Read it at Econospeak
I’m going to regret this, but here is a short reaction to the Modern Monetary Theory (MMT) uprising, occasioned by reading (after some hesitation) Philip Pilkington’s MMT-inspired attack on IS-LM models over at Naked Capitalism.
Running on MMT
by Peter Dorman
(h/t Kevin Fathi via email)
47 comments:
I think STF was a little harsh with his comment regarding undergrad econ (not a good way to make friends, MMT should know this), even though he is right, but his reframing of the 'corner solution' was awesome.
Sorry. Should have proofread. Didn't mean to sound harsh. Will go post rejoinder to that affect. Thanks for the suggestion.
circular logic that leads to no conclusion of any significance, but succeeds in throwing out more theoretical abstractions - upon which you will all be arguing until the end of time - and still reach no conclusion of any significance.
as i understand it - MMT is about 1) using a fact-based approach to describe how the monetary system works and then 2) developing policies around 1).
in this micro argument about money supply / IR relationships, until there is a consensus about 1), there is no point in arguing about 2).
someone draw a chart please.
Very nice and polite comments there by Scott and Tom. Clearly every MMTer can see what he was missing. :)
SR,
Tom comments over there: "Under the existing monetary regime the Fed can and does set the target rate in the overnight market for federal funds independently. It does this either by paying interest on reserves at or above its target rate, as now, or else the excess reserves need to be drained by issuance of Treasury securities to offset fiscal deficits that create excess reserves through injection of net financial assets into non-government. "
The problem is that these morons CANNOT understand what Tom writes here, they just cant "see" it.
No Mathematical Maturity:
http://en.wikipedia.org/wiki/Mathematical_maturity
"Mathematical maturity is an informal term used by mathematicians to refer to a mixture of mathematical experience and insight that cannot be directly taught."
No one can teach them what any of this means because they lack cognitive skills required to understand it. And they are not smart enough to recognize that they posses this slight cognitive deficiency. So you see people like this guy banging the same gong even though we have had NO EFFECT by monetary policy going past 3 years now...
Theirs is a "rules based" approach, that requires no true understanding of operations and causes/effects. That this person is incapable of understanding is no big deal, but the problem for us is that Ben Bernanke cant understand this either, and he is Chair of the CB....
Resp,
Regret and hesitation... It would be nice if MMT could lose the reactionary reputation and just be the simple elegant solution to an economic puzzle.
Ryan, I either one ignores others, or one engages them. It's damned if you do and damned if you don't. If you don't engage, the presumption is that the objection is uncontested. If one contests the objection, then one is being confrontational.
Some people are better at this than others. Warren, for example, is masterful at it. But I am sure he has had a lot of practice over the years.
And let's understand that the MMT position that has been researched and published for 20 years, and increasingly validated by research in neoclassical journals, was referred to as "implausible" with no reference to or attempt to seriously confront any core MMT literature on these points.
I'm not complaining as I think the intent to engage was genuine in this case, but one person's engaging is another's over reaction or even disrespect.
No one thinks the title of this moron's post itself wasn't confrontational?
"Running on 'empty'" ?
Please.
I just assumed he was a Jackson Browne fan. :)
But yes, that's my partly my point--one may think it's honest engagement and another may in some cases legitimately no think that's what just happened at all.
Like Tom, I think Warren's approach is the best one, though I'm obviously light years away from him in that regard.
This is revealing:
"My view is that corner solutions are usually wrong;"
Rules based thought process, cant intuitively understand system operations independently. Sad really.
From Phillip's piece: "every mainstream model: they are not intellectual constructions that promote thought; they are more akin to cages built out of the remnants of long dead assumptions that are used to entrap the minds of those they are handed to."
"42 Howbeit, likewise, of the chiefs also many believe in Him, but because of the Pharisees they did not avow it, lest they may be put out of the synagogue,
43 for they love the glory of men rather than even the glory of God."
...Dont want to get kicked out of the synagogue, even if it is corrupt.
