Most mainstream economists seem to think the idea behind Modern Monetary Theory is something new that some wild heterodox economic cranks have come up with.
New? Cranks? How about reading one of the great founders of neoclassical economics — Knut Wicksell. This is what Wicksell wrote in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise):Lars P. Syll’s Blog
This debunks the idea by the authors (Ben Fine and Alfredo Saad-Filho) that “underlying Keynesianism is the idea that there is a natural or equilibrium full-employment interest rate”.Keynes quotes proving the point.
Can America recover ideal rates of growth through interest-rate policies? This important analysis suggests that most economists misunderstand the issue. Updating Keynes, the analysis suggests that fiscal stimulus, labor union bargaining power, and more progressive income taxes are needed to support growth. (The article includes some algebra, which some readers may choose to skip.)
The main points of this paper are that loanable-funds macroeconomic models with their “natural” interest rate do not fit with modern institutions and data. Before getting into the numbers, it makes sense to describe the models and how to think about macroeconomics in the first place....Unfortunately, the article cited is behind a paywall. This is a useful short summary however.
This distinguishes money as the nominal unit of account from tokens that represent it. Randy Wray call this money versus the money thing."Money" we call a chartal means of payment which is also a means of exchange. An organization will be called a "means of exchange," "means of payment," or "money" group insofar as it effectively imposes within the sphere of authority of its orders the conventional or legal (tormol) validity of a means of exchange, of payment, or money; these will be termed "internal", means of exchange, etc. Means used in transactions with non-members will be called "external" means of exchange.Means of exchange or of payment which are not chartal are "natural", means. They may be differentiated (a) in technical terms, according to their physical characteristic— they may be ornaments, clothing, useful objects of various sorts — or according to whether their utilization occurs in terms of weight or not. They may also (b) be distinguished economically according to whether they are used primarily as means of exchange or for purposes of social prestige, the prestige of possession. They may also be distinguished according to whether they are used as means of ex- change and payment in internal or in external transactions.Money, means of exchange or of payment are "tokens" so far as they do not or no longer possess a value independent of their use as means of exchange and of payment. They are, on the other hand, "material" means so far as their value as such is influenced by their possible use for other purposes, or may be so influenced.
All of these models are based on a parable of equilibrium based on Wicksell’s Rocking Horse model. We now know this to be mathematically false, so why don’t we just replace it?
His famous quote from 1918“If you hit a rocking horse with a stick, the movement of the horse will be very different from the stick. The hits are the cause of the movement, but the system’s own equilibrium laws condition the form of movement”Wicksells model was one of damped equilibrium. In nature equilibrium is a state of rest, so a pendulum for example will eventually stopped swinging. So the only way to make the rocking horse rock is to hit it with a stick.
To get away from models where change is generated by philosogen and chaloric we have to abandon the assumption that what drives cycles is outside the model. To get a rocking horse to rick requires energy, and how much it swings depends on its centre of mass. The economy is much more like a powered rocking horse where its centre of gravity is subject to rare but violent shifts to new equilibria.
Responding to the critique of his Bloomberg View post on heterodox economics and its alleged anti-math position, Noah Smith approvingly cites Steve Keen telling us there isLars P. Syll’s Bloga wing of heterodox economics that is anti-mathematical. Known as “Critical Realism” and centred on the work of Tony Lawson at Cambridge UK, it attributes the failings of economics to the use of mathematics itself…Although yours truly appreciate much of Steve Keen’s debunking of mainstream economics, on this issue he is, however, just plain wrong! For a more truthful characterization of Tony Lawson’s position, here’s what Axel Leijonhufvud has to say:
Greenspan is announcing that the Fed is no longer asking in a Friedmanite mode “do we have the right quantity of money?”, but rather asking in a Wicksellian mode “do we have the right configuration of interest rates”WCEG — The Equitablog
Wicksell argued that if interest rates rise above some “natural rate,” they weaken investment demand and growth, while if they fall below it, they spur excessive demand and inflation. But markets inherently correct imbalances, restoring optimal equilibrium.
Keynes disagreed. “The economic system . . . seems capable of remaining in a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse,” he wrote. “The evidence indicates that full, or even approximately full, employment is of rare and short-lived occurrence.”....
But isn’t Keynes now mainstream? No, say Foley and Taylor. The mainstream still sees economies as inherently moving to an optimal equilibrium, as Wicksell did. It still says demand causes short-run fluctuations, but only supply factors, such as the capital stock and technology, can affect long-run growth. ....
Is it just me or is Wicksell saying that if banks do not provide enough bank deposits (by lending), then the state should take over this task?econoblog 101
"The fundamental difference between Keynes and Wicksell and in general the supporters of the LFT [Loanable Funds Theory] lies in the specification of the consequences of the presence of bank money.…
In contrast, Keynes states that the spread of a fiat money such as bank money changes the structure of the economic system. He underscores this point by introducing the distinction between a real exchange economy and a monetary economy.…
Keynes notes that the classical economists formulated an explanation of how the real-exchange economy works, convinced that this explanation could be easily applied to a monetary economy. He believed that this conviction was unfounded …" — Giancarlo Bertocco
