about intertemporal consumption. So New Keynesian theory is not dependent on the impact of interest rates on capital. I also think that allowing for imperfect competition is more important than you suggest, because it makes understanding why firms respond to demand a lot easier.

      (4) Price flexibility restores full employment? Not in a liquidity trap! And outside of that, only through the actions of sensible central banks. See Nick Rowe below and his latest post. But I agree that this may underestimate complications caused by debt adjustment.

      (5) The big enchilada. I have some sympathy for this. One of the achievements – from a mainstream perspective - of New Keynesian theory is that it allowed Keynesian analysis to be cast in conventional microeconomic terms, of identifying the market imperfection that justifies ‘intervention’. Most NK economists should see the efficient full employment equilibrium as a convenient construct that allows abstraction, and nothing more. I think this has benefits, but I also think that there were two unfortunate consequences of this conceptualisation. First, it encouraged the idea that there was some concept of a non-interventionist monetary policy, whereas I do not think there is any such thing. It also allowed the idea that if prices were ‘flexible’ Keynesian analysis becomes redundant, but it does not if monetary policy is disabled, or badly designed.

  4. Simon says "I admit to not being terribly concerned about what Keynes really meant". Why not? Is he also not interested in what Smith, Ricardo, Marx, Marshall, Pigou, Friedman (etc., etc., etc.) really meant? If so, what should we conclude? That the only meaning Simon is concerned with is Simon's? Or that we should emulate him and demonstrate disregard for what he has to say?

    1. Because I'm interested in ideas, and much less who happened to come up with them. In addition, only looking at the texts of 'great men' is a huge insult to every other economist.

    2. And every woman. Particularly Joan Robinson. A lot of people have probably forgotten the theory of Monopolistic Competition.

      She was also someone who was not happy with the misinterpretation of Keynes. (And Hicks himself later regretted it.)

      Where Rational Expectations Theory is wrong is assuming that all relevant and useful knowledge is incorporated into the latest paper in the JME. Intellectual progress is not linear. (This by the way is a major argument against neo-liberalism in political science theory). What theory was more useful in dealing with 2008. The General Theory or Prescott/Lucas/Sargent?

      Intellectual progress in the humanities often involves going back into understanding what was learned in the past. Understanding what Keynes actually said is important. For example, it is important to understand that you do not need to have price rigidity to get effective anti-cyclical policy. If it was this Keynesian policy, in the correct sense of the word, which was used to get out of the Great Depression - we need to understand it and differentiate it from what it was not.

    3. While I guess it's sort of interesting if price rigidity isn't neccessary for anti-cyclical policy, what does it really matter? There is overwhelming empirical evidence that wage and price rigidity are a part of economic life. Therefore there is nothing wrong with using models based on those things.

  5. I would certainly like to see more realistic models of the wealth effect since I can only assume the simplistic models I have heard of are pranks. Can anyone believe these?

  6. Dear Simon Wren-Lewis:

    You ask for some help with Keynesian views. Here are my thoughts:

    "What New Keynesian theory does need is that falls in real interest rates stimulate aggregate demand (i.e. some form of IS curve), and in the basic model this comes from changing the intertemporal pattern of consumption. Is that wrong?"

    Yes, it's wrong. Keynes's theory is a theory of consumption, based on income. Saving is the residual. Interest rates do not affect aggregate saving; hence the intertemporal pattern of planned consumption plays no role.

    "What explains cyclical unemployment is real interest rates being at the wrong level. Movements in wages and prices get us out of a recession because they lead the central bank to reduce real interest rates. At the zero bound they cannot do that, and in those circumstances wage and price flexibility could make things worse. Is that wrong?"

    Yes. Keynes did not offer a theory of “cyclical unemployment.” He offered a theory of underemployment equilibrium. Interest rates do affect business investment, and in the modern world, household durable-goods consumption. But that effect, which bears on cost, is usually small compared to that of the “marginal efficiency of capital,” also known as animal spirits. A decline in wages and prices per se increases the real interest rate (measured ex post), so the action by the central bank that you describe merely offsets this increase, but in any event, the effect is small since the psychology of a slump is overwhelming. Downward wage and price flexibility always makes things worse, not merely at the zero bound, since it always increases the real burden of debt.

    "Now it is true that the standard New Keynesian model assumes a labour market that clears, but a model that replaces this with labour market imperfect competition would not behave very differently. That is what I actually teach." 

    Chapter Two of the General Theory abolished the supply curve of labor, hence the “labor market”, and transferred the determination of employment to the domain of effective demand. Businesses hire when they can sell the goods that their employees make, and not otherwise. Any model with a “labor market” is an anti-Keynesian model.

    "Equally the basic New Keynesian model assumes rational expectations, but if we want to change this to a case where agents make predictable errors that is easy enough to do."

    Rational expectations does not belong in any model that calls itself Keynesian. For a Keynesian theory, you do need to assess expectations, but whether they are found to have errors, ex post, is not important. What matters is the state of belief at the time decisions are made.

    "(I think what I teach is pretty close to how many central bankers think, if not the rest of 'my tribe'!)"  

    Not in my experience, though I may have known a different generation of central bankers. But that's a detail.

    I hope this helps clarify some of the key issues.

    James Galbraith
    University of Texas at Austin

    1. James:

      1. In an New Keynesian model. for a given nominal interest rate set by the central bank, increased price flexibility is always destabilising, precisely because it causes the real interest rate to move in the wrong direction. Unless the central bank adjusts the nominal interest rate by *more* than this, the economy implodes (it reaches an unemployment "equilibrium" with 100% unemployment).

      2. " Businesses hire when they can sell the goods that their employees make, and not otherwise." That is also exactly true in New Keynesian models. Draw a simple labour market diagram, with W/P on the vertical axis. The New Keynesian labour demand curve is vertical, at the level of employment needed to produce the amount of goods that firms can actually sell, given demand. (New Keynesian models violate the "first classical postulate", even if we amend that postulate to include monopolistic competition.)

    2. 1. This is a modification of what Simon wrote above. It appears we agree: (a) nominal interest rates are set by the central bank, not in a loanable funds market, and (b) wage-and-price cuts as policy are (almost) always a bad idea.