Resp,
Matt,
"Rules based thought process, cant intuitively understand system operations independently."
I think you are being way too harsh. People think about this like they think of thermodynamics: that the underlying reality is so complex that you need a mental model. Hence the talk of "corner solutions" etc. Once one understands that in this particular case the simple operational mechanics are enough to get what is going on, I am sure everybody is able to get to the correct conclusions without worrying whether they are "corner" or not. It is simply very hard to unlearn to think in terms of the textbook money multiplier model. That is why people with little econ "schooling" get it so fast.
The perhaps fundamental is that most economists have not woken up to the fact that a modern economy is monetary rather than goods exchange. Therefore, most economists don't think in terms of what actually happens in a modern economy but rather construct models based on production, distribution, and consumption of goods independently of monetary factors like credit and state currency, which are determinative instead of accidental and excludable. This is a fatal error, as monetary economics shows. The models are rigorous and elegant, but they do not reflect actual operations.
As a philosopher, I always recall the well-known saying of Thomas Aquinas in De Ente et Essentia, paraphrasing Aristotle: "A small mistake in the beginning becomes a great one by the end." Or, as we might say, you can't get there from here.
Other economists recognize this at least implicitly and recoil at the notion that their entire methodology is ill-conceived and their assumptions contrived.The reason that some many react to MMT the way they do is that they feel threatened. Fight or flight is a natural response under the circumstances, so they either ignore MMT and monetary economics or they attempt to discredit it and marginalize its proponents.
"First they ignore you, then they attack you, and then you win," although "winning" may mean that they "discover" your contributions as their own and claim them.
Actually, the assertion of a "corner solution" was indeed correct in that it recognizes the value of solutions not based on monetary economics as constantly zero if the operational reality be recognized. When that recognition comes, most of what has passed as orthodox economic reasoning won't be able to be sold in the marketplace of ideas for any price. That must be a terrifying thought for anyone holding such a position.
Tom Hickey, I don't know how you manage to keep going - you seem to be everywhere at once! Good job.
Peter,
It seems either they cant understand these things or you can take the position that they actually do understand these things but they are lying.
I do not think that they are knowingly lying.
Warren calls it 'innocent fraud'. That seems like an oxymoron to me as how can you commit fraud if you are not knowingly misrepresenting?
If you are knowingly misrepresenting, then it cannot be "innocent".
So perhaps consider that I am actually going easy on them when I posit that they simply are in a position whereby they cannot understand the operations of these systems.
What is worse, to think they are liars or morons?
Just speaking for myself here, I think it is worse to accuse them of being liars.
They have found themselves in a position to not be able to fully and intuitively understand these systems and there is probably not much they can do about it.
The best thing we can hope for is to push them aside and away from policy setting positions or influence.
Resp
Matt and Peter
You both make good points As engineers we have had to learn and understand the 2nd Law of Thermodynamics and we have internalized it. There is nothing so comforting as the knowledge that the properties of a closed system are fundamental at the root and others will never be able to undermine an argument based on it. Assuming one applies it properly of course.
I have been in extended debate over at MMR of late and it is becoming apparent that many economist (non-engineering) types and even posters with a science background do not truly understand closed systems. Or they are unable to apply the relationships properly. I've been giving the benefit of the doubt in discussions but now it is becoming clear.
Maybe a group of interested engineers should write a manifesto of economics as an engineering study or something.
Once I stumbled upon MMT I truly began to think economics was as much an engineering problem as anything else and the main tenets of economics do not stand up to scientific scrutiny except under extremely narrow circumstances.
Matt,
Ok, let's assume some of the people purposely lie (why is the gain for Mr Dorman to lie about the monetary system? - seems like a conspiracy theory to me, but OK). say 10% lie on purpose, 90% are confused. We can never be sure which is which here. Accusing people of bad intentions is counterproductive IMO, see the latest MMR/MMT spat. Let's convince the 90% and the 10% will have no choice but to shut up. Calling the 90% we want to persuade "morons" won't help, even if we sprinkle it with quotations from the Bible. When was the last time you changed your mind persuaded by someone calling you a moron? The only other choice is to firmly believe the 100% of people are members of a vast conspiracy to to keep the truth about money hidden from the masses. But then as conspiracy theorists we ourselves are perceived as... m*****s.
paulie46: "Maybe a group of interested engineers should write a manifesto of economics as an engineering study or something.
