This blog will be a bit different from my normal fare. It provides insights into how entrenched a destructive and mindless neo-liberal Groupthink pervades the economics profession. For the last several years I have been on the ‘expert’ panel for the Fairfax press Annual Economic Survey. Essentially, this assembles a group of well-known economists in Australia from the market, academic and institutional (for example, union) sectors and we wax lyrical about what we expect will happen in the year ahead. To be fair, there is a large element of chance in the exercise as there is in all forecasting. So I am never one to criticise when an organisation such as the IMF or the OECD or some bank economist gets a forecast wrong. The future is uncertain and we have no formal grounds for even forming probabilistic estimates, given we cannot even assemble a probability density function (an distributional ordering of all possible events ) to extract these probabilities. So guess work is guess work and you have to be guided by experience and an understanding of how the system operates and the elements within the relevant system interact. What I do rail against is the phenomenon of systematic bias in forecast errors. For example, the IMF always predicts stronger growth than occurs when it is advocating imposing austerity (thereby underestimating the costs of the policy). The systematic bias in their errors is traceable to the flawed models they use to generate the predictions, which, in turn, reflect their ideological slant against government deficits and in favour of fiscal surpluses (as a benchmark). As luck would have it, in the 2016 round of the Fairfax Scope survey, I was fortunate enough to achieve the status of Forecaster of the Year (shared with 2 other members of the panel) – see Scope 2017 economic survey: Stephen Anthony, Bill Mitchell; and Renee Fry-McKibbin tie for forecaster of the year – for detail. I tweeted over the weekend that as a result “MMT predicts well”. There was a lot underlying that three-word Tweet and it intersected with recent events that demonstrate how far gone mainstream macroeconomics is – it is in an advanced state of denial and has lost almost all traction on the real world....Bill Mitchell – billy blog
That “old fashioned” MMT predicts well – Groupthink in action
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
Rectification and generalization of MMT
ReplyDeleteComment on Bill Mitchell on ‘That “old fashioned” MMT predicts well ― Groupthink in action’
Yes, MMT is superior to mainstream economics, a.k.a. Orthodoxy, a.k.a. neoclassical economics, a.k.a. Walrasian economics, a.k.a. the maximization-and-equilibrium world (Krugman), a.k.a. microfounded DSGE/VAR approach.#1
Yes, Orthodoxy is provable false according to the well defined scientific criteria of material and formal consistency. By consequence, economic textbooks from Samuelson to Mankiw/Rodrik/et al. are scientifically worthless.#2 Entirely new textbooks are needed and they have to be macrofounded instead of microfounded.
Yes, Orthodoxy is no longer defensible.#3 Mainstream economists face a dishonorable discharge from the sciences.
As spokesperson of MMT Bill Mitchell concludes: “The Global Financial Crisis demonstrated beyond any doubt the poverty of the mainstream, free-market economic approach ... The failure of the system to self-regulate exemplified what Marx, Keynes, Kalecki and other heterodox economists have known for a long time ― that the Capitalist system is inherently unstable and requires strong government oversight.”
Does this leave MMT “... as the only viable body of macroeconomic thought that can not only detail the operational realities of the monetary systems that nations employ but also explain why the mainstream approach is inherently misleading and erroneous.”?
No, because MMT, too, is ‘inherently misleading and erroneous.’ MMT is right in discarding Walrasian microfoundations and adopting macrofoundations but ‘Marx, Keynes, Kalecki and other heterodox economists’ are NOT acceptable as alternative because they, too, got the macrofoundations wrong.#3
The foundational error/mistake/blunder of MMT is that it does not cut the economy at the joints: “MMT labels any transactions between the government sector and the non-government sector as a vertical transaction. The government sector is considered to include the treasury and the central bank, whereas the non-government sector includes private individuals and firms (including the private banking system) and the external sector ― that is, foreign buyers and sellers.”#4
For good methodological reasons, the analysis has to start at the most elementary level with the distinction between the household and the business sector which in turn consists initially of one giant fully integrated firm.#5
See part 2
Part 2
ReplyDeleteThe functional (NOT historical) emergence of money now proceeds in two steps.
(i) The business sector creates IOUs and these are payed out as wage income Yw to the household sector. The IOUs flow back to the business sector in the form of consumption expenditures C. For a start it holds C=Yw. So, the stock of IOU-money is zero at the beginning and at the end of the period. IOU-money is a pure transaction medium which is created and destroyed during one period. There is no such thing as a given stock of money. What we have is a Wicksellian cashless economy or a Mitchell-Innesian credit economy.
(ii) In the second step the central bank is introduced which generalizes the private IOUs and replaces them by the liability side of its own balance sheet. The business sector pays the wage income Yw no longer in private IOUs but in the central bank’s public IOUs which are called money.
The central bank is a functionally well defined institution and money is, as Knapp had it, ‘a creature of law’.#6
Entirely independent of the history of monies from the cowrie shell onward, what is analytically needed for the theory of money is the framework of a “monetary theory of production” (Keynes) and an institution that creates, transfers, and destroys money in the form of a generally accepted liability. Money is not a thing, not a good, not a stock, not a heap of metal or paper ― money is information that materialized historically on various data carriers.
Both the failed orthodox and heterodox theory of money has to be replaced by the macrofounded#5 theory of money.
Egmont Kakarot-Handtke
#1 The common denominator of mainstream economics is given by this axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub) These microfoundations are forever unacceptable.
#2 See ‘The father of modern economics and his imbecile kids’
http://axecorg.blogspot.de/2016/11/the-father-of-modern-economics-and-his.html
#3 See ‘Heterodoxy, too, is scientific junk’
http://axecorg.blogspot.de/2015/09/heterodoxy-too-is-scientific-junk_85.html
#4 Wikipedia
https://en.wikipedia.org/wiki/Modern_Monetary_Theory#Vertical_transactions
#5 The true macro axioms are given with: (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
#6 For details see ‘Essentials of Constructive Heterodoxy: Money, Credit, Interest’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2569663
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ReplyDeleteI instigated a questionnaire recently on what professions people thought were most in thrall to groupthink. Results are here:
ReplyDeletehttp://markwadsworth.blogspot.co.uk/2017/01/fun-online-polls-group-think-usa.html
It's not very scientific. Just a bit of fun.
There's also a poll (at the top right) on what sort of immigration policies people prefer: Trump's or Merkel. The vast majority (over 90% last time I looked) went for one of those. To find out which, go and vote yourself!!!