JFK was an MMTer..! — Ralph Musgrave

Here is the full section to which Ralph refers. 

James Tobin's report of a conversation with JFK:

APPENDIX A 

NOTE 1

I had left the Council of Economic Advisors to return to Yale as of August 1, 1962. Later, in the fall, I was in Washingtonconsulting for the Council. Walter Heller was kind enough to ask for an appointment for me to see JFK, and the president was kind enough to grant it. I guess it was only the second or third time I had an interview with the president by myself. This was a memorable one. The president was extremely cordial, informal, and friendly, calling me “Jim”, a practice he had acquired only late in my service on the CEA. After joshing me about the leisure and high income of the academic life to which I had returned, he wanted to talk about economics, economic theory indeed. He wanted to ask me some questions, but it turned out he wanted to give his own answers to them too and see if I agreed, almost as if he were showing how well he had learned his lessons.So he did most of the talking, and my own interventions were largely to confirm that his own answers to his questions were right. There were two subjects; the budget deficit and gold. On the first, he said, “Is there any economic limit to the deficit? I know of course about the political limits. People say you can't increase the national debt too fast or too much. We're always answering that the debt isn't growing relative to national income. But is there any economic limit on the size of the debt in relation to national income? There isn't, is there? That's just a political answer, isn't it? Well, what is the limit?” I said the only limit is really inflation. He grabbed at that. “That's right, isn't it? The deficit can be any size, the debt can be any size, provided they don't cause inflation. Everything else is just talk.” We had a similar conversation about gold and the balance of payments: “Why do we worry about a deficit in the balance of payments? It's only because we might lose gold, that so?And what do we care about gold? It isn't worth anything, in itself, is it?” I assured him it was not, that its value derived wholly from the willingness of nations, especially the U.S., to transform gold into their currencies. “We could, if we wanted to, run the world without gold? And wouldn't that be more sensible? Wasn't it just the irrational prejudices of bankers that kept us tied to gold? We don't have any real national, or international, interest in it, do we?”

I don't claim these to be exact quotations, but this was the gist of the conversation. He spent more than half an hour from a busy day on this conversation, and he was obviously having a good time. Obviously too, he and I both recognized that the talk was an academic one, divorced from the day to day policy decisions where he realized so keenly that the political and ideological myths from which he was showing his intellectual liberation were so constraining and compelling. I was extremely gratified, of course, because there were points he had certainly not understood in 1961 and points I had tried persistently to make orally and in writing for almost two years. Maybe he was just showing that he understood my points, without indicating that he agreed with them. But that was definitely not the tone of the conversation. Rather it was that he understood them and accepted them but that he was, as I well knew, hemmed in. His next appointment was kept waiting, and when Ken O'Donnell finally made him break our interview off, he said good-bye in a most cordial and friendly way.

Ralphomics
JFK was an MMTer..!

Ralph Musgrave

How China became a market economy--Review of Julian Gewirtz’s “Unlikely Partners”

A view of the development of market socialism with Chinese characteristics.

Julian Gewirtrz’s “Unlikely Partners” charts, with an extraordinary attention to detail, these world-historic decisions and focuses on the role that foreign economists played in these early stages of China’s transformation. But while the declared focus of the book is on the foreign-to-Chinese interaction and cooperation, with the high point (extremely well described) being a week-long cruise-seminar in August 1985 along the Yangtze river on a luxury boat with about a hundred Chinese and foreign economists participating, among whom the most important for Chinese later reforms proved to be Janos Kornai, Wlodimierz Brus and James Tobin, the book is more than that. It documents almost 15 years (from Mao’s death to 1992) of discussions and policy decisions about the “goal model” of Chinese economy: relations between the government and enterprises, role of the plan and the market, ownership structure, macroeconomic policies and the like. Practically, the entire “new” Chinese economy, from the Central Bank to the Special Economic Zones to state conglomerates was “invented” then.