      2. Once you eliminate the labor supply curve, as Keynes did, then you don't have a labor market at all. That is, real-wage-adjustment plays no role in the story, and therefore there is no market. Neither one that "clears" (as Simon wrote above) nor any other kind. Given a vertical labor demand curve, you can argue that this is (practically) the same thing. But then, why introduce all the confusing verbiage? Keynes got rid of it; you can too.

    3. James,

      I do not think you are answering the questions. For example, Simon wrote "New Keynesian theory [requires] that falls in real interest rates stimulate aggregate demand (i.e. some form of IS curve)," and asks whether it is wrong to think lower real interest rates stimulate aggregate demand. He says that in the *basic* model this comes from changing the intertemporal pattern of consumption, but this is just how the mechanism is implemented.

      You response saying that's not how Keynes did it. That's not the question.

    4. It's not necessarily wrong to think that lower interest rates stimulate demand, but it would be wrong to conclude they do simply because certain assumptions give that result. Even if you want to stick with rational optimisers, it's not hard to imagine a utility function that provides for a very low degree of inter-temporal substitution. Put that into an OLG model, where households have finite time horizons and you can easily get the opposite response of spending to interest rates.

      I don't see how you can conclude one is better than the other simply on the basis of some rather ad hoc assumptions.

    5. see Robert W's response below. This raises the possibility that the policy recommendation is correct (lower interest rates) but the mechanism in the model is wrong. I shouldn't try to speak for him but I think this is what Simon's after.

      One potential response is that we shouldn't take the mechanism in a simple NK model with no investment too seriously. Another would be that the mainstream needs to build an NK model which does a better job of capturing how firms make investment decisions and relies less on household consumption Euler equations. Afaik dislike of consumption Euler equations is quite widespread in the mainstream (I half recall an anecdote about Sargent rubbishing them). This could then be a constructive dialogue - the heterodox could say "you need to fix this bit because it's wrong" (not because it's not what Keynes wrote) and then the mainstream could go away and do it.

    6. I would hope that is the sort of constructive dialogue that would come out of this whole process. I think the number of heterodox economists who would think it mattered what Keynes thought, rather than what actually made sense, would be a small minority. The problem is when economists on either side focus only on the most narrow-minded views expressed by the other side.

    7. James

      Thanks for your response. I'm glad Nick got in a reply first, because he makes some points more clearly than I probably would have. (His latest post ( is also spot on.) In the NK model wage and price movements matter ONLY because of what they make central banks do.

      I think we agree that there is an IS curve. If its via consumer durables and investment rather than non-durable spending, fine - I think these are details. (To be honest, I focused on aggregate consumption because I wanted to avoid getting into capital, where I know there are issues.) Your view is that any efforts by central banks to lower real rates will be insufficient to offset animal spirits. Would you have the same view in reverse in a boom?

      I think the labour market is not central, which was what I was trying to say in my post. It matters in a NK model only in so far as it adds to any change to inflation, which matters only in so far as it influences central bank's decisions on interest rates.You ask, in response to Nick: "But then, why introduce all the confusing verbiage?". Here I think part of the answer is so that RBC people can relate to what is being done. But if it succeeds here, but does not compromise the model, where is the harm in this - except perhaps that it might mislead others.

    8. Begging to differ, Simon's question was: "where ... do I locate the heterodox (post-Keynesian or whatever) critique of New Keynesian analysis?"

      My answer is, you can start with Keynes -- he was a pretty good theorist on these issues.

      I could have pointed to my 1994 textbook, Macroeconomics, co-authored with William Darity, chapter 13.

      But Keynes is easier to find.


    9. of course mainstream NK models with firm investment decisions already exist. Here's the first one google hit for me.
      I have no idea if that goes far enough to satisfy this particular criticism

    10. James - I'm not sure if your reply there was directed at me but, to clarify, I do believe that Keynes made enormous contributions to economics that are still valid and useful today. I just don't think it matters that it was Keynes that made them. If it turned out that, in fact, that wasn't what he meant after all, it wouldn't make any difference.

    11. Messages crossed!

      Simon, thanks for your reply.

      I tell my students that the IS curve is not a bad way to summarize some things in a simple way -- but not to get over-committed to it, since its location is not very stable, and the whole apparatus tends to focus attention, excessively, on the equilibrium position.

      Can the central bank choke off a boom? Maybe, with extreme measures! I was around (on Capitol Hill) in 1981 when Paul Volcker choked off a weak, early recovery -- and that took brutal measures. Off-hand I don't think that I know a case where a central bank has choked off a real boom, at least, not in the US. They famously didn't do it in either 1928-9 or 1998-2000.

      The idea of central banks working on wage-expectations has an interesting history, with roots in the relationship of the Bundesbank, the exchange-rate of the mark, and the role of IG Metall as the leading wage-setting union in Germany in the old days. And it was a big idea in the UK, if I recall correctly, in the early Thatcher period.

      It got taken up by economists in the US, oddly, partly as a byproduct of the congressional oversight hearings into monetary policy, initiated in 1975 (another thing I was involved in), which gave the Fed an open microphone to the US economy. But its application to the US was always a bit far-fetched; it was never rational for a worker to accept a lower wage rate, otherwise achievable, because some other person might then be punished by a higher interest rate. (I've written about this over the years, mainly in a book called Balancing Acts, back in 1989.)

      Finally, on the labor market, your response is very interesting! My reply is, likely, the one you may expect. I do worry about misleading a lot of other people -- who might be open-minded on these questions. I've no interest at all in what the "RBC people" think.

      But if you can get through to them, more power to you.


    12. James,

      I think I misread you. I thought you were not answering the substantive questions, but I see you meant "Keynes wrote this" to mean something like "Keynes wrote this, and this is where the mainstream is substantively wrong "

    13. Correct. And note that, in the longer sentence you have in quotes, those are two independent clauses. It's not an "A, therefore B" sentence.

      I would defend either proposition separately.


    14. James: when I think about NK models, I like to delete the labour market altogether. You lose (almost) nothing by doing this. Think of self-employed worker/firms, selling services to each other. Labour and output are the same thing. The demand for output *is* the demand for labour. And if the central bank temporarily sets the interest rate too high, given expected inflation, and expected future demand (animal spirits?), those worker/firms will be driven off their labour/output supply curves, thereby violating Keynes' second "classical" postulate, even if we amend it to allow for imperfect competition.

      Yep. Those NKs are pure liquidity preference guys. Except, they want the central bank to try to set the rate of interest where the loanable funds theory says it should be.

      Thanks Simon!

