By Philip Pilkington, a writer and research assistant at Kingston University in London. You can follow him on Twitter @pilkingtonphil
Father, forgive them, for they do not know what they do.
– Luke 23:43
Some decades ago the British economist Joan Robinson – one of John Maynard Keynes’ most brilliant students who helped him with the original draft of his General Theory – half-jokingly referred to some of her colleagues as “Bastard Keynesians”. These colleagues were mostly American Keynesians, but there were a few British Bastard Keynesians too – such as John Hicks, who invented the now famous ISLM diagram. What Robinson was trying to say was that these so-called Keynesians were fatherless in the sense that they should not be recognised as legitimately belonging to the Keynesian family. The Bastard Keynesians, in turn, generally assumed that this criticism implied some sort of Keynesian fundamentalism on the part of the British school. They seemed to assume that Robinson and her colleagues were just being obscurantist snobs.
Such a misinterpretation exists to this day. The second and third generation Bastard Keynesians – which include many of those who generally collect under the title “New Keynesian” – have reinforced this criticism. Paul Krugman, for example, in response from criticisms that he was misrepresenting the work of Keynes and his follower Hyman Minsky wrote:
So, first of all, my basic reaction to discussions about What Minsky Really Meant — and, similarly, to discussions about What Keynes Really Meant — is, I Don’t Care. I mean, intellectual history is a fine endeavor. But for working economists the reason to read old books is for insight, not authority; if something Keynes or Minsky said helps crystallize an idea in your mind — and there’s a lot of that in both mens’ writing — that’s really good, but if where you take the idea is very different from what the great man said somewhere else in his book, so what? This is economics, not Talmudic scholarship.
This is a classic misrepresentation of those who accuse Krugman and his ilk of Bastard Keynesianism. When people accuse Krugman and others of distorting the work of others it is not because of some sort of sacredness of the original text, but instead because Bastard Keynesianism is racked with internal inconsistencies that its adherents cannot recognise because, blinded as they are by their neoclassical prejudices, they never get beyond a shallow reading of actual Keynesian economics. What is more, these inconsistencies are not simply some sort of obscure doctrinal or theoretical nuance that only matters to hard-core theorists; rather they generate concrete policy responses that may well cause a great deal of trouble and, quite possibly, discredit Keynesian economics itself if and when they fail spectacularly should they be implemented.
We turn now to one of the most egregiously incorrect postulates of the modern-day Bastard Keynesians, one which regularly arises in policy discussions; namely the so-called “natural rate of interest”. We will focus on the work of Paul Krugman. Not because he has engaged in any sin that his Bastard Keynesian colleagues have not also engaged in but simply because he is the most public face of the movement today. He is also a rather clear writer (unusual for a neoclassical) and so can easily be pinned down in the claims he makes.
What is the Natural Rate of Interest and How Does it “Work”?
The natural rate of interest is the interest rate at which the economy reaches full employment without generating substantial inflation. Any interest rate lower than the natural rate would lead to inflation as individuals spent and invested too much money because of the cheapness of borrowing; while any rate higher than the natural rate would generate unemployment as individuals spent and invested too little money because borrowing rates were too expensive. The idea lying behind this is that in order to bring the economy to a low-inflation level of full employment all the central bank has to do is set the interest rate at the level at which the supply and demand for savings generates a sustainable quasi-equilibrium result.
Yes, the whole idea is essentially based on the classic supply and demand graph – only applied to savings and investment rather than, say, the demand for apples or bananas at any given price. Neoclassicals find it remarkably difficult to think outside such a framework because it has been drummed into them since day one. Indeed, one would not be exaggerating too much by saying that neoclassical economics – and consequently, Bastard Keynesianism, which is an offshoot – is just a great big pile of crude supply and demand graphs piled one on top of the other. The idea of a natural rate of interest is simply the supply and demand graph being applied to the economy at large.
The supposed fact that a natural rate of interest exists leads many neoclassicals to assert that central banks have full control over the level of economic output in an economy at any given point in time. This, in turn, leads many neoclassicals to assert that other policies, like government expenditure programs (stimulus packages), are completely ineffective and only generate inflation. After all, if central banks can set the interest rate in line with the natural rate to generate Economic Bliss then why on earth would we need the government to intervene at all? Looked at in this way, the argument in favour of a natural rate of interest can be interpreted as a strong case against any macroeconomic stabilisation policies that involve the government in any meaningful way.
However, the Bastard Keynesians came up with an argument against this way back in the 1930s. They call it the “liquidity trap”. They claim that when the economy is in a so-called “liquidity trap” – as it supposedly has been since 2008 – then the natural rate of interest is actually negative. The problem here, according to the Bastard Keynesians, is that the central bank can only really drop the interest rate to the zero-bound level and, because the natural rate is negative, the economy fails to return to full employment levels of growth. Paul Krugman summarises as such with reference to the post-2008 world:
Right now the interest rate that the Fed can choose is essentially zero, but that’s not enough to achieve full employment. As shown above, the interest rate the Fed would like to have is negative. That’s not just what I say, by the way: the FT reports that the Fed’s own economists estimate the desired Fed funds rate at -5 percent.
Although rarely actually explained, the idea behind this is that in a negative interest rate environment money would, in a sense, decay. Holding onto money like an Ebenezer Scrooge character – which is effectively what the Bastard Keynesians believe is going on in a liquidity trap environment – would actually cost the holder money. Thus they would, in a tidy supply and demand manner, be incentivised to spend and invest their cash holdings. On the back of this consumption and investment would rise together with the level of employment until we were back to a state of Economic Bliss.
Inconsistencies in the Bastards’ Arguments
From a policy standpoint the problems with this are immediately obvious to anyone who actually follows financial markets (which, many are surprised to know, most economists do not): even if the central bank could succeed in creating a negative interest rate environment by generating inflation, it is by no means clear that now hoarded money would flow into real investment or consumption. Instead it might inflate asset price bubbles across the financial markets – from commodities to stocks – which would do nothing more than increase economic instability and, in the process, discredit Keynesian policies.
The reason why the Bastard Keynesians miss this is because there is a major inconsistency embedded deep in their worldview and in their theories. In fact, it is embedded so deep that they themselves are completely unable to recognise it. The problem lies in that, while these economists often reject the notions of perfectly rational agents and perfectly efficient markets, their theories actually implicitly rely on such notions without their even recognising it. In modern Bastard Keynesian theory, as in the theories of the earlier Bastard Keynesians, there exists a massive blind spot that distorts their perspective on many important issues.
In order to understand this we must again consider what these economists mean by a natural rate of interest. Note carefully that they refer to this interest rate in the singular, not in the plural. This is because, as we have already seen, they assume that the rate that needs to be set in line with the natural rate is the central bank overnight interest rates – what used to be called the “money rate of interest”. However, the central bank overnight interest rate is but one of many interest rates in the economy. There are, in fact, distinct interest rates on every financial asset in the economy. There are separate interest rates, for example, on triple-A rated company debt and on low-rate junk bonds; there are separate interest rates on personal mortgages and on credit-card debt – and so on and so on.
The reason that the Bastard Keynesians ignore this fact is that they assume – quite correctly – that when the central bank raises or lowers the overnight interest rate, all these other interest rates respond accordingly. The central bank rate of interest can properly be seen as the “risk-free” rate of interest while all the other interest rates integrate whatever risks the borrower is seen to represent. To understand this better let us imagine that the central bank risk-free rate is set at, say, 4%. Investors and savers know that by parking their money in government bonds they can get this 4% without incurring any risk. So, if they are to put their money into, say, a risky junk bond that has a high risk of default they will demand maybe 15%.
Now, say that the central bank lowers the risk-free rate to 0%. Well, now the investors and savers are going to be willing to accept a much lower return from the risky junk bond. Their choice is no longer between a risk-free rate of 4% and a risky rate of 15% but is instead between a 0% rate of return that incurs no risk and a risky asset with a high default risk. Thus they might be willing to buy the junk bond if it has, maybe, an 11% rate of interest or so.
This is all well and good if we assume that savers and investors are perfectly rational and price in risk perfectly. After all, if investors and savers are not subject to irrational swings and do not misprice risk because they essentially know the future then this whole process should work like clockwork – or, more poignantly, like an enormous series of neoclassical supply and demand curves that exist all across the money markets. However, if investors and savers are not perfectly rational and cannot price in risk perfectly because they do not know the future, then the interest rates on everything except the risk-free rate set by the central bank is completely and utterly indeterminate and is subject to the whims of investors.
In our example above, the very fact that other investors are piling into junk bonds due to the 0% risk-free rate might cause a burst of herd behaviour among investors who then drive yields on said junk bonds down to freakishly low levels – in fact, this is precisely what we have seen in recent weeks and, as I have written elsewhere, I have yet to see a convincing explanation for this shift that does not relate this to some sort of irrational behaviour.
The idea of a natural rate of interest then implicitly rests on the idea that investors and savers in the economy are perfectly rational and have perfect information about the future. Indeed, it actually implicitly relies on the Efficient Market Hypothesis in its strongest form. In order for the overnight interest rate as set by the central bank to line up all interest rates in the economy with the low-inflation, full-employment optimum rate investors and savers would have to set all these rates at their own “natural rates” – this, in turn, would require a Herculean level of rationality amongst investors and savers. What is more, if such Superhuman rationality and foresight is lacking all we will get are speculative bubbles and chaos as well-advertised shifts in the central bank’s monetary policy leads to irrational bursts of herd behaviour amongst investors which is then further influenced by the fear of “money decay” that comes with a negative rate environment.
