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Saturday, October 22, 2016

JW Mason — How I Think about Monetary Policy

From my point of view, the conceptual issues here are simpler than you’d guess from the shouting. It comes down to two questions. First, how much control does the central bank have over the terms on which various economic units can adjust their balance sheets by selling assets or issuing new liabilities? And second, how many units would increase their spending on goods and services if they could more easily make the required balance sheet adjustments? Obviously, these questions are not straightforward. And they have to be answered jointly — to be effective, monetary policy has to reach not just the elasticity of the financial system in general, but its elasticity at the points where it meets financially-constrained units. But in principle, it’s simple enough.…
JW goes on to show how conventional approaches to dealing with these "simple" questions are simplistic. Economies are granular rather than homogenous, dynamic rather than static, complex rather than simple.
The whole question, it seems to me, is made more confusing than it needs to be by two bad habits of economists. First is the tendency to think of the economy as a tightly articulated system, with just a few degrees of freedom.…
The second vice is economists’ incorrigible tendency to mistake the map for the territory.…
Both of the oversimplifications seem to result from assuming ergodicity.

The first is the informal fallacy of hasty generalization. The second is the informal fallacy of mistaking a view of reality for reality. They are related fallacies, the second being an instance of the first. They seem to arise at least in part from a cognitive bias for imposing precision without due regard for rigor. Strange for math people that regard rigor so highly in model formulation.

This is not economics but logic and critical thinking, which are taught in Philosophy 101. JW gets an A for recognizing this. Economists that commit these errors get an F.

J. W. Mason
How I Think about Monetary Policy [For some reason this link is not working now]
JW Mason

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