      (By the way, James: if you really want to give the New Keynesians a hard time, you could legitimately accuse them of just assuming (people in their model expect) full employment in the long run, even though there is nothing in their model to make this the *only* rational expectation, *even if* the central bank sets the rate of interest exactly right. Without that ad hoc assumption, NK models are even more extremely "Keynesian" than Old Keynesian models.)

    15. James,

      "Can the central bank choke off a boom?"

      Well, perhaps just choke in general? Marcus Nunes seems to think so:

    16. The Market Fiscalist2 May 2014 at 19:35


      "By the way, James: if you really want to give the New Keynesians a hard time, you could legitimately accuse them of just assuming (people in their model expect) full employment in the long run, even though there is nothing in their model to make this the *only* rational expectation, *even if* the central bank sets the rate of interest exactly right. Without that ad hoc assumption, NK models are even more extremely "Keynesian" than Old Keynesian models"

      With friends like this who need enemies ?

    17. If you told me "in this model, during recessions people act as if they expect things to get back to normal eventually" I'd find that pretty easy to swallow.

      How different is the assumption about the long run that Nick refers to from that?

  7. Happy to have a discussion. I am the professor, part of the heterodox economics department at UMKC, referred to above in one of the comments. I was formerly a colleague of James Galbraith at UT. I am a white-collar criminologist, a former financial regulator and a recovering litigator. In economics jargon, much of my work relates to the micro-foundations of macro.

    As the commentator noted, I argue that the evidence indicates that "accounting control fraud" epidemics were the primary driver of the second phase of the S&L debacle, the Enron-era scandals, and the current crisis in the U.S. (and Ireland, Iceland, and probably the UK). We used these insights to contain the S&L debacle and prevent it from becoming an event large enough to cause a macro crisis. One way of considering our work is that we have established that Minsky's "ponzi phase" is not a metaphor. We focus on the perverse incentives of the bankers (which as Akerlof & Romer 1993 explained -- citing our work -- can often be directly contrary to the bank's incentives). We demonstrate that fraudulent bank CEOs can create a series of "Gresham's" dynamics that can make control fraud common and suborn supposed "controls," and that the "recipe" for optimizing accounting control fraud is an ideal means of hyper-inflating financial bubbles.

    Classical economists would have had little difficulty understanding our work. Neoclassical economists, assuming perfect, cost-free information, assumed fraud out of existence. Modern finance scholars, via "efficient markets" and "rational expectations" implicitly assumed fraud out of existence. Implicit assumptions are the most dangerous because they do not have to be considered and defended. White-collar criminologists falsified the efficient market hypothesis decades before it was developed by finance scholars. Our work also explains why (1) econometric studies of financial products and practices done of fields beset by accounting control fraud will often have the wrong sign, (2) why spreads between increasingly high risk home loans and conventional loans tended to narrow rather than explode, (3) why loan loss provisions fell to record lows as loan risk increased massively, (4) why accounting control fraud is a "sure thing," and (5) why the officers controlling the purchasers who knowingly acquired massive amounts of fraudulently originated loans in the secondary market were eager to follow the financial version of "don't ask; don't tell."

    What can we do to aid the discussion you have requested?

    Bill Black

    1. Dear Mr. Black,

      Please give us a concise explanation of your term, 'accounting control fraud.' Sounds like jargon to me.


    2. Yes, it's a term of art. Control fraud occurs when the people controlling a seemingly legitimate entity use it as a "weapon" to defraud. There are several variants of control fraud. Accounting is the "weapon of choice" in finance. Here is the "recipe" for accounting control fraud by a lender (or loan purchaser).
      1. Grow like crazy
      2. By making (purchasing) really crappy loans at a premium (nominal) yield
      3. While employing extreme leverage, and
      4. While providing only trivial allowances for loan and lease losses (ALLL)

      The recipe produces three "sure things." The lender (purchaser) will report record (albeit fictional) income in the near term, the controlling officers will promptly be made wealthy by modern executive compensation, and the lender (purchaser) will suffer catastrophic losses. Note that these sure things are captured in Akerlof and Romer's title (1993) "Looting: The Economic Underworld of Bankruptcy for Profit."

      Other variants of control fraud are also likely to be familiar to you. Anti-purchaser control frauds defraud the purchaser about the quality/quantity of the goods or services sold. (Think "lemons" markets -- and note that many of these fraud variants maim and kill.)

      Anti-public control frauds (e.g., illegal dumping of toxic waste and tax fraud) harm the general public.

      Anti-employee control frauds (defrauding the workers of their pay; or providing a deadly work environment while misleading the workers).

      Each of these forms of control fraud is (now) capable of producing a "Gresham's" dynamic (Akerlof 1970) in which bad ethics drives good ethics out of the markets or professions. (Prior to the introduction of modern executive compensation this was not true of banks following the "recipe.") Fraudulent CEOs running control frauds often deliberately generate a Gresham's dynamic in order to suborn (rather than "defeat") supposed controls (e.g., appraisers, auditors, and credit rating agencies). The "independent" professionals become among the most valuable fraud allies.

      "Private market discipline" is an oxymoron in the presence of accounting control fraud because the record reported earnings make creditors eager to fund the rapid growth of such frauds. Banks fund, rather than "discipline," accounting control frauds (which is why the frauds are typically able to obtain exceptionally high leverage).

      Fyi, I named it "control fraud" because the key concept is that the folks who control the seemingly legitimate entity (for-profit, NGO, or governmental) pose unique risks. The titles of the person(s) exercising this control vary enormously. For purposes of discussing the role of epidemics of accounting control fraud in driving our recurrent, intensifying financial crises you can substitute "CEO" for "control" with minimal loss of generality.

      Thank you for your question.
      Bill Black

    3. Thanks for laying out the basics so clearly, Professor Black.

      I'd like to note that major US banks (JP Morgan Chase, Wells Fargo, Bank of America, Citibank, Goldman Sachs) -- or more accurately, the CEOs and other executives leading them -- have all been shown to be engaging in several different forms of control fraud continuously since the mid-2000s:
      - anti-purchaser fraud against the purchasers of securities (selling essentially fraudulent securities; later, foreclosing on the "collateral" on the securities on their own behalf and not crediting the value to the securities holders; and a few other harder to explain forms)
      - anti-borrower fraud (first by extracting illegal "fees" from borrowers, later by foreclosing using forged documents)
      - anti-depositor fraud (almost entirely illegal "fees")
      - anti-municipality fraud (failing to pay registration fees for mortgages, for example)
      - anti-stockholder fraud (cooking the books, presenting worthless mortgages as valuable, boosting earnings by claiming a drop in their creditworthiness as earnings -- yes, this really happened, and more)

      You can look up each of these frauds separately, there's now years of discussion online about each one. And I've left some of them out!

