What Paul Krugman Could Learn From The Post Keynesian Roots Of MMT

To the common reader, the distinctions among old Keynesianism, new Keynesian, and Post Keynesianism might seem confusing. You might find these are political doctrines, with broad agreement among their followers. Governments should run deficits in periods of sustained unemployment. Maybe sometimes fiscal policy should be more emphasized over monetary policy. After all central banks cannot stimulate the economy by lowering interest rate when it is zero. In an inflationary period, central banks can fight it by raising interest rates, although this is a blunt, crude tool. What is there to argue about?

Yet economists argue. Kelton (2020) has a popular book emphasizing that, given how money and banks work, governments need not be concerned with balancing their budgets because of a fear that the money to pay for it will not be there. And then Clinton's Secretary of the Treasury and Obama's director of the National Economic Council responds to Kelton getting publicity:

"I am sorry to see the [New York Times] taking MMT serious as an intellectual movement. It is the equivalent of publicizing fad diets, quack cancer cures or creationist theories" -- Larry Summers

Those who follow MMT have seen the claim that it is revolutionary and that mainstream economists do not understand money. Paul Krugman, a leading mainstream economist, reacts:

"...And I will say that I am, to use the technical term, pissed at this kind of thing. I spent years after the 2008 financial crisis arguing against austerity and the obsession with debt, taking a lot of abuse in the process.." -- Paul Krugman

What is going on here? Is this just pettiness about who should have more influence in the public square?

I have said before that what is being argued is not the desirability of certain policies. Keynes stated that his book was about something else:

"This book is chiefly addressed to my fellow economists. I hope that it will be intelligible to others. But its main purpose is to deal with difficult questions of theory, and only in the second place with the application of this theory to practice." -- Keynes (1936) [first three sentences]

Keynes' attempt at revolution failed. Mainstream economists, after Keynes and maybe before, argued that sometimes governments should spend more and tax less in a recession to prod the economy toward a long run equilibrium.

The background theory is that of an economy that is always approaching an equilibrium, in the long-run. The current "saltwater" school, also known as new Keynesianism, argues that this approach is too slow to be relied on for policy. Monopolies and limitations to competition, information asymmetries, sticky wages and prices are just too large. Government policy should focus on removing these limitations or somehow getting the economy to simulate a desired equilibrium path. I do not know that Joseph Stiglitz, for example, would argue that some these hindrances to equilibrium could ever be removed.

The "freshwater" school, once known as new classical economics, argues that, empirically, modern economies function close enough to the ideal competitive model that any such government policies should be looked on with great suspicion. Their simple macroeconomic models are the baseline with which both schools operate.

The names come from historical associations. Freshwater economists came out of the University of Chicago, the University of Minnesota, and the University of Rochester, all near one of the Great Lakes. Saltwater economists tend to be nearer ocean coasts, such as at Harvard and the Massachusetts Institute of Technology.

New classical economists, such as Robert Lucas and Thomas Sargeant, overthrew, in the 1970s, the Neokeynesianism or Old Keynesian of Alvin Hansen, Paul Samuelson, and Robert Solow. In the 1960s, Old Keynesian was known as the "New Economics" and the neoclassic synthesis. There is good reason for the common reader to be confused.

MMT builds on Post Keynesianism, and I am going to take it for granted that their proponents accept a Post Keynesian take on the above. (Which is not to say that Post Keynesians do not argue, sometimes vehemently, among themselves.) Joan Robinson called the neoclassical synthesis "bastard Keynesianism". Both freshwater and saltwater economists are pre-Keynesian. Carter (2020) provides an interestingly structured popular presentation of the unjustified rejection of the economics of Keynes

I find it hard to locate the logic in arguments that labor markets, good markets, and money markets tend to clear in any run. Some, such as Davidson (2007) emphasize money and uncertainty. Minsky (2008) and Marglin (2021) note the dynamic setting of Keynes' theory. In a model of the United States economy, it should not matter whether one calculates prices in dimes or dollars. This is a far cry from arguing that money is neutral, that the same real equilibrium would be approached if prices fell to 10 percent of their current nominal values.

I tend to emphasize microeconomics, following Sraffa. The theory of prices of production does not provide a logical foundation for the substitution mechanisms marginalists require for their ideas to make sense. Well-defined supply and demand functions do not exist in the long run.

Mainstream economists are apparently not taught any of this:

"...This article aroused the anger of just about every macroeconomist on Twitter..."

"...The brief description of freshwater and saltwater economics is fine, but to describe MMT as being 'brackish' — i.e., some sort of fusion of freshwater and saltwater, or a middle ground between the two — is absurd..."

-- Noah Smith The NYT article on MMT is really bad

I suspect many economists on twitter were not angered by this article. As far as I know, James Galbraith came up with the metaphor of brackwater economics. As seen above, it is not intended to be a fusion or middle ground. Rather it is a matter of rejecting both freshwater and saltwater economics. The nonexistence of an intertemporal budget constraint is another aspect of macroeconomics that Noah Smith seems to be confused about. Mainstream macroeconomists absurdly postulate that governments must always pay off their debts as time approaches infinity.

