JW Mason — Minsky on the Non-Neutrality of Money

I try not to spend too much time criticizing orthodox economics. I think that heterodox people who spend all their energy pointing out the shortcomings and contradictions of the mainstream are, in a sense, making the same mistake as the ones who spend all their energy trying to make their ideas acceptable to the mainstream. We should focus on building up our positive knowledge of social reality, and let the profession fend for itself. 

That said, like almost everyone in the world of heterodoxy I do end up writing a lot, and often obstreperously, about what is wrong with the economics profession. To which you can fairly respond: OK, but where is the alternative economics you're proposing instead? 

The honest answer is, it doesn't exist. There are many heterodox economics, including a large contingent of Post Keynesians, but Post Keynesianism is not a coherent alternative research program. [1] Still, there are lots of promising pieces, which might someday be assembled into a coherent program. One of these is labeled "Minsky". [2] Unfortunately, while Minsky is certainly known to a broader audience than most economists associated with heterodoxy, it's mainly only for the financial fragility hypothesis, which I would argue is not central to his contribution. 

I recently read a short piece he wrote in 1993, towards the end of his career, that gives an excellent overview of his approach. It's what I'd recommend -- along with the overview of his work by Perry Mehrling that I mentioned in the earlier post, and also the overview by Pollin and Dymski -- as a starting point for anyone interested in his work.… 

For me, the fundamental points here are (1) That our overarching vision of capitalist economies needs to be a system of "units" (including firms, governments, etc.) linked by current money payments and commitments to future money payments, not a set of agents exchanging goods; and (2) that the critical influence of liquidity comes in the terms on which long-lived commitments to particular forms of production trade off against current income.

This post is about what "capitalism" actually is based on how it works in a monetary production economy. How it works is the result of addressing key issues that the conventional approach to economics ignores by assuming the neutrality of money. Money is not neutral for very specific reasons that JW suggests need to be explored — and Minsky realized this. In doing so, he suggested how to set economics on a fresh course based on tried and trusty principle, Follow the money.

From the POV of following the money, money and banking, and finance are essential components of the study of economics, and accounting is as important or more so than econometric modeling. This being the case, law and government are also heavily involved in understanding the construction of economics systems based on the wider social and political context.

Probably the most important takeaway from JW's recent posts is his focus on the need to be asking the right questions in order to arrive at the right answers. The first step in design and engineering is figuring out what the problem actually is. Instead, economists have tended to assume that the purpose of economics is to provide explanations. The problem here is that events can have many explanations. But when dealing with a system that has variable effects depending on the construction of the system and the variable inputs, the question is about how the system works to do what it is capable of doing.

The conventional view of economists about their subject is similar to theoretical physics, whose object is "pure science," which consists mostly in constructing mathematical models. Evaluating those models based on outcome is left to experimental physicists, and then the result are passed along to applied physicists, who are called engineers. Conventional economics has tended to emphasize the theoretical, ignore the experimental, and leave the applied to a separate discipline, management science, that doesn't rely on very much on economic theory.

As Thomas Aquinas observed at the outset of De ente et essentia, paraphrasing Aristotele, "A small mistake at the beginning becomes a great one by the end.

The Slack Wire
Minsky on the Non-Neutrality of Money
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

JW Mason — Mehrling on Black on Capital

In retrospect, the most fundamental source of misunderstanding came (and comes still) from the difference between an economics and a finance vision of the nature of the economy. The classical economists habitually thought of the present as determined by the past. In Adam Smith, capital is an accumulation from the careful saving of past generations, and much of modern economics still retains this old idea of the essential scarcity of capital, and of the consequent virtue attached to parsimony. The financial point of view, by contrast, sees the present as determined by the future, or rather by our ideas about the future. Capital is less a thing than an idea about future income flows discounted back to the present, and the quantity of capital can therefore change without prior saving.

The Slack Wire
Mehrling on Black on Capital
JW Mason | Assistant Professor of Economics at Roosevelt University

INET — The Exchange Rate as a Monetary Phenomenon

On Perry Mehrling's "money view" as it relates to forex.