      Workers who protest the frauds get fired; those who aid and abet get promoted.

      Wells Fargo has a *manual* instructing its employees in committing foreclosure fraud!

      The business model used refuses to loan to creditworthy people, because creditworthy people can fight back against being defrauded. The megabank business model is all about loaning to suckers who won't be able to defend themselves in court.

      You'll see this in credit cards as well as mortgages: it's very hard to get a credit card from one of these companies if you have a good credit rating -- but if you have a bad credit rating and no income, they'll happily lend to you. The credit card "accounts receivable" are then promptly resold to "investors" (a.k.a. "muppets", in banker terminology, or "suckers" as we would call them).

      The ratings agencies were paid off to rate the worthless securities as AAA, as was revealed a few years ago.

      The regulators have been extremely suborned. This is well-documented; the SEC and DOJ and OCC and Federal Reserve have absolutely refused to do anything about any of the crimes. When the FDIC head tried to do something, she was attacked by all the other "regulators" and then forced out. The Federal Reserve has actually been giving these criminals 0%-interest loans. They have of course been using this to pay themselves bonuses.

      State Attorneys General have also generally done nothing, though they have not been "aiding and abetting" in quite the same way as the federal regulators.

      This has gotten bad enough that the fraudulent banks have felt free to expand their businesses into yet new, more exotic forms of fraud. The culture of fraud is endemic in the organizations now.

      At the moment, the only check on the criminal racketeering behavior of these major banks is private lawsuits; unfortunately, an awful lot of judges assume honesty on the part of the bankers, despite the massive, bulk forgery of documents. Still, it's slowly getting through to the minds of judges -- it's been going on for over a decade.

      Now, back to my point: how do you model an economy with a banking system which is *dominated* by companies which behave like this? It's too large a factor to ignore when the biggest 5 banks are doing it systemically (as are several in the next "tier").

      Yet most macroeconomists ignore it completely. Apart from Professor Black -- who as he says is really doing micro -- and those who listen to him.

    4. Particularly noteworthy for macro modelling are:
      - the *inverted creditworthiness* effect, where only those who *cannot* pay back their loans get loans. Early on in the cycle, this boosts aggregate demand, as the poor have more money;
      - the *debt slavery* effect, where people have been enticed into perpetual interest payments without any chance of clearing the principal. Later in the cycle, this *crashes* aggregate demand, as the poor have no money;
      - the confidence effect on investors; as they realize they've been defrauded, they start holding what money they have left out of the banking system, except for government-insured deposits;
      - the diversion-of-central-bank-funds effect, which I've talked about before; when the bank gets lent money at 0% by the Federal Reserve, to the extent possible, the crooked CEOs transfer it directly into their own pockets as bonuses. Additional money is used for covering up various other frauds. The money does not go into productive lending, or at least not if the CEO can help it.

      This creates a very different model of macro, doesn't it?

      Now, in Canada it seems this isn't the institutional structure they're dealing with. Lucky Canadians. In the US, this is what we're dealing with.

    5. Bill, I'm surprised you see much conflict between your work and mainstream. Differences in information between agents has been central to microeconomics in the 70s. The fact that information in financial markets is costly to obtain was pointed out by Grossman and Stiglitz in 1980, who argue that means informationally efficient markets are impossible.

      The dominant theory of why firms have to fund investment out of free cash flow is the "pecking order theory" -- it's harder for firms to use outside finance because it increases the incentives to steal.

      Honestly, your idea of "accounting control fraud" is perfectly easy to explain to the mainstream. The thing that's hard to explain from a neoclassical point of view is not that people try to commit fraud, but that people let themselves be defrauded.

    6. Well, I've been trying to explain it to the lost stream for 30 years (since joining the Federal Home Loan Bank Board on April 2, 1984 to be precise), so I have a good basis for my comments. While I have many successes, more typical was this response from Cochrane to a profile in Playboy of all places about the work of the UMKC economics department.

      "I mean, every• now and then there's an excluded subgroup that turns out to be right," said John Cochrane of the University of Chicago. Cochrane speaks proudly for mainstream, also known as neoclassical, economics. Talking with me over the phone before the conference, he made clear that his condemnation was general: "I haven't read their specific work. I'm busy, and I try to read what is considered interesting and valid." His position on heterodox economists was unambiguous: They're kooks. "They are about two percent of academe and about zero percent of finance." He was dismissive of their prediction of the credit-bubble collapse. ‘Beware those who predict nine of the last two crashes, okay? They're just not rigorous and don't use modern mathematical tools. This business is a wide-open meritocracy. You have to distinguish between closed minds and a lack of quality. The perception is that this is 1969 stuff. Give me new data and new ideas.’"

      To paraphrase: "I haven't read any of their work, indeed I've never read any of the criminology literature, indeed I don't even know that I'm commenting on the criminology literature but I'm sure its worthless or I would have read it." This is in response to a journalist starting by noting our predictive successes.

      If you mean that if they had open minds they would listen to the experts on fraud because good white-collar criminology has to be good economics/finance and assertions about fraud by economists that have been falsified by criminologists have to be not just bad criminology but bad economics/finance, you are correct. Our work is all about incentive structures -- it should be easily accessible by economists. The problem isn't the soundness of our work, it's that the theoretical and policy implications blow up so much unacknowledged dogma dear to so many economists. 1) Efficient markets, 2) efficient contracts, 3) private market discipline, 4) the value of requiring sub (or convertible) debt as "capital" for banks, 5) the desirability of the regulatory "competition in laxity", 6) the claim that more consumer choices are unambiguously desirable for the consumer, 7) the claim that greater bank asset powers combined with a "prompt corrective action" mandate provide a superior financial system, 8) the claim that repealing Glass-Steagall was desirable, 9) the claim that "sophisticated" market participants (e.g., derivatives counter-parties) posed no material fraud risk, 10) the entire law and economics canon with respect to corporate law and governance, 11) the "agency cost" literature (which overwhelmingly assumes that agency problems are resolved successfully by the principals), 12) the claims that we can rely on the "reputational" interests of (fill in the blank: CEOs, auditors, etc) to prevent abuse, 13) the claim that modern executive compensation "aligns" the interests of managers and shareholders, 14) the claim that econometric techniques are superior (as I noted, they produce the wrong sign in the presence of accounting control fraud), 15) virtually all pricing/risk models -- which falsely assume an exogenous distribution of risk (when neoclassical economic policies govern banking we create intensely crimingoenic environments that produce vastly increased losses, and 16) the entire macro canon of explaining bubbles and financial crises which implicitly assumes fraud out of the explanation contrary to the available facts. And that's off the top of my head.

