Yanis Varoufakis — A New Approach to Eurozone Sovereign Debt – op-ed in Project Syndicate

The eurozone is unique among currency areas: Its central bank lacks a state to support its decisions, while its member states lack a central bank to support them in difficult times. Europe’s leaders have tried to fill this institutional lacuna with complex, non-credible rules that often fail to bind, and that, despite this failure, end up suffocating member states in need. One such rule is the Maastricht Treaty’s cap on member states’ public debt at 60% of GDP. Another is the treaty’s “no bailout” clause. Most member states, including Germany, have violated the first rule, surreptitiously or not, while for several the second rule has been overwhelmed by expensive financing packages.

The problem with debt restructuring in the eurozone is that it is essential and, at the same time, inconsistent with the implicit constitution underpinning the monetary union. When economics clashes with an institution’s rules, policymakers must either find creative ways to amend the rules or watch their creation collapse.…

Yanis Varoufakis
A New Approach to Eurozone Sovereign Debt – op-ed in Project Syndicate

Also

My question to Christine Lagarde, Eurogroup 25th June 2015 – as narrated by Landon Thomas in the NYT

Greece’s Third MoU (Memorandum of Understading) annotated by Yanis Varoufakis

Joan Johnson-Freese — U.S.-China Relations: The Hypocrisy of Rules

"Follow the rules" means our rules.

The hypocrisy of both countries’ actions do not escape others.

The Diplomat
U.S.-China Relations: The Hypocrisy of Rules
Joan Johnson-Freese | Professor of National Security Affairs at the Naval War College

Lord Keynes — Hodgson on Methodological Individualism

The “broad” version of methodological individualism simply reduces to the “proposition that explanations of social phenomena should be in terms of both individuals and social structures” (Hodgson 2007: 223). Such an approach does not even deserve the label “methodological individualism,” since it has obviously abandoned the very essence of such a method.
And it is most curious indeed to read in theHandbook on Contemporary Austrian Economics(2010) that (supposedly) Austrian economics can now have a clarified version of methodological individualism that “allows for the causal role of social customs” (Evans 2010: 9) and that recognises that “social phenomena are not strictly reducible to [sc. individuals]” (Evans 2010: 11). At one point this method seems to get the name “institutional individualism” (Evans 2010: 11). If so, this is just an admission that the strict “methodological individualist” approach is now so broad that the question is raised why it should have that name at all.

Social Democracy for the 21st Century
Hodgson on Methodological Individualism
Lord Keynes

This is really key for understanding fundamental differences between, on one hand, Austrian and neoclassical economics, and on the other, Marxism, Old Keynesianism, Post Keynesianism, and MMT, all of which are institutionalist.

The view of Austrian and neoclassical economics is that economics is chiefly concerned with individual agents acting rationally in pursuit of utility through individual choice through market exchange that reveals changing preferences, thereby sending signals to producers wrt price and quantity in accordance with the "law" of supply and demand.

The view of the heterodox economists that are institutionalists is that individual behavior in society and therefore in an economy takes place not only through rational choice based on subjective utility, that is, preferences and indifference level, but also through a complex web of social rules and rule-following, where these rules are embedded in cultural rituals and codified in institutional arrangements and rule following strongly influences behavior.

Most individuals have little if anything say in the construction of rules, even though they are constrained by the obligation, need, or persuasion to follow them. The result is a web of social relationships that affect virtually all aspects of individual life from the meso level of societal subsystems or macro level of the society as a whole — a complex adaptable system capable of emergence, which is comprised of individuals and subsystems arranged in relationships that are characterized by rules and rule-following with consequences for rule breaking. As opposed to methodological individualism, this might be better characterized as methodological holism.

Methodological holism is different from ontological holism. A human being is an ontological whole that we model as an organsim comprised of subsystems — organs — and individual cells in precise relationships. But there is no such "thing" as society. What we call "society" is what we assume is described by the complex adaptive system that we construct as a conceptual model. However, there is no entity corresponding to society. Society can be modeled as an organism, for example, but society is not an organism. The idea that society is a thing would be ontological holism, but I am unaware of anyone in the life or social sciences that holds this position.