For They Know Not What They Do…
It is at this point at which the irony of the Bastard Keynesian position reaches fever-pitch. Most of the Bastard Keynesians do not believe in such unrealistic rationality and yet they continue on with their natural rate nonsense regardless. Paul Krugman, for example, has been highly critical of the Efficient Markets view of financial markets and has written eloquently on the properly Keynesian idea that financial markets are inherently speculative. He appears to take this view largely in line with his support for the school of Behavioural Economics. In his blurb to his colleague Robert Shiller’s “Irrational Exuberance” Krugman approvingly writes that:
Robert Shiller has done more than any other economist of his generation to document the less rational aspects of financial markets.
Yet Krugman and his Bastard Keynesian colleagues seem completely unable to integrate these insights into their macroeconomic theories. Why? I would argue because of poor scholarship. It is certainly true that paying too much deference to the work of our forbearers may result in dogmatism. Certainly this is often the case with Marxists and Austrians. But the alternative is arguably much worse. By engaging in poor scholarship, as the Bastard Keynesians habitually do, one risks completely missing discrepancies and inconsistencies that arise upon adopting work that is being done in a completely different framework to one’s own neoclassical framework. This can lead to embarrassing misunderstandings that, frankly, make Keynesians appear sloppy and intellectually lazy. It also leads to desperately bad policy advice that could, if ever implemented, lead to Keynesian ideas being discredited.
Perhaps the most unfortunate aspect of all this is that the Bastard Keynesians, with only a very few exceptions, are today the main representatives of Keynesian economics to both policymakers and the general public. By fitting somewhat comfortably into the mainstream – because, arguably, they are not really Keynesians at all – they have managed to secure social positions of influence from which they preach what they and others think to be the Keynesian message.
Such can be quite troubling. While I think all those in the Keynesian camp appreciate the Bastard Keynesians pushing for common-sense fiscal policy in these dark days, nevertheless it is hard not sometimes to feel that the people representing these ideas are playing with forces that they do not comprehend or understand. It sometimes feels a bit like being at a civilised political debate in which the position you represent is completely underrepresented when suddenly someone shows up that agrees with you. On the surface this looks promising; they have a good position in society, better than your own, and people seem to know their name. Unfortunately all they do is rant and shout and prove completely unable to handle nuance.
As they stand there making threatening gestures and frothing at the mouth you wonder to yourself: “Should I distance myself from this person altogether or should I just throw my lot in with them? Is it better to approach this debate from the point-of-view of coherence, integrity and consistency; or is it better to approach it from the point-of-view of brute force and sheer decimal volume?” I would imagine that those who put themselves in the Keynesian camp can come up with the answer to that question on their own and after careful reflection; however, it should be pointed out that more and more people will likely be asking it in the coming years as within the halls of academia and within certain growing circles true Keynesian ideas are beginning to blossom.
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The rationality aspect just makes mathematical models have a more solid base.
Not sure how else you’d incorporate irrational social behavior into an aggregate economic model.
In the end, all economic agents have free will within basic constraints of the system. So while there are shortcuts used to be able to sensibly model phenomena, it’s not dogmatic or illogical just because of the point that, yes, people behave irrationally.
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept? Throw out all the mathematical models that rely on a semblance of rationality in order to run basic statistics?
The rationality condition that “bastard keynesians” use just makes mathematical models have a more solid base.
Not sure how else you’d incorporate irrational social behavior into an aggregate economic model. It’s almost a play into the Austrian School who prefer dialectics over empirics. In fact, I think they would love to destroy a foundational feature of modern economics by saying that the rationality from neo-classical economics is invalid. That way it casts complete doubt on all NK/RBC DSGE models and leaves only mutual intellectual masturbation among mises enthusiasts.
In the end, all economic agents have free will within basic constraints of the system. So while there are shortcuts used to be able to sensibly model phenomena, it’s not dogmatic or illogical just because of the point that, yes, people behave irrationally.
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept? Throw out all the mathematical models that rely on a semblance of rationality in order to run basic statistics?
The rationality condition that “b4stard keynesians” use just makes mathematical models have a more solid base.
Not sure how else you’d incorporate irrational social behavior into an aggregate economic model. It’s almost a play into the Austrian School who prefer dialectics over empirics. In fact, I think they would love to destroy a foundational feature of modern economics by saying that the rationality from neo-classical economics is invalid. That way it casts complete doubt on all NK/RBC DSGE models and leaves only mutual intellectual masturbation among mises enthusiasts.
In the end, all economic agents have free will within basic constraints of the system. So while there are shortcuts used to be able to sensibly model phenomena, it’s not dogmatic or illogical just because of the point that, yes, people behave irrationally.
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept? Throw out all the mathematical models that rely on a semblance of rationality in order to run basic statistics?
The rationality condition that “b4st4rd keynesians” use just makes mathematical models have a more solid base.
Not sure how else you’d incorporate irrational social behavior into an aggregate economic model. It’s almost a play into the Austrian School who prefer dialectics over empirics. In fact, I think they would love to destroy a foundational feature of modern economics by saying that the rationality from neo-classical economics is invalid. That way it casts complete doubt on all NK/RBC DSGE models and leaves only mutual intellectual masturbation among mises enthusiasts.
In the end, all economic agents have free will within basic constraints of the system. So while there are shortcuts used to be able to sensibly model social phenomena, it’s not dogmatic or illogical to embrace models that rely on pseudo-rationality just because of the point that, yes, people behave irrationally.
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept? Throw out all the mathematical models that rely on a semblance of rationality in order to run basic statistics?
The rationality condition that “b4st4rd keynesians” use just makes mathematical models have a more solid base.
Not sure how else you’d incorporate irrational social behavior into an aggregate economic model. It’s almost a play into the Austrian School who prefer dialectics over empirics. In fact, I think they would love to destroy a foundational feature of modern economics by saying that the rationality from neo-classical economics is invalid. That way it casts complete doubt on all NK/RBC DSGE models and leaves only mutual intellectual masturbation among mises enthusiasts.
All economic agents have free will within basic constraints of the system. So while there are shortcuts used to be able to sensibly model social phenomena, it’s not dogmatic or illogical to embrace models that rely on pseudo-rationality just because of the point that, yes, people behave irrationally.
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept? Throw out all the mathematical models that rely on a semblance of rationality in order to run basic statistics?
The rationality condition used by them just makes mathematical models have a more solid base.
Not sure how you’d incorporate irrational social behavior into an aggregate economic model. It’s strikes me as a play into the Austrian School, who prefer dialectics over empirics. In fact, I think they would love to destroy a foundational feature of modern economics by saying that the rationality from neo-classical economics is invalid. That way it casts complete doubt on all NK/RBC DSGE models and leaves only mutual intellectual masturbation among mises enthusiasts.
All economic agents have free will within basic constraints of the system. So while there are shortcuts used to be able to sensibly model social phenomena, it’s not dogmatic or illogical to embrace models that rely on pseudo-rationality just because of the point that, yes, people behave irrationally.
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept? Throw out all the mathematical models that rely on a semblance of rationality in order to run basic statistics?
God damn it’s impossible to post a comment.
The rationality condition that “b4st4rd keynesians” use just makes mathematical models have a more solid base.
Not sure how else you’d incorporate irrational social behavior into an aggregate economic model. It’s almost a play into the Austrian School who prefer dialectics over empirics. In fact, I think they would love to destroy a foundational feature of modern economics by saying that the rationality from neo-classical economics is invalid. That way it casts complete doubt on all NK/RBC DSGE models and leaves only mutual intellectual masturbation among mises enthusiasts.
All economic agents have free will within basic constraints of the system. So while there are shortcuts used to be able to sensibly model social phenomena, it’s not dogmatic or illogical to embrace models that rely on pseudo-rationality just because of the point that, yes, people behave irrationally.
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept? Throw out all the mathematical models that rely on a semblance of rationality in order to run basic statistics?
The rationality condition that they use just makes mathematical models have a more solid base.
I am unsure of how else you would incorporate irrational social behavior into an aggregate economic model. It’s almost a play into the Austrian School who prefer dialectics over empirics. In fact, I think they would love to destroy a foundational feature of modern economics by saying that the rationality from neo-classical economics is invalid. That way it casts complete doubt on all NK/RBC DSGE models and leaves only mutual self-pleasure without empirical analysis among mises enthusiasts.
All economic agents have free will within basic constraints of the system. So while there are shortcuts used to be able to sensibly model social phenomena, it’s not dogmatic or illogical to embrace models that rely on pseudo-rationality just because of the point that, yes, people behave irrationally.
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept? Throw out all the mathematical models that rely on a semblance of rationality in order to run basic statistics?
The rationality condition that they use just makes mathematical models have a more solid base.
I am unsure of how else you would incorporate irrational social behavior into an aggregate economic model. It’s almost a play into the Austrian School who prefer dialectics over empirics.
In fact, I think they would love to destroy a foundational feature of modern economics (rationality from neo-classical). That way it casts complete doubt on all DSGE models and leaves only self-righteous on-empirical analysis among Mises enthusiasts.
