Non-economists have tendency to look down economists when they go astray
.. and then immediately jump into the most fringe and unsound theories that provide "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics.
.. and then immediately jump into the most fringe and unsound theories that provide "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics.
For instance (and there are more examples), here(1) is an explanation of how commercial bank loan funds. This explanation comes from the Bank of England, who, I suppose, know a few things about the subject. This explanation, of how reality works, have nothing to do with what a mainstream macroeconomics book explain. How is that possible?
Can you find some physics book that explain something that the engineers say it's not true?
My personal opinion is that, at the end of the day, the problem is that economics is a political subject. Maybe the only political subject that matters, because it's about who does the work and who keep the results. So, it's not incompetence what we are dealing here, but too many different interests trying to control the narrative.
(1). https://www.bankofengland.co.uk/working-paper/2015/banks-are...
On the other hand, MMT is deeply concerned with institutional arrangements in the banking system, and still elides central banks and governments in its explanations of how the system works because doing so avoids the inconvenience of explaining that the main reason budget deficits result in long term repayment obligations for governments under current institutional arrangements is because central banks fundamentally disagree with MMTers that systematically buying up all newly emitted government debt and pushing interest rates down to permanent zero is compatible with low inflation.
I think a lot of engineers would have issues with more arcane theoretical stuff like string theory too (and most physicists would have issue with engineers abstracting away certain details because the approximations they work with are good enough...)
I have been following this debate for a while and it's only now that we heard "well, of course, we knew it all the time".
>>because central banks fundamentally disagree with MMTers
Maybe central banks disagree but we can't really know, because they are forbidden to buy public debt directly. What is that prohibition but an institutional arrangement? And why are those institutional arrangement in place in the first case? It's true that MMT is deeply concerned about that and it seems pretty relevant to me.
An engineer using Newtonian physics is very aware that is a simplification. Here the situation is the opposite, the physics (the economists) are simplifying away what the engineer (the BOE people) see in the reality, so their theories work.
> Maybe central banks disagree but we can't really know, because they are forbidden to buy public debt directly. What is that prohibition but an institutional arrangement? And why are those institutional arrangement in place in the first case? It's true that MMT is deeply concerned about that and it seems pretty relevant to me.
Central banks being unable to lend to governments or purchase government debt directly is a total non-factor in them consistently declining to match government debt emission dollar for dollar with government bond purchases on the secondary market (no MMT economist would disagree either). They are free to complement fiscal expansions with monetary expansions (at least over periods longer than changeable monthly base interest rate targets) as MMT would prefer, or take the opposite approach, which they sometimes do. If central banks thought MMT was fundamentally right, we wouldn't have seen them ever pull money out of the system to push up interest rates...
I think I will be cavalier about that comment.
>"[..] what mainstream economists really believe [..]"
This is something that always puzzle me in this kind of discussion, maybe you can help me with that. What mainstream economists really believe?
I mean, here (1) is a review of what text-books say about money creation. In my opinion (and it seems yours too) this is not the same that we see in practice.
So, my question would be, do mainstream economist believe different things that what they write in the textbooks?
(1)- https://ac.els-cdn.com/S1057521915001477/1-s2.0-S10575219150...
And the reality of money creation is pretty fuzzy too and depends a lot on what you define as "money supply" and the "banking sector" (funnily enough, even pretty basic physics has a degree of this problem too, which is why you get concepts of waves and particles that both fit some of the facts, though you don't get anyone inside or outside the mainstream very strongly committed to arguing against wave-particle duality...).
Ultimately private banks both intermediate between deposits and savers and create credit borrowed from central banks. They're only permitted to do the latter because their role in doing the former makes the government unwilling to let them fail. The "credit creation" emphasisers are right to emphasise that the limits on individual bank credit creation are soft because the "bank capital" they are permitted to borrow against is not a fixed variable, the intermediation emphasisers are right to note that when the commercial banking system borrows more money, the central bank tends to pull money out of the rest of the economy in the very short term, and propose raising interest rates in the slightly less short term, and so the banking system is only really able to expand the money supply when the central bank is comfortable with it doing so.
More generally, it's possible to entirely agree with Werner and MMT on banks' present role being far better described as primarily one of credit creation and entirely disagree with their respective alternative preferred policy approaches to central banking (or vice versa for that matter). What mainstream economists are primarily concerned with is the principle that raising interest rates for a variety of reasons (including but not limited to its effect on demand for bank credit) somewhat reduces inflation (and demand) and lowering them somewhat increases demand (and inflation) which is pretty much the most theoretically and empirically sound conclusion ever reached in macroeconomics (despite a few edge cases where it might not be true).
Because he thinks that the notion that private banks create money as an account operation, and they search reserves after giving a credit, and not before, is too complicate for his readers.
Fair enough, but you have to recognize that, then, it's not so strange, and hardly their fault, that MMT economists end writing "straw men" posts (as you said before).
Any time an expert is writing for a non-expert audience, they are usually writing a simplification tailored for the audience and the purpose of the writing.
> Because he thinks that the notion that private banks create money as an account operation, and they search reserves after giving a credit, and not before, is too complicate for his readers.
Or because the general idea of a multiplier effect works either way, and his columns are unlikely to depend on the mechanics of the simplified computation of the multiplier as an estimator of the maximum level of the multiplier effect under the simplifying assumptions that apply to that calculation.
If you have a specific problematic column in mind, we could have a less abstract discussion about the problem you have with it.
Anyway, I don't think our discussion is going to arrive anywhere.
You ask for Krugman (who is a guy that I like by the way) opinions:
https://www.cnbc.com/id/46944145
For me, what he says there is in clear contradiction with (for instance):
https://www.sciencedirect.com/science/article/pii/S105752191...