      [end of part 1 of response]

    7. part 2 of response:

      Yes, economics now purports to take information and agents seriously, but you know full well that it is taught in economics programs worldwide overwhelmingly as a triumphal tale of agents motivated (e.g., by modern executive compensation) to use information in a manner that enhances efficiency and mutes agency abuses. The reality is that it primarily does the opposite. How many readers of this blog, when they took university courses in economics (1) read any criminology literature and (2) studied fraud as a serious concern out of the economics literature on fraud?

      "Pecking order theory" is an example of the long-falsified triumphal version of economics. As I explained, and as you know from the most recent crisis, one of the factors that no one disputes is the massive increase in leverage. What our research can add to that is that they provided used the funds provided by this leverage (rather than "free cash flow") to fund "investments" in pervasively fraudulent mortgage product. The phrase "people let themselves be defrauded" is symptomatic of the problem. First, it takes a pure rational actor approach, and only theoclassical economists could still be relying on such long-falsified approaches. Second, it disparages the victim. Even theoclassical apologists such as Easterbrook & Fischel concede that shareholders are not in a position to exercise effective "discipline" through their investments. If you mean creditors (mostly banks), you are assuming that they (having never heard of control fraud in their econ and B School programs) somehow became expert in spotting such frauds. There is no basis for that assumption. What they do see is Enron reporting record earnings, blessed by AA's clean opinion, with the CFO on the cover of CFO magazine, and the company praised in Fortune. They let their banks get defrauded because they normally make money lending to firms like Enron. There is direct evidence that key senior officers at Enron, who were honest, did not understand the concept of accounting control fraud.

      Vincent Kaminski, the (honest) former chief risk officer of Enron (and a brilliant quant) recently wrote.

      "There is one particular book I wish I had read in the early days of my business career, which would have saved me and the firms I worked for a lot of money.
      Many companies that have eventually gone bankrupt have been very successful at projecting the image of unstoppable success for a long time
      The book, entitled The best way to rob a bank is to own one: how corporate executives and politicians looted the S&L industry, was written by William Black, associate professor of economics and law at the University of Missouri-Kansas City. It is based on his experience as a regulator of savings and loans (S&L) institutions during the S&L crisis of the 1980s and early 1990s. Within its pages, Black introduces the concept of ‘control fraud' – effectively, a very simple recipe for great riches and limited civil and criminal liability."

      Again, I value your ideas on how to get a message of the findings of another discipline, which has the relevant expertise, to become a regular part of what it means to study to be an economist or finance expert. I agree that while the theoretical and policy implications threaten a vast number of the most important economic propositions, our mode of analysis should be congenial to a wide range of economists.

      We are, however, inherently threatening to those who rely on unsound models and forms of econometric study. It's very bad to get the wrong sign and the models lack any claim to statistical validity, so in my most Irish moments I even hope to influence the quants. Kaminski is a good start.

      Bill Black

    8. I'm guessing this commenting forum is already dead, but in case it isn't I just wanted to say that I find the ideas shown by Bill Black both intriguing and illuminating! Your explanation of the term 'accounting control fraud' was very much neccessary for me to understand the first comment, so thank you for that.

      Of course it was possible for mainstream economists to notice the problems that were growing in the financial sector (and several did, see Joseph Stiglitz for example). Other mainstream economists such as Paul Krugman would almost certainly agree with most of your criticism concerning economics dogma.
      However, mainstream economics still lacks actual modelling to explain much of what goes on in the financial sector and exactly how it affects the broader economy. A lot of new models include a financial sector behaving in a Minsky-esque fashion but it is still mostly exogenous. In that sense this looks like it could potentially be very useful indeed.

      You have convinced me to read the couple of Akerlof books I have lying around somewhere. I suppose I'll have to go buy something of Kaminski's as well.

      (My apologies if parts of this post don't make any sense.)

    9. Thank you for the long reply. John Cochrane is an efficient-market fanatic, so his reaction is not that surprising. But Cochrane is far from the whole field. Apparent deviations from the efficient market are well-documented (momentum, short-term reversal, accruals). There is a large literature of "behavioral finance" which investigates how people actually make decisions in financial markets, rather than how they would make them under the assumption of perfect rationality. At this point, particularly after the widespread fraud we say, the idea that firms will commit fraud, and rational investors are insufficient to stop them is not a hard sell.

      The big mystery, from the point of view of rational expectations, is not why people try to commit fraud (a selfish agent with rational expectations will try to commit fraud at every opportunity), but why people are so easy to defraud. So the mystery is given that investment banks had clear incentives to stuff garbage into their CDOs, why people buy them? Why does anyone do business with Goldman-Sachs? And I really do think this is something of a mystery, with or without rational expectations.

    10. << The dominant theory of why firms have to fund investment out of free cash flow is the "pecking order theory" -- it's harder for firms to use outside finance because it increases the incentives to steal. >>

      Think about what this statement -- "firms have to fund investment out of free cash flow" -- does to macro theories under which the central bank can influence levels of investment/consumption by changing interest rates for lending. It blows ALL such "monetary policy" theories out of the water, doesn't it? Lowering interest rates should do NOTHING because, based on this, firms and individuals don't borrow.

      So obviously this isn't entirely true, since we see some borrowing, but you get my point: if there's strong aversion to outside borrowing, this changes the entire model of how central bank interest rate changes effect the economy.

      Yet we still see mainstream economists claiming that "monetary policy" will have an effect. Even left-wing mainstream economists.

      This result should lead them to be calling for direct fiscal transfers -- "fiscal policy". Instead, they're IGNORING this result. Bill Black is right that macroeconomists are simply ignoring the results of his work. And they're ignoring the "pecking order theory" too.