All economic agents have free will within basic constraints of the system. So while there are shortcuts used to be able to sensibly model social phenomena, it’s not dogmatic or illogical to embrace models that rely on pseudo-rationality just because of the point that, yes, people behave irrationally.
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept? Throw out all the mathematical models that rely on a semblance of rationality in order to run basic statistics?
The rationality condition that they use just makes mathematical models have a more solid base.
I am unsure of how else you would incorporate irrational social behavior into an aggregate economic model. It’s almost a play into the Austrian School who prefer dialectics over empirics.
part 2 (why are so many comments being eaten?!?!)
In fact, I think they would love to destroy a foundational feature of modern economics by saying that the rationality from neo-classical economics is invalid. That way it casts complete doubt on all NK/RBC DSGE models and leaves only mutual intellectual masturbation among mises enthusiasts.
All economic agents have free will within basic constraints of the system. So while there are shortcuts used to be able to sensibly model social phenomena, it’s not dogmatic or illogical to embrace models that rely on pseudo-rationality just because of the point that, yes, people behave irrationally.
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept? Throw out all the mathematical models that rely on a semblance of rationality in order to run basic statistics?
(part 2 — comments keep getting eaten and the site is loading very slow)
In fact, I think they would love to destroy a foundational feature of modern economics by saying that the rationality from neo-classical economics is invalid.
All economic agents have free will within basic constraints of the system. So while there are shortcuts/oversimplifications used to be able to sensibly model social phenomena, it’s not dogmatic or illogical to embrace models that rely on an unrealistic hhuman rationality just because of the point that, yes, people behave irrationally.
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept? Throw out all the mathematical models that rely on a semblance of rationality in order to run basic statistics?
CE has stated my perception…and I’m sick of austrian relevance, given destruction they have perpetrated…as they double down.
“Base” in what? Certainly not reality. The “base” of “rationality” is required in order to define solvable mathematical models. But models based on bad assumptions will give bad results, i.e., results that are not realistic, even if the mathematics itself is sound.
Mathematics is not reality; it’s a human intellectual invention. The mathematical models have to prove them selves by providing testable conclusions.
And many have provided valuable testable conclusions that have proven right by reality.
I can’t imagine that anyone would disregard what a rational reaction to a policy shock would be. Yes, people are irrational, but no, they’re not totally unpredictable, especially as a group.
Sometimes, but they also fail miserably. Getting some answers “right” some of the time does not prove anything—a broken clock is right twice a day. Instead of dealing with reality, the
modelworld builders just sweep the failures under the rug as “shocks”.Either the model provides robust predictions of suitable accuracy, or it’s useless. Clinging to bad models just because there’s nothing else is just superstition.
And another dirty secret is the math is garbage.
Folks like Deidre McCloskey and (IIRC) Phil Mirowski have looked a lot of the mathing up (both are solid mathematicians) and they’ve concluded that what gets mathed up is often the most trivial elements of the argument, that the real argument is in the narrative prior to the mathematical window-dressing.
So much for rigor.
Oui. Even I, a math (and economics) imbecile, once I picked up the appropriate jargon, could come up with a model that relates the “natural rate of interest” to “inflation, unemployment, whatever” by applying the Heisenberg “uncertainty principle,” currently comprehensible only to central bank geniuses.
Rationality is usually code for an approach based on maximization of utility. Economists following this approach have already made a whole host of assumptions (usually without realizing it) that may not be valid in practice. For example, by making the utility function single-valued they are excluding the possibility that people might have multiple utility values controlled by other variables, while by making it a real number they are assuming properties like transitivity which haven’t been proved. (For example, what makes us think that utility has only one dimension? Maybe it’s a vector?)
If you really wanted to truly model ‘rational’ behavior, you’d have to take a closer look at what utility really is and how it works – which in turn would require a better understanding of how humans actually behave in practice and what motivates them. I’d love to see someone actually do this, but it’s unlikely to happen as long as economists still think that their current model describes reality.
In today’s highly ideologically charged environment Keynesianism has become a rhetorical bin into which anything Conservative economists disagree is discarded. These apologists have created multiple Keynesian strawmen to discredit him, and even Keynesian economists themselves have, without bad intentions, contributed mulitple versions of Keynesianism that naturally arise by historical interpretation. However, many critics fail to distinguish Keynesian economics and the economics of Keynes. Economist Joan Robinson coined the term “bastard Keynesianism” to describe post-war Keynesian orthodoxy which neglected uncertainity, time, and psychological expectation in their mathematical models acting a simulacrum of the economy.
Keynes learned from experience that fiscal policy is more effective than monetary policy for influencing aggregate demand to counter business cycle downturns. Fiscal policy has a more direct effect on demand than indirect actions like changing the interest rates to increase or decrease investment, which is subject to greater market uncertainty. Keynes applied both fiscal and monetary solutions in combination depending of the historical situation. These were not automatic theoretical formulae to be applied blindly, but remedies based on historical context, empirical observation, and even intuition of how people behave.
Keynes’ ‘liquidity preference’ thesis held that in a money economy if persons preferred to hold their income in cash (or any asset that could quickly be turned into cash) from income insecurity, or for current transactions, a general imbalance between savings (over savings) and investment would cause an economic downward spiral. With this view of liquidity the primary economic factor was not interest rates, but variations of income (wages) and employment. In fact, chronic unemployment could be the natural equilibrium of the economy, and not Say’s equilibrium of full employment. This challenge to Say’s Law was the revolution in thinking Keynes brought to his lifetime.
Joan Robinson said the Keynesian revolution was about time. She made the distinction between history, and equilibrium. Historical time is uncertain and indeterminate involving the creative free will of human beings. Equilibrium is a theoretical construct that is a mathematical point in logical time. Keynes questioned the simulacrum of mathematical economic equilibrium and instead turned to human behavior in real time, in lived historical time, to understand economic activity.
Love it. Keynes advocated budget surpluses and balanced trade and here we have an MMT advocate accusing someone else of being a “bastard Keynesian”. The irony is so thick I’m surprised Pilkington can breath.
Precisely MFH, and to say nothing of the rationality MMT’ers believe governments and officials possess to keep spending in check.
As opposed to multi] – national corporations that need trillion dollar bail outs?
skippy… caveat, numerology is a piss poor tool to use ie continuity of life aka know the price of everything and the value of nothing… sigh.
“As opposed to multi] – national corporations that need trillion dollar bail outs?”
If by need you mean bought with bribes (“campaign contributions”) to… who? Who did they buy it from?
Dingdingding! That’s right, the government.
I think the title of this article is meaningful in a way that the author probably didn’t intend. I bet Phil had an interesting childhood.
The construct of power dynamics in a competitive environment has to many axis to model in real time, that’s just the human factor, now mathematically describe the the planet in toto (with the observation that we are still early on in leaning about it – no data no equation~).
Austrians are numerologists that create obligations (metaphysical assumptions born of ignorance of how “mankind” should live) that can not be payed (repetitive boom and bust) and then torture everyone for their faulty engineering, see most religions over the last fiveish century’s.
skippy… they need to get out of the *Temple* and do some actual forensic anthropological research, incorporate physical science and more importantly stop the – self inflicted intellectual retardation – cough… embracing a tomb of writ from antiquity’s dark pasts a priori bias thunkit.
PS. as one regular on this blog here used to link a so called science blog, which in the fine print, buried out of sight… proclaimes[!!!] our tomb is sacrosanct factual truthieness… it is but for us to devise… we mean… divine the granular… for it can be no other way… ommmmm~
The above comment perfectly represents why Bastard Keynesianism is poisoning the well with misinformation about who said what. Soundbites can be dangerous things indeed.
The above comment perfectly represents the condescending arrogance of MMT’ers who always dismiss criticism of their perfectly balanced and oh so rational theory as lacking understanding or deliberately misleading.
If only we could all understand that the world would be such a perfect, harmonious place with smooth business cycles and perpetual growth if we just accepted the simple accounting.
Sometimes an economy really does need a decent reboot, but in my humble opinion, stringently applying MMT and Keynesiam now will merely exacerbate the huge imbalances.
As Yves regularly demonstrates here, the officials and bankers can’t be trusted to use it rationally.
What imbalances are you referring to? And if you’re saying applying MMT/Keynesianism to the current system would be worse, then you’re tacitly endorsing austerity which is widely accepted as being counterproductive and lacking in any theoretical base or empirical support.
Yes, a lot of people make bad arguments, get their candy taken, and then harbor resentment. Comes with the territory, I guess.
Lambert,
Shoot I made like 10 different posts trying to take out chunks to figure out what was triggering the spam filter.
Shows how lame I am that I didn’t even think of the alternative meaning of “model”.
But in the end I had gotten them through (though butchered and broken up) — so maybe you shouldn’t pull all of the comments lol!
@Chris I think I ended up publishingh them all, except for the dupes.
hmmnn….there is no abstract “the economy”…there are those corporations, making “decisions” based upon what they can get away with..
not unlike there is no “our relationship”..there are two individuals…
Define “reboot” or we’ll just assume you’re an advocate of liquidationism.
Wondering how severe inequality from gaming financiers who are above rule of law must become before liquidationism becomes preferable. It would take care of the concentration of wealth problem.
To cushion the blow for the majority, something like Kucinch’s NEED Act (drawn from The Chicago Plan) would be in place, with its Citizens Dividend.