But why should Noah Smith be any different? Larry Summers ignorantly cited James Galbraith, who is a proponent of MMT or, at least, theories of endogenous money. I doubt that Summers believes this:

"I am all for intellectual diversity and wish that the NYT would give more attention to Marxist scholars like Steve Marglin, whose book Raising Keynes deserves extensive debate, or other left scholars like Tom Palley, Dean Baker or Jamie Galbraith." -- Larry Summers

You can find a post-2008 YouTube video, where Marglin says something like that his colleages are polite to him at holiday parties, but they have nothing to say about his research. Anyways, his long tome, which I have barely started, is clear that Keynes was arguing about more than government policy. He argues that models like the Keynesian cross and IS/LM are only a first pass description of the General Theory. The dynamic setting has to be taken into account in further passes. According to one review I stumbled upon Marglin's book could be improved in its account of money. Keynes' Treatise on Money contains a theory of endogeneous money. I can see reading the General Theory as assuming the central bank can set the stock of money, as a concession to the view he was arguing against, even though others say otherwise.

One could pursue political economy because one is interested in advancing political means that improve the lives of the vast majority of the population. One might make a compromise here. One might think one's policies are more likely to be enacted if one does the least to challenge hegemonic ideas about how the world works. As I understand it, Krugman has said somewhere that his academic strategy is to think in terms of simple models, like IS/LM, and then recast the argument into a publishable model of a Representative Agent, Rational Expectations (RARE) economy, also known as Dynamic Stochastic General Equilibrium (DSGE) model. In this approach, one puts forth arguments that one correctly believes have nothing to do with how actually existing capitalist economies function. One ignores some conclusions of the model. And it is doubtful that this approach will ever approach an useful description of a capitalist economy. I think Brad DeLong has said somewhere that this approach of boring from within is wasted time. (I welcome explicit links for the above.) It would seem that however politically useful such attempts have been, maybe after a half century of scientific failure by mainstream economists, heterodox approaches should be taken more seriously.

References

• Zachary D. Carter. 2020. The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes. Random House.
• Paul Davidson. 2007. John Maynard Keynes. Palgrave Macmillan
• John Hicks. 1981. IS-LM: an explanation. Journal of Post Keynesian Economics 3(2): 139-154.
• Stephamie Kelton. 2020. The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economics. Public Affairs.
• John Maynard Keynes. 1936. The General Theory of Employment, Interest, and Money. Harcourt-Brace.
• Stephen A. Marglin. 2021. Raising Keynes: A Twenty-First-Century General Theory., Harvard University Press.
• Hyman Minsky. 2008. John Maynard Keynes. McGraw-Hill.
• Franco Modiglani. 1944. Liquidity preference and the theory of interest. Econometrica 12(1): 45-88.

Causes Of Inflation

Social norms exist about what wages can be expected from various types of jobs. And norms also exist for what the rate of profits or markups will be. Inflation arises when these norms conflict and institutions exist to fight about these norms.

There is no single rate of profits or a single wage for all jobs. In some jobs, you can expect to have a standard work week, weekends off, benefits, some asurance that your job will exist next week, and so. And in other jobs you cannot expect such. Here I am alluding to the theory of dual labor markets.

By the way, whether a job is in the formal or informal sector is not a matter of 'skill'. "The suggestion that any job is 'low skill' is a myth perpetuated by wealthy interests to justify inhumane working conditions, little/no healthcare, and low wages". A lot of struggle led to some jobs being considered 'skilled', and a reactionary counter-struggle resists such. Gender and race goes into this, of course. I doubt programmers were well-payed when a computer was a 'girl'. For example, I've read Richard Feynman's memoirs about how the 'computers' at Los Alamos implemented a time-sharing operating system (not his terminology). Do taxi drivers and Uber drivers face the same expectations? Bartenders at high-end restraurants in trendy parts of town and elsewhere?

How those with power understand what is going on matters. Suppose a certain set of hegemonic beliefs includes the incorrect idea that labor 'markets' tend to clear, maybe if only they could be made more 'flexible' and obstacles, such as labor unions, minimum wages, and so on are removed. And those running a country's central bank think their primary job is to fight inflation by raising interest rates whenever real wages show a slight increase. If the economy is run 'cold' for decades, much bad can result.

Consider a country where the workforce is highly unionized and collective bargaining is widely accepted, including with backing in law. Suppose contracts are staggered. Different sectors negoiate at different times. Suppose, by contrast, that the employers and employees are all expected to come together at one time. Inflation will be different in these two setups.

Another set of conventions involves families and households. Is co-habitation, without marriage, common? If you work in the formal sector, can you put your partner and non-biological children on your benefits? How many are expected, in the typical household - whatever that is - to work full or part time? What do you need for commuting? What kind of non-wage support can you expect? Have these norms varied recently? Have you tried following different conventions lately, and did you prefer it? The answer to these questions might have something to do with fluctuations in the labor force participation rate. With low unionization, a different set of institutions will resist attempts at the casualization of the work force.

Another set of expectations involves firms, their suppliers, and their customers. What proportion of restaurants and grocery stores do those who process agricultural products expect to be among those providing final demands? What level of capacity do firms expect to operate at? Does a different mode of operations change this? For example, I suspect a number of firms have realized they could double their office staff, if they had the demand and need, perhaps with an increase of support from their Information Technology support staff. If those running firms have highly uncertain or incorrect expectations, bottlenecks in some sectors can be expected to result.

