Comment on Fred Moseley and Peter Dorman on ‘It’s Red Friday and Time to Discuss the Role of Exploitation in Profit’AXEC: New Foundations of Economics
The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)
This perhaps surprises the general public: economists do not know until this day what profit is. By consequence, they have NO idea about how the monetary economy works. More specifically, economics consists of four main approaches, Walrasianism, Keynesianism, Marxianism, Austrianism, and NONE of them gets profit right.#1
As a consequence, economic policy guidance never had sound scientific foundations. Because economists never captured the essence of the market economy, whatever they have said for or against capitalism, communism or socialism has been based upon provable false theories about how the monetary economy works....AXEC: New Foundations of Economics
I haven’t used this blog to call attention to my new textbooks, Microeconomics: A Fresh Start and Macroeconomics: A Fresh Start, so let me do that now. Where did they come from, what’s new about them, and who are they for? In this post I will describe the concepts behind the books in a general way, and in future posts I’ll discuss particular things to look for in each of them.Econospeak
Hello Peter,
Appreciate you engaging again. Very quickly since I'm unfortunately too tied up to write more at the moment and possibly for the next several days.
Regarding your points,
1. The point, as I suggested in the previous post comments, is that MMT and others associated with the Post Keynesian school argue that the money multiplier has causation backwards. Further, because the central bank is targeting an interest rate, it MUST accommodate banks' demand for reserve balalnces related to reserve requirements and payment settlement needs. To do otherwise would mean not achieving its target rate. This not a controversial point even in neoclassical literature on central bank operations; central banks simply do not control credit creation through a money multiplier process or reserve requirements aside from gold standard or other "special case" regimes (China). Regarding being "lent up," not enough time to respond completely, but I'll just say that I find the concept to be largely theoretical and not very applicable, as central bank trading desks are well-known to attempt to estimate banks desired excess reserve holdings at the target rate and accommodate (not to mention that in many countries there aren't RR at all).
2. There is no suggestion in MMT that the CB can't or doesn't control where it sets its target rate, only that to achieve whatever target rate it is setting it must accommodate banks demand for balances. It obviously alters its target rate based on macro conditions, as people like you think it should do. This has nothing at all to do with the argument we are making. This is the difference between operational tactics of monetary policy and the strategy of monetary policy. The MMT point you are critiquing is about tactics, but you are talking about strategy, which is not unimplortant but not relevant to the point we are making. In the process of accommodating banks' demand for balances, the CB will adjust its target rate and will obviously do so in order in a way related to its goals to slow/increase bank credit expansion, etc.
Best, Scott FullwilerMy comment:
The money multiplier is an accounting residual, the effect of the reserve requirement on banks. As Scott notes, lending is not affected by quantity but by price. The cb as monopolist sets the price (interest rate) and lets quantity float.
So the causation is not quantity but price.The cb uses the price (interest rate) to influence the ratio of saving and borrowing due to the spread that the banks charge customers by adjusting the banks's cost of making loans up or down. Regrettably, not only do most textbooks have the causation reversed, but also the Fed's own information does too.
I was under this mistaken impression for some time, and I am grateful to the MMT economists for setting me straight on this.
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.
To continue some random thoughts about the role of microeconomics in macro, consider the notion of a balance sheet recession. Like most others who came to see this as an essential ingredient of the current crisis, my route was via the financial balances framework—for instance, the Wynne Godley version. I saw the problem in aggregate/net terms: the US household sector in the mid 00's was running up unsustainable debt loads, especially through the medium of the housing bubble.
This is a purely macroeconomic perspective, and one can go a long way with it. Nevertheless, one can go even further by filling out some of the microeconomic aspects.
One that has attracted a lot of attention is the role of inequality between households. This takes us from net to gross balances: the accumulation of large debts among some households adds fragility and eventually drag to the system notwithstanding the net wealth accumulation of other households. The inequality/debt nexus has been examined at a purely macro level, but to dig further we would need to disentangle the threads: which households in particular are going into hock, what motivates them to do this, how are collateral constraints imposed or lifted, etc. Even with statistical controls, aggregate analysis can only point to association, not causal pathways.
But there are other micro aspects to household balances that are worth exploring. Some that occur to me are:Dorman poses some good questions that he claims require empirical answers, therefore disaggregation to the micro level in order to answer.