Then,in my perfect world, we would have a huge investment in robotics to eliminate the need for useless labor and free people up to stop and smell the roses.
Hey, I can dream can’t I?
But I’m a lowly beancounter, never took much interest in economics while in school outside of econ 101.
Don’t confuse arrogance with confidence and knowledge. Also don’t speak with ad hominems by attacking the speaker.
No, Keynes argued for sufficient spending to achieve full employment. Surpluses and balanced trade were discussed in an entirely different context.
Precisely.
In “How to pay for the war”, Keynes very clearly advocates budget surpluses at full employment to resolve the inflation gap. MMT rejects that idea outright.
Keynes also supported balanced trade through his Bancor proposal, but MMT prefers trade deficits.
Clearly, you guys are the bastard keynesians .
You don’t know what you’re talking about. MMT quite openly states that if government needs more non-inflationary space for spending it should increase taxation to refuce consumption.
Furthermore Keynes was not suggesting that surpluses could pay for the war. He was stating governments should run tight fiscal policy to avoid inflationary effects. Period.
MFH:In “How to pay for the war”, Keynes very clearly advocates budget surpluses at full employment to resolve the inflation gap. MMT rejects that idea outright.
Do you have exact quotes from How to Pay for the War? There was just an article in the NYT making the same claim, but not having K’s book, I find it unlikely. The innertubes have spoiled me, I know I should toddle on down to a lieberry. According to what I have read about this book [the chapter on HtPftW in Dudley Dillard’s 1948 book on Keynes] Keynes didn’t advocate surpluses during wartime. How could he have? During wars there is mega government spending, often as a necessity for survival. The problem is how to keep this from causing giant inflation – a major real world problem involving money. Not balancing budgets – a purely nominal, monetary and nearly meaningless goal.
Dillard, p.245:
MMT doesn’t reject surpluses – it just says that they are only rarely appropriate. At the height of a speculative boom, an economy’s automatic stabilizers might result in government budget surpluses. What of it?
Keynes also supported balanced trade through his Bancor proposal, but MMT prefers trade deficits.
MMT doesn’t advocate trade deficits. It just says don’t pee in your pants if you have one, particularly if you are a gorilla of a nation like the USA. The worst it could do would be to push your fx value down a bit. But forcing your people out of work to avoid this is bonkers. Wray has some articles from the 90s lauding the bancor. Some MMTers – Bill Mitchell – even advocate stringent regulation of fx speculation and think that this + returning to full employment worldwide should result in stabler currencies and more balanced trade.
But the general “solution” MMT prefers – floating fiat & not peeing – might not have been politically possible back then, and Keynes just had a different solution to the same problems, which might have been better and more practical, particularly back then, is all.
Did Keynes actually advocate budget surpluses? Why should a brilliant thinker like Keynes promote such a stupid policy? Please give the source for this.
(part 2 — comments keep getting eaten and the site is loading very slow)
In fact, I think they would love to destroy a foundational feature of modern economics by saying that the rationality from neo-classical economics is invalid.
All economic agents have free will within basic constraints of the system. So while there are shortcuts/oversimplifications used to be able to sensibly model social phenomena, it’s not dogmatic or illogical to embrace models that rely on an unrealistic human rationality just because of the point that, yes, people behave irrationally.
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept? Throw out all the mathematical models that rely on a semblance of rationality in order to run basic statistics?
Let me try to clarify (since I had an original comment written up and I had to butcher it to figure out what was tripping the spam-filter to eat the comments).
The optimization conditions that serve as the basis for the models every non-Austrian economist uses are reliant upon the assumption that economic agents are in fact rational.
It’s a poor assumption, but a necessary one as a starting point for modelling social phenomena like economic behavior.
Now, I don’t know if Philip realizes that he’s actually joining forces with Austrians in this because by going after the neo-classical foundations of modern “bastard Keynesians” you’re also attacking empirical work and econometric modelling as a whole!
The defense against this piece is simple: models aren’t perfect, they aren’t meant to be perfect, they’re meant to be guides, to use a framework to analyze effects of changes in the economy. Underneath all that is an assumption that people will behave essentially rationally. We know people are irrational, but if we throw out that important piece, we’re left to be in the same camp as the smug Mises bots who prefer mutual self-pleasure over concrete resolution of differences — we enter a world where empirics don’t matter and nuance becomes more important than trying to build a better framework for understanding aspects of the economy.
So I guess what I’d wonder is, what would Philip prefer? No mathematical modelling at all? No more econometrics?
Isn’t it better to have imperfect models that are right sometimes than to have no models at all and the starting point that: MARKETS ARE INEFFICIENT AND PEOPLE ARE IRRATIONAL. Okay, now what? We can just opine at length like Austrians about every nuance that leaves us without any tools to analyze effects of policy or how to structure an economy. Or we can try to improve on the imperfect frameworks we’re building and tweak them to match observed behavioral phenomena.
I don’t see the need for mathematical modelling or econometrics. Other Post-Keynesians disagree with me on this. But they would agree with my criticisms above. So, it’s not an either/or. I know one Post-Keynesian who spends all their time math modelling and doing econometric work while he never uses rational agents or any similiar assumptions and fully agrees with the above critique.
My own opinion? Math modelling and econometrics are — as Keynes knew well — a scam. It’s all smoke and mirrors and usually serves to hide the fact that the person using these techniques is not familiar with the empirical reality whatsoever.
I’m curious what work they are doing then… even if your friend is just running simple regressions to find micro-relationships between variables, it still requires embracing the underlying constraints and assumptions that go along with the modelling and statistical techniques being used (which are at the heart neoclassically rooted).
As for your own personal opinion of mathematical modeling and econometrics…well, I guess you and the goldbug/Austrian mises-bots have something in common after all :)
I’m curious what work they are doing then… even if your friend is just running simple regressions to find micro-relationships between variables, it still requires embracing the underlying constraints and assumptions that go along with the modelling and statistical techniques being used (which are at the heart neoclassically rooted).
As for your own personal opinion of mathematical modelling and econometrics…well, I guess you and the goldbug Austrians have something in common after all :)
I’m curious what work this Post-Keynesian you know is doing then… even if he’s just running simple regressions to find micro-relationships between variables, it would require embracing neoclassical assumptions that enable statistical applications.
As for your own personal opinion of mathematical modelling and econometrics…well, I guess you and the goldbug Austrians have something in common after all :)
RE: your own personal opinion of mathematical modelling and econometrics…well, I guess you and the goldbug Austrians have something in common after all :)
Also: what exactly is this post-keynesian you’re referring to working on? I’m struggling to think of any econometric applications that don’t rely on at least some vague neoclassical notion of rationality to determine constraints of variables.
That’s a rhetorical tactic/logical fallacy known as “false equivalence”. I could just as easily say:
“Hey, Chris Engel, you are interested in economics and so are the Austrians! You guys have something in common!”
The trick here is that I am trying to rhetorically tie you to an undesirable position. You see this tactic a lot on Fox News and other propaganda outfits. It’s very underhanded.
Anyway, I probably spend more time on real-world empirical issues than either you or the Austrians (who generally shun such enquiries a priori). So, I’m not hugely concerned with your attempts at rhetorical sophistry.
Right, then you don’t understand econometric applications at all beyond your own limited “rational agent” view of the subject. Estimating a fiscal multiplier, for example, of the import elasticity of demand do not require any rationality assumptions. Neither do about a million and one other macro applications.
I think you have just been to trained to think in a certain way to the extent that you canot conceive that any other way of thinking exists. The essence of the neoclassical poison. Also possibly incurable.
[pulled from spam queue. –ls]
Not at all. One of the defining characteristics of Austrian school is their rejection of empirical work, something you support.
It’s not a false equivalence, it’s merely an observation. You do indeed share quite a unique and important quality in the field of economics that Austrians embody — do with that what you may.
Ah, I see you don’t understand just how rooted neoclassical assumption of rationality is for econometrics.
Let’s delve deeper into this. When estimating a fiscal multiplier you will of course be using iron-clad accounting identities that don’t rely on any assumptions of rationality or efficient markets. But you will also be utilizing assumptions on how exactly variables within that accounting identity will react to exogenous variables. Underlying this interaction is 99% of the time a neoclassical condition of rationality that constrains the output. The vast majority of the time you can’t even step into the arena of using statistical techniques without at least some neoclassical base.
I’m not saying no econometric analyses lack a neoclassical basis, but if you could cite “one of the millions” of applications in a study that are totally devoid of any neoclassical assumptions, then we can work with something specific and not your own declared generality.
Not at all. One of the defining characteristics of AU school is their rejection of empirical work, something you support.
It’s not a false equivalence, it’s merely an observation. You do indeed share quite a unique quality in the field of economics that Mises folks embody — do with that what you may.
Ah, I see you don’t understand just how rooted neoclassical assumption of rationality is for econometrics.
Let’s delve deeper into this. When estimating a fiscal multiplier you will of course be using iron-clad accounting identities that don’t rely on any assumptions of rationality or efficient markets. But you will also be utilizing assumptions on how exactly variables within that accounting identity will react to exogenous variables. Underlying this interaction is 99% of the time a neoclassical condition of rationality that constrains the output. The vast majority of the time you can’t even step into the arena of using statistical techniques without at least some neoclassical base.
