Keeper quote from Joseph Schumpeter. He nailed endogenous money as "credit money" and observed correctly how "money" gets created by banks' extending credit — "they create deposits in their act of lending." This effect is now amplified through non-bank and quasi-bank financial institutions.
The contemporary financialized economy runs largely on privately created credit. This has an even greater effect than Schumpeter likely anticipated. Economists' ignoring this unduly limit the scope of their models by failing to include money & banking, and finance. The result is "surprise resulting from exogenous shock." In other words, the conventional economists were looking in the wrong direction owning to oversimplification of their models of an economy.
To say that this resulted in "great embarrassment of the profession in the fallout from the global financial crisis would be an understatement. But conventional economists still have not dealt with it by including a correct approach to money & banking and finance. Nor have institutional arrangement been changed to prevent a repeat, perhaps on an even grander scale.
Hyman Minsky was a student of Schumpter at Harvard. Minsky drew out some conclusions from Schumpter's view that became the financial instability hypothesis. Randy Wray, MMT economist and perhaps the most published author on theory of money, was a student of Minsky.
Although Schumpeter eschewed being associated with any particular economic school of thought, he is often considered as belonging to the Austrian school of economics and he was an Austrian national. Hyman Minsky also eschewed association with a particular economic school, but he is often characterized as a Post Keynesian.
MMT has roots in many previous economists and economic schools, although it is usually associated with the Post Keynesian. But here is Wray associated with Schumpeter through Minsky. MMT economists also acknowledge their debt to Abba Lerner, a student of Friedrich Hayek who is generally associated with the Austrian school of economics, too.
Incidentally, the chapter in which this quote occurs is worth reading in full. Here is the citation:
Joseph Schumpeter, History of Economic Analysis, Allen & Unwin, 1954, reprinted by Tayor & Francis, 1986, p. 1080
in CHAPTER 8 Money, Credit, and Cycles, 7. BANK CREDIT AND THE ‘CREATION’ OF DEPOSITS, pp. 1076-1083.
Schumpeter doesn't take credit for originality in this, citing Keynes's Theory of Money, for example. He does criticize Keynes for again mudding the waters in the General Theory. See footnote on page 1080.
Incidentally, the chapter in which this quote occurs is worth reading in full. Here is the citation:
Joseph Schumpeter, History of Economic Analysis, Allen & Unwin, 1954, reprinted by Tayor & Francis, 1986, p. 1080
in CHAPTER 8 Money, Credit, and Cycles, 7. BANK CREDIT AND THE ‘CREATION’ OF DEPOSITS, pp. 1076-1083.
Schumpeter doesn't take credit for originality in this, citing Keynes's Theory of Money, for example. He does criticize Keynes for again mudding the waters in the General Theory. See footnote on page 1080.
Lars P. Syll’s Blog
Schumpeter — an early champion of MMT
Lars P. Syll | Professor, Malmo University
Schumpeter — an early champion of MMT
Lars P. Syll | Professor, Malmo University
Poor Schumpeter — abused as a testimonial for MMT
ReplyDeleteComment on Lars Syll on ‘Schumpeter — an early champion of MMT’
Lars Syll cites Schumpeter: “The theory to which economists clung so tenaciously makes them out to be savers when they neither save nor intend to do so; it attributes to them an influence on the ‘supply of credit’ which they do not have. The theory of ‘credit creation’ not only recognizes patent facts without obscuring them by artificial constructions; it also brings out the peculiar mechanism of saving and investment that is characteristic of fullfledged capitalist society and the true role of banks in capitalist evolution. With less qualification than has to be added in most cases, this theory therefore constitutes definite advance in analysis.”
Lars Syll, though, fails to cite the sequel: “Nevertheless, it proved extraordinarily difficult for economists to recognize that bank loans and bank investments do create deposits. In fact, throughout the period under survey they refused with practical unanimity to do so. And even in 1930, when the large majority had been converted and accepted that doctrine as a matter of course, Keynes rightly felt it to be necessary to reexpound and to defend the doctrine at length (fn.5), and some of its most important aspects cannot be said to be fully understood even now.”