It is thus an indisputably necessary book for anyone who wants to learn more about China and about that extraordinary period of intellectual ferment....

Global Inequality
How China became a market economy--Review of Julian Gewirtz’s “Unlikely Partners”
Branko Milanovic | Visiting Presidential Professor at City University of New York Graduate Center and senior scholar at the Luxembourg Income Study (LIS), and formerly lead economist in the World Bank's research department and senior associate at Carnegie Endowment for International Peace
ht Mark Thoma at Economist's View

Lars P. Syll — RBC models — nonsense on stilts

I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it. — James Tobin

Determining causality is a bitch in social science since many factors generally contribute to causality involving social behavior. Studying a single individual and making assumptions about future behavior based on habits and revealed preferences might hold but transferring this to groups of individuals involves the fallacy of composition. This makes the assumption of methodological individualism and microfoundations problematic.

Assuming methodological individualism ignores that regularity in social behavior is more likely induced by stable institutional arrangements than individual factors involving assumptions of homogeneity that rather obviously do not hold in the real world.

Choosing a single variable or a few variables as causal factors operating universally and timelessly to produce regular results is seldom realistic. This is clearly done for convenience, to make the math tractable, rather than as a matter of induction based on empirical data or abduction based on reasoning to the best explanation. 

In many cases the process of identifying assumptions in conventional economics seem to be driven by ideology, with conclusions supported by authority, which is justification by power and gatekeepers rather than either reasoning or evidence.

In addition to the problem identifying assumptions, there is also the issue of assuming ergodicity (time average of a same is equal to the ensemble average) in processes that are conditioned historically and dynamically.

Moreover, the greater the scope the less accurate the solution is likely to be. This is a reason that social sciences have tended to focus on case studies rather than general theories.

Lars P. Syll’s Blog
RBC models — nonsense on stilts
Lars P. Syll | Professor, Malmo University

Thomas Pally — James Tobin (Book Review)

Tom Pally reviews Robert W. Dimand's book on James Tobin.

Thomas Palley — Economics for Democratic and Open Societies
James Tobin

Thomas Pally | Schwartz Economic Growth Fellow at the New America Foundation

Dimond also wrote an article, "James Tobin and Modern Monetary Theory,"available at SSRN.

Ramanan — James Tobin On Real Business Cycle Theory

Nice Tobin quote.

The Case for Concerted Action
James Tobin On Real Business Cycle Theory
V. Ramanan

Also

Marc Lavoie On The DSGE Emperor

Ramanan — Two more on economic modeling and stock flow consistency

The Case for Concerted Action
Subscripting Helps!

Discrete Time Or Continuous Time?
V. Ramanan

Jason Smith — On the use of hypotheses: or, what do you get when you assume non-ergodicity?

Jason Smith replies to Lars Syll (and Paul Davidson).

What comes out of assuming ergodicity? All of basic thermodynamics and much of basic economics. If we assume economic (or thermodynamic) systems aren't ergodic -- what does that give us?

Essentially, assuming non-ergodicity is analogous to the assumption that I(A) < I(B) in the information transfer framework (ergoditicy is the assumption that I(A) ≈ I(B) ... the information in the two macro observable is the same, from which you can derive supply and demand). 

What can we get from the assumption I(A) < I(B)? Nothing. 

That is to say that while ergodicity is a useful assumption, non-ergodicity is a completely useless assumption. It doesn't prove that economies are quasi-periodic chaotic systems or that they are some other kind of complex system -- you need evidence for that! Show us a model that that is empirically successful. Or at least more empirically successful than assuming ergodicity.