I’m not saying no econometric analyses lack a neoclassical basis, but if you could cite “one of the millions” of applications in a study that are totally devoid of any neoclassical assumptions, then we can work with something specific and not your own declared generality.
The site won’t let me post the comment I’ve written out and if I try to butcher it to get across the point it will be totally lost. I’ll try to rewrite:
It’s not a false equivalence to state you share a very unique quality with them — rejecting mathematical modelling and empirics is so rare in economics, and you stand alone with them…
Show me the specific study you’re referring to (since there’s “millions” of applications according to you). You don’t seem to understand just how rooted neoclassical assumptions are in econometric modelling. Fiscal multiplier analysis relies on interaction variables with constraints bound by rationality assumptions. The _vast_ majority of the time you can’t even step into the arena of statistical analysis without falling into a neoclassical assumption. How can you even build the functional form of a basic econometric linear regression without falling into neoclassical realm?!
The site won’t let me post the comment I’ve written out and if I try to butcher it to get across the point it will be totally lost. I’ll try to rewrite:
It’s not a false equivalence to state you share a very unique quality with them — rejecting mathematical modelling and empirics is so rare in economics, and you stand alone with them…
Show me the specific study you’re referring to (since there’s “millions” of applications according to you). You don’t seem to understand just how rooted neoclassical assumptions are in econometric modelling. You can’t even build the functional form of a basic econometric linear regression without falling into neoclassical realm?!
@Chris Engel I pulled your comments out of the spam queue; I ‘m not sure what the trigger was — ” model,” maybe.
But please don’t post identical comments over and over — to the algorithms, that looks like what a bot would do.
Also I must say I’m surprised at your knee-jerk reaction to my observation (which came along with a “:)” to show it was tongue-in-cheek anyway, as it’s well known you’re a critic of them). Even to compare me to FOX for pointing out the similarity between you and the Austrian school. It certaintly does expose the insecurity you have in your own worldview though.
And “I bet I spend more time than you on real-world empirical issues”! And my dad can beat your dad up too!
I don’t like when people misrepresent my position. And I suspect that you saying that I’m “againt” empirical work really just shows other what sort of narrow grasp you have of what constitutes “empirical work”. The poison runs deep in your veins, my friend, very deep. Butcarry on with your rational agent nonsense regardless. If you ever build a model that can make decent market predictions look me up. I might also be interested in a bridge that you may or may not have to sell me.
It’s scary just how similar your defense of your version of “empirical work” is to the Austrians:
http://www.cato-unbound.org/2012/09/05/steven-horwitz/empirics-austrian-economics
I don’t see neoclassical ideas as poison at all. I find it silly to take such a broad position against mathematical modelling and econometrics, sorry…
And let’s clear up two key things:
1) Efficient market dogma is not assumed within neoclassical economics at all. It’s something that arose much later.
2) In past work, you have misquoted Adam Smith’s invisible hand the way people misquote Keynes’ long-run everyone is dead. Adam Smith wasn’t a free market fundamentalist. That stuff didn’t come about until the post-war period even with Fama and the lot.
There’s still room for neoclassical framework for econometric analysis without subscribing to neoliberal free market fundamentalism.
Chris,
Prove it then. My empirics won out this week — empirics using a non-modelling Post-Keynesian framework. I called the stock market move, the fall in the dollar and the rise in the price of gold this day last week:
http://ftalphaville.ft.com/2013/05/28/1517532/goldistocks-and-the-bulls-and-the-bears/
So, put your money where your mouth is. Create a rational agent model — or any other neoclassical model — that can make tangible market predictions. Do it. Otherwise you’re just full of hot air and abstractions. Another neoclassical creating nothing of relevance and talking nonsense.
Have you reduced yourself to being a stock picker now? Shame..
I don’t purport to be able to forecast short-term financial market moves (although you seem more than happy to tout your record…).
You seem to be conflating financial market modelling with macroeconometric modeling, just as you happily lumped neoclassicals with the neoliberal freemarketeers of the post-war era.
You won’t see me advocating failed concepts like financial equilibrium. You also won’t see me trying to make market calls — because asset markets in the short-run do exhibit incredibly irrational behavior. And even very predictable bubbles like Housing can go on and on for years beyond a reasonable price level before the market actually reacts.
But if you’re going to really try and make short-term asset market calls then you’re going to complete your metamorphisis into an Austrian-style hack.
Look at your own FT column, the qualifiers you sprinkle all around your CNBC-style market predictions essentially make you look like a gypsie fortuneteller cold-reading a mark. But hey, I guess that’s what most people who study economics end up trying to do — make market calls and convince someone to hire you?
I don’t claim to predict the future, especially the near term future of volatile high-leverage markets, and you’d be wise not to fall into the same trap that many people who begin to understand the economy do…
http://www.amazon.com/Macrodynamics-Capitalism-Elements-Synthesis-Schumpeter/dp/3540879315/ref=sr_1_4?s=books&ie=UTF8&qid=1370367
Haha! Too Holy for the real world. A good neoclassical you are, Mr. Engel. It’s an awful pity that the rest of us have to subsidise your soothsaying. But keep building those models. You’ll get into heaven someday. Or future historians will just laugh at your useless priest-like attitude.
P.S. The General Theory was written largely in response to Keynes’ study of real financial markets. He was not as Holy as the charlatan neoclassicals who pooh-pooh anyone who tries to study the real world. Middle age priests. THAT is what these people are. Their models are their collars and their chalices.
“Now, I don’t know if Philip realizes that he’s actually joining forces with Austrians in this because by going after the neo-classical foundations of modern “bastard Keynesians” you’re also attacking empirical work and econometric modelling as a whole!”
I understand that Philip’s not favorable to mathematical modeling and econometrics. As someone who’s done a little bit of both from time to time, I think they have their place. However, I really don’t understand your comment Chris. Why does going after neo-classical foundations entail attacking empirical work and econometric modeling? Can’t those techniques of analysis be used by other economic approaches? Is there something inherent in empirical analysis and econometric that entails using assumptions about people being rational, markets attaining equilibrium, and that there are natural rates of interest? Why not formulate entirely different theories. Why not macro theories that don’t make assumptions about the rationality of individuals or groups? Why not assumptions are markets are reflexive and subject to path interdependence? Why not assumptions that there’s no natural rate?
What are we to do with the knowledge and evidence that people are irrational, markets don’t follow equilibrium analysis, and that the natural rate of interest is a shaky concept?
Read more at http://www.nakedcapitalism.com/2013/06/philip-pilkington-paul-krugman-and-the-fatherless-keynesians.html#uPj5sSqo9G5zUAJ9.99
Sorry, my reply should have ended at: “Why not assumptions that there’s no natural rate?”
Enjoyed the article Philip, as usual. I read Robinson’s Economic Philosophy last week, and I was so impressed by her frankness and sound thinking; I was also sicked by the thought that this books appears to be gathering dust on the library shelves while so many economists just spout superstition and myth. And I do often, and regrettably, find Krugman on that list too.
I think the singular failure of economics has been to define “rigor” in terms of mathematics only, and not incorporating a wider intellectual understanding of this history and philosophy of the subject as well as history itself. I suspect economists defend their attitude by arguing that few physicists and chemists care about these aspects of their fields either. But that of course only reflects the conceit of the economists that they have actually developed a true science. In fact if you look at the history of scientific development, I believe you’ll find many examples of scientists who know quite a lot about the history and philosophy of their field while that field was still being developed into a reliable scientific discipline.
But I do Krugman deserves some additional nuance. Having read his column and ‘blog for many years now, I can’t say that I ever noticed that he referred to ISLM as a perfected model. Instead, Krugman often points out the ISLM “does a good job” at describing the economics in the current zero-interest rate regime. For me, this raises perhaps an even bigger problem, since his position seems to reflect Friedman’s inane view of the scientific method—if it works, then it must be right. As you point out, ISLM may look good now, but as the old saw goes, a broken clock is right twice a day. And as you point out, the logical implication of a “negative interest rate” in the ISLM can’t be created naturally in an economy anyway—the government would have to impose a tax on savings to get the desired effect.
Thus, ISLM and “new Keynesianism” are both examples of the basics failure of economics to meet the intellectual rigor of the sciences. By clinging to poor intellectual standards, they can’t provide robust models that give true insight into the workings of an economy. Instead, at best they pull fragmentary ideas and special cases and act as if they have insight into the entire subject.
David,
I’m glad you read Robinson’s book. It really is fantastic. If you liked it you should also try to get your hands on “Freedom and Neccesity”. It’s also a forgotten classic (and short and precise as Robinson is apt to be).
Frankly, I think that these New Keynesian types have no idea what they’re talking about. They simply do not know very much about the systems they purport to be describing — financial markets being the most important case in point. Also, mathematical rigour is very pretty but what good is it if you’ve literally been trained to repress monstrous inconsistencies in your own theoretical framework.
I think the mathematisation of the discipline has led to a few generation of trained economists that can no longer think clearly at all. It’s like Doublethink and Newspeak in Orwell’s 1984. Once you’ve adopted the Newspeak language you automatically accept the Doublethink.
Thanks, Philip, I’ll check out that book. And isn’t it disgusting how scare Robinson’s writings have become? We can find all sorts of editions of Hayek and Friedman, Samuelson and Marshall, but her books have been left to rot. Just another indication of the religion that is modern economics—There’s the cannon and there’s the apocrypha.
