Lars P. Syll — On the non-neutrality of money

One of Keynes’s central tenets — in clear contradistinction to the beliefs of mainstream economists — is that there is no strong automatic tendency for economies to move toward full employment levels in monetary economies.

Money doesn’t matter in mainstream macroeconomic models. That’s true. But in the real world in which we happen to live, money does certainly matter. Money is not neutral and money matters in both the short run and the long run....

"New Keynesianism" isn't Keynesian. It is bastard Keynesianism if it is Keynesian at all. Paul Krugman self-identifies as "neoclassical," in accepting neutrality of money, banks as only intermediaries, equilibrium, and rational maximization. So do many if not most other Democratic Party economics heavyweights and advisors. Time for them to step aside and make room for the new wave. We don't have time to wait for funerals.

Lars P. Syll’s Blog
On the non-neutrality of money
Lars P. Syll | Professor, Malmo University

REVIEW ESSAY–The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory by Philip Pilkington Marc Morgan

Book review.

American Affairs

REVIEW ESSAY–The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory by Philip Pilkington

Marc Morgan | research economist at the World Inequality Lab of the Paris School of Economics.

'Fridays for Keynesianism' — Peter Bofinger

Excellent summary of the recognition of the classical fallacy by Keynes, what followed, and why neoclassical economics is proving so difficult to dislodge even though it has been discredited.

Note: This is not the only fallacy that plays a part in neoclassical assumptions. The fallacy of composition is another, as Keynes also observed.

Social Europe
'Fridays for Keynesianism'

Peter Bofinger | Professor of Economics at Würzburg University and a former member of the German Council of Economic Experts

See also

Brave New Europe
Paul Romer: The Dismal Kingdom – Do Economists Have Too Much Power?
Mathew D. Rose

Three Economic Ideas Threatening to Defenders of the Status Quo — Peter Cooper

1. Profit as surplus labor or as a property-based claim

One idea threatening to the defenders of the status quo is the recognition that profit income reflects capitalist property relations rather than productive contribution.…

 2. Capitalist economies are demand constrained 

 The Keynesian or Kaleckian principle of effective demand may not seem quite such a hindrance to defenders of the status quo as knowledge of the nature of profit, but the motivation for its denial – at least in the long run – is easy enough to perceive.…

3. Money matters, including in the long run

Also threatening to defenders of the status quo is any analysis that subjects the monetary system to scrutiny, whether it be the endogeneity of money or the implications, applicable to modern monetary systems, of currency sovereignty. (Money as Taboo for Economists illustrates this sociological dynamic in operation.)...

heteconomist
Three Economic Ideas Threatening to Defenders of the Status Quo
Peter Cooper

Brian Romanchuk — Why Doesn't The Government Impose Taxes In Chickens?

Silly question? Brian is responding to someone who asserted that in effect government does. 

Actually, it used to be that government confiscated property to move it to government use, but that is no longer considered "proper," unless the police do it on other pretexts. In a monetary production economy, taxes are payable in "money," that is, the government's currency.

What David Andolfatto apparently means is that one's purchasing power declines as a result of taxation, which is true. But that is not all there is to it, as Brian points out. In addition, neoclassical assumptions come embedded in the assertion.

Physicist Richard Feynman famously pointed out that a major purpose of science is to keep us from fooling ourselves and we are the easiest one's to fool (because of cognitive-emotional bias). 

While David Andolfatto states the obvious at the household level with respect to barter, this is not actually what happens and that makes a big difference in the approach to economics.

Thomas Aquinas is famous for his paraphrasing of Aristotle in De ente and essentia, "A small mistake in the beginning becomes a big one by the end."

Framing counts. Get the framing wrong and miss the point.