Rumplestatskin — When ‘culture’ is the best explanation

A recent blog post about ‘culture’ making a lousy explanation of social and economic phenomena sheds even more light on the bizarre culture that is economics.

The core criticism is that “since “culture” is compatible with any conceivable set of facts, it is not falsifiable.” Which is surprising for a member of the economics club that subscribes to the unfalsifiable belief that some utility function drives all human behaviour.

In a stroke of irony their argument boils down to “our culture is to not accept culture as an explanation of behaviour”.
So why am I so defensive about culture as a useful principle in economic theory?

I guess I should first offer an economic definition of culture. Culture is the total learnt cooperative behaviours of a society, which includes the way members of that society draw meaning from the behaviour of others. Society simply means the relevant group – such as country, State, club, school, workplace, or family.
To be more clear, culture is the way we understand the meaning of signals....

Macrobusiness (Oz)
When ‘culture’ is the best explanation
Rumplestatskin | professional economist with a background in property development, environmental economics research and economic regulation

(h/t Yves Smith at Naked Capitalism)

There are four essential aspects of social life that tend to be ignored in mainstream economics — language, culture, institutions, and related norms. All of these are reducible to rules and rule-following.

Lord Keynes — Post Keynesian Policy on Interest Rates

...there are two traditions within modern Post Keynesian economics on the role and effect of interest rates:

(1) the activist Post Keynesians (Basil Moore [1988], Giuseppe Fontana, Thomas Palley), who, instead of an inflation target, advocate activist monetary policy as a useful tool for targeting output, investment or capacity utilization;

(2) the group Rochon calls the “parking it” Post Keynesians, who contend the fiscal policy is the main tool to target output, employment and investment, while monetary policy comes with disturbing side effects on real variables. The relationship between interest rates and output is complex and not linear: the monetary transmission between interest rates and real economic variables is unreliable and complicated. The interest rate should be parked at a given level and fiscal policy should be employed. They are three further subdivisions within the “parking it” Post Keynesians:

(i) the Smithin rule: the real rate of interest should be very low, close to zero (John Smithin);

(ii) the Kansas city rule: the nominal rate of interest should be zero, possibly negative real rates of interest (Wray, Matthew Forstater, Pavlina Tcherneva).

(iii) the Pasinetti rule/Fair Rate rule: the real rate of interest should be equal to the rate of growth of labour productivity (Pasinetti).
My feeling is that the “parking it” Post Keynesians are essentially right.

Social Democracy for the 21st Century
Post Keynesian Policy on Interest Rates
Lord Keynes

Evan Soltas — NGDP Is a 'Simple Rule'

It is tempting to wonder whether NGDP targeting came up during the FOMC discussion, given Eric Rosengren and Charles Evans, two alternate members present at the meeting who are respectively the Federal Reserve Bank presidents of Boston and Chicago, have both endorsed it. Given explicit debate over the practice in the FOMC's November 2011 minutes, whether it entered the discussion is uncertain.

It should be obvious, though, that an NGDP level target would meet the Fed criteria voiced in the minutes. Above all, an NGDP target is a "simple rule" which fulfills the dual mandate, serves as the most clear of benchmarks, dodges the zero lower bound problem, and has been shown to outperform other rules under model uncertainty. "Hybrid" NGDP targeting, which assigns weight to both the level and rate of growth of NGDP, would most closely fit the Fed's interest in "inertial" policy rules.

Evan Soltas | economics & thought
NGDP Is a 'Simple Rule'
Evan Soltas

Mark Thoma — "Inflation Targeting is Dead"

It's hard to figure out how to fix the world if you don't have a reliable model that can explain what went wrong. The optimal money rule in a model depends upon the the way in which changes in monetary policy are transmitted to the real economy. Is it because of price rigidities? Wage rigidities? Information problems? Credit frictions and rationing? The best response to a negative shock to the economy varies depending upon what type of model the investigator is using. 