    11. Walt: to answer one of your questions, people do business with Goldman Sachs because *there's nobody to do business with except the cartel of crooks*.

      Want to do an IPO? The crook cartel has cornered the market. If you're Google you may be able to bypass them, but most companies need an "underwriter", and they've cornered the market on it.

      I personally only use a small list of vetted firms. But you have no idea how much business I've simply lost access to because of this. It's actually hard to get a credit card without dealing with one of the crooked firms!

    12. Walt, Cochrane's statement indicates two things. One, he knew he would pay no cost to his reputation in the profession while making a statement that in any other field would destroy your reputation as scholar. Indeed, he knew that he'd enhance his reputation among those at Chicago that I so often criticize. Second, he wasn't simply dismissing me (and my colleagues) he was dismissing an entire field (criminology) with the relevant expertise and the work of Akerlof & Romer (1993) ("Looting: The Economic Underworld of Bankruptcy for Profit."). I reviewed over 70 articles purporting to discuss the causes of the crisis to see if they even analyzed the possibility of looting ("accounting control fraud") as a material contributor to the crisis; None of the articles discussed or referenced the criminology literature. Two cited Akerlof and Romer (1993), but neither applied their theory to the crisis. Again, there is no other field in which scholars could ignore a Nobel Laureate's theories (which proved to have powerful predictive success) in this manner and even get published in a journal with referees.

      The approach ("apparent deviations" from EMH) is characteristic of a major problem in economics education in which the supposedly normal case is "efficient markets" or "perfect competition" and "deviations" are consigned to the last two weeks of the course (which the instructor races through because he's behind his outline). Michael Jensen had the decency to be upset when he discovered that no article contesting EMH could get past a referee in the (top rated) finance journal he edited for so many years. As I noted, criminologists had falsified EMH three decades before economists proposed it.
      [end of part 1 of response]

    13. Part 2 of response to Walt]
      I would urge you to distinguish even more rigorously between firms and controlling officers. I know you understand the distinction. I quote you here:
      "The big mystery, from the point of view of rational expectations, is not why people try to commit fraud (a selfish agent with rational expectations will try to commit fraud at every opportunity), but why people are so easy to defraud. So the mystery is given that investment banks had clear incentives to stuff garbage into their CDOs, why people buy them? Why does anyone do business with Goldman-Sachs?"
      You ask several good questions. First, reexamine the fraud "recipe" for the officers controlling a firm that is a loan originator (or purchaser). You will note that they are the same recipe (other than one originates and the other purchases). Implication A: the secondary market was not necessary to the crisis (the reality is that originators did have "skin in the game" because of their "reps and warranties" -- note the litigation). The S&L debacle frauds and the Irish bank frauds in the current crisis did not rely on secondary market sales. Implication B: the recipes are compatible -- if the fraudulent originators choose to sell to the secondary market they will have eager buyers if the buyers are accounting control frauds. (See my papers on New Economic Perspectives -- UMKC's economics department's blog -- explaining the FCIC findings about the epidemic of fraudulent mortgage sales to the secondary market. But here's the ultra short version: the purchasers (nationwide average) were informed by the (not very) "due diligence" reviewer that 46% of the reps and warranties were false. Would honest officers have done the deals in these circumstances. The community of (fraudulent) interests between the officers leading the fraudulent originators and officers leading the fraudulent purchasers produced the financial equivalent of "don't ask; don't tell.") So the first stage answer as to why "people" bought the underlying fraudulently originated mortgages (appraisal fraud + "liar's" loans) is that they were running frauds. The second stage answer as to why folks bought AAA CDO tranches is even more interesting, for investigations have documented the extraordinarily large degree to which the investment banks "ate their own cooking" -- even of the AAA tranches, indeed, the "super senior" AAA tranches. That is explained overwhelmingly by the famous saying in the trade: "every trader's first option is on the firm." Merrill Lynch is a prime (pun intended) example. When you invested the firm's capital your nominal return was risk-adjusted for purposes of determining your bonus. Solution: buy vast amounts of the AAA super-senior tranches that ML had just structured. Risk weighting: zero. Nominal yield: superior to any other "risk free" asset. Result, another A" sure thing" -- the officers who caused ML to "eat its own cooking" by investing the firm's capital in purchasing the super senior AAA were certain (until the crash) to report a superb risk-adjusted return and receive very large bonuses -- and once the disaster hit they could walk away with no "claw back." And their practices of "eating their own cooking" flowed through the large (nominal) income/bonuses to the controlling officers who also were able to walk away without claw backs.

      As to why a German banker would buy a AAA tranche of a CDO that bore a materially higher nominal yield than other "risk free" assets -- the same reasoning applies.

      As to why folks use Goldman Sachs -- they believe the game is rigged and that Goldman's government connections rig it better than their rivals. They hope (I think erroneously) that Goldman's connections will exceed Goldman's officers' avarice.


    14. "As to why folks use Goldman Sachs -- they believe the game is rigged and that Goldman's government connections rig it better than their rivals. They hope (I think erroneously) that Goldman's connections will exceed Goldman's officers' avarice."

      I have met a number of Goldman Sachs partners and they strike me as very arrogant and remarkably untalented. Must be a dreadful place to work - but then this is about money. But clearly they know how to do something, and I guess the above has to be it.

      I would like to see this incorporated into the microeconomic foundations of analysis of the finance industry.

  8. Like the Apostle Paul, I defraud no one. I ‘m not into flimflam, and I am not a flimflam economist.

    All be economists as the field of economics is not restricted to NYT pundit Paul Krugman, or to ivory tower Oxford academedian Simon Wren-Lewis.

    An inquiring mind asks, what is money? Money is defined as the credit and trade that comes from the administration of a household or stronghold; and interest is defined as the cost of money.

    Economics is defined as the life experience between a person and another, a corporation, and the state, that is government; either it be ethical or pathological; it is the trust and flow that comes from sovereignty, and the model that best presents economics is the Dispensation Economics Manifest. presented here

    As communicated in Ephesians 1:10, dispensation economics is a theory of providence: it describes how God the Father, established Jesus Christ to provide for a world lost to sin, that is doubt.

    An economy is defined as the life experience that comes from the administration of the credit and trade that comes from a household or stronghold; an economy exists for the experience of life or the experience of death; this life and death experience is determined by the prevailing interest rate of the existing monetary regime and its monetary policies and schemes.