Bond Economics
Why Doesn't The Government Impose Taxes In Chickens?
Brian Romanchuk

Michael Roberts — Pluralism in economics: mainstream, heterodox and Marxist

So it was great that I had been invited to present the case for the contribution of Marxist economics, along with Carolina Alves, the Joan Robinson fellow at Girton College, Cambridge. In my presentation (see my PP here The contribution of Marxian economics), I outlined the differences in theory and policy, both micro and macro between mainstream neoclassical economics, the heterodox alternatives (Keynesian, post-Keynesian, institutional and Austrian) and the Marxist.

I see this as three ‘schools’ of thought – something that some participants from the heterodox wing found strange. Why was Marxian economics not subsumed within the heterodox? For me, the answer was simple. There was one thing that unites the mainstream and the heterodox (in every form) and one thing in which Marxian economics stood out: namely the labour theory of value and surplus value. The neoclassical and all the heterodox from Keynes to Kalecki, Robinson, Minsky, Keen and the MMTers deny the validity and relevance of Marx’s key contribution to understanding the capitalist system: that is it is a system of production for profit; and profits emerge from the exploitation of labour power – where value and surplus value arises. Value does not come from marginal utility (individual satisfaction) or marginal productivity (return on factor input) but from exploitation, realised in the sale of commodities for a profit. 

Capitalism is a monetary economy where production is for profit, not need. This glaringly obvious reality is denied by the mainstream (where there is no profit “at the margin”) and also by the heterodox who either accept marginalism or reckon profit comes from ‘monopoly’ or ‘power’ or from ‘financialisation’ – but not from the exploitation of labour power.

For me, Marx’s explanation is not only correct in reality, it is also necessary in order to clarify the very process of accumulation and endemic crisis within capitalism – all other schools of economics fall short on this.

Michael Roberts Blog
Pluralism in economics: mainstream, heterodox and Marxist

Michael Roberts

Bill Mitchell — The ‘fiscal contraction expansion’ lie lives on – now playing in Italy – Part 1

Pathetic was the first word that came to mind when I read this article – The Italian Budget: A Case of Contractionary Fiscal Expansion? – written by Olivier Blanchard and Jeromin Zettlemeyer, from the Peter Peterson Institute for International Economics. Here is a former IMF chief economist and a former German economic bureaucrat continuing to rehearse the failed ‘fiscal contraction expansion’ lie that rose to prominence during the worst days of the GFC, when the European Commission and the IMF (along with the OECD and other groups) touted the idea of ‘growth friendly’ austerity. Nations were told that if they savagely cut public spending their economies would grow because interest rates would be lower and private investment would more than fill the gap left by the spending cuts. History tells us that the application of this nonsense caused devastation throughout, with Greece being the showcase nation. The damage and carnage left by the application of these mainstream New Keynesian ideas are still reverberating in elevated unemployment rates, high poverty rates, broken communities and increased suicide rates, to name a few of the pathologies it engendered. But the ‘boys are back in town’ (sorry Thin Lizzy) and Blanchard and Zettlemeyer are falling in behind the IMF and the European Commission against the current Italian government by demanding fiscal cutbacks. It will turn out badly for Italy if the government buckles under this sort of pressure. It once again shows that the mainstream economics profession has learned very little from the GFC. For them the story stays the same. It is one that we should reject in every circle it arises. This is Part 1 of a two-part analysis of the latest incarnation of this ruse my profession inflicts on societies....

Bill Mitchell – billy blog
The ‘fiscal contraction expansion’ lie lives on – now playing in Italy – Part 1
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Lars P. Syll — Kalecki and Keynes on the loanable funds fallacy

Banks are not intermediaries between savers and borrowers, and finance is not allocating existing savings to future investment.

The opposite is true. Bank credit is self-funding; in credit extension, loans (assets) create deposits (liabilities). In finance as allocation of capital, investment creates saving.