Fn. 5 says: “There is, however, a sequel to Lord Keynes’ treatment of the subject of credit creation in the Treatise of 1930 of which it is necessary to take notice in passing. The deposit-creating bank loan and its role in the financing of investment without any previous saving up of the sums thus lent have practically disappeared in the analytic schema of the General Theory, where it is again the saving public that holds the scene. Orthodox Keynesianism has in fact reverted to the old view according to which the central facts about the money market are analytically rendered by means of the public’s propensity to save coupled with its liquidity preference. I cannot do more than advert to this fact. Whether this spells progress or retrogression, every economist must decide for himself.”
Keynes’ GT is a clear retrogression. And, as a matter of fact, MMT followed the Keynes of the GT. It should not be too difficult to see this. The MMT balances equations reads (X−M)+(G−T)+(I−S)=0 (i).#1 When simplified to the bare bones, i.e. X, M, G, T, all 0, then we have I=S that is, saving equals investment.
This is the Keynesian Ur-blunder: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)
See part 2
Part 2
ReplyDeleteThe axiomatically correct balances equation reads (X−M)+(G−T)+(I−S)−(Q−Yd)=0 (ii).#2 Legend: Q macroeconomic monetary profit, Yd distributed profit.
The comparison of (i) and (ii) tells everybody that Keynes dealt with a zero profit economy. Because a zero profit economy is a NONENTITY the whole of the GT is proto-scientific garbage.#3 Keynes, of course, never realized this, and neither did his dull followers up to the present including Lars Syll and the MMTers. What happened as a practical result is that Keynes and MMT ultimately became the profit machine for the one-percenters.#4
To portray Schumpeter as a forerunner of the brain-dead analytical MMT garbage is an insult of the outstanding scientist Schumpeter who, as an exception#5, clearly saw the defects of Keynesian macro and who spotted exactly where macro and monetary theory took the wrong turn.
Egmont Kakarot-Handtke
#1 Down with idiocy!
https://axecorg.blogspot.de/2017/12/down-with-idiocy.html
#2 Profit and the Private-Property-Irrelevance Theorem
https://axecorg.blogspot.de/2018/05/profit-and-private-property-irrelevance.html
#3 Going beyond Wicksell, Keynes, and MMT
https://axecorg.blogspot.de/2017/01/going-beyond-wicksell-keynes-and-mmt.html
#4 Keynes, Lerner, MMT, Trump and exploding profit
https://axecorg.blogspot.de/2017/12/keynes-lerner-mmt-trump-and-exploding.html
#5 Economists: Standing on the Shoulders of Gnomes
https://axecorg.blogspot.de/2018/04/economists-standing-on-shoulders-of.html
The fundamental essence of Austrian analysis is an endless attack on the ability of banks to create credit from nothing. Before the Fed, after the Fed, after 1971. Always. Every day.
ReplyDeleteMMT and Keynesianism are like Russiagate and your treatment of Austrian analysis is like Rachel Maddow hiding Glenn Greenwald. You are obviously afraid of something.
"and the work of Francis Crick" ??
ReplyDeleteTom - Double Helix Crick? Did he write about economics somewhere??
Bob Roddis
ReplyDeleteYou say: “The fundamental essence of Austrian analysis is an endless attack on the ability of banks to create credit from nothing. Before the Fed, after the Fed, after 1971. Always. Every day.”
Obviously, you are an activist. Activists claim to fight for the greater good or for the survival of humanity. Activists populate the political realm. The political realm is ontologically different from the scientific realm. The mission of the economist as a scientist is to figure out how the economy works. The ambition of the scientist is different from the political agenda pusher: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. Work on this line is laying the foundations of the economics of the future . . .” (Schumpeter)#1
The “fundamental essence of Austrian analysis” is that Austrians failed badly at the scientific task. Mainly because they were always too busy with political agenda pushing. The same holds for MMTers.#2
Your argument “MMT and Keynesianism are like Russiagate and your treatment of Austrian analysis is like Rachel Maddow hiding Glenn Greenwald.” is absolutely incomprehensible for anyone who has intellectually risen above the level of endless TV watching.
