Bill Mitchell — Is the British Labour Party aboard the fiscal dominance train – Part 1?

As I type this (Sunday), I am heading to Brighton, England from Edinburgh. We had two sessions in Edinburgh yesterday (Saturday) and it was great to share ideas with some really committed people. We had to dodge a Hollywood closure of the streets (‘Fast and Furious 9 had commandeered the inner city to film a car or two swerving out of control or whatever, and I hope the city received heaps for the inconvenience to its citizens. But, with the direction now south, and tomorrow’s two events (more later), I am thinking the place of the British Labour Party in the progressive struggle. It doesn’t look good to me. The news overnight has been that the Party’s “head of policy and the author of the party’s last election manifesto” (quoting the Times today) has quit the Party claiming “I no longer have faith we will succeed”. The blame game starts and, as usual, Jeremy Corbyn’s leadership is in focus. The Times cartoon had the caption “They’ve got what it takes to form a government” with two ducks (in Brighton) looking at a sign against a wall saying “Labour Civil War Chaos”. What should we make of all this? My take is this: there is a clear paradigm shift going on in macroeconomic policy thinking. Every day (it seems) a new article pops up with someone claiming monetary policy has run its course and a new era of fiscal policy dominance is the only viable way ahead. That means that the central bank imprimatur on policy – determining whether such policy can continue to be effective and relying on interest rate adjustments etc as the primary counter-stabilisation policy – is over. That means that New Keynesian economics is over. That means that fiscal credibility rules that are neoliberal central are over. And that is why I think British Labour are looking poorly in the polls. They have taken advice from a number of characters who have pushed them into a ‘New Keynesian’ mindset and they are now ‘yesterday’s news’. They have missed the boat on these major shifts that have been going on. That is why they need a major shift in macroeconomic thinking. Only Modern Monetary Theory (MMT) offers a consistent and credible path for them to make that shift....

Bill Mitchell – billy blog

Is the British Labour Party aboard the fiscal dominance train – Part 1?
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Mariana Mazzucato — New Times: Mariana Mazzucato on why it's time for progressives to rethink capitalism

Some separate economic from societal problems, stating that we must address the former before we can tackle the latter. But the future for progressives lies in advancing the two together.…

The time is ripe for progressives to make their case with confidence and to rethink capitalism. Narratives about wealth creation must become more collective, as should the distribution of the rewards which result. The public realm matters to wealth creation, just as it matters to building a stronger and more just society.

New Statesman
New Times: Mariana Mazzucato on why it's time for progressives to rethink capitalism
Mariana Mazzucato | RM Phillips chair in the Economics of Innovation at SPRU in the University of Sussex

See also

Prospect
A real industrial revolution
Mariana Mazzucato

Noah Smith — Did macro theory fail us in the crisis?

This is a useful article. Pay particular attention to point 4.

I feel like if you have models for everything, you don't actually have any models at all. Without a way of choosing between models, your near-infinite stable of models turns into one big giant mega-model that can give anyone any results he wants. Worried about a financial crisis? Pull out a model that tells you a financial crisis could be looming. Worried about inflation? Pull out a model where inflation is a big danger. And so on.

I'm kinda going to agree with Noah about this. If macro theory presumes a model that predicted the crisis precisely based on assumptions and deductive logic, what he says is true. No mathematical model predicted the crisis with precision. Moreover, there will likely never be such an econometric model for reasons that Keynes explained.

But what this says is that macro theory is not very relevant to the real world, and policy makers should not be looking to macro theory  for guidance, other than peripherally.

Business people understand this. If macro theory were useful in business forecasting and operations, businesses would be hiring macroeconomists and competing away the best ones with huge salary offers. The fact that this is not happening is all you need to know about the practical usefulness of macro theory based on formalized models.

I think that this shows how there needs to be a distinction drawn between macroeconomics as a theoretical discipline and political economy as a policy science that combines economics with political science, sociology, history, law and government, and psychology — all disciplines that deal with the real world empirically — and other relevant methodological disciplines like applied mathematics, systems theory, philosophy of science, and analytic philosophy.

Does this mean that theoretical macro is a waste of time? No. Theoretical pursuits have their place. But they should know their place and not represent themselves as something they are not.

If you ever want macro models to actually be useful, it's not enough to just wave your hands and say "all models are wrong". It's not enough to treat models as ways to "organize our thinking". You've got to have a way to take them to data and decide if you should keep them around, send them back to the shop for alterations, or burn them in a fire.

What it means is that macroeconomists should not be assumed to be especially qualified as policy advisors based on their knowledge of macro theory. Those seeking policy advise should look elsewhere, or at least at least much more broadly.

Noahpinion
Did macro theory fail us in the crisis?
Noah Smith | Assistant Professor of Finance, Stony Brook University

Unlearning Economics — A Question for Economists

Sincerely: do you believe your discipline has earned a status as a decider of policy? Which successes would you point to in order to highlight this? And how have non-economists fared in the policy arena compared to you?

A look at the record.

Unlearning Economics
A Question for Economists

An interesting throw-off: "And, as Ha-Joon Chang has pointed out, recently industrialised/industrialising countries such as South Korea, Japan and China have largely relied on bureaucrats and lawyers to form policy (and my sources tell me that the economists in China are inclined towards Sraffian economics)."

Also of interest from Unlearning recently:

Peiria

Introducing Post-Keynesian Economics

Unlearning Economics