Once I stumbled upon MMT I truly began to think economics was as much an engineering problem as anything else and the main tenets of economics do not stand up to scientific scrutiny except under extremely narrow circumstances."
Exactly. Too many "professionals" in economics just make things up to suit their views. Milton Friedman admitted as much and thought that the end justified the means. The way is works is to construct a model based on assumptions that will take you where you want to go, admit that it is not a complete representation of reality, and they draw sweeping conclusions anyway. It is disingenuous, and it fits in precisely with the behavior of ambitious intellectuals in an acquisitive era.
Matt, I think that a lot of economists are just in denial about advances in the field that would overturn their boats.
Peter,
I dont think Mr Dorman is lying, I think he has found himself in a position where he is not able to understand the operation of these systems.
So I dont think it is probably possible to explain these things to him.
Warren Mosler has had direct face to face conversations with Paul Krugman (still doesnt get it), lately we see confusion from Dean Baker and Jared Bernstein, two "progressive" economists (dont get it), I have tried to explain these things to some of my conservative friends and it is literally like their eyes start to glaze over; you can just see them tune out when you start to explain these things.
Nassim Taleb was on this morning talking about "borowing our children's money"... and saying that Ron Paul has it all correct.
You are never going to be able to get these people to understand it, if they were capable, they would already get it. (How long did it take you? I bet no more than 5 minutes?)
so I think what we can hope for is to present these things to regular people, and just like ourselves, many will be able to understand it intuitively, and perhaps we can get the voters to drive policy changes...
Look right now I am listening to CNBC on Xm and Bill Gross is on telling America that "once the Fed stops buying Treasuries then it is up to the Chinese to step up if they want to"... this after he made a reeeeeaaally bad similar call at the end of QE2 last year.
These people will never learn, they are MORONS there is no other way to explain it. I feel sorry for them.
Resp,
PS Peter,
They don't value the truth. This creates all kinds of problems for them.
Resp,
Matt
I'm with Peter here.
They don't have the ability to see it. It isn't that they aren't smart enough.
It's some kind of a block. They have no anchor so they keep searching for the beginning of a circle for a starting point.
There are an infinite number of starting points and they don't know which one to pick.
Just choose one for an anchor and everything will be relative to that point.
Engineers learn where to pick their anchor to simplify the analysis.
Peter & Paul,
OK, maybe some can get to a place where they will be able to see it; I dont think it is fully impossible.
I dont think it is likely at all though. It is a very very low probability.
They need to "change" over to value truth above all else, then perhaps they will be able to gain an open mind about these things.
This imo is what Tom gets at here with his references to 'perennial wisdom'. Valuing truth is a big part of this imo...
Resp,
Matt,
"The world changes one funeral at a time" - someone
Paulie that's going to take too long for me anyway! ;)
(Patience!)
resp,
Matt: "This imo is what Tom gets at here with his references to 'perennial wisdom'. Valuing truth is a big part of this imo..."
Right, they are "interested men" (and women) in Tom Paine's sense.
As Upton Sinclair quipped, " "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"
—I, Candidate for Governor: And How I Got Licked (1935), repr. University of California Press, 1994, p. 109.
Matt,
I totally see what you are saying. Yes, some of them are dishonest, or not as smart or flexible as they should. I still the "moron" strategy may not be the best (let's keep that thought to ourselves!).
"(How long did it take you? I bet no more than 5 minutes?)"