Egmont Kakarot-Handtke
#1 Schumpeter and the Essence of Profit
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1845771
#2 MMT and the canonical macroeconomic model
https://axecorg.blogspot.com/2019/04/mmt-and-canonical-macroeconomic-model.html
This comment has been removed by the author.
ReplyDeleteI'm not so sure about economics = science. What about happiness, which isn't scientific? A factory farm may be proven to be the most economic efficient system for profit, but it is hell on Earth. The same with society. Economics is as much about desires, wants, needs, hopes, i.e, it is human and therefore a soft science. The maths doesn't have much to say about feelings.
DeleteTom, Clint:
ReplyDeleteSchumpeter reversed the initials. The paper he refers to is by Wilfred Frank Crick, The Genesis of Bank Deposits- Economica 20 (1927).
Here is his footnote in full.
It is, moreover, highly significant that, as late as June 1927, there was room for the article of F. W. Crick, The Genesis of Bank Deposits’ (Economica), which explains how bank loans create deposits and repayment to banks annihilates them—in a manner that should have been indeed, but evidently was not even then, ‘time-honored theory.’ There is, however, a sequel to Lord Keynes’s treatment of the subject of credit creation in the Treatise of 1930 of which it is necessary to take notice in passing. The deposit-creating bank loan and its role in the financing of investment without any previous saving up of the sums thus lent have practically disappeared in the analytic schema of the General Theory, where it is again the saving public that holds the scene.
Orthodox Keynesianism has in fact reverted to the old view according to which the central facts about the money market are analytically rendered by means of the public’s propensity to save coupled with its liquidity preference. I cannot do more than advert to this fact. Whether this spells progress or retrogression, every economist must decide for himself.
Kaivey
ReplyDeleteYou say: “I’m not so sure about economics = science. What about happiness, which isn’t scientific?”
Happiness is an issue for psychologists, NOT economists. Economists are traditionally confused about their real subject matter.#1, #2 This is why they have achieved NOTHING of scientific value in the last 200+ years.
Egmont Kakarot-Handtke
#1 Economics is NOT about Happiness but about Profit
https://axecorg.blogspot.com/2018/04/economics-is-not-about-happiness-but.html
#2 MMTers: too much mind-reading, too little thinking
https://axecorg.blogspot.com/2019/04/mmters-too-much-mind-reading-too-little.html
I'm not so sure about economics = science. What about happiness, which isn't scientific? A factory farm may be proven to be the most economic efficient system for profit, but it is hell on Earth. The same with society. Economics is as much about desires, wants, needs, hopes, i.e, it is human and therefore a soft science. The maths doesn't have much to say about feelings.
ReplyDeleteA factory farm is "efficient"? For whom? Not for people who value clean water. Or don't wish to kill animals. Or would prefer free range animals. Values are subjective and cannot be measured with math. It's simply amazing how you can manage to know absolutely NOTHING about Austrian analysis and concepts but still cluelessly attack it again and again. It's like critiquing a piano concert performance you didn't attend of a performer you've never heard of who played a piece you had never even heard. Simply amazing.
Bob Roddis
ReplyDeleteYou say: “It’s simply amazing how you can manage to know absolutely NOTHING about Austrian analysis and concepts but still cluelessly attack it again and again. It’s like critiquing a piano concert performance you didn’t attend of a performer you’ve never heard of who played a piece you had never even heard.”
That’s not accurate.
This is the piece everybody has heard: “The fundamental essence of Austrian analysis is an endless attack on the ability of banks to create credit from nothing. Before the Fed, after the Fed, after 1971. Always. Every day.”
This is an Austrian “piano concert performance” and you are the performer and it sounds more like a fart on a mouth organ.
Egmont Kakarot-Handtke
Egmont: My statement is a short overview in one sentence of something you have never bothered to engage in the slightest. It's like me informing you after you have reviewed the concert (that you never heard) that it had been performed on a piano (which you also did not know until I told you).
ReplyDeleteThe endless excuses for purposeful ignorance are simply amazing.
Thanks for the clarification. I deleted the reference to Crick as confusing.
ReplyDelete