It seems to me that whatever it is what they put in their textbooks, even more important is what they put in their models.
Here there is a good criticism of Krugman views: https://www.nakedcapitalism.com/2012/04/scott-fullwiler-krug...
But if they didn't solve it, we are not going to neither.
IME, the simplifying assumptions are often explicit, so they do.
I’m not sure what MMT books you’ve been reading...
Particularly, it's a tool for estimating a limit of an effect in a particular idealized policy circumstance and with other simplifying assumptions.
The simplifications don't represent real world conditions, so the computation is of little real-world relevance though the effect is.
Much of a first-year physics text will be simplifications that apply in idealized conditions that are broadly similar, IME.
Where MMT goes wrong is the relevance of all this. They succumb into "banking mysticism" and assume far too large macroeconomic role to banking.
Banks don’t create demand out of thin air by providing loans.
While banks can create loans "out of thin air" in some extent (careful with technical details), they are limited by their reserves. Central bank controls the size of the money supply, because it is the source of bank reserves and capital requirements.
https://www.sciencedirect.com/science/article/pii/S105752191...
And
https://www.sciencedirect.com/science/article/pii/S105752191...
Economists at the Bank of England re-ran these tests in an attempt to disprove the above theory and found themselves reaffirming it:
https://www.bankofengland.co.uk/working-paper/2015/banks-are...
It has since been reaffirmed by other central banks, including the Bundesbank
https://www.bundesbank.de/Redaktion/DE/Downloads/Veroeffentl...
This is exactly what MMT says (and the reason of their support for fiscal policies), but not what mainstream says.
See the mainstream justification for 'quantitative easing': improve the reserves of the commercial banks so they 'decide' to loan. MMT have always said that this is not how it works. Banks don't loan because they have more money, because banks don't create demand. By the way, MMT have always said also that this was not the way to go but this would not generate inflation, as some critics pointed.
>>While banks can create loans "out of thin air" [..] they are limited by their reserves.
My understanding is that this is not exactly true, and here MMT proves mainstream wrong again. As you say we have to be careful with the technical details.
Banks don't look into how much reserves they have and, then, they decide what they are going to loan. The credit departments of banks loan whenever they think they can make a good business and then the bank search for the reserves.
If they can't find enough reserves in the inter-bank market, they will go to the central bank. The central bank always will cover the commercial bank needs. What the central bank can control is how expensive it's going to be to cover those needs. The money multiplier theory is also wrong.
So who defines who's an economist?
> the most fringe and unsound theories
According to ...?
> "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics
This sounds as if being comprehensive or radical is something bad. Keep in mind the earth not being flat and orbiting the sun was both radical (at that time) and comprehensive in terms of laws governing that movement.
I just gave a counterexample to the suggestion of GP that it's a positive indicator of bad ideas.
The biggest problem I have with economist is when it comes to discussing technology and economy. While they have no problem having opinions about the effect of technology most treat it as an externality and not something central to their models.
Yet any economist worth their salt should do exactly that as technology has a bigger impact on the economy than what you can find in behavioral economics.
So the problem isn't the economist themselves but the power they have on public policy and that should be critiqued for the nonfactual base it is.
This is not true at all.
I think you are confusing talking heads and pundits in TV with academic economics. Productivity, technology and economic growth
Technology and it's relation to economics is included in growth theories and it's important subject that it subject of active study. It's in the A in Solow–Swan model. The model predicts that in the absence of continuing improvements in technology, growth per worker must ultimately cease. More modern theories take the technology even more seriously.
There are a few people like Tyler Cowen who take it seriously but most models used by governments (Like the Danish DREAM model) aren't even close to factoring those things in. And they are the ones who the politicians end up listening to.
A few fringe Austrians (only one with academic credentials) have mentioned hyperinflation as a possibility. An additional few Austrians suggested a high possibility of something like 7-10% inflation, which was still controversial among Austrians. Of the Austrians actually active in academia (which is a higher number than many would guess), I can think of one assistant professor who predicted rising inflation.
I'd be interested in hearing about all of these academic Austrians who have argued that they are both to be full of shit.
Ron Paul is not an Austrian-school economist (or any other kind of economist.)
> as far as I'm aware the mises institute has agreed with him all of that time.
[Citation needed]
Also, Ron Paul usually doesn't predict hyperinflation, though I would agree that he's very hyperbolic.
Basic observation: Government that issues debt (or money) in it's own currency can't go bankrupt. This is essentially correct and it even works in practice. Hyperinflation is a problem only if you have to pay foreign debt in foreign currency.
Where MMT differs from mainstream is that in their model this ability can be exploited freely. The fiscal-monetary conflict goes away. They also assume that the only feedback loop goes trough taxation–taxation is seen as the tool reducing the money supply. Other ways money creation affects the economy don't exist or don't matter.
You called it extreme and then largely agreed with it....?
True premise can lead to wrong conclusion.
Some models can work only within a some range.
If you accept only one-handed economists you get into trouble.
---
joke explainer: “Give me a one-handed Economist. All my economists say 'on hand...', then 'but on the other...” ― Harry Truman
Because when you declare a school of thought to be "extreme" it's kind of weird to agree with the core (and most controversial) concepts and only disagree on unspecified details.
On the one hand, it's like declaring that the Catholic Church is run by religious extremists because their wafers are exactly the wrong shade of pale off-white. On the other hand, it's exactly like that as well.
Just because a government publishes a 1% inflation number (that may be derived from heavily manipulated statistics) doesn't real mean inflation isn't happening.