Friday, February 16, 2018

Merijn Knibbe — Modern macro-economists: money is not ‘neutral’. Bordo, Meissner, Sufi and Mian do a good job.

Hardcore neoclassical economist John Taylor has edited a new handbook of macro-economics. The good news: the sands are shifting. After 2008, more attention has been paid to the obvious fact that we’re living in a monetary world. Guess what: it turns out that money is non-neutral after all. Two examples (summaries below):
(A) Bordo and Meissner claim that whenever a country has a large banking sector it has a choice, during a financial crisis. It can bail out the banks or it can try to mitigate the crisis and prevent unemployment to increase to extreme levels.
And (B): Mian and Sufi’s work implicates that the ‘representative consumer’ is bogus: differences between renters and house owners in combination with data on indebtedness and house price booms and busts explain a lot of the severity of the 2008 crisis....
Real-World Economics Review Blog
Modern macro-economists: money is not ‘neutral’. Bordo, Meissner, Sufi and Mian do a good job.
Merijn Knibbe

"Countries can have two of the following three choices: a large financial sector, fiscal bailouts devoted to financial crises, and discretionary fiscal policy aimed at raising demand during the recessions induced by financial crises."

This does not specify the monetary regime assumed and, furthermore, it assumes a government that is not sovereign in its currency.

A currency sovereign has the option of allowing a large and lightly regulated financial sector, bailing out the financial sector in financial crises, and also supporting the economy with stimulus when contraction threats owing to lagging demand. 

The second study is based on the wealth effect. This is hardly controversial since the Fed admitted using it in its approach to stemming the financial crisis.

See also

The first axiom of neoclassical economics: methodological individualism
Christian Arnsperger and Yanis Varoufakis

The second axiom of neoclassical economics: methodological instrumentalism

The third axiom of neoclassical economics: methodological equilibration


Bob Roddis said...

What EXACTLY do you people mean by:

1. A government that is not sovereign in its currency.

2. a government that is sovereign in its currency.

I have always found that a very peculiar way of stating whatever it is you think you are saying.

Ralph Musgrave said...

Bob Roddis,

Since you admit you don't know what "you people" are saying, you aren't in a position to pass judgement on whether "whatever it is you think you are saying" is "peculiar" or not.

Can I suggest you do a course in logic?

But perhaps I can help. As you ought to have grasped long ago, a government that is sovereign in its currency is one which issues its own currency, e.g. the US, Japan, UK, etc. In contrast, individual EU countries, e.g. Germany and France, no longer have their own currencies (Deutschmark and French Franc). There are not "sovereign".

Ralph Musgrave said...

“Bordo and Meissner claim that whenever a country has a large banking sector it has a choice, during a financial crisis. It can bail out the banks or it can try to mitigate the crisis and prevent unemployment to increase to extreme levels.”

B&M don’t know what they’re talking about. As MMTers keep pointing out, the only limit to the amount of money a government can print to escape a recession is the limit imposed by inflation. Bailing out banks should not cause any significant inflation. “Bailing out” simply puts them back on their feet – and the bank bail out by the Fed in the recent crisis wasn’t ruinously expensive.

Having done that, a monetarily sovereign government can spend whatever is needed to get unemployment down as well.

But never mind, I’m sure B&M’s work – I mean “hot air” - will look good on their CVs.

Bob Roddis said...

I didn't say I didn't know what you are saying. I just want YOU to say it. Apparently, you are unable to do that.

Ralph Musgrave said...

I did "say it", far as I'm aware: last paragraph of my first comment above.

AXEC / E.K-H said...

Heterodoxy ― an axiomatic failure just like Orthodoxy
Comment on Christian Arnsperger/Yanis Varoufakis on ‘The first axiom of neoclassical economics: methodological individualism’

After 200+ years, economists still do not have the true theory/model. The failure of economics had been programmed by the founding fathers with the definition of the subject matter as social science and later on with this very specific guideline: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)

This translates into the neo-Walrasian axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

Of course, economists did not stick slavishly to HC1/HC5 but varied the one or the other axiom. This, though, never to the point of abandoning the neoclassical paradigm completely. Arrow’s definition therefore covers General Equilibrium Theory, Marshallian partial analysis, Behavioral Economics, DSGE, RBC, New Keynesianism, Agent Based Models, and a whole grab bag of verbalized/common sense/ad hoc/special purpose models. In effect, everybody starts from his own do-it-yourself set of premises and the inevitable result is a heap of inconsistent and incoherent models with a lost common core.

While the failure of economics is beyond reasonable doubt, the representative economist still suffers from the delusion that what he does is science. It is nothing but cargo cult science which Feynman described as: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

Christian Arnsperger/Yanis Varoufakis see the crucial methodological blunder in methodological individualism: “So, the first feature of the ‘body of theory’ we think of as neoclassical is its methodological individualism: the idea that socio-economic explanation must be sought at the level of the individual agent.”

This is accurate but a bit shallow. While methodological individualism is indeed false in all dimensions, the problem goes deeper. And here is where Heterodoxy’s own failure comes into view.

The common understanding of neoclassical models is that they are behavioral. The representative economist traditionally takes Human Nature/motives/behavior/action, i.e. a mixture of folk psychology and folk sociology, as starting point and then tries to explain the behavior of the economy as a whole. The crucial methodological defect of the behavioral approach is that NO way leads from the explanation of Human Nature/motives/behavior/action to the explanation of how the economic system works. All behavioral/microfounded approaches crash against the methodological wall that is known as Fallacy of Composition.

Economics does not conform to Aristotle’s general definition of science: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” The neoclassical premises = microfoundations have NEVER been certain/true/primary. This is why orthodox economics is an axiomatic failure.

See part 2

AXEC / E.K-H said...

Part 2

The only reason why Orthodoxy is still around is that Heterodoxy has failed to develop a suitable alternative: “... we may say that ... the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend)#1

Heterodoxy habitually criticizes/rejects methodological individualism but shares the underlying methodological tenet that economics is a social science. It is not. Economics is a systems science. The subject matter of economics is not human behavior but the behavior of the economic system.#2

So, there is NO use to change the one or the other neo-Walrasian axiom and to keep the rest. A paradigm shift is indispensable, and this means that the neoclassical approach has to go out of the window for good. Economics has to move from behavioral axioms/microfoundations to systemic axioms/macrofoundations. Keynes tried but failed.#3

The state of economics is as follows: (i) all neoclassical/microfoundations approaches are axiomatically dead, (ii) all Keynesian approaches are defective with regard to the definition of macroeconomic profit/income, (iii) neither Orthodoxy nor Heterodoxy has consistent axiomatic foundations, (iv) if it isn’t macro-axiomatized it isn’t economics#4, (v) in the scientifically strict sense, economics is still at the level of a proto-science.

Heterodoxy has exhausted itself with repetitive critique of detail but never got to the point of wholesale and definitive refutation which is the hallmark of a paradigm shift: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug) and “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.” (Feynman)

In fact, this has always been too hard for Heterodoxy and this is why it has to be buried in the same scientific graveyard as neoclassical economics and the Flat Earth Theory.

Egmont Kakarot-Handtke

#1 The stupidity of Heterodoxy is the life insurance of Orthodoxy

#2 For details of the big picture see cross-references NOT a science of behavior

#3 For details of the big picture see cross-references Keynesianism

#4 The core of macroeconomic premises reads: (A0) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which, in turn, consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.