I probably would not have written the above two paragraphs - maybe the whole post - without the prompting of current events. I look backwards to Joan Robinson's explanation (prediction) of stagflation and other literature.

Selected References

• James K. Galbraith. 1998. Created Unequal: The Crisis in American Pay. Free Press.
• Stephen A. Marglin. 1984. Growth, Distribution, and Prices, Harvard University Press.
• Joan Robinson. 1962. "A Model of Accumulation" (In Essays in The Theory of Economic Growth, Macmillan).
• Graham White. 2001. The Poverty of Conventional Economic Wisdom and the Search for Alternative Economic and Social Policies. The Drawing Board: An Australian Review of Public Affairs 2(2): 67-68.

David Graeber (1961 - 2020) On Usenet A Long Time Ago

I first became aware of David Graeber as a poster on Usenet back in the 1990s.

Many people who have succeeded in this world have no interest in conducting honest discussions. I found some places where one could have cheerful talk, including with harsh disagreement. And I found other places not so much. I probably fit in with the latter.

Sometime in November 1998, a thread arose, "A Donaldism for David Friedman". David Friedman is Milton's son and also promotes plutocracy under the guise of 'liberty'. The thread was about how participants should treat other posters who continually lied and said others secretly wanted to set up a totalitarian dictatorship where they could kill those who disagreed with them. Graeber was not having any of this:

[Dan Clore wrote:]

David [Friedman] wrote:

His basic thesis is that most of the people who claim to be left anarchists are really leninists, or something similar, who mask their views because their true views are unfashionable. If he can demonstrate it about Chomsky, who has the virtue of having written lots of stuff over a long period of time, and if, by forcing people on line to defend Chomsky, he can demonstrate it about them, he can discredit (at least) online left-anarchism--as a movement, and perhaps as a theory. That tactic doesn't appear workable applied to you, since you seem to have no particular interest in defending Chomsky, but it might work for those who do. And, given his beliefs about left-anarchism, it seems to me that it is a reasonable tactic.

Unfortunately for Jimi's "basic thesis", Chomsky has a long historical record in print of attacking Marxism-Leninism and state socialism in general -- including the 1960s, when it was much, much more "fashionable" than anarchism / libertarian socialism. That fact that empirical evidence disproves Jimi's thesis only seems to make him believe in it all the more rabidly: draw what conclusions from that you will.

I am beginning to finally understand what Friedman means by "reasonable". He appears to apply the term only to whether one's actions are consistent with one's premises, and rational in the sense of logically coherent. He does not appear to feel that premises themselves can be unreasonable. One could presumably start from the assumption that David Friedman is indeed a purple-assed baboon and that he ate one's grandmother and as long as one's techniques of argument are consistent with this premise, one is not an unreasonable person.

The question is whether he realizes this  can only confuse everyone else because just about everyone else does not define "reasonable" in this  way. "Reasonable", for most people, implies among other things an ability to compromise, to accomodate other points of view... "Reasonable" implies you are _not_ a fanatic who starts with wild unfalsifiable accusations, not that you have correctly concluded that, if your opponents are evil monsters, then making wild unfalsifiable accusations is best way to make them look bad.

I put forward to Mr. Friedman, then: if you are really a reasonable person ("reasonable" in the common sense, not in your own specialized sense) you will stop using the word in this way because it is obviously deceptive. It allows you to constantly insist to people who do not know you are using the word in a highly idiosyncratic, specialized sense that obvious fanatics who never compromise on anything are "reasonable", and people who are not fanatics and interested in accomodating different points of view are not. At the very least you can shift to a word like "rational". "Reasonable" is an important word with a very rich history and your usage is, to my mind, and I think to others,  just a horrible  perversion of it.

DG

It is very difficult to navigate Google's version of the Usenet archives.

I thought Debt: The First 5,000 Years quite interesting. I probably recall it badly. I learned that money first emerged as the second-hand trading of promises in communities where everybody knew everybody. It was not a matter of solving a problem of the lack of the double-coincidence of wants in a barter system. These debts became more formal, more rigid, when communities became more hierarchical, more structured. The introduction of coins, as tokens, came about when you had outsiders, like an empire's soldiers visit, and they had no interest in participating in a village community as an equal. Debts periodically got out of hand, and a jubilee would be declared. (Yes, I know, Graeber was mistaken about Apple. I know several entrepreneurs who have started their own high tech companies.)

I was vaguely aware of Graeber jeopardizing his career at Yale with his support of the union for graduate students, his organizing role in Occupy Wall Street, and his move to London. I read his essay "Bullshit Jobs", but have yet to read the book.

This post is totally inadequate for an appreciation of him.

Update: Benjamin Balthaser in Jacobin, Michael Hardt in Jacobin, Malcolm Harris in the Nation, Sam Roberts for the New York Times, Nathan Robinson in his Current Affairs, Rebeccca Solnit in the Guardian, and many in the New York Review of Books.