Lars P. Syll’s Blog
Kalecki and Keynes on the loanable funds fallacy
Lars P. Syll | Professor, Malmo University

Jörg Bibow — On Modern Monetary Theory and Some Odd Twists and Turns in the Evolution of Macroeconomics

Mainstream neoclassical economics is hooked on the idea of individual worker-savers as prime movers in capitalist market economies. As workers, individuals choose how much to work, determining the economy’s output; as savers, they determine how much of that output takes the shape of the economy’s capital investment. With banks as conduits channeling saving flows into investment, firms churn inputs into outputs that match worker-savers’ tastes. In this way, the neoclassical world gets shaped by what rational intertemporal utility-maximizing worker-savers wish it to be....

Models describe possible worlds. The mathematical question is how consistent the model is (proof). The scientific question is how closely the model corresponds to the actual world that the model purportedly represents (evidence).

MMT features the money-first principle: the state has to first issue its money, either by literally spending it into existence or by having its central bank purchase (“monetize”) assets, for taxpayers to then send it back to the treasury as taxes. Seen in this way, taxes do not “finance” government spending. Rather, they are a means to contain inflation depending on the economy’s real resource constraints (as made clear in Keynes’s [1940] “How to pay for the war”). Similarly, government bond issuance – supposedly collecting loanable funds from worker-savers – is not a means to “finance” government spending either, but an instrument to manage interest rates (as Keynes made clear in his reflections on monetary policy and debt management during WWII)....

Rather than using formal modeling, MMT uses institutional analysis to describe actual operations based on institutional arrangements, both formal (law, regulation) and informal (operating procedure).

Multiplier Effect
On Modern Monetary Theory and Some Odd Twists and Turns in the Evolution of Macroeconomics

Jörg Bibow

Michael Hudson — “Creating Wealth” through Debt: The West’s Finance-Capitalist Road

I kid to this previously, but it was in a list of links. It is important enough to give it its own post.

Hudson at his best. It's a must-read. Longish, so save it for the weekend if time is an issue.

Michael Hudson — On Finance, Real Estate And The Powers Of Neoliberalism
“Creating Wealth” through Debt: The West’s Finance-Capitalist Road— To be delivered at the Peking University, School of Marxist Studies, May 5-6, 2018

Michael Hudson | President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and Guest Professor at Peking University

David Ruccio — Utopia and macroeconomics

From the beginning, mainstream macroeconomics has been a battleground between the visible and the invisible hand.

Keynesian macroeconomics, represented on the left-hand side of the chart above, has an aggregate supply curve with a long horizontal section at levels of output (Y or real GDP) below full employment (Yfe). What this means is that the aggregate demand determines the actual level of output, which can be and often is at less than full employment (e.g., when AD falls from AD1 to AD2, output to Y1, and prices to P2), with no necessary tendency to return to full employment and price stability. Therefore, according to Keynesian economists, the visible hand of government needs to step in and, through a combination of fiscal and monetary policy, move the economy toward full employment (at Yfe) and stable prices (at P1).

Neoclassical macroeconomists, like their classical predecessors, have a very different view of the macroeconomy, which is represented on the right-hand side of the chart. They start with a vertical aggregate supply curve at a level of output corresponding to full employment. Therefore, according to their theory—often referred to as Say’s Lawor “supply creates its own demand”—aggregate demand does not determine the level of output; instead, it determines only the price level. Thus, for example, if aggregate demand falls (e.g., from AD1 to AD2), output does not change (it remains at Yfe)—only the price level falls (from P1 to P2). On the neoclassical view, the invisible hand of the market maintains full employment (through the labor market) and reverses price deflation (through the so-called real-balance effect) by boosting aggregate demand (back to AD1 from AD2)....

That’s why we need to question the shared utopianism of the two sides of mainstream macroeconomics. What has gone missing from much of the current debate, even outside the mainstream, is that full employment and price stability are consistent with the worst abuses of contemporary capitalism.…

Occasional Links & Commentary
Utopia and macroeconomics
David F. Ruccio | Professor of Economics, University of Notre Dame

Nature — How to retool our concept of value – Mariana Mazzucato

Must-read in full. It's short and to the point.

