Orthodox vs MMT on Method

Those coming to MMT/Post Keynesian economics from the non- or at least less-academic world may not be aware of some of the methodological differences that exist between our approach and that of mainstream economics. These philosophical issues, though not nearly as exciting as talking about Federal Reserve policy or the organization of the financial market, truly lie at the heart of our disputes. One should, therefore, have at least have a passing familiarity with these in order to understand the rhetoric of the arguments (and how to win!).

Method involves how a particular school of thought views the nature of knowledge and the legitimate means of creating it. Say you are a biologist and want to understand more about the behavior of the field mouse. How should you do so? Do you imagine yourself as a mouse and decide what you would do in your daily life? Do you catch a field mouse and put it in your office, then write down what you observe? Do you set up cameras and try to capture images of the field mouse in its natural setting? Which of these would be most effective? These are the sort of questions that those who study method try to answer.

Volumes have been written on this subject, but I want to focus on a smaller issue. To put it into a context, imagine an argument:

Premise 1: All Texans own a cowboy hat.

Premise 2: Alex is a Texan.

Conclusion: Alex owns a cowboy hat.

This argument is valid if the conclusion is supported by the premises. Sure enough, that looks okay. Note that determining validity is a relatively (though not completely) objective process. Mathematics provides one means of determining validity, which is one of the reasons it’s so popular in economics. And while we can most certainly enter into some serious debates with Orthodox economists over validity, I think the next concept is more important because it’s more below the surface.

Whence come the premises? What is appropriate/acceptable in specifying them? This is a key methodological question. In mainstream economics, they have adopted the Cartesian tradition that argues that it makes more sense to base premises on reason than observation since the latter can be unreliable and biased by our preconceptions. If theory determines what you see, then using the latter to confirm the former is only a psuedoscientific exercise. True science involves basing the premises of your model on careful introspection and reflection. This is why Neoclassical microeconomics is based on concepts like, “all firms are short-term profit maximizers.” Did some economist do a study or survey to determine this? No. Instead, it just seems reasonable. More than that, they regard it as obviously true. How could any reasonable person disagree with this? The fact that studies show that firms are more concerned with sales and market share does not concern them. What people say and what they do are not the same. Besides, even if firms don’t try to short-term profit maximize, say Mainstream economists, they act as if they do. This is a critical methodological point. They believe that knowledge gained from introspection and the generation of “obviously true” premises is superior to that based on observation of the real world.

Post Keynesian economists come down on the opposite side of that issue. To them, premises that cannot be justified on the basis of something we can observe in the real world are questionable, at best. Of course, simplification is necessary for modeling, but the guide to what the non-simplified version of the premise would be is provided by observation. In addition, we believe it vital to be able to point to a real-world line of causation to justify our claims. Neoclassicals do not necessarily agree, thinking instead that analogies and thought experiments suffice–indeed, they see them as superior because they are supposedly uncontaminated.

And so this points to a deep divide between Post Keynesians/MMTers and orthodoxy. And it can be an especially frustrating one because it lies beneath the surface and leads to one side completely dismissing what the other views as “evidence.” For example, I ended up in a mini debate with a Monetarist on my Forbes.com blog. He was arguing that inflation is caused by an excess of money supply over money demand. I asked–on four separate occasions and in a very pointed manner–how can this be possible? How can the Fed raise money supply without the cooperation of the public? Can they make someone sell a government security or take out a loan? What mechanism does the Fed have at its disposal that allows it to force the money supply above money demand? I never received a direct answer. Instead, I got analogies: monetary policy is like an orchard or a fire place (Friedman’s classic mechanism being a helicopter). The Monetarist has now completely withdrawn from the conversation without ever clarifying this issue and yet at the same time stating, “If you cannot increase the money supply above money demand, you would never have inflation!” Hence, he believes this to be a critical point, but one he cannot justify in terms of real world events. He doesn’t think he needs to.

I won’t go into the philosophy of which position is correct other than to say that while I can see the merit of both approaches to some extent, ultimately reason is every bit as vulnerable to a priori contamination as observation and if the latter is not to be our ultimate guide to “are we getting it right?” then what is? How on earth can you put forward as your explanation of a key economic phenomenon a process which cannot occur in the real world? I just don’t see it. And I’m not sure they do either, in reality. I think it was very embarrassing to my detractor that he could not come up with an answer. In fact, at one point he stated, “Our postions are so diametrically opposed that I dońt think this conversation will lead ‘somewhere.’”

Quite right. I think economics should be relevant, and he doesn’t.