Elsewhere

• Here is a post from a blog devoted to cybercommunism. The blogger is glowing about Paul Cockshoot's work on refuting Hayek's supposed refutation of the possibility of a post-capitalist society.
• William Milberg writes about how it is becoming more common to use the word "capitalism", a word mainstream economists had mostly stopped using.
• Herbert Giants and Rakesh Khurana write about the corrupting effects of neoclassical economics on what is taught in business school and then practiced by corporate elites.
• Osita Nwanevu writes, in The New Republic, about the enthusiasts that showed up at last weekend's Third MMT Conference.
• Lisa Schweitzer studies urban environments. In a blog post, she expresses irritation at Paul Romer's arrogance, admittedly filtered through a glowing New York Times article.
• A long time ago, Connie Bruck profiled George Soros in the New Yorker. Soros consciously thinks of himself as building on Karl Popper's The Open Society and its Enemies.

Elsewhere: Popular Writing On Modern Monetary Theory

Some articles:

• Josh Barro, in New York Magazine.
• Noah Smith, in Bloomberg.
• Linette Lopez, in Business Insider.
• Michael Strain, also in Bloomberg.

I do not assert that all points in these articles are well-taken.

I think of MMT as descriptive. It combines endogenous money, functional finance, and chartalism. Much of its empirical evidence consists of qualitative descriptions of how financial institutions and central banks operate. One can imagine a policy regime where unemployment and inflation are addressed by changes in the level of taxes and government spending, with monetary policy is a more passive attempt to keep interest rates permanently low. This would contrast with one where central banks are more responsible, through interest rate policy, with addressing unemployment and inflation. An analysis of the implications of such treatments need not be normative.

(Some asides: As a contrast, Josh Barro could have brought up his father, Robert's, treatment of Ricardian equivalence, which Ricardo rejected. Doesn't Marx, in chapter 1, volume 1 of Capital have an incorrect theory in which barter precedes money?)

Two Kinds Of Economists

Or, rather, I classify economists into two kinds on each of three dimensions (Table 1).

Table 1: Classifications For Economists

Emphasis on social reproduction	Emphasis on allocating scarce resources
Money non-neutral	Money as a veil
Economic issues arise under competitive model, with all agents in possession of all information actually existing	Economic issues to be explained as a result of deviation from an ideal, competitive model

I have written about the first dimension before. Classical political economy, and economists in related traditions, focus on what needs to hold such that society is reproduced. Neoclassical economics is defined, by many, as being about the allocation of scarce resources.

Post Keynesians and others describe money as having real effects. Many mainstream economists, on the other hand, model capitalist economies as, basically, barter economies. They hold money to be neutral, at least in the long run. It is not clear that such models can be extended to contain money.

My third dimension, above, relates to attitudes to two types of models. In one, an economy is described, at a high level of abstraction, as characterized by free competition, with no agent being able to influence market prices, and all agents having complete information about what can be known. In the other model, one introduces rigidities and stickiness in prices; oligopolies, monopolies, and monopsonies; information asymmetries; and so on. One group of economists thinks the former model can describe an economy that need not tend to an equilibrium with desirable properties. Many mainstream economists, however, think actually existing economies are to be described by deviations from perfect competition and that it is the goal of policy to try to make actual economies function like the ideal. (I was inspired to try to define this dimension by Palermo (2016).)

Theoretically, the above taxonomy yields eight kinds of economists. I do not know that one can find important economists at every node of the cube so defined. But, to see how this works out, consider Joseph Schumpeter. He emphasized scarcity, thought money and finance impact real variables, and saw issues with a perfectly competitive economies. For the latter, consider his argument - later taken up by John Kenneth Galbraith - that large corporations were needed for the research and development needed for growth in a mature economy.

John Maynard Keynes is another economist that emphasized the real effects of money and argued issues can arise in the ideal economy. He argued, in the General Theory, that a perfectly competitive economy would be violently unstable. Rigidities in wages are desirable, for they provide stability. I am not sure where I would put him on the first dimension, but followers at Cambridge, such as Kaldor and Robinson, developed models of warranted growth in the 1950s that lie in the upper left box in the figure.

Obviously, this post should go on to explore more nodes in the cube I have outlined.

References

• John H. Finch and Robert McMaster (2018). History Matters: On the mystifying appeal of Bowles and Gintis. Cambridge Journal of Economics.
• Giulio Palermo (2016). Post-Walrasian Economics: A Marxist Critique. Science & Society 80(3): 346-378.

Daniel Defoe On Debt As Money

In this passage, Roxana is preparing to move from Paris to Amsterdam. She liquidates her possessions, and uses jewelry and bills of exchange as money to carry with her.

"I could not but approve all his measures, seeing they were so well contrived, and in so friendly a manner, for my benefit; and as he seemed to be so very sincere, I resolved to put my life in his hands. Immediately I went to my lodgings, and sent away Amy with such bundles as I had prepared for my travelling. I also sent several parcels of my fine[Pg 181] furniture to the merchant's house to be laid up for me, and bringing the key of the lodgings with me, I came back to his house. Here we finished our matters of money, and I delivered into his hands seven thousand eight hundred pistoles in bills and money, a copy of an assignment on the townhouse of Paris for four thousand pistoles, at three per cent. interest, attested, and a procuration for receiving the interest half-yearly; but the original I kept myself.