INET
The Exchange Rate as a Monetary Phenomenon
Elham Saeidinezhad, Jay Pocklington, Michael Beall, and Yakov Feygin

Reminder — Money As A Hierarchical System: Legal And Economic Perspectives This Evening 9/12

Christine Desan | Leo Gotley Professor of Law at Harvard Law School

L. Randall Wray, Ph.D. | Professor of Economics and Research Director for the Center for Full Employment and Price Stability at the University of Missouri-Kansas City

Perry Mehrling is the Director of Education Programs for the Institute for New Economic Thinking and Professor of Economics at Barnard College

Katharina Pistor | Michael I. Sovern Professor of Law at Columbia Law School, the Director of the School’s Center on Global Legal Transformation, and a member of Columbia University’s Committee on Global Thought

DATE
Thursday, September 12th, 6.30pm

LOCATION
Room 106, Jerome Greene Hall, Columbia Law School

ATTENDANCE
Free and open to all.

VIDEO
A livestream will be available on this site during the event, and a recording will be uploaded after the seminar.

TOPIC SUMMARY
This seminar will examine the hierarchical power relationships generated and continuously affected by the legal and economic design of the monetary system. Questions to be addressed include:

How have financial and legal technologies shaped our monetary system?

How do different contemporary legal and economic views on money and the monetary economy relate to each other?

What role should and/or does power play in discussions of legal and economic design of the monetary system?

Perry Mehrling on George Soros at INET Berlin

Mr. Soros has referred to the European Union as a fantastical object.

I want to propose right here at the beginning of the conference that we seriously consider the possibility that intertemporal general equilibrium functions for economists as a “fantastical object”.

Observers of economics easily miss this, focusing instead on the fights between those who think government intervention is the solution and those who think government intervention is the problem. But typically both sides of this fight have vividly in front of them the very same fantastical object; they are fighting about how best to make that fantastical object a present reality, but they are in agreement about resisting Mr. Soros’ attempts to get them to let go of their fantastical object.

Read it at INET
Mehrling on Soros
by Perry Mehrling

Perry Mehrling reflects on The Economist on heterodoxy

He thinks that each school has a piece of the answer, and no one has the whole of it. This fits nicely with Hegel's dialectical approach to the development of knowledge, btw, as well as science as a work in progress.

Read it at The Money View
Heterodoxy and The Economist

by Perry Mehrling

UPDATE: JKH comments:
Wed, 01/04/2012 - 6:33am.

Neo-chartalism is strong on accounting and monetary operations, but weak on risk.

Regarding the former, base money is the problem with orthodoxy. Base money in the form of reserves is almost meaningless. Banks do not lend on the basis of reserves. They lend on the basis of capital. Failure to understand this is a profound general problem within the economics profession. In particular, it’s been a problem for its comprehension of QE.

Regarding the latter, the effect of QE is not additional purchasing power. Purchasing power is available already by collateralizing the instruments that might not have been removed from the market. This is not a perfect offset, but it is an important caveat.

The true effect of QE is to take risk out of the market. That is a stabilizing factor in terms of risk management viewed broadly. And it allows resetting of the private market risk taking function. Neo-chartalists don’t seem to acknowledge any of this. They focus on the fact that removing risk from the market removes expected return, and consider that a drain of income rather than a removal of risk. That’s the wrong way to look at.

Perry Mehrling - What's Next?

"Otmar Issing, for example, offers a Nobel for anyone who provides a proper theoretical treatment that combines credit and money, financial quantities and financial prices. That is what practicing central banker economists like himself have always been looking for, and not found yet, certainly not in the pre-crisis academic consensus.

"A decade ago, Olivier Blanchard wrote an influential paper, “What do we know about macroeconomics that Fisher and Wicksell did not?”, in which he put forth a kind of Whig history of the progress of macroeconomic thinking up to 2000. Compared to today, suggested Blanchard, macroeconomics pre-1940 looks like “a period where confusion reigned, for lack of an integrated framework”.

"According to his account, the inter-temporal general equilibrium model (DSGE) provided that missing framework. Now, ten years later, we can see that framework in a different light, as the origin also of the “beauty” that economists mistook for truth, and apparently still do, if only by force of intellectual habit. The important takeaway is that the crisis has opened the ground for alternative frameworks as well as tweaks of the existing one.

"To be provocative, let me put it this way. We are living today in a period not unlike the inter-war period, a period where confusion reigns for lack of an integrated framework. We are living in a period of exploration and experimentation, not only in the policy world but also in the world of ideas. Let the new economic thinking begin."

IMF Calls for New Economic Thinking —

Or Does It?

Is this realization making room for MMT?