Sunday, September 23, 2018

Brian Romanchuk — Primer: Understanding the Post-Keynesian Rejection of Mainstream Inflation Theory

From the Perspective of Conventional Economic Analysis, the Post-Keynesian Approach to Inflation Is Mystifying. If We Focus on the Modern Monetary Theory (MMT) School of Thought in Particular, It Is Very Easy to Either Find Claims That "MMT Has No Theory of Inflation," or Non-MMTers "Explain" the MMT Inflation Theory Is Some Random Trivial Relationship That They Just Made Up. The Key to Understanding Post-Keynesian Approaches Is That It Takes a Completely Different Approach to Understanding Inflation, and Outcomes Are Seen as Very Difficult to Forecast.
This Article Is Based on Section 8.1.1 ("the Rejection of the Acceleratoinist Thesis") of Professor Marc Lavoie's Excellent Post-Keynesian Economics: New Foundations (Link to My Review). From the Perspective of a Non-Academic, a Significant Portion of the Book Would Likely Be Found as Arcane, and Could Easily Be Confusing to a Non-Specialist. However, Section 8.1.1 Is Extremely Straightforward, and the Most Difficult Part of My Writing Task Here Is Staying Within "Fair Use" Copyright Limitations When Describing It. 
(Since I Raised the Issue of MMT Earlier, I Cannot Say Whether There Are Any Major Disagreements Between MMTers and Lavoie's Description of Post-Keynesian Thinking on Inflation. My Feeling Is That There Is Nothing That a Non-Academic Would Get Too Excited About, Other Than the Importance That MMT Ascribes to the Job Guarantee Wage in Stabilising Inflation. For the Analysis of a Country Without a Job Guarantee -- Currently, All of Them -- This Distinction Has No Practical Import.)… 
Important Now That MMT and PKE Are Gaining Recognition.
Bond Economics
Primer: Understanding the Post-Keynesian Rejection of Mainstream Inflation Theory
Brian Romanchuk


AXEC / E.K-H said...

Economics as tireless production of proto-scientific toilet paper: inflation theory as an example
Comment on Brian Romanchuk on ‘Primer: Understanding The Post-Keynesian Rejection Of Mainstream Inflation Theory’

Economics is a failed/fake science or what Feynman called a cargo cult science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit ― the pivotal concept of the subject matter ― wrong. The pluralism of provably false theories is evidence for the representative economist’s scientific incompetence.

After 200+ years, there is still no such thing as a valid profit-, employment-, or inflation they, there is always a whole bunch of theories/models and everyone is free to pick the one that suits him politically. This guarantees that economics remains what it is since the founding fathers: a brain-dead talk-show.

Brian Romanchuk gives a vivid description of how economists produce their proto-scientific junk: “So imagine that your boss tells you to come up with ‘an inflation model’ for some country (which is a pretty common demand for employees of central banks or investment firms). According to post-Keynesian theory, the ‘correct’ answer is to respond that inflation is an historical accident. However, I must point out that the theoretically correct answer is also an extremely career-limiting one, so any employee stuck in that particular situation needs to figure out what their superiors want to see, and give them exactly that (even if the model stinks).”

This characterization of the representative economist fits the definition of a pseudo-inquirer: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack)

There is no use to untangle the multiple idiocies in Brian Romanchuk’s treatment of inflation theory. What has to be done is to replace his blather by the scientifically correct approach.

In order to go back to the basics, the elementary production-consumption economy is for a start clearly defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (profit/loss Qm≡C−Yw, saving/dissaving Sm≡Yw−C).

Money is needed by the business sector to pay the workers who receive the wage income Yw per period. The workers spend C per period. Given the two conditions, the market clearing price is derived for a start as P=W/R (i). So, the macroeconomic price P is determined by the wage rate W, which has to be fixed as a numéraire, and the productivity R.

The average stock of transaction money follows for a start as M=kYw, with k determined by the payment pattern. In other words, the quantity of money M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by the central bank. This, to begin with, kills the commonplace Quantity Theory of inflation.#1, #2

The market clearing price is given in the general case with the macroeconomic Law of Supply and Demand P = (rhoE)*(W/R) (ii), with rhoE≡C/Yw.#3 An expenditure ratio rhoE greater than 1 indicates credit expansion = dissaving, a ratio rhoE less than 1 the opposite. In the initial period rhoE=1, i.e. the household sector’s budget is balanced. The ratio rhoE establishes the link between the product market and the money/capital market.

See part 2

AXEC / E.K-H said...

Part 2

Now we have: deficit spending, i.e. rhoE greater 1, yields a price hike. If deficit spending is repeated period after period the price remains on the elevated level but there is NO inflation. No matter how long the household sector’s debt increases, there is NO accelerated price increase. The same holds for the government sector.#4

The macroeconomic Law of Supply and Demand makes it clear that inflation only occurs if the wage rate W increases in successive periods faster than productivity R. This can happen at ANY employment level. It is NOT a precondition that employment is close to the capacity limit. This is merely a false interpretation of the Phillips curve.#5

The explanation for the fact that inflation in the USA is since some time below the FED’s target value of 2 percent is that the rate of change of the average wage rate has been lower than the rate of change of average productivity. Things become a bit more complex, of course, when foreign trade, investment etcetera is taken into account. This does not change the fact that the core of inflation theory is given with eq. (ii). This tiny equation fully replaces Brian Romanchuk’s gigantic roll of proto-scientific toilet paper.

Egmont Kakarot-Handtke

#1 Inflation: back to basics

#2 Attention: there are THREE types of inflation

#3 Wikimedia, Macroeconomic Law of Supply and Demand

#4 MMT was right all along: Gov-Deficits do NOT cause inflation

#5 NAIRU, wage-led growth, and Samuelson's Dyscalculia

Matt Franko said...

“However, I must point out that the theoretically correct answer is also an extremely career-limiting one, so any employee stuck in that particular situation needs to figure out what their superiors want to see, and give them exactly that (even if the model stinks).”

That is the dialectic methodology they are trained in at Liberal Art school.. ... not a factor of continuing employment....

They are not trained in scientific methods....

AXEC / E.K-H said...

Brian Romanchuk

You say: “I forgot what a relable source you are. My bad.”

It is too obvious that you are a fake mathematician. A genuine mathematician does not care at all about “reliability” or “credibility” or other subjective social criteria but alone about objective proof.

If you had done the routine job of a competent scientist you would have found out two things:

(i) The equation Qre=I−Sm is logically true given the correct macroeconomic axioms and is objectively testable because all variables are measurable with the accuracy of two decimal places.

(ii) That this equation has been derived independently by Allais on a different route.#1

According to Wikipedia, Allais was a major proponent of mathematical economics and as a winner of the economics Nobel in 1988 he certainly satisfies your standard of “reliability”.

So, what you would have done as a genuine mathematician is to check the references and then to perform a little exercise in elementary algebra. Fact is that you are a scientifically incompetent blatherer.

Egmont Kakarot-Handtke

#1 How Keynes got macro wrong and Allais got it right