The meaning of "value" is one of the most pertinent questions in economics and political economy. Michael Hudson has been emphasizing this for some time, as have Marxists and Marxian. Consideration of value of other than as price revealed in competitive markets is ruled out in conventional economics by methodological assumptions.

What we value and how we value it is one of the most contested, misunderstood and important ideas in economics. Economist Mariana Mazzucato’s comprehensive The Value of Everything explores how ideas about what value is, where it comes from and how it should be distributed have changed in the past 400 years, and why value matters now more than ever. Mazzucato emphasizes the need to reopen debate to make economies more productive, equitable and sustainable. The 2008 financial crisis was just a taste of looming problems — climate disruption, massive biodiversity and ecosystem-services decline, even the possible collapse of Western civilization — unless we learn to value what really matters.

Early economists focused on the production of value from land (François Quesnay and the ‘physiocrats’), labour (Adam Smith to Karl Marx) and capital. In this view, value determines price (Four decades ago, I described this in terms of embodied energy: see R. Costanza Science 210, 1219–1224; 1980). By contrast, the current mainstream ‘marginalist’ concept bases value on market exchanges: price, as revealed by the interaction of supply and demand in markets, determines value, and the only things that have value are those that fetch a price.

This has major implications for ideas about the distinction between value creation and value extraction, the nature of unearned income (‘rent’) and how value should be distributed....

Nature
How to retool our concept of value — Mariana Mazzucato
Robert Costanza

Roger Farmer — Standing on the Shoulders of Giants

The divergence of neoclassical economics from classical ideas does not have to do with mathematical formalism. It occurs when Walras and Pareto introduced us to homoeconomicus, a human being who springs fully formed into the world at the age of 18 with a complete understanding of his preferences over every conceivable outcome in his extensive choice set. That step enabled us to understand why markets are better ways of organizing economic activity than any other known form of social organization.…

Homoeconomicus [sic] brought understanding that was central to the neoclassical project. But his introduction to economics came at the cost of splitting economics off from sociology which retained the idea that our preferences are formed through social interaction. There is room for both ideas in the social sciences and economists and sociologists have much to learn from each other. But to engage in genuine dialogue we must first learn each other’s language.…

True to a point. But the fundamental assumptions of neoclassical economics that enable a formalistic approach to be tractable mathematically — methodological individualism, microfoundations, rational choice, preference maximization, money neutrality, and general equilibrium — are such gross oversimplifications as to make the models worthless beyond a very limited scope and at a restricted scale.

Moreover, abstraction of homo economicus from homo socialis implies that the economic system is being studied only from the perspective of the elements, ignoring the networked relations of the element.

"Economics" at the academic level now means neoclassical economics. While the neoclassical approach is useful, its usefulness is vitiated when it is dogmatized into the orthodox approach or put forward as the scientific consensus, ruling out other approaches by declaring that the methodological debate is now over. Relegating all approaches other than the neoclassical approach to the category of "heterodox" reveals foundational dogmatism, which is anti-scientific.

Roger Farmer's Economic Window

Standing on the Shoulders of Giants
Roger Farmer | Distinguished Professor of Economics at UCLA

David F. Ruccio — Utopia and value theory

Mainstream economists refer to it as price theory, everyone else value theory. But whatever it’s called, it’s at the center of economists’ differing explanations of what happens in (and alongside) markets.

As I see it, price/value theory serves as the framework to explain a wide range of phenomena, from how and for how much commodities are exchanged in markets through the determinants of the distribution of incomes to the outcomes—for the economy and society as a whole—of the allocation of resources and commodities through markets.

And each price/value theory has a utopian dimension. It’s not just an accounting for and an explanation of the conditions and consequences of commodity exchange; it’s also a way of thinking about the fairness and justice of markets. It therefore informs (and is informed by) a utopian horizon within and beyond markets.