I think it took me a lot longer. I was persuaded to look at it by the fact that Bill Mitchell looked like he knew what he was talking about, was able to translate any transaction to a balance sheet framework and seemed to have powerful insights (like "the private sector cannot change its balance sheet position by itself" - powerful and has profound implications!) He didn't persuade me calling everyone around a moron (although I am sure his opinion may be such, and he is known to be abrasive too). This initial "hook" led me to come back, read and reread many times, each time more difficult texts until I got this stuff. Not that I am not confused about many things still.
If someone says a thing that sounds intriguing and weird, it doesn't help if he is condescending (and I am guilty of it myself, the knowledge can give the feeling of power - I see when a giant is wrong, obviously wrong!)
I do not think for a second I am smarter than Krugman, like paulie46 I think he has a mental block, thinks about it in wrong terms. Some of it (most?) may be the about pride and status, how can they afford to admit they are wrong? Have been wrong all this time? Recall their textbooks? Issue chapter long erratas? Forget it. So I think we need to keep in mind that when commenting on their blogs, we are not talking to them, but to their acolytes and admirers. Again, I frequently (darn, almost always!) make a mistake of talking down to established people, which only enrages their faithful - nothing gained! :(
Matt,
I totally see what you are saying. Yes, some of them are dishonest, or not as smart or flexible as they should. I still the "moron" strategy may not be the best (let's keep that thought to ourselves!).
"(How long did it take you? I bet no more than 5 minutes?)"
I think it took me a lot longer. I was persuaded to look at it by the fact that Bill Mitchell looked like he knew what he was talking about, was able to translate any transaction to a balance sheet framework and seemed to have powerful insights (like "the private sector cannot change its balance sheet position by itself" - powerful and has profound implications!) He didn't persuade me calling everyone around a moron (although I am sure his opinion may be such, and he is known to be abrasive too). This initial "hook" led me to come back, read and reread many times, each time more difficult texts until I got this stuff. Not that I am not confused about many things still.
If someone says a thing that sounds intriguing and weird, it doesn't help if he is condescending (and I am guilty of it myself, the knowledge can give the feeling of power - I see when a giant is wrong, obviously wrong!)
I do not think for a second I am smarter than Krugman, like paulie46 I think he has a mental block, thinks about it in wrong terms. Some of it (most?) may be the about pride and status, how can they afford to admit they are wrong? Have been wrong all this time? Recall their textbooks? Issue chapter long erratas? Forget it. So I think we need to keep in mind that when commenting on their blogs, we are not talking to them, but to their acolytes and admirers. Again, I frequently (darn, almost always!) make a mistake of talking down to established people, which only enrages their faithful - nothing gained! :(
Tom,
Can you be more specific?
Who doesn't realise that we live in a monetary economy?
Which models are you thinking of?
@ vimothy
Anyone that doesn't use monetary economics, finance, accounting and stock=flow consistent models.
Steven Keen and Michael have gone through this in their criticisms of orthodoxy, and so have the MMT economists.
I am also thinking of those who build their systems on top of barter and commodity money rather than the credit and state theories of money.
As Queen Elizabeth said to her economists, "Why didn't you see this coming?"
They have a shit load of cognitive biases. It's very hard to throw wrong assumptions through the board and adopt new ones. It's probably the hardest thing a mature human can do.
The brain has literally hundreds of mechanisms to avoid doing that precisely! The fact is humankind has been fighting against this problem since its origin as species, it usually takes a new generation or two to write down false assumptions and use new better ones.
Sadly this happens even in physics! very sad indeed, but for some reason there are some persons who Have the luck and correct brain wiring to be able to change minds faster than others.
Tom,
Do you have anything specific in mind though?
Most of the economists I know do not work in areas where "money" qua money is an issue of relevance in any sense.
Most of the monetary economists that I know (not a big group) or am familiar with are of course aware that we live in a monetary economy, and build models in which money plays a role.
Also, there are plenty of mainstream people doing stock-flow consistent macro modelling. Certainly not limited to the Levy Institute--e.g., you can get it from the IMF.
So, again, I ask for something more specific.