    The beast regime of regional governance and totalitarian collectivism emerged on October 23, 2013, replacing the democratic nation stage and banker regime, when the bond vigilantes in calling the Interest Rate on the US Ten Year Note, ^TNX, from 2.48%, and thus PIVOTED the world from the paradigm and age of liberalism, meaning freedom from the state, into that of authoritarianism.

    The failure of credit and death of currencies is underway as investors no longer trust the monetary policies of the world central banks to stimulate investment gain.

    The failure of credit came the week ending April 25, 2014, and constitutes the most significant economic event since President Nixon took the US off the gold standard in 1971

    The failure of credit pivots the world out of the age of credit and into the age of debt servitude, and is evidenced by the parabolic turn lower in Chinese Financials, CHIX, China Investments, YAO, China Technology, CQQQ, China Industrials, CHII, China Real Estate, TAO, as well as Regional Banks, KRE, the US small Caps, IWC, IWM, the National Bank of Greece, NBG, Greece, GREK, Ireland’s Bank, IRE, and Ireland, EIRL, as well as Credit Providers Visa, V, and Mastercard, MA, the nation of Russia, RSX, ERUS, and Debt Trades, such as Blackstone, BX, and Leveraged Buyouts, PSP, and manifests as the death of Major World Currencies, DBV, such as the Australian Dollar, FXA, and Emerging Market Currencies, CEW, such as the Chinese Yuan, CYB.

    1. My Friday on Haight-Ashbury... (not saying it's wrong)

  9. "What New Keynesian theory does need is that falls in real interest rates stimulate aggregate demand (i.e. some form of IS curve), and in the basic model this comes from changing the intertemporal pattern of consumption. Is that wrong? "

    Yes that is wrong. The intertemporal pattern of consumption has essentially nothing to do with real interest rates. This is a IV regression coefficient (or GMM if you prefer). This is the well known excess smoothness puzzle. In contrast, Keynes believed that the real interest rate principally affected investment. This is, in fact, the correlation that you see in the data (if you look).

    I do not consider it an typical of progressive research programs to move from a model which fits the data to one which doesn't.

    I think that you really should engage heterodox economists in debate. Such heterodox economists are paleo Keynesians. You often assert the superiority of new Keynesian models to 1960s era Keynesian models. I do not know the basis for this assertion (I do have to note that prominent Paleo Keynesians all assumed expectations augmented Phillips curves-- ask your colleague James Forder

    So, for example, you think the PIH is a better model of consumption than a constant times disposable income. However, the constant times disposable income model fits the _US data much better (warning pdf ). What convinces you that the PIH is anywhere near as good a model ?

    I ask again, what have microfoundations ever done for us ?

    By the way, over at Krugman's blog, I am trying to convince him that he is heterodox.

    1. "I ask again, what have microfoundations ever done for us ?"

      I always say the problem is bad microfoundations. There are serious problems with "Microeconomics 101" -- and this isn't being discussed nearly enough.

      The theory of the firm is especially problematic:

      One: it needs to incorporate cost-plus pricing as the main pricing mechanism for the average firm, since it is;
      Two: investors are maximizing their rate of return, not their total return;
      Three: managers are frequently maximizing their personal income, not the company's (the old principal-agent problem);
      Four: advertising/marketing (product differentiation / artificial demand creation) needs to be modeled as the typical firm's primary response to low sales, since it is;
      Five: Supply is not dependent on price in the short run, and is determined by technological factors and the availability of capital.
      Six: in the short run, the market NEVER clears and is never in equilibrium.
      Seven: In the medium run of several years, supply will usually increase if there are high prices, but it increases in a "step-change" fashion, not smoothly, and this involves capital expenditure.
      Eight: in the medium run, the market NEVER clears and is never in equilbrium; there is an oscillation as demand builds up to the point where someone decides to expand their factory.

      This is before we even start talking about Bill Black's work on fraud committed by the CEOs in charge of companies; firms suffering from fraud by the CEOs have quite different behavior from "legitimate" firms.

      And this is before we try to analyze weird firms like banks.'

      I haven't even discussed the problems with the microeconomic theory of the consumer, because they're smaller problems.

      Anyway, my point is that a halfway-realistic microeconomics might provide interesting foundations for macroeconomics. But nonsense micro isn't going to help you understand macro.

      Micro is much more rotten than macro.

  10. Hi
    I spent tens of thousands of hours trawling through tens of thousands of official institution documents here in New Zealand in regards to the internal dynamics of our money system.
    I now challenge the stupidity of nation-state government’s that outsource the accountancy of their primary credit base - based upon value of their own natural and people resource collateral - to then have private banks type that value into their accounts to then lend it back to the nation-state as interest bearing loans to circulate as the nations entire currency - under which terms and conditions oneday heading off your national debt and saying goodbye to your lenders to then live off the constructed assets is a mathematical impossibility – and is ultimately a wholely futile mission.
    My evidence of cause is here;
    Compilation of my researched tried - tested and suggested reform is here;

    1. "I now challenge the stupidity of nation-state government’s that outsource the accountancy of their primary credit base - based upon value of their own natural and people resource collateral - to then have private banks type that value into their accounts to then lend it back to the nation-state as interest bearing loans to circulate as the nations entire currency -"

      This benefits a few very rich people who operate the private banks. Those very rich people purchase control of the government by a combination of implied bribery ("you'll get a job here after you stop being a Congressman... if you help me") and propaganda ("free markets!").

      You can go through the whole story in the late-19th / early-20th century US. The very rich people I refer to were known at the time as the "Money Trust", a group of people who were wealthy due to their control of the money supply. JP Morgan famously among them.

      The problem is a political one, not an economic one; the reform is obvious -- and was even done by Abraham Lincoln when he issued "greenbacks" -- but the "Money Trust" making money off the current scheme will fight tooth and nail to prevent it.

  11. I am going to try to be constructive. I think that if you want to debate with a heterodox economist who will go beyond name calling, then it would be a good idea to debate Brad DeLong. I would also suggest Krugman, but he insists he agrees with you which would make for a very brief debate. I would also suggest Noah Smith, but it's a bit bold to suggest to an Oxford professor that he debate a SUNY Stony Brook assistant professor (who is very very smart).

    Also honestly trying to be constructive, I ask what you mean by "in terms of macroeconomic mechanisms" ? Does hydraulic Keynesianism count, or do you insist on agents with some objective and some possible irrational expectations ? Is it a macroeconomic mechanism if it isn't micro founded ?