Thus, for the moment we need robust rules. Inflation targeting works well in models with Calvo type price-rigidities, and a Taylor type rule often emerges from models in this general class, but is this the most robust rule in the face of model uncertainty? We don't know the true model of the macroeconomy, that ought to be clear at this point. Does inflation targeting work well when the underlying problem is a breakdown in financial intermediation or other big problems in the financial sector? I'm not at all convinced that it does - some of the best remedies in this case involve abandoning a strict adherence to an inflation target in the short-run.

So, in the best of all worlds I'd prefer to have a model of the economy that works, find the optimal policy rule for that model, and then execute it. In the world we live in, I want robust rules -- rules that work well in a variety of models and in the face of a variety of different types of shocks (or at least recognize that the rule has to change when the source of the problem switches from, say, price rigidities to a breakdown in financial intermediation). One message that comes out of the description of NGDP targeting above is that this approach does appear to be more robust than inflation targeting. It's not always better, in some models a standard Taylor type rule is the best that can be done. But it's becoming harder and harder to believe that the Great Recession can be adequately described by models of this type, and hence hard to believe that we are well served by policy rules that assume price rigidities are the main source of economic fluctuations.

Read it at Economist's View
"Inflation Targeting is Dead"

by Mark Thoma

Everything but the obvious. Hint — try Godley stock-flow consistent macro modeling and fiscal rules (functional finance). Monetary policy is dead because Monetarism is moribund. Love live fiscal! Post Keynesianism rules.

Money as rules and meta-money

Sell on News posted a very interesting piece at MacroBusiness. Overruled is short and worth reading in its entirety. (h/t) Yves Smith)

Here is a teaser.

... let’s start with a definition of what money is. It is rules. Rules about value and obligation. Those rules are usually based on legally enforced structures, although that need not be the case. In the case of cross border capital markets, the enforcement is informal because there is no supranational government to impose penalties. Disputes are resolved by a handful of law firms, the main penalty is to be prevented from participating for a period....

Sell on News develops the idea of money as rules to include "meta-money," the result of financial innovation such as derivates.

That is the world we are now in. It is why such huge distortions are appearing in areas like quantitative easing, extremely low interest rates, an ailing cost of capital, the hankering after something solid in precious metals like gold and silver, equity markets whose pricing seems strange. Governments have given up oversight of the financial markets, handing it over to the traders. We must now suffer the consequences as the traders try to outdo each other in an infinite game of pass the parcel. Or, more accurately, taking out bets on who will pass the parcel to whom.

The conclusion?

That is the world we are now in. It is why such huge distortions are appearing in areas like quantitative easing, extremely low interest rates, an ailing cost of capital, the hankering after something solid in precious metals like gold and silver, equity markets whose pricing seems strange. Governments have given up oversight of the financial markets, handing it over to the traders. We must now suffer the consequences as the traders try to outdo each other in an infinite game of pass the parcel. Or, more accurately, taking out bets on who will pass the parcel to whom.

Eventually, I suspect, GFC version 2 will come along, and the rules will finally collapse. Governments will have to come in and re-set them. There will be a huge re-regulation backlash. But how is it that governments allowed it to get to this stage? What ever happened to governing?

I agree with the notion that money is rules. Money is not a thing or a set of things, it is essentially an idea. This idea is one of the greatest intangible inventions of humankind, like markets. Money and markets go together like horse and carriage or ox and plow. Once there was a domesticated horse, it was a simple step to the carriage. Same goes for ox and plow. But horses, oxen, carriages and plows are real things. Money and markets are not. Automobiles are horseless carriages, and tractors are ox-less plows. No great imaginative jump. But money and markets have evolved in ways that could never be imagined or anticipated, and only on the basis of transforming rules.

Money and markets just took a fiant step as ideas and the global financial crisis was the result of an failure to harness those ideas sufficiently. The question is now that the genie is out of the bottle, whether it can be controlled.