Paul Krugman is a very smart guy. It was like pulling teeth to get him to admit that the US cannot become insolvent and that the only constraint is availability of real resources and therefore inflation if effective demand exceeds the capacity to supply it.
And as Jamie Galbraith observed in a paper in response to a question of about the few that saw the crisis coming and predicted, it was only heterodox economists.
Apart of cognitive biases a lot of people has, others are simply liars. Why? Status and ego mainly.
Other have some more 'obscure' reasons, like politics or public exposure. I think a lot of people who works at financial institutions or public knows how the system works very well, even if they don't admit.
But sometimes they do such a great job you don't know what to believe (look at hacks in ECB and Europe).
Peter: "Some of it (most?) may be the about pride and status, how can they afford to admit they are wrong? Have been wrong all this time? Recall their textbooks? Issue chapter long erratas? Forget it."
What you are writing here is true, very true.
I would just add to this that what you have done here is to point out what is the "textbook" definition of what a 'moron' actually is:
"but vain were they made in their reasonings, and darkened is their unintelligent heart.
22 Alleging themselves to be wise, they are made stupid," Romans 1:21,22
The Greek word for 'stupid ones' here is 'moroi' which is where the English word 'moron' comes from.
Jesus Himself used the term: "17 Stupid (moroi) and blind!" Mat 23:17
FD: I'm a bit of a determinist.
They are made stupid ones (moroi). Not much they can probably do about it. We have the unmerited favor of not being made morons, we are able to see truth. I'm led to believe they simply cannot see it, I do not believe they are making a decision to see or not to see.
So I dont call them liars, as my faith leads me to believe they are made 'stupid' (morons). I dont believe in 'free will' in these matters so I dont 'blame' them.
"17 This, then, I am saying and attesting in the Lord: By no means are you still to be walking according as those of the nations also are walking, in the vanity of their mind,
18 their comprehension being darkened, being estranged from the life of God because of the ignorance that is in them, because of the callousness of their hearts,
19 who, being past feeling, in greed give themselves up with wantonness to all uncleanness as a vocation." Eph 4:17
Their comprehension is darkened, this is how I see it. Speaking strictly for myself here, these current events (to me) are literally the scriptures in action.... accounts vary ;)
Resp,
Leverage, I hope you don/t mind my giving suggestions since English is not your first language. I assume you mean "overboard" when you write "through the board."
Thanks Tom, wasn't very sure about how to translate that actually heh :)
So far no response from Dorman. Certainly his prerogative, but seems odd to call out another group of economists--suggesting that their views are "empty" and implausible--without actually offering any specific critique, and then to not respond when those being critiqued leave clarifying comments. May not actually have wanted to engage.
Or could have had other things to attend to--don't want to assume since I have no idea obviously.
"mathematical maturity" :)
thanks matt and tom.
Enginomics:
http://enginomics.blogspot.com/2011/01/why-communism-has-and-always-will-fail.html
Red,
Just to point out that Tom and beowulf to me are an enigma to the solely Mathematical Maturity explanation.
Tom has a PhD in philosophy and beo is JD so neither looks like have ever been immersed in a highly abstract, highly mathematical secondary curriculum.
Yet they both get this stuff....
So it probably has more to do than just being given Math Maturity, although that probably is very helpful.
The other part perhaps is related to 'truth seeking' if you will.
So it looks like you have to be given to highly value truth, and posses some decent Math cognitive aptitude.
Get those two things together in the same person and looks like we have a pretty good shot at being able to explain this stuff to them.
Resp,
Matt
It follows that we will have to appeal to everyone else on religious grounds.
Paulie,
As far as the "religious", I could probably point some things out to them in the scriptures supportive of and congruent with the MMT paradigm, but I dont think a lot of them will be able to see it either unfortunately...
My experience has been that many so-called "religious" people either dont believe the truth of the scriptures or else they havent been taught correctly.
So tough nuts to crack all around...
Resp,
Matt,
I was referring to economic religion - a fundamental belief in some theory without proof.
But anything that would convince pure followers might work - they would just never really understand it.
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