Let me explain.…

Excellent short explanation of a key economic idea that functions as a political weapon in the class war.

The differences between neoclassical price theory and Marxian value theory couldn’t be more stark. The differences are even more dramatic when we compare their utopian horizons. Whereas neoclassical price theory leads to a utopian celebration of capitalist markets, Marxian value theory both informs and is informed by a utopian critique of capitalist exploitation—and therefore a movement beyond capitalism.

The question is how surplus value is created. Surplus value becomes profit (owners' share by fact of ownership), which is income that is not earned since it is the difference between proceeds and wages.

In both cases—neoclassical price and Marxian value theory—the story about commodity exchange, and therefore the analysis of the form that wealth takes under capitalism, has a utopian dimension. The two theories have that in common. Where they differ is the form that utopian dimension takes....

Occasional Links & Commentary
Utopia and value theory
David F. Ruccio | Professor of Economics, University of Notre Dame

See also

Michael Roberts Blog
Inequality and exploitation
Michael Roberts

See also

Monthly Review
The Multiple Meanings of Marx’s Value Theory

Riccardo Bellofiore

Claire Connelly — Neoliberal v Neoclassical economics – what’s the difference?

Bad title, which the author corrects in the article. Neoliberalism is a political theory rather than an economic theory. Neoclassical economics is an economic theory. The tile contains a category error.

The most important thing to understand is that neoliberalism is a post-war political movement that grew out of the Mont Pelerin Society, a thought collective that formed a consensus not to put the market at the centre of the state, but to take it over completely. Its entire objective is to co-opt economics and subvert the public interest to suit the needs of powerful capitalist institutions and the politicians, economists, financiers, philosophers, bankers, think-tanks and media organisations that support them.

Neoliberalism is associated with laissez-faire economic liberalism and was pioneered by economist Milton Friedman & Friedrich Hayeck, but as the economic historian, Philip Mirowski points out, this is a deliberate deception to trick people into thinking it is concerned about market equilibrium...

Renegade Inc
Neoliberal v Neoclassical economics – what’s the difference?

Claire Connelly | editor-in-chief of Renegade Inc.

Brian Romanchuk — The Curious Profit Accounting Of DSGE Models

One of the more puzzling aspects of neo-classical economic theory is the assertion that profits are zero in equilibrium under the conditions that are assumed for many models. One should re-interpret this statement as "excess profits" are zero, but there are still some awkward aspects to the treatment of profits in standard macro models. This article works through the theory of profits for an example dynamic stochastic general equilibrium (DSGE) model, and discusses the difficulties with the mathematical formulation.

The example is taken from Chapter 16 ("Optimal Taxation With Commitment") in the textbook Recursive Macroeconomic Theory, by Lars Ljungqvist and Thomas J. Sargent (I have the third edition). For brevity, the text will be abbreviated as [LS2012] herein. If the reader is mathematically trained and wishes to delve into DSGE models, this textbook is the best place to start. The mathematics is closer to the original optimal control theory that DSGE macro is based upon, whereas other treatments follow the mathematical standards of academic economics, the difficulties with which are discussed later in this article....

Bond Economics
The Curious Profit Accounting Of DSGE Models
 Brian Romanchuk

Se also

Lars P. Syll’s Blog
Ricardian equivalence — nothing but total horseshit!
Lars P. Syll | Professor, Malmo University

Jacob A. Robbins — How the rise of market power in the United States may explain some macroeconomic puzzles

These new facts are particularly puzzling from the point of view of the standard neoclassical economic model, in which markets are perfectly competitive. In this view, profits should not persist over the long run, let alone enable the owners of corporations to increase their share of income over time. The standard model, however, cannot address many of the fundamental changes that have occurred in the U.S. economy over the past 40 years.

In order to explain these new trends, I and my co-authors make several modifications to the standard model, among them positing imperfect market competition, financial assets based on monopoly profits, and the possibility that the natural rate of interest can change. With these parsimonious modifications, our model can explain the data in ways the old model cannot.