I could have trusted all I had with him, for he was perfectly honest, and had not the least view of doing me any wrong. Indeed, after it was so apparent that he had, as it were, saved my life, or at least saved me from being exposed and ruined—I say, after this, how could I doubt him in anything?

When I came to him, he had everything ready as I wanted, and as he had proposed. As to my money, he gave me first of all an accepted bill, payable at Rotterdam, for four thousand pistoles, and drawn from Genoa upon a merchant at Rotterdam, payable to a merchant at Paris, and endorsed by him to my merchant; this, he assured me, would be punctually paid; and so it was, to a day. The rest I had in other bills of exchange, drawn by himself upon other merchants in Holland. Having secured my jewels too, as well as I could, he sent me away the same[Pg 182] evening in a friend's coach, which he had procured for me, to St. Germain, and the next morning to Rouen. He also sent a servant of his own on horseback with me, who provided everything for me, and who carried his orders to the captain of the ship, which lay about three miles below Rouen, in the river, and by his directions I went immediately on board. The third day after I was on board the ship went away, and we were out at sea the next day after that; and thus I took my leave of France, and got clear of an ugly business, which, had it gone on, might have ruined me, and sent me back as naked to England as I was a little before I left it." -- Daniel Defoe, Roxana: The Fortunate Mistress (1724).

Defoe's novel, Robinson Crusoe, is more well-known among economists. For example, one can read Stephen Hymer's "Robinson Crusoe and the secret of primitive accumulation" (Monthly Review, 1971).

G. C. Harcourt On The Intellectual Dishonesty Of Mainstream Economists

1.0 A Harcourt Quotation

I think of Geoff Harcourt as being known for, at least:

• Surveys of the Cambridge Capital Controversies (CCC)
• Maintaining good relationships with neoclassical economists, while advocating Post Keynesianism.

Given the second, the charge of intellectual dishonesty in the following surprised me:

"With the deaths in the 1980s of Joan Robinson, Piero Sraffa, Nicholas Kaldor and Richard Kahn, the bulk of the profession has started to behave as if they and their work never existed. Aggregate production function models and accompanying marginal productivity results, together with the long-period method, are being applied in the work which reflects the new interest in growth theory of the late 1980s and early 1990s associated, for example, with the contributions of Lucas and Romer. The intellectual dishonesty - or, at best, ignorance - which characterizes these developments is breathtaking in its audacity and arrogance, reflecting the ruthless use of power by mainstream economists in dominant positions in the profession...

...So the simple theory did not provide coherent results and the logically immune theory was not applicable. Here the matter rested: Cambridge (UK) won, but who cares, let us assume that they never existed - a good economist's ploy...

...Thus the current position is an uneasy state of rest, under the foundations of which a time bomb is ticking away, planted by a small, powerless group of economists who are either ageing or dead." -- G. C. Harcourt. Capital Theory Controversies, in The Elgar Companion to Radical Political Economy (ed. by Philip Arestis and Malcolm Sawyer), Edward Elgar (1994).

2.0 Nonsense About Minimum Wages

Since mid February, many economists in the USA have been discussing Obama's proposal that the Federal minimum wage be raised to $9 an hour. I find most of this discussion nonsensical. It would only make sense if an internally consistent theory existed in which higher wages, imposed from outside the labor market, led to less employment. The failure of empirical data to conform to this theory would then be explained by relaxing certain assumptions of the theory, such as perfect competition, or introducing other imperfections, such as information asymmetries and principal agent problems.

But, as should be well known among economists by now, no such theory exists. Peter Cooper has more on this point, in the context of current discussions on minimum wages.

3.0 A Krugman Quotation

If we accept Colin Rogers' take on the CCC, the Wicksellian concept of the natural rate of interest cannot be sustained. Neither can the claim that interest rates are to be explained by the supply and demand for loanable funds. So I do not know what Krugman is writing about towards the end of this paragraph:

"The interest-rate story is fairly simple. As some of us have been trying to explain for four years and more, the financial crisis and the bursting of the housing bubble created a situation in which almost all of the economy's major players are simultaneously trying to pay down debt by spending less than their income. Since my spending is your income and your spending is my income, this means a deeply depressed economy. It also means low interest rates, because another way to look at our situation is, to put it loosely, that right now everyone wants to save and nobody wants to invest. Se we're awash in desired savings with no place to go, and those excess savings are driving down borrowing costs." -- Paul Krugman (8 March 2013). "The Market Speaks", The New York Times: p. A25.

In other contexts, Krugman is willing, I think, to point out that his former boss, Ben Bernanke, sets the interest rate undergirding the whole structure of interest rates.

(I find much of Krugman's columns uninteresting these days. Since I regularly read his blog, I often know his points beforehand. This is not to say that his column is not worthwhile, abstracting from the mistakes in mainstream economics that he seems to feel it necessary to repeat.)

Nick Rowe, Fool Or Knave?

