Friday, November 11, 2016

Simon Wren-Lewis — Do New Keynesians assume full employment?


Simon Wren-Lewis doesn't ask the fundamental question, Where does the money come from; hence he does not understand monetary economics and sectoral balance, or the difference in policy space between sound finance and functional finance. 

So this is not in the model and therefore the model can't explain actual events other than by assuming that the labor market is based on the ratio between preference for work (income) and leisure (reduced income).

I guess this is what happens when one spends one's life on campus rather than in the actual world. It's also pretty astounding since this is a principal issue that Keynes addressed.

Mainly Macro
Do New Keynesians assume full employment?
Simon Wren-Lewis | Professor of Economics, Oxford University

14 comments:

André said...

"Simon Wren-Lewis doesn't ask the fundamental question, Where does the money come from; hence he does not understand ..."

Just passing by to say that I agree 100%.

In my opion, that's the core problem of most (if not all) economic models we have today. Simon Wren-Lewis is not alone...

Matt Franko said...

"that's the core problem of most (if not all) economic models"

There are only about 1,000 to 2,000 of us globally that understand this...

Footsoldier said...

Here's a fantastic new paper by Andrea Terzi


MACROECONOMICS IS SHIFTING. WHAT’S THE RIGHT DIRECTION?


http://moslereconomics.com/wp-content/uploads/2016/11/Berlin-2016-TERZI.pdf

Tom Hickey said...

Previously posted here at MNE on 11/6.

Ignacio said...

Tom how do you explain that he said "he gets it", that he "really does get it" when he addressed MMT a few months ago and then gets back to his own incoherent musings?

They have to sounds fancy with explanations to avoid the uncomfortable fact that they don't really get it.

Tom Hickey said...

Trump appears to get the currency sovereignty thing — that the US cannot be forced into default owing to obligations in its own currency.

I don't know how much Trump gets, but that is basic. A whole lot of people either don't realize that is the case, or at least pretend not to.

He is a persuader and realizes that one cannot get ahead of the public. Depending on how much he understands, he will have to educate the public on it.

He apparently is not concerned with red ink. Neither were the Reagan folks, and Cheney famously said at the time that deficits don't matter. He could remind the public of this, for example, whereas the GOP since they has reversed course on this.

At any rate, he is going to have to make some kind of case, since his ambitions don't add up without expanding the deficit, and he is an ambitious person.

The highest personal priorities for him now are getting re-elected and building his legacy. These will be in the forefront of his mind wrt to policy and execution.

He has been chiefly in the RE business as was his father. RE is mostly about finance — using leverage. I am pretty sure based on this that this is how he will approach government. He is not afraid of using debt-financing as a tool.

Ignacio said...

Was thinking about SWL here and other economists, they say "yeah, I get it, as does the whole academic mainstream macro", but no, they don't because they keep circling around the same things.

MRW said...

What's the difference between sound finance and functional finance, or at least your definition of them?

Should explain it for the lookiloos.

Tom Hickey said...

Sound finance requires a balanced budget either of a period, usually a fiscal year, or over a cycle, in which deficit financed stimulus is offset as the economy recovers.

Abba Lerner enumerated three rules of functional finance:

1. The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.

2. By borrowing money when it wishes to raise the rate of interest, and by lending money or repaying debt when it wishes to lower the rate of in- terest, the government shall maintain that rate of interest that induces the optimum amount of investment.

3. If either of the first two rules conflicts with the principles of ‘sound finance’, balancing the budget, or limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.
— WikipediaWikipedia

MRW said...

In my opion, that's the core problem of most (if not all) economic models we have today. Simon Wren-Lewis is not alone...

Ditto climate models.

=======================================

Thanks, Tom. "Sound money" also known as "sound finance." Top of page 5 in Terzi's paper (as contd. from bottom of pg. 4.)

Ralph Musgrave said...

If there is anything remotely significant or interesting in "New Keynsianism" can someone tell me what it is?

Compared to MMT it's positively sleep inducing. Or perhaps I've missed something.

Simsalablunder said...

"Compared to MMT it's positively sleep inducing. Or perhaps I've missed something"

No, you didn't miss anything while sleeping. "New Keynsianism" worked flawlessly.

Tom Hickey said...

"Sound finance" is an aspect of "sound money."

"Sound money" is money that retains its purchasing power or increases in purchasing power. Sound money is the basis for sound finance.

Those who advocate for sound money hate inflation, and they define "inflation" very narrowly. Disinflation and even deflation are OK because the relative value of money is increasing. It favors lenders and savers.

Sound finance is anti-inflationary monetary and fiscal policy.

Functional finance" is a full employment monetary and fiscal policy.

alfonmacia661 said...

The prices of child system will vary relying on the particular logo, the amount which you purchase, the form of infant system, in addition to whether you buy the pre-made or powder formula. maximum new mother and father who wish to give their infant the very exceptional will frequently mistake this with having to shop for the maximum high priced child formula available available on the market.For more ==== >>>>>> http://musclegainfast.com/ion-z/