    1. Robert. As I cannot remember disagreeing with anything Brad writes either, it would not make a good debate. I do sometimes disagree with Noah, and the only problem I have debating with him is that he writes better than me.

      A mechanism can be anything. I have a prejudice in favour of microfounded mechanisms, but not in the face of strong evidence otherwise, so you may yet convince me on consumption. (My views on consumption are very close to Chris Carroll's.)

    2. Thanks for your reply. You are always very polite. I think you write about as well as Noah Smith, that is very well.

      On Brad " "Let me note that I find myself with Robert Waldmann:

      Robert Waldmann: Commenting Before Reading: “The eternally simmering blog debate over ‘microfoundations’ has reached a sort of balance….

      I haven’t gotten a one-tenth of the way convincing answer to the question “what have microfoundations ever done for us.”""

      I haven't really kept up with Chris Carroll since he graduated (I mean received his BA). I am very delighted at the "may yet convince," even though it may refer to a probability on the order of one in a billion.

      That hope inspires me to write another post on consumption.

    3. Actually still trying to be constructive, I think your best way to contribute to the discussion is to act as moderator in a debate between paleo and new Keynesians. You often stress the value of eclecticism and propose working with both micro founded and aggregate models. Of course there is no reason for the participants in the debate to be in the same continent in this day and age. You could moderate the debate from a blog.

      Oh I seem to have reinvented mainlymacro

      Uh please keep up the good work.

      (I was honestly trying to make a constructive suggestion for possible improvement but I realize I can't think of improvements of your current effort).

      Your ability to be courteous when responding to harsh criticism is also much appreciated.

    4. "I have a prejudice in favour of microfounded mechanisms,"

      I do too, but I don't like microfoundations which are *false microconomics*.

      A lot of macroeconomists seem to assume that the stuff taught in classical microeconomics 101 is basically correct. It isn't. It's extremely, extremely wrong. The most egregious omission is marketing, which is often a first-order effect dominant over everything else, but I've listed several of the other problems below (and not even close to all of them).

      I'd be interested to see a macroeconomic model based on actually-empirically-demonstrated microeconomic behavior of firms (well, the CEOs of firms, really) and consumers. It'll be interesting.

      For one example, the standard response of firms to lower-than-expected sales is not to lower prices, but rather to advertise.

  12. Simon,
    Are you serious that you would like to have 'a debate about macroeconomics with heterodox economists, and have tried to initiate one in the past. A debate that gets beyond generalities (and name calling), and talks about actual macroeconomic mechanisms and what policy makers should do'?
    Funnily enough, we are also being thwarted in arranging a debate. Our offer to run an event called ‘Are reforms to the UK curriculum going too far, or not far enough?’ at the Bristol Festival of Economics fell on deaf ears. Perhaps you could put some pressure on Andrew Kelly to accept our invitation for 2015, or ask that the Royal Economic Society allows Post-Crash to run an event next year as part of the main conference and not as a fringe?

  13. Simon, I see that you've read Nick Rowe's latest post on the New-Keynesian conspiracy, however, did you read this comment by Rowe?:

    Do you have a response?

    1. Tom. On Nick's first point about growth rates I think this is a misunderstanding. We had a short back and forth about this after some recent post, but I cannot remember where. On the second I think there is an interesting issue here, but I'm not sure what the answer is. It could be very relevant for secular stagnation.

    2. The second point being "There is nothing in NK models that ensures that C(t)+G(t) will asymptote to Y*(t)?"

      Thanks Simon.

    3. Tom: this is the (useful but a little inconclusive) back and forth I had with Simon:

  14. In 2011, the Value Added Tax (VAT) was raised to 20% by Chancellor George Osborne, where it remains. I guess Chancellor Osborne is an anti-Keynesian.

  15. One of the best critics of mainstream economics is Cullen Roche:

  16. «mainstream economics consistently pays no attention to the insights and warnings of Bill Black. Black, coming from a background of professional regulation and criminology, is firmly in the institutionalist tradition of economics, if you think about it, but is simply ignored by the mainstream because -- what? They don't like to talk about fraud and crime?»

    Well, not if you want to have a prosperous career with many highly paid consultancy contracts.

    A little detail: Ken Lay of Enron fame endowed thirty-five professorial chairs (a trifling amount of money for him, it only takes a few millions to endow a chair) in accounting and economics.

    Also, the big mistake that Bill Black makes is that Usian voters care about ending fraud and theft: they don't, because they know that they would do the same if they could.

    Usians worry a lot about crimes committed by dark, brown or XY menaces; they don't feel that fraud and crime in Wall Street is an issue for them, and many feel that they benefit from it when they lead to house price bubbles.

    My usual quote from famous Usian political expect Grover Norquist:
    «But going into November, what actually saved it for the Republicans was the investor vote, which went heavily R. Why? One, they didn't blame Bush for the collapse of the bubble. They were mad at having lower stock prices and 401(k)s, but they didn't say Bush did this and that caused this. Secondly, the Democratic solution was to sic the trial lawyers on Enron and finish it off. No no no no no. We want our market caps to go back up, not low.
    The 1930s rhetoric was bash business -- only a handful of bankers thought that meant them. Now if you say we're going to smash the big corporations, 60-plus percent of voters say "That's my retirement you're messing with. I don't appreciate that". And the Democrats have spent 50 years explaining that Republicans will pollute the earth and kill baby seals to get market caps higher. And in 2002, voters said, “We're sorry about the seals and everything but we really got to get the stock market up.»

    1. Now that the upper middle class is finding that they're being cheated by Wall Street, this "I could be one of the scammers too!" dynamic is starting to fade away.

  17. Dear Simon and all those who have commented,

    As a member of the Post-Crash Economics Society and a true believer of pluralism within education, I just want to say how encouraging and refreshing it is for us all to see these debates happening. One of the primary aims of our campaign is to get academics, practitioners, students, the public and everyone in between to have these types of discussions. The more we see these the more we begin to understand just how rich our chosen discipline is. In our ideal world our undergraduate curricula would reflect these opposing views and allow us the space to discuss and develop our own opinions on economic matters. This is seemingly quite a way off but in the mean time it is reassuring to know that for the curious critical engagement is only a blog away.

    Let's keep talking!

    Post-Crash Economics

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