I take the following as given:

• Contemporary heterodox economists are continuing communities that have been around for generations in leading universities. And they are and have been publishing in scholarly peer reviewed journals.
• Many in these communities accept theories of endogenous money, that a central monetary authority cannot control the quantity of money in use in the economy.
• Many in these communities reject the loanable funds theory of interest in all runs. Interest rates cannot be explained by the interaction of supply and demand, savings and investment.
• These perspectives are not taught in mainstream textbooks (which are almost all a matter of shedding darkness).

Nick Rowe demonstrates the truth of the last proposition while pretending the opposite. To appreciate Rowe's refusal to honestly state that he and the mainstream textbooks do not teach the existence of the heterodox perspectives on money I list above, one must read the comments to the linked post. For example, Nick Rowe states, "The idea that banks just act as intermediaries between savers/lenders and spenders/borrowers is about long run equilibrium." Nowhere does he state that this idea is controversial.

One sees a lot of other ignorance and stupidity on display in the comments:

• One W. Peden pretends that a "majority" of heterodox critiques of economics are, like climate change denialism, "by outsiders to the discipline".
• Ian Lippert pretends "there is [an] unified methodology to ... microeconomics", even though commentators earlier in the thread demonstrated that heterodox economists severely criticize microeconomics, just as well as macroeconomics.
• DavidN also pretends that "micro and the various subfields" do not get critiques from the heterodox.
• Stephen Gordon, after being told more than once of specific political programs associated with Modern Monetary Theory (MMT), such as a program for an Employer of Last Resort (ELR), continues to pretend MMT has "No policy implications/recommendation". (For his gross stupidity and illiteracy, he owes the commentator DeusDJ an apology.)

I realize that I should not get angry about those who refuse to engage a large number of their fellow economists and who rudely tell lies, maybe first to themselves, about what economists teach. For there will always be many vulgar fools and knaves.

Brouhaha Over Krugman On Endogenous Money

I recently posted about the theory that the money supply is endogenous and under the control of a country's central bank, such as the Federal Reserve. Paul Krugman dismisses the theory.

Proponents of Modern Monetary Theory, in the comments and elsewhere, have taken issue with Krugman. I have in mind, for example, Dean Baker, Peter Cooper, Scott Fullwiler, Greg Hannsgen (of the Levy Institute), Bill Mitchell, Warren Mosler, Cullen Roche, and Pavlina Tcherneva (cross-posted). James Galbraith appears in various comments, for example, in this one, in which he says, "I was a student of Godley (and even more so, of Kaldor) many years ago and a close observer of monetary policy during my years on Capitol Hill, so this material came easily to me."

Some British Nineteenth Century Controversies In Monetary Theory

Britain suspended convertibility during the Napoleonic wars. During that period, until 1821, money in England was paper, unbacked by gold. The restoration of convertibility was followed by a stagnant period in British development, with a crisis in 1825 and a reform in 1844 called the Bank Charter Act.

This post recalls some debates in monetary theory among British political economists while these events were occurring. (I don't consider myself expert on monetary theory during the Classical period.) Table 1 shows some schools of thought in monetary theory. The term schools is traditional with respect to the currency and banking schools, but should not be interpreted too strongly for any groups in the table. These schools, unlike, say, the Physiocrats, do not have a recognized leader, followers, popularizers, etc. Rather, they are more like the Mercantilists, a diverse set of pamphleteers and politicians grouped together by later writers.

Table 1: Some "Schools" and Example Members

Years	Contending Schools
1797-1821	Bullionists Henry Thornton David Ricardo	Anti-Bullionists Robert Torrens Robert Malthus
1825-1844	Currency School Robert Torrens Samuel Jones Lloyd Mountifort Longfield	Banking School Thomas Tooke John Stuart Mill
2nd Half of the 20th Century	Quantity Theory Milton Friedman	Endogenous Money Nicholas Kaldor

In each period shown in the table, I have listed two schools. Economists in the first school in each row argued that the money supply was exogenous and that the price level varied with amount of money issued by central bank. Economists in the second school in each row argued that the money supply was endogenous, that is was not capable of being controlled by the central bank, and that it varied with demand for it. The details of these arguments varied among these and other economists.

The last row suggests that these arguments are still current. In fact, advocates of Modern Monetary Theory currently argue that the money supply is endogenous.

Bank for International Settlements (BIS) - Receptive to Heterodoxy?

I never even heard of the Bank for International Settlements (BIS) before a couple years ago. I am vaguely aware of the Basel accords, which I guess they have something to do with.

I have come across two papers - a ridiculously small number of data points - which make me wonder if they are receptive to heterodox economics. William White, the former chief economist of the BIS, criticized last December the direction of research in modern macroeconomics. He thinks macroeconomists should pay more attention to Hyman Minsky and also Austrian Business Cycle Theory. In a current BIS working paper (H/T to D-Squared), Piti Disyatat rejects the loanable funds theory and argues for the theory of an endogenous money supply, if I understand correctly. This paper references, among others, Basil Moore, Thomas Palley, and Randy Wray.

Endogenous Money Supply In The Long Run

This post is not about how the United States Federal Reserve cannot control, on a day-to-day basis, the quantity of money in circulation. Rather, I consider financial innovation over time leads to the creation of new debt instruments that fall under a reasonable definition of "money".

One way of looking at money is that, under capitalism, money buys goods, and goods sell for money, but goods do not buy goods. A simple example: I understand one can write checks against a hedge fund. So hedge funds are money.