Yes, that's a point that Keynes made and which Davidson and Syll elaborate:

Many thanks for sending me your article I enjoyed it very much. I am sure these matters need discussing in that sort of way. There is one point, to which in practice I attach a great importance, you do not allude to. In many of these statistical researches, in order to get enough observations they have to be scattered over a lengthy period of time; and for a lengthy period of time it very seldom remains true that the environment is sufficiently stable. That is the dilemma of many of these enquiries, which they do not seem to me to face. Either they are dependent on too few observations, or they cannot rely on the stability of the environment. It is only rarely that this dilemma can be avoided.
Letter from J. M. Keynes to T. Koopmans, May 29, 1941

Of course, that is a bit of a hand wave but Keynes is much more specific about it in other places. But the idea is that the basis for neoclassical assumptions is too non-representation of the subject matter to yield a useful methodology. Neoclassical methods are not useful for telling us what we really need to know, in particular for policy formulation. Keynes proposed a new economic method based on a monetary production economy in which money is non-neutral and uncertainty dominates.

Keynes was not only a theoretician but an economic "engineer" who are active in the world of policy at the time of the Great Depression and his ideas are credited with saving the day — other than by neoclassical economists that have sought to "correct" this, for which the world is now suffering another prolonged contraction.

In the Keynesian view, econometric models are essentially a waste of time. According to old Keynesians and Post Keynesians, Paul Samuelson "bastardized" Keynes by introducing key assumptions that Keynes specifically rejected.

In this view, macroeconometricians should be doing something else, like looking for types of models that actually are useful, like the stock-flow consistent approach developed independently by James Tobin and Wynne Godley, and set forth in Godley & Cripps, Macroeconomics (1983) and Godley and Lavoie (2007, 2nd ed. rev., 2012). See Lavoie (2010).

Information Transfer Economics
On the use of hypotheses: or, what do you get when you assume non-ergodicity?

Jason Smith

David Glasner — What Is Free Banking All About?

I notice that there has been a bit of a dustup lately about free banking, triggered by two posts by Izabella Kaminska, first on FTAlphaville followed by another on her own blog. I don’t want to get too deeply into the specifics of Kaminska’s posts, save to correct a couple of factual misstatements and conceptual misunderstandings (see below). At any rate, George Selgin has a detailed reply to Kaminska’s errors with which I mostly agree, and Scott Sumner has scolded her for not distinguishing between sensible free bankers, e.g., Larry White, George Selgin, Kevin Dowd, and Bill Woolsey, and the anti-Fed, gold-bug nutcases who, following in the footsteps of Ron Paul, have adopted free banking as a slogan with which to pursue their anti-Fed crusade. 

Now it just so happens that, as some readers may know, I wrote a book about free banking, which I began writing almost 30 years ago. The point of the book was not to call for a revolutionary change in our monetary system, but to show that financial innovations and market forces were causing our modern monetary system to evolve into something like the theoretical model of a free banking system that had been worked out in a general sort of way by some classical monetary theorists, starting with Adam Smith, who believed that a system of private banks operating under a gold standard would supply as much money as, but no more money than, the public wanted to hold. In other words, the quantity of money produced by a system of competing banks, operating under convertibility, could be left to take care of itself, with no centralized quantitative control over either the quantity of bank liabilities or the amount of reserves held by the banking system.…

Uneasy Money

What Is Free Banking All About?
David Glasner

Paul Craig Roberts — What is Supply-Side Economics?

Back to the Seventies and Eighties. Roberts, a former assistant secretary of the Treasury, reports on the history and politics of supply side economics. Many Tidbits you probably weren't aware of, or had forgotten about.

Counterpunch
What is Supply-Side Economics?
Paul Craig Roberts | former assistant secretary of the Treasury

Winterspeak— A Bank is still not a financial intermediary: Part 2

More on Paul Krugman's use of James Tobin to defend his view of finance and monetary economics.

Winterspeak
A Bank is still not a financial intermediary: Part 2

Winterspeak — A Bank is still not a financial intermediary: redux

Winterspeak responds to JKH's recent elaboration of a previous discussion of Paul Krugman's assertion that banks are not special based on his reading of Tobin-Brainard 1963. That reading is contested by some.It is significant in that it reveals how Krugman's idea of endogenous money compares to heterodox views that he contests. However, in the course of it a lot of information is coming out about bank operations that is of interest, especially in the discussion in the comments.