And I totally agree with your other comments.
Cheers!
Which reminds me of that old saying;
“If the only tool you have is a hammer, everything looks like a nail.”
Here is another interesting phrase;
“Dumb as a bag of hammers.”
And one more thought that sheds some light on tools and the nature of tool users;
I’ve heard that in Germany, famous for fine engineering standards, mechanical engineering students are not allowed to have a hammer in their toolbox until the second year of study, the implication being that without the option of banging things together with brute force, they will have to design and make parts that actually fit and function properly from the git-go.
Philip,
the authors of “Freedom and Necessity” are whom? There are more than one
such title…
thanks
Sorry, you’re quite right… popular title! Here:
http://www.amazon.com/Freedom-Necessity-Introduction-Society-Vintage/dp/0394716825
As David indicates above, Robinson’s work is extremely difficult to get your hands on. This isn’t a coincidence. Most economists today could not read her stuff. Too many inconvenient truths.
Speaking of obscure books, Philip, have you read The Capitalist Manifesto by Louis Kelso and Mortimer Adler?
I admit to being an Adler fan, in part because I find he has the same frankness and low bullshit tolerance as Robinson. I’ve started reading the book, but haven’t got too far yet. Nevertheless, it looks interesting for at least trying to define economics in terms of maintaining democracy and human dignity.
…similarly, Asian philosophy proffers that “life” is an improper “tool” with which to view death..
What a great exchange. It’s good to see some fireworks here. I see some useful recognition on all sides of the fact that economics is an effort to apply various models in an attempt to construct policy.
The critical problem is that the nature of our politics prevents entire generations from recognizing the provisionality of these models. So we get generations of people who’ve finally got tenure, respectability and influence over policy makers. If events confound their models, theyre no more able than any other social “science” practitioners to recalibrate and change course. Their modeling is too fundamentally tied into the exercise of power over the lives of the mob. The stakes are too high.
I don’t see how economics can escape the need for models because all the evidence is observational data, there being no true counterfactual or pure experiment in economic systems. The models are necessary to adjust for multiple covariates and get closer to accurately estimating probable effects.
Maybe the question is more how much importance do we give to models when it comes to deciding policy? I think using models to determine policy is where the corruption gets most thick.
Any conception of how a system works is a model. Keynes objected to use of mathematical models because they produce a false sense of reliability which is not reflected by actual observation of their accuracy. Nothing has changed in the following eighty years. Current DSGE models, the EMH, Barro-Ricardian Equivalence etc. have been less than useless in economic forecasting.
It is completely immaterial how sophisticated the maths are when the models are founded on false assumptions. Economists don’t believe individuals and firms are atomistic rational actors because there’s overwhelming evidence of this, they assume rationaliy because otherwise their models don’t work.
If instead of throwing calculus at a whiteboard we observe how the Fed interacts wih the bond market and conclude “the Fed sells securities to drain reserves”, this is perfectly acceptable as a model and its elegant simplicity allows it to be tested much more readily. If we look at flows in and out of the private sector and conclude “our current account deficit is X, our budget balance is Y, this means a net loss of non-government financial wealth”, the same applies. We can make a forecast based on that and then watch how it plays out.
Mathematical models have simply not proven themselves capable of revealing anything helpful for policy-makers. Maybe that will change one day but until then they should remain on that whiteboard and out of swrious discussion.
“It is completely immaterial how sophisticated the maths are when the models are founded on false assumptions”.
For what it’s worth here is Stephen Kinsella on the subject of the difficulties of modeling:-
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1955613
You’re spot-on — imperfection isn’t uselessness, just be skeptical and know the shortfalls.
The rational agent is the bridge between factual accounting identities and conceptual frameworks for how our economy’s moving parts come together.
“The rational agent is the bridge between factual accounting identities and conceptual frameworks for how our economy’s moving parts come together.”
Lol. I’m saving that quote. Thanks.
You did say you might be interested in a bridge he might or might not be willing to sell…
Chris, how can an accounting identity be “factual,” when what makes it an accounting identity is that it is true by logic alone?
Also why isn’t it true that:
The IRRATIONAL agent is the bridge between factual accounting identities and conceptual frameworks for how our economy’s moving parts come together?
I’m asking a serious question. The rational agent assumption is the bridge between accounting identities and SOME conceptual frameworks, theories, and models about the economy’s moving parts. But aren’t we really arguing because some of us think that the conceptual frameworks involved are false, misleading, and not very useful for accounting for or predicting empirical results. Why would we want to retain an assumption that leads to a conceptual apparatus that s plainly harmful to most of us?
I was being deliberately redundant by saying “factual” (i.e., indisputable) accounting identities to distinguish between the theoretical frameworks that are conceptual and vary in interpretation.
I think the argument was that I think it’s patently absurd for someone to call-out the entirety of neoclassical economics and then to say that mathematical models and econometrics are useless.
I’d love to see a simplified model that doesn’t rely on an assumption of rationality. Even Warren Mosler’s investor newsletter thing and blog is analyzing policy and markets based on how things “should” be reacting given rational behavior. You can’t escape neoclassical conditions. You really can’t.
As for the efficient markets, financial equilibrium, free market fundamentalism — that’s a separate bundle of a topic outside of neoclassical tenets. And I took issue with Philip conflating them as if they’re inseparable.
If you think the model is false and wrong and that’s the disagreement — by all means, model the economy differently. But I’m willing to bet you’ll fall into a neoclassical assumption no matter what.
I didn’t promise a simplified model. On the other hand, simplicity is neither everything nor the only thing. It’s only one of the criteria we use to choose among competing formulations. Anyway, I guarantee that if I do formulate such a theory it won’t assume that people are rational in the classical sense of the term. I believe people can be rational, in a different and more nuanced sense than the classical notion, but even then I don’t believe people will be “rational” all the time even in my sense. So agent-based modeling has to employ more complex basic assumptions.
However, the bigger issue may be one of whether we want to model the macro-economy in terms of individual behavior aggregated to the macro level at all. Macro level is most probably the emergent result of lower level interactions that cannot be reduced to lower levels of analysis. The whole approach of making assumptions about individual reality and then somehow connecting that to behavior at the macrolevel is foolish in my view. The other social sciences increasingly realize this and model at different levels without trying to reduce the macro to the micro. This classical approach of Physics doesn’t work for the economy, because it is a complex adaptive systems.
Big smoke, no fire.
Neo-Keynesians are deceived when they refer to the relationship between savings and debt. Within the current banking system there is only an indirect fractional relationship between the two. Debt is created by balance sheet expansion. That is why we seen loan to deposit rates smaller than one.
Hyman Minsky understood this when he produced the concept of a super-debt-cycle. A liquidity trap is connected to over-indebtedness and uncertainty. Minsky understood that at the end of a super-debt-cycle an inflationary debt-based fiat monetary system turns deflationary. From that moment on liquidity programs like QE and ZIRP as well as fiscal stimuli will only delay the final outcome and exacerbate the costs. These programs cannot realize an economic escape velocity big enough to bring debt ratio’s down.
Bernanke knows this too. He is only serving us the nineteen thirties in slow motion. Paul Volcker gave a clean sheet to Alan Greenspan, who turned it into a irreversible mess for Bernanke. We need a debt jubilee directly followed by a monetary reset. Otherwise we keep kicking the can down the road until it becomes nucleair.
Readers familiar with the dutch language are advised to visit the following website: http://www.economie-macht-maatschappij.com/monetair-beleid.html
Much smoke hide fire?
“These programs cannot realize an economic escape velocity big enough to bring debt ratio’s down.”
Second World War?
Yes, WW II. But that was simply the occasion. Having gone through the experience, I know it was the “spirit?” engendered which was catching. It had very little to do war, per se. A threatening asteroid would do the same.
(“Economists don’t believe individuals and firms are atomistic rational actors because there’s overwhelming evidence of this, they assume rationaliy because otherwise their models don’t work.”)
…without application of individual here and now circumstance, or reference to,
it appears this is another example of “human condition”…language, and ability to reference that which is not here and now, aside…
brilliant!
Death & Taxes: Hamilton vs. Jefferson
The problem is the solution…
When you grow up in a big family, large enough to see the entire empire distribution of behavior, you find yourself always at a birth, a wedding and a death. And a funny thing happens when you witness many cycles, moving in spacetime, all ending in death.
The ‘winners,’ those who face death admiraly are not the empire favorites, those who seek immortality in public and peer admiration. Don’t fool yourself; time of death is relative, and fear is a poor substitute for parents.
Easily exploitable resources fuel the empire, and debt assigned to the unborn of civil marriage, another easily exploitable resource, is its oxygen. Rocket science is not rocket science; it’s all around you. Managing gravity is the easy part.
Funny, what happens when people and empires begin to orbit death. At the system threshold gap, conversion in both directions becomes possible. If you look ahead, empire derivative perception, behavior and outcome may be altered, with the necessary catalytic gained in time, and compiled to complete the circuit.
Your foundation is your exit; the empire may only pass through you. Family law, banking, is the timer key, compiled across social class event horizons, charge separation contained by quantum entanglement, until it’s not.
The global economy is rolling over again, and the $30T in digital printing has only served to pull the empire deeper into the dead zone. Faking it until you make it is no substitute for a proper foundation. Repeating history did not help China, or any other nation/state.