The emergence of new forms of money illustrates why no final systems of regulations can exist in a capitalist economy. Should something like the Federal Deposit Insurance Corporation be set up to guarantee these new forms of money? If so, some capital requirements, restrictions on leverage ratios, and so on would need to be instituted. Maybe some sort of firewalls, as in the Glass-Steagall act, should be rebuilt.

Kaldor's Contributions: An Impressionistic Survey

Introduction
This post gives a quick overview of my impressions of the contributions to economics of Nicholas Kaldor. In writing this post, I deliberately did not review the entries on him at Gonçalo Fonseca's site on the history of economic thought, in the New Palgrave, or at Wikipedia. I did use Turner (1993) for the biographical details.

Biography
I will be brief on the biography of Lord Nicholas Kaldor (12 May 1908 - 1986). Born in Budapest, he later studied at Berlin. He transferred to the London School of Economics (LSE) as an undergraduate in the Fall of 1927. Kaldor visited the United States, including Harvard and Princeton, in 1935. He moved to Cambridge in 1939, with the evacuation of the LSE to Cambridge, and stayed on at Cambridge (King's College) after the war. He joined the United States Strategic Bombing Survey under the direction of John Kenneth Galbraith. He became a Baron in 1974 and was the president of the Royal Economic Society in 1976. Kaldor's wife was named Clarissa, and they had four daughters. Anthony P. Thirwall was named his literary executor.

1930s
Economists in the 1930s had, once again, a controversy on the theory of capital, with Frank Knight on one side and Friedrich A. Hayek and Fritz Machlup on the other. Early in his career, Kaldor (1937) surveyed that dispute. He followed up with investigations (1939a, 1942) of Hayek's capital theory and exposition of the Austrian Business Cycle Theory. Although Kaldor's judgments are sharp, I think these articles might have been more convincing if the standard of the time allowed for more mathematics.

I don't recall ever reading Kaldor's original contributions to welfare economics. Apparently, he had an article in the 1939 volume of the Economic Journal. This article and one by J. R. Hicks are the primary source of the famous Hicks-Kaldor compensation principle.

Apparently the younger economists at Cambridge and LSE, such as Robinson and Kaldor, respectively, met once a month to debate macroeconomics even before the publication of Keynes' General Theory. Kaldor became a convert to Keynes, as can be seen in Kaldor (1939b). Barkley Rosser, Jr., tends to cite Goodwin and Kaldor as early explorations of non-linear dynamics in economic models. Maybe Kaldor (1940) is important here, which I have not read in at least a decade, if ever.

Later Work on Growth and Distribution Theory
Kaldor's later work on growth and distribution is more clearly Post Keynesian, in my opinion. His 1956 paper compares and contrast three theories of distribution: a neoclassical theory which makes most sense with a now exploded scarcity theory of value, a classical theory in which wages are exogeneous in the theory of value and distribution, and a Post Keynesian theory in which the distribution of income depends on macroeconomic savings propensities. I think this paper led to the souring of his relationship with Joan Robinson; she was, I guess, worried about priority in publication. Luigi Pasinetti disputed the logical consistency of Kaldor's presentation, in which workers obtain income from capital but save that portion of their income at the higher rate characteristic in Kaldor's model of savings out of profits. In a later seminar with Pasinetti, Robinson, and Samuelson & Modigliani, Kaldor (1966) clarified that he thought of the savings rate as pertaining to the source of income, not the individual savers. This ties into the idea that savings out of retained earnings is not transparent to those holding stock in corporations. Kaldor suggested these ideas can explain how the market value of corporate stock relates to the book value of the assets owned by corporations. Later work by others demonstrate that for two classes to persist in Kaldor's model, the rate of profits must exceed the rate of interest (i.e., the return to capital obtainable by workers in the financial markets they have access to). This may not be a good idea, but perhaps it would be an interesting idea to synthesize this literature with literature related to De Long et al (1990) - and I would prefer not to reference Shleifer.

Kaldor developed a related series of growth models. He presented one at the famous August 1958 Corfu conference. I guess it was in this paper he presented his "stylized facts". He presented another model in this series (Kaldor and Mirrlees 1962) in the same issue of the Review of Economic Studies in which he welcomed (1962) Arrow to the band of heretics for his "Learning by Doing" paper. Kaldor's models use a technical progress function, which, I gather, is empirically indistinguishable from a Cobb-Douglas production function with technical progress.

Kaldor emphasized increasing returns in manufacturing in these models, and he championed Verdoon's law. Thirwall (e.g., 1986) applies these ideas to developing economics. I gather a policy recommendation in this literature is for export-led growth. An emphasis on increasing returns underlies Kaldor's (1972, 1975, and 1985) mature criticisms of neoclassical economics.

Finally, I want to mention Kaldor's theory of endogenous money. Kaldor described both the inability of monetary authorities to control the supply of money under some given definition and the ability of financial institutions to continually evolve new instruments to serve as money. He used these ideas to refute monetarism (1986, first edition 1982).

