Thursday, January 5, 2012
The descriptive v. the normative in MMT as a macro theory
Distinguishing the descriptive (positive) from the prescriptive (normative) in MMT is theory-dependent. A theory is a generalized explanation that leads to predictions based on putative causation. Testing predictions formulated as hypotheses is the experimental aspect of the theory and it is part of the descriptive (positive) aspect, i.e., tests causal claims.
A scientific theory contains causal explanations that enable predictions. (There is a huge literature in the philosophy of science about nature of causality and its use as a theoretical tool.) This predictive capacity underlies the application of theory in engineering and technology. Broadly speaking, applied macro includes its application to formulating policy options. This application macro may result in a range of policy options. Options can be judged based on efficiency and effectiveness.
According Peter R. Drucker in The Effective Executive, efficiency is "doing things right," and effectiveness is "doing the right things." Assessing efficiency is a scientific (positive) concern, and the criteria for "doing things right' are generally clear and agreed upon.
Correctness wrt to effectiveness is based on the goals chosen. This is where the prescriptive (normative) enters. Economics does not supply policy objectives, which are a political matter, decided by representatives elected by citizens in a liberal democracy. Economists can only inform those responsible for governing about economic possibilities of various policy options.
The JG is part and parcel of the theoretical aspect of MMT as a macro theory that addresses reconciling the big three: production, employment and price. This is not a choice. Any macro theory that expects to seem credible in the currency academic universe of discourse has set these are priorities.
Take the JG out as a price anchor in addition to an employment buffer, and you don't have MMT as the macro theory it is. As Warren Mosler has said, the JG can be eliminated in making policy decisions, but don't then blame MMT economists if inflation results. One is just not following MMT as a macro theory anymore if one make that decision.
Of course, anyone can take other aspects of the MMT description and try to build another macro theory with knowledge that MMT economists have uniquely contributed. But it won't be Mosler-Wray-Mitchell (in temporal order) MMT macro, as amplified by MMT economists that have followed them in developing MMT as a macro theory.
That is say, the JG is not a normative policy option that is optional along a spectrum of policy options to choose from. It is part of the macro theory as a generalized description that enables prediction. MMT economists are firm in stating that if you want full employment and price stability, this is the only existing theory that shows the way to achieve it in the existing monetary and economic framework. Not that there cannot be others. But as of now, there aren't any.
It is also important to note that the JG is not an independent proposal. There have been JG type programs already, but they are not MMT JG because they have not been implemented as part and parcel of the MMT macro paradigm, which includes monetary theory, SFC macro modeling, Minsky's approach to finance, and Lerner's functional finance, integrated into a coherent and comprehensive macro paradigm.
As the MMT economists have said, if one rejects the JG, then one must either accept a buffer stock of unemployed as a default, or else provide alternative buffering solution to the JG that obviates the buffer stock of unemployed. The MMT economists remind that in accepting a buffer stock of unemployed one is simultaneously accepting significant inefficiency that results in economic underperformance, idle resources, and massive waste over time. This is an externality of the existing system that as costly as any of the other large negative externalities such as environmental pollution and degradation.
So to successfully attack the JG, one would need to show that a buffer of employed is less efficient and effective than a buffer of unemployed even with the enormous waste, or else provide an alternative buffer.
Let me emphasize — This is a macro problem, not a political one, not an ideological one, and not a micro one, which is the way most people on the blogs are addressing in the recent debate. It is claimed to be straight up macro, which requires knowledge of the history of the debate since the days of Classical Economics if one is going to join the debate, let alone advance it.
Finally, it is necessary to point out that some of the criticism of the JG-ELR, as well as other aspects of MMT such as fiscal policy, is based on the view that adopting such an approach undermines "capitalism," e.g., by destroying motivation, enlarging government intervention, and so forth.
Some of these issues are empirical claims that can be assessed through economic data as well as the finding of other branches of science like psychology, sociology, anthropology and evolutionary theory.
However, many of these issues are not decidable empirically. These are ideological issues rather than macroeconomic ones or scientific ones. This is the stuff of philosophy.
Some ideologies reject the very concept of macroeconomics as a valid discipline. So the contentiousness of the issues goes far beyond the JG or any specific aspect of MMT. In this regard the debate becomes a philosophical one rather than an economic one.