The South lost the war because its trading partners preferred federal debt to the cotton backing Confederate currency, for what, by now, should be obvious reasons associated with the imperialist model, which is why many consider Lincoln a traitor. The Civil War, like all wars, was about currency, fear of the future.
The false choice is and always has been centralized vs. decentralized economic slavery, both of which require easily exploitable resources, and neither of which can withstand accountable scrutiny. Selfishness, greed, or whatever you want to call exploitation, in a positive feedback cycle of positive feedback cycles, cannot bring an economy into equilibrium.
Which would you rather own, a warehouse full of cotton or control over future production? If you are labor, the answer is neither.
Skill at timing, logic employed to cultivate instinct, showing up on time, in place and with skill eliminates the need for money, collapsing all the middle controllers in the tax code enabling the event horizons. When you hear ‘whatever it costs,’ you have arrived, deferring all empire income, taxation without representation.
Debt is the MAD insurance cementing the empire, which may only drown itself, if not balanced by independent family income streams. The size, shape, shelves, and noose on the empire determines its perceptions. Some things you just don’t want to know.
So, you are rolling out your developments across a number of generations, which affects majority perception on the derivative side. Spirit, language, is the flux capacitor. Intelligence, mathematics, is the motor inductor. And body, mechanization, is the political resistance. The result is physics, space travel.
Print yourself a circuit. Bend, twist, and strand to get voltage potential. What you see is deductive distillation. Money cannot enable space travel forward; it’s a delay mechanism. Do you see any other critters exchanging money to build a home?
Whether the Fed pulls or pushes on a string, children learn from or teach their parents, or civil law prescribes or distills military law depends upon your perspective. From the perspective of military law, subordination allows civil authority to run its course, which ends in the dead zone every time.
The school system is a sunk cost, we are each responsible for our own health, and families have to take care of their own in old age. That’s just the way it is. Family has outlasted every government in history because it profits from a symbiotic relationship with its environment. An empire shorts it to an artifice, distilling the best to begin the next cycle.
The empire common is wanting the benefits of leadership, but not the responsibility, all chiefs and no indians. The participants hoped that automation was the answer. Exactly wrong, as usual. Adopt any lifestyle you want, but expect to pay; the empire majority is not all-powerful. Spacetime is spacetime wherever you go.
Requiring labor to be licensed to do things the empire way, to make its money, and then denying it licenses is pretty damn stupid, but do what you want; fix it yourself. There is no book on parenting for a simple reason; books, like all media, are derivative in nature.
An empire can exploit a community, with commonality, but only you can build a community, with particularity. AIG and Sony are firefighters setting the global economy on FIRE. Round and round they go, faster and faster, accomplishing nothing, $30T and escalating, to support an artificial world already awash in artificial capacity, orators competing for shrinking space. The majority is its own worst enemy.
Did you really think Japanese kids where going to pay for US retirees when they cannot provide for their own? The majority looks for love in all the wrong places because it accepts the empire assumption of behavior replication. An empire is an extension of gravity, from which life emerges. It’s as simple as that.
“More than a generation of heavy federal spending, it turns out, has provided the seed money for a Washington [DC] economy that now operates globally…The new moneyed brain trust…,” money on the sideline, blah, blah, blah. Got stuff / gravity to burn?
Phil,
I think you have interesting points and sadly I’m not erudite enough to fully grasp all the nuance. What I do come away with is exasperation that you undermine your argument with such polemic.
If you could please just state your position without feeling the need to ream those you disagree with, you might actually accomplish your presumed goal of getting people to listen to you. Can you rewrite this as a position piece and not a opinion piece?
I’d have to agree.
And nicely put.
Phil, I read your stuff, and really would find it more pleasurable if you’d tone it down a bit.
Phil, I enjoy your “reaming,” and I enjoyed this piece very much. I also think it was valuable to point out the inconsistency in “bastard keynesian” assumption. This isn’t an academic environment, but a blog on political economy, as I see it. So, for me, polemics are perfectly in order.
Meh, his pieces are meant to get a rise in the neo-liberal/libertarian frame of thinking. Good writing does this.
Also if being nice was truly the intent of blog writing on econ, then people who blog for libertarian view points ought to stop killing people with poisonous ideas.
It is best to call em out and shoot them down then to let them continue to spread such horrible falsities.
I read through the entire thread, and all I come away with are thoughts recalling Einstein:
“If we knew what we were doing, it wouldn’t be called research.”
“We can’t solve our problems using the same kind of thinking we used when we created them.”
Go thou and do likewise.
It occurred to me last year that E=MCsquared is the equation for economics too.
See E = economic activity, m = money and c = cooperation.
So economic activity = money X cooperation-squared.
if somebody thinks about this long enough — say for about 30 minutes on the bus or train — they’ll realize how true it is.
It’s weird you can have a physics formula also work for economics, since economists been trying that for 100 years without getting anywhere. You can almost just imagine giving up completely. But now with this breakthrough it’s been resolved by QED with ESP, just by riding public transportation in fact, and not by showboating it up with complicated equations that only confuse people and impress the feeble-minded and delusional.
Wonderful formulation, needs to be writ large. Mind if I steal it?
Beautiful, craazy!… See Ya in Stockholm (and I don’t mean for the riots). Wonder how much those Nobel Prizes in Economics weigh? I would imagine they fairly heavily around one’s neck.
I don’t think that Krugman has ever denied being a neoclassical with some Keynesian ideas. His neoclassicism is more clearly seen in his acceptance of equilibria and his discounting of private debt (The neoclassical “One man’s debt is another man’s asset.)
Like neoclassical economists in general, Krugman’s view of money is pervaded with gold standard thinking. There is no particular reason to see why this would be a neoclassical view, although it certainly is a neoliberal one, at least with regard to the 99%.
Krugman’s initial embrace of free trade can also be seen as another one of these neoclassical/neoliberal elements.
Krugman’s deficit dove ideas on government deficits is a mix of Keynes and neoclassicism: Government’s should run deficits countercyclically but then pay them back as the economy improves.
To be honest, I don’t know how much that differs from Keynes, indeed a post I would like to see would be an examination of the neoclassical elements in Keynes. The commonly accepted view of Keynes use of aggregates, for instance, does not seem that far off from the neoclassical, and is likely why a neoclassical like Krugman would find them so attractive.
Kudos. Well said.
As a non-economist watching these debates from afar, it has seemed increasingly clear to me over the past few years that the elephant in the room is the unprecedented concentration of wealth and power in American society specifically and western society more generally.
Who cares about how much money is spent or how much money is raised in taxation or whether there is a current accounts deficit or a current accounts surplus over arbitrarily short periods of time?
All that matters right now is how money is spent, whether we invest it in the public commons or squander it on private waste. Everything else is noise until we bring our system back into something remotely balanced and sustainable.
In these kinds of forums, I don’t see MMTers loudly advocating for massive tax increases on the wealthy (ie, a transfer from the private domestic sector to the government sector). Instead, what typically happens is someone says that people don’t understand sectoral balances. I don’t see MMTers loudly discussing the problem of price inflation encountered by people trying to pay for rent and utilities and transportation and medical care and education and so forth. Instead, what typically happens is someone says that when we encounter inflation, then MMT policies will act against it – as if prices aren’t a problem in the here and now. I don’t see MMTers acknowledging the Constitution at all, as if the Bill of Rights is simply something to be ignored for expediency like an inconvenient variable excluded from a model. Etc.
And I’m increasingly enjoying the irony that the inflation-denying wing of MMT seems to have fundamentally embraced the Chicago school idea that monetary policy matters. Money is just a concept, an idea, a framework we hold in our heads for how to compare the relative labor values of two otherwise unrelated things and transport value across time and space. Printing specific currency units, either physically or electronically, doesn’t create wealth; that requires wise investment to increase the productive capacity of the nation (infrastructure, social insurance, etc.).
It’s the distribution of wealth within the private domestic sector that matters in 21st century American political economy; we have plenty to go around.
As a non-economist watching these debates from afar, it has seemed increasingly clear to me over the past few years that the elephant in the room is the unprecedented concentration of wealth and power in American society specifically and western society more generally. True.
Who cares about how much money is spent or how much money is raised in taxation Money isn’t raised in taxation. It really, really isn’t. Money is destroyed by taxation.
In these kinds of forums, I don’t see MMTers loudly advocating for massive tax increases on the wealthy (ie, a transfer from the private domestic sector to the government sector). Because “massive tax increases on the wealthy” is NOT “a transfer from the private domestic sector to the government sector.” MTIs just make the wealthy have less money. This may be a Good Thing, but the people themselves have to decide that and vote for politicians who pass such laws.
Government spending, which MMTers advocate is the real taxation, the transfer from the private to the public sector. Government spending through a JG that mobilizes labor power that would otherwise be destroyed – look at Chris’s lost output clock – is a frigging utterly free lunch that creates real wealth out of nothing, just out of newly created money, wealth that wouldn’t exist if not for it. It is not merely rearranging & redistributing stuff. Sure, rearrange & redistribute. But that is a separate issue from eradicating unemployment forever, which would yield colossal and immediate free-lunch benefits.