A Bank is still not a financial intermediary: redux

Winterspeak

The question hangs on the interpretation of "intermediary." In the broad sense, an intermediary is an agent that facilitates a relationship between principles, usually for a professional fee, like a matchmaker. But this is not the only use of intermediary and banks are usually considered financial intermediaries even though they do not lend out deposit but rather fund their loans with a combination of capital and borrowing from various sources only part of which includes deposits.

The difference with banks is that their primary function is risk management rather than intermediation in the sense of savings and loan institutions and credit unions, for instance, that actually lend out deposits that they take in. The argument is not so much about this kind of intermediation, since banks are clearly special cases in that they have access to borrowing in the interbank payment system not only from other banks but also from the central bank.

Banks lend against capital and fund their assets resulting from loans by borrowing from a variety of sources, other banks, depositors and the money market. In extending credit, banks don't just receive interest as a fee for matching borrower and lender. Banks actively participate in the creation of flow, not only by arranging for existing funds to be lent, but also by adding to deposits, thereby generating a flow that increases the money stock through expansion of M1. As Neil Wilson notes in a comment at Winterspeak's, this necessitates dynamic analysis of flow rather than static analysis of stock. Other intermediaries free up existing funds to generate flow while banks create flow "out of thin air" by creating deposits and only afterward obtaining matching funding in order to balance accounts.

The question is whether this makes a difference that makes the special case of banks special economically. The fact that banks lent imprudently to borrowers who were not creditworthy based on dodgy collateral would argue that banks are indeed specially economically in generating financial instability, as Minsky hypothesized. Yet, shadow banking was also heavily involved in the crisis, which would argue against banks alone being special in this sense. However, many of the shadow banking institutions were owned and controlled by banks and were used to by banks to increase leverage beyond that which regulation allowed.

circuit — James Tobin on why deflation isn't a cure for unemployment

There's been a lot written lately on why the Pigou effect (i.e., increase in output and employment caused by an increase in consumption due to a rise in the real balances of wealth) isn't a foolproof way around the problem of the zero lower bound. It reminded me of these lines by James Tobin....

Fictional Reserve Barking
James Tobin on why deflation isn't a cure for unemployment
circuit

Why lower prices do not necessarily stimulate demand, and why it is likely they won't in Fisher debt-deflation.

Gunnar Tomasson — Mainstream monetary economics and a Fool's Errand

Interesting message to gang8 from Gunnar Tomasson, Mainstream monetary economics and a Fool's Errand, on Claudio Borio's recent BIS paper.

In correspondence with Samuelson, beginning in 1977, I made the point that it was LOGICALLY impossible to integrate what Tobin referred to as the "income" and "asset" sides of the economy.

Samuelson did not challenge the point, noting only that he was "confident" that "any who were expert [in such matters] would not agree that [I] had isolated a contradiction in [his] Foundations."

Later, when I put the very same point to Tobin, he did NOT address its merits but advised that he had "now" - after a quarter century of doing otherwise - come to "like the stock-flow-stock" approach to the subject matter.

That is to say, he had given up on PROVING what Samuelson had ASSUMED/HYPOTHESIZED.

Tobin did not explain WHY he had given up on his long-time quest, but referred me to his Nobel lecture delivered in 1981.

As noted by Claudio Borio, the models of mainstream economists do NOT include money - and there is a very good, but unspoken, reason why that is so:

INCOME FLOWS, measured in money, cannot in principle be placed in a unitary conceptual framework/model with ASSETS, measured in money.

Economists who seek to graft money onto their macroeconomic models are attempting the impossible - both Samuelson and Tobin KNEW that there was a problem with that.

One assumed the problem away - the other tackled it valiantly for a quarter century but changed tack without ever acknowledging (to the best of my knowledge) that it was a fool's errand.

There is also a link at the bottom to an interesting post in The Economist.