Here’s how it works: 

WCEG
How the rise of market power in the United States may explain some macroeconomic puzzles
Jacob A. Robbins, Ph.D. candidate in economics at Brown University and a doctoral fellow at the Washington Center for Equitable Growth

See also

Kaldor and Piketty’s facts: The rise of monopoly power in the United States
Gauti Eggertsson, Jacob A. Robbins, Ella Getz Wold

Ramanan — Twin Deceits

Ramanan analyzes the sleight of hand going on in the neoclassical world now regarding employment and fiscal policy.

The Case for Concerted Action
Twin Deceits
V. Ramanan

David F. Ruccio — Utopia—without classes

Good analysis of utopian versus utopianism. Short and important.

The difference is that between ideal and real. 

If the core assumptions are unrealistic and infeasible, then the consequent conceptual model will be "utopian" in the pejorative sense, and the project unachievable — "pie in the sky." If there is a disconnect between the ideal and the real, then it's utopianism.

If the assumptions are realistic and feasible, then the conceptual model will be "utopian" in the positive sense, and the project is achievable if implemented correctly.

If there is a disconnect between the ideal and the real, then it's utopianism.

Professor Ruccio explores how neoclassical economics and Marxian economics stack up in this regard.

Occasional Links & Commentary
Utopia—without classes
David F. Ruccio | Professor of Economics, University of Notre Dame

Brad DeLong — John Maynard Keynes: Essays In Biography

Brad rates this as a should-read. For anyone interested in Keynesianism, Post Keynesianism and MMT, the history of economics, or economic theory, it is a must-read.

Conventional economists have apparently concluded that they don't need to read it if they even thought about, which most probably haven't, being under the spell of the "normal paradigm" in spite of its poor results empirically.

Washington Center for Equitable Growth
John Maynard Keynes: Essays In Biography

Brad DeLong

Here is a link to download Keynes's Essays in Biography (1933) as a PDF.

Another must-read from Brad.

 I think the very smart Jeffrey Friedman gets this… not quite right. The case for the empirical benefits of capitalism is very strong—but only if one is willing to remove libertarian blinders and focus on eliminating the market failures (in distributions, in aggregate demand, in externalities, in information, etc.) that keep the function the market maximizes from being a good proxy for societal well-being. And once one has the market properly supported and disciplined, the philosophical discussion can commence: Jeffrey Friedman: What’s Wrong with Libertarianism: “Libertarian arguments about the empirical benefits of capitalism are, as yet, inadequate…

From the Marxian and Institutionalist points of view,  economic liberalism, of which contemporary Libertarianism is a variant, provides the philosophical framework for bourgeois capitalism. Its fundamental weakness is prioritizing economic liberalism over social and political liberalism, which gives rise to many paradoxes of liberalism that result in illiberality such as have been pointed out many time here at MNE.

Brad also provides another keeper Keynes quote.

Here is an excerpt:

But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice.

Individualism as the pursuit of self-interest does not lead to the greatest good for the greatest number the spontaneous emergence of natural order, unless "natural order" is conceived as the outcome of social Darwinism. This result is so grossly unfair that overtime it becomes unstable politically.

Keynes is saying here that individualism only works as a guiding principle of liberalism if collective consciousness is sufficiently high, which is manifested in a society's culture and institutions. The fact that civil and criminal law are needed goes to show that collective consciousness alone is not that high presently. In addition, the level of social and political dysfunctionality in liberal countries shows that the culture and institutions of the society are insufficient to bridle narrow self-interest to the degree necessary to generate a harmonious society and balanced social, political and economic conditions.

This is a design problem.

Jeffrey Friedman: What’s Wrong with Libertarianism

More from BDL:

Three Books for 2017: Economics for the Common Good, Janesville, Economism

Weekend Reading: Richard Thaler: Behavioral Economics