I don’t see MMTers loudly discussing the problem of price inflation encountered by people trying to pay for rent and utilities and transportation and medical care and education and so forth. Instead, what typically happens is someone says that when we encounter inflation, then MMT policies will act against it – as if prices aren’t a problem in the here and now. Lose your job. Live in a place where hardly anybody has jobs. Then the effective price inflation is infinite.
MMT/Keynesian spending, without any new taxation, would not be inflationary, not now, not later. It would eradicate unemployment, and the long-run evidence is that unemployment causes inflation, rather than fights it. Neoclassical/bastard private-investment-led Keynesianism is inflationary – that was its Achilles heel. MMT/PostKeynesianism/ Keynes himself resolutely & vehemently opposes inflation.
I don’t see MMTers acknowledging the Constitution at all, as if the Bill of Rights is simply something to be ignored for expediency like an inconvenient variable excluded from a model. Etc.Huh? What does the Constitution & the Bill of Rights in particular have to do with anything here?
And I’m increasingly enjoying the irony that the inflation-denying wing of MMT seems to have fundamentally embraced the Chicago school idea that monetary policy matters. There is no inflation-denying wing. MMTers – along with many other economists uniformly understand inflation much better than the anti-Keynesians who seem to have confused you. As best I can, I try to write things that all MMT academics would agree with, and I could provide cites for everything.
MMT forthrightly denies the wacky mainstream/Chicago belief in the efficacy of monetary policy – meaning interest rate fiddling. Following Keynes, MMTers & most postKeynesians, as opposed to neoclassical/bastard Keynesians, advocate low to zero interest rates (so-called “loose money”) partly because this should decrease inflation. Even wackier than the idea that interest rate manipulation matters enormously, that the Fed can micromanage the economy, is the mainstream idea, e.g. Barro, that fiscal policy doesn’t matter. That the government doesn’t really affect the economy however it taxes or spends.
MMT/Keynes/Institutionalist econ says money matters, is not neutral, as everyone knows. But your paragraph about “money is just…” vaguely veers toward saying money is neutral, and government spending just rearranges things at best.
Printing specific currency units, either physically or electronically, doesn’t create wealth; that requires wise investment to increase the productive capacity of the nation (infrastructure, social insurance, etc.). NO, NO, NO, A THOUSAND TIMES NO!!! Hogwash that people have to have their minds fuddled by nonsense for years to believe.
Throwing money out of helicopters even, ALWAYS has consequences. In times like now, it would be “wisely invested” – just by existing, just by being created & thrown out of a helicopter – and increase production and capacity etc. In a giant boom, it would be inflationary, and change the real wealth distribution of creditors and debtors. Money is NEVER, EVER neutral. If someone could create perfect counterfeits right now and used the money to build pyramids, there is no question that this is “wiser spending” than forcing millions out of work, that the morons of Harvard & Chicago extol.
It’s the distribution of wealth within the private domestic sector that matters in 21st century American political economy; we have plenty to go around. Sure, we could rearrange things better. But stopping colossal wealth-destruction = unemployment = a vicious, inhuman, morally depraved, criminal assault on the poor and jobless is the first order of business. Why not let people support themselves financially & benefit everyone else by doing so?
If a school has 2 kids: one who steals all the others’ toys, and one who sets fires destroying classrooms and burning other children, which one do you deal with first?
Mainstream “economics”, which fuddles so many minds, solves the problem by saying fire doesn’t exist, and unfortunately that is what you tend to say. No, the colossal and idiotic wealth destruction called unemployment does exist, and at times like now, everybody could be better off if we just built pyramids. In better times, this would be less and less true, which is why MMT advocates the least inflationary form of spending, the Job Guarantee. An MMT society would have the hardest, least inflationary money the world has ever seen, and no unemployment.
I would say Barro’s position on fiscal stimulus being useless is an aberration from the mainstream.
Wow, I’m fascinated at how little this has to do with what is put into political discourse by people claiming some variant of MMT. Do you honestly believe that the importance of fiscal policy is some brilliant insight of MMT? Everyone believes fiscal policy is important, from Halliburton to hospital chains. Why do you think so much effort is spent lobbying Congress for trillions of dollars of federal spending? Do you understand how absurd that sounds, that you think there is even some controversy over fiscal policy? Everyone wants the government to fund their pet ideas.
There are three basic claims crossing over into political advocacy.
1. It doesn’t matter what we spend money on, spending in general is good when times are bad. The fact that you can’t see how that conflicts with the Constitution or market-based economics is a mindboggling blind spot you have, a complete ignorance of what oppressed communities face in the United States and around the world. Ending the drug war alone would radically improve, not harm, our economy. On a larger scale, winding down the national security state and the two tiered justice system would make our nation much stronger. I am having a hard time coming to any conclusion other than that MMTers purposefully ignore this because at the end of the day, ‘spending money solves all our problems’ fits right in with larger authoritarian developments.
2. High value platinum coins and other monetary gimmicks can be game changers, can actually solve problems. Yet you rightfully point out that the problem is getting people to vote for politicians that support good policies. Gimmicks do nothing to change the political leadership – they assume, rather bizarrely, that the corrupt politicians just indicted would all of a sudden act in the best interest of the public. What we confront is a management issue, not a technical issue. Suggesting policies that ignore the management problem is hilariously absurd; it’s like no one looked at the budgets of the past decade to project where an additional trillion dollars or 30 would be spent.
3. Government backstops/guarantees/money printing/whatever doesn’t cause inflation. This religious belief system that employment levels are the primary driver of inflation strikes me as exactly the same kind of gobbledygook of robotic rational behavior rather than actual human behavior of the efficient markets hypothesis crowd. What is the constraint on spending? That is never discussed; the answer is always more.
The fact that you throw in the Jobs Guarantee is a real tell to me. That’s not an objective truth; that’s actually a very controversial idea. The notion that we should have people perform work that wouldn’t otherwise be done is laughable. Do you have any idea what kind of management and overhead and reporting would have to be in place to have millions of people cycling through short-term, low-wage jobs as lifeguards and front desk receptionists and whatever other projects local governments and nonprofits get around to implementing? You think that develops skills that are marketable to employers that aren’t hiring? You think paying people $5 an hour or whatever gives them the income to revitalize local communities?
Plus, on a basic philosophical level, humanity is not called to work. Leisure time is actually when we build and create and explore and do and learn and grow.
If a public works project is worth doing, then hire people to do that project. Don’t hire people because they’re unemployed. Social insurance is so superior to ditch digging that it really reveals the centrally-planned authoritarianism and bureaucracy and paternalism of people who advocate JG. The real world just doesn’t work that way; there is way too much politics at all levels of government.
The linking of the safety net with providing people something to do is completely artificial and ungrounded in anything evidence-based. In general, the experiences we have with training and workforce development programs is that marginally increasing skills has virtually no impact on employability. Skills deficiencies and mismatches simply are not why we have economic problems today.
Classical’s and neo knuckle draggers alike have, as pointed out above, self appointed themselves as oracles of divine knowledge.
When confronted with any evidence that challenges or refutes their divine wisdom, they do as they have always done, start a Holy War or call out the Inquisition…. heretics are on the loose!!!
skippy… give’em heaps PP… the murdering bastards deserve more… but… who wants to become one too…
Although rarely actually explained, the idea behind this is that in a negative interest rate environment money would, in a sense, decay. Holding onto money like an Ebenezer Scrooge character – which is effectively what the Bastard Keynesians believe is going on in a liquidity trap environment – would actually cost the holder money. Thus they would, in a tidy supply and demand manner, be incentivised to spend and invest their cash holdings
Read more at http://www.nakedcapitalism.com/2013/06/philip-pilkington-paul-krugman-and-the-fatherless-keynesians.html#v71O8rH8j6MRHsPM.99
Ummm,I think the above assumption/analysis/conclusion is opposite of reality. The holder of cash in a negative interest rate environment would actually gain. That is why people hoard cash. It is only when interest rates are higher that people are incentivized to invest.
“What is the Natural Rate of Interest and How Does it “Work”?
…Yes, the whole idea is essentially based on the classic supply and demand graph – only applied to savings and investment rather than, say, the demand for apples or bananas at any given price.”
Sigh… The real difficulty is does one accept the patently false assumptions of the economists and then work through their models to find the models failure points (and one has to do this to have the economists talk to one) or cut off the discussion at a clearly impossible assumption (stuff is bought and sold ala supply and demand curves or that money is a commodity like apples and bananas) and pull one’s own model out of one’s pocket (actually Steven Keen’s model). But then the economists quit talking to you…
Lars P Syll seem to agree with you Philip.
“Krugman – more Wicksell than Keynes”
http://larspsyll.wordpress.com/2013/06/06/krugman-more-wicksell-than-keynes/
He also put up your article on his page:
“Paul Krugman – a Bastard Keynesian”
http://larspsyll.wordpress.com/2013/06/05/paul-krugman-a-bastard-keynesian/
He have written books about booth Wicksell and Keynes, really good ones so he know them the topic for sure.
P.S. My argument has been blessed with incredibly fortuitous timing. This very week, our corrupt leadership has been unable to deny massive spying on American citizens.
That is bad spending, both unconstitutional and a waste of money.
Any MMTer who isn’t speaking out loudly against such massive government abuse is clearly siding with the authoritarian assault on the Constitution. Now, that’s a legitimate position.
Just don’t be duplicitous about which side you’re on.