References

• J. Bradford De Long, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1990) "Noise Trader Risk in Financial Markets", Journal of Political Economy, V. 98, N. 4 (August): 703-738
• Nicholas Kaldor (1937) "Annual Survey of Economic Theory: The Recent Controversy on the Theory of Capital", Econometrica, V. 5, N. 3 (July): 201-233
• -- (1939a) "Capital Intensity and the Trade Cycle", Economica, New Series, V. 6, N. 21 (February): 40-66
• -- (1939b) "Speculation and Economic Stability", Review of Economic Studies, V. 7, N. 1 (October): 1-27
• -- (1940) "A Model of the Trade Cycle", Economic Journal, V. 50, N. 197 (March): 78-92
• -- (1942) "Professor Hayek and the Concertina-Effect", Economica, New Series, V. 9, N. 36 (November): 359-382
• -- (1956) "Alternative Theories of Distribution", Review of Economic Studies, V. 23: 83-100
• -- (1962) "Comment", Review of Economic Studies V. 29, N. 3 (June): 246-250
• -- (1966) "Marginal Productivity and Macro-Economic Theories of Distribution: Comment on Samuelson and Modigliani", Review of Economic Studies, V. 33, N. 4 (October): 309-319
• -- (1985) Economics without Equilibrium, M. E. Sharpe
• -- (1972) "The Irrelevance of Equilibrium Economics", Economic Journal, V. 82, N. 328 (December): 1237-1255
• -- (1975) "What is Wrong with Economic Theory", Quarterly Journal of Economics, V. 89, N. 3 (August): 347-357
• -- (1986) The Scourge of Monetarism, Second Edition, Oxford University Press
• Nicholas Kaldor and James A. Mirrlees (1962) "A New Model of Economic Growth", Review of Economic Studies V. 29, N. 3 (June): 174-192
• A. P. Thirwall (1986) "A General Model of Growth and Development on Kaldorian Lines", Oxford Economic Papers (July)
• Marjorie S. Turner (1993) Nicholas Kaldor and the Real World, M. E. Sharpe

Hyman Minsky: Man of the Moment

There has been quite a bit of talk about Hyman Minsky recently, and for good reason. In particular, this week's New Yorker leads off with an article by John Cassidy about Hyman Minsky.

Minsky was a Post Keynesian economist who I read years ago. I think in particular of his book John Maynard Keynes, which I thought quite good. I do not recall the five business-cycle stages John Cassidy mentions (displacement, boom, euphoria, profit taking, and panic). The elements I do recall lie elsewhere. I'm currently reading a couple of articles to help my recollection.

As I recall, Minsky emphasizes that Keynes' General Theory was set in a business cycle context. He thinks this context important in understanding Keynes' idea of an unemployment equilibrium. Minsky also points out the tendency under capitalism to continually evolve new financial instruments and new markets for trading in second-hand debt. (Thus, a regulatory regime will also need to evolve if a recurrence of debt-deflation is to be avoided.) In a sense, Minsky's view is that the supply of money is endogenous and non-neutral in the long run.

Minsky makes a tripartite distinction among types of finance:

• Hedge Finance: The returns to an investment both cover interest charges and allow the principal to be paid off.
• Speculative Finance: The returns cover interest charges, but the principal must be rolled over when it comes due.
• Ponzi finance: The returns do not even cover interest charges and one must take on a growing burden of debt.

Businesses take on finance for leverage.

As memories of the last downturn fade, pressure grows to become more highly leveraged. Speculative and ponzi finance grow at the expense of hedge finance. Notice that unexpected events can convert hedge finance to speculative finance and speculative finance to ponzi finance. The returns to an investment might not be as expected. Perhaps an institution from which you were expecting a cash flow goes bankrupt. So if returns were previously expected to cover more than interest charges, one might now find that returns can only be expected to cover interest charges. Or perhaps the interest rate is higher than expected when the principal comes due. A speculator can only roll over the principal in the hope that later refinancing will improve his situation. At any rate, the financial system is endogenously unstable.

Do these observations speak to the current mortage problems and their potential for affecting the broader economy?

On-Line References

• John Cassidy, "The Minsky Moment (4 Feb. 2008)
• Hyman P. Minsky, "The Financial Instability Hypothesis" (May 1992)
• L. Randall Wray, "Lessons from the Subprime Meltdown" (Dec. 2007)

Some Post Keynesian Propositions on Inflation

James Galbraith and Barkley Rosser, for example, are familar with this view.

Inflation is not always and everywhere a monetary phenomenon. In the United States in the 1970s, it was a matter of cost-push. When nominal claims on income add up to more than real income, inflation can result.

An incomes policy is one approach to attacking inflation that might have been tried. For example, a tax-based incomes policy could have been implemented. Institutions matter. For example, in an economy with large unions, major labor contracts could be coordinated to be renegotiated at once, or they could be staggered. The latter is likely to lead to more inflation.

Monetary policy is not impotent. In a modern industrial economy, the supply of money is endogenous. The Federal Reserve in the U.S., for example, sets an important interest rate but, generally, does not have control over the amount of money in circulation. Lowering the interest rate (pushing on a string) may not be effective, but raising interest rates can be a defacto incomes policy. When combined with union-busting, as in Ronald Reagan's foul policy, one can expect inflation to moderate.