Howard Reed has argued that we need to rebuild economics, and I agree. He calls the process deconomics beause it requires a deconstruction and rebuidling of all that subject thinks it knows. Again, he is right.
As is John Hope when arguing on this blog today that if we are to do so we have to follow the money. He quotes Steve Keen saying:
Fundamentally we do not live in a barter economy. Everybody except economists realise that . Economists model the world as if it's a barter system. They leave money out of their thinking entirely. No banks whatsoever. No money is necessary. Everything's barter. And then they start giving guidance about how much money you should create. In their theory the only thing money creation can cause is inflation. They completely ignore the actual process of creating money. [And yet] if you live in the real world ….it uses money.
Precisely. And quite staggeringly true of macroeconomics, with which I have a little familiarity.
But this also means something else: it means that macro almost ignores tax as well. Not quite, I agree, because it is in one formulation of GDP, but that's seen as the residual form of that calculation and all the focus in that form is given to savings whenever it seems to be discussed.
And this is not surprising. Because macro, most especially in its general equilibrium form, does not ‘do money' not can it ‘do tax' because as modern money monetary theory argues, they are the flip side of each other. Tax exists to cancel government created money. All its other functions, important as they might be, are ancillary to that.
What does this mean? I'd suggest that an analysis as straightforward as this is makes it very clear that if deconomics is to work then it has to start where any good investigation does, by following the money.
Macroeconomics does not do that. It fails as a result. Deconomics will succeed where macro has failed if that is what it does. And on the way tax will, necessarily, have to be built into the equation.
The result would be radically different, and for one simple reason. It would be based on the economics that the real world can observe. That may be too radical for many macroeconomists, but it is exactly what we need.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Macroeconomics is a very broad field so to say that it doesn’t take into account money or tax is wholly wrong. You would hope that a self-described economist would know a little about basic macroeconomics, and how important it’s treatment of money has been.
One would also note at this point that the general equilibrium theory is a bottom up theory, and is traditionally part of microeconomics. Again, I am a little concerned that an economics lecturer does not seem to understand this. General equilibrium models only deal with supply, demand and price level, so it’s hardly surprising to see it omit money and taxes. But if you think that general equilibrium models are the sum of macroeconomics on the matter of money and tax you should probably review you knowledge base.
As for macroeconomics, the quantity theory of money (MV=PQ) is just the first building block, moving on to Mises’ Theory of Money and Credit, to Keynes’ General Theory (of Employment, Interest and Money, to give it it’s full title), and then all the follow on theories from these. Your favored MMT is just a follow on theory from Keynes and Neo-chartalism, and is hardly the first theory to take into account money and tax.
Central Bank monetary policy and government fiscal policy, which both fall under the broader category of macroeconomic policy are inextricably linked to money and tax.
To suggest macroeconomics ignore these things is ignorant to both the subject and reality. Macroeconomists have been looking at tax and money, amongst other things, for over a century.
If I’d set a trap for you it would not have been possible for you to fall into it more effectively
Did I say macro had wholly ignored tax? No.
Did I quote Steve Keen saying all macro thought money created was inflation? Yes.
And yes – I am well aware DSGE is micro pretending to be macro – I will note this rather more in a response to Diane Coyle in due course
But actually, how wrong can someone who argues supply, demand and price level can ignore considerations of tax and money be? Spectacularly wrong.
And that is what you are.
I made clear exactly what you do
But I managed to draw all the right conclusions and you all the wrong ones
I hope you don’t teach….
Let’s just have a look at what you say.
“Precisely. And quite staggeringly true of macroeconomics, with which I have a little familiarity.”
This is with reference to Keen’s nonsense on macro. Economists don’t leave money out of their thinking, and don’t view the world as a barter system. Nor do macro economists think all money creation is inflationary.
“it means that macro almost ignores tax as well.”
No it doesn’t. Fiscal policy is macro based, and spends a lot of time looking at taxation.
“And this is not surprising. Because macro, most especially in its general equilibrium form, does not ‘do money’ not can it ‘do tax’”
Macro does money and tax, an GE is micro not macro. Some trap you are setting here – are you simply getting things wrong on purpose? You must be a very cunning man indeed.
“But actually, how wrong can someone who argues supply, demand and price level can ignore considerations of tax and money be? Spectacularly wrong.”
From this statement I can see you don’t understand general equilibrium theory. It doesn’t include money and tax for very specific reasons. But being an expert economist and having promised to respond to Diane Coyle I can await your response to her to see what a mess you make of it.
“But I managed to draw all the right conclusions and you all the wrong ones”
Really? By not understanding what macroeconomics is, then confusing micro for macro, and otherwise making rather dumb statements you have drawn the right conclusions?
The only conclusion I can draw here is that you don’t really understand what you are talking about, and seem to be at a playground level of “I’m right, you’re wrong”. Maybe you don’t like real economists because they don’t take you or your pet MMT theory seriously? With posts like the above, it’s not hard to see why.
“I hope you don’t teach….”
The same could be said for you, though you seem to be a Professor (of practice, so a lecturer in other words) at City, so I do fear for your poor students if this is the level of understanding their tutor has.
It’s very hard to know where to begin here
Although I guess I should start by noting that ad hominem attacks now appear to be mainstream macro
The I’ll note your claim that DSGE is not macro but micro and will draw your attention to Oliver Blanchard disagreeing with you, here. https://academic.oup.com/oxrep/article/34/1-2/43/4781808 I think it fair to say he knows more about macro as most see it than me.
And I’ll note that fiscal policy is not just tax, but is largely ignored in macro and has been for thirty plus years, so what is your point?
Do I need to go further? I don’t think so. Macroeconomists of some note would laugh at your claims. I will too.
Dammit, you don’t even know what a professor of practice is.
So “HF” says:
“Maybe you don’t like real economists because they don’t take you or your pet MMT theory seriously?”
Dude, if you are going to be “real” you could start with your real name because you can’t have credibility and be an anonymous troll at the same time. No guts, no story.
BTW 3 things:
1. I don’t know any real economists that don’t take MMT seriously. Some may not like it but they take it seriously. You take it seriously enough to know that it is “a follow on from Keynes and neo-chartalism”.
2. As someone that had to suffer through all that General Equilibrium and DSGE drivel as a student I am pleased to see the likes of you pedding away from it as fast as you can. And by the way DSGE IS passed off as macro (or used to be) under the banner of New Concensus Macroeconomics.
3. Its good to see the likes of you including Keynes. The sort of “macro” that Richard Murphy and Steve Keen are referring to doesn’t. Perhaps there is a slight misunderstanding between you?
Do you know which end of the broom you are holding? First you say DSGE models are macro
“Because macro, most especially in its general equilibrium form”
Then you acknowledge they are microeconomics
“I am well aware DSGE is micro pretending to be macro”
Then you say they are macro again
“The I’ll note your claim that DSGE is not macro but micro and will draw your attention to Oliver Blanchard disagreeing with you”
General equilibrium theory is traditionally microeconomics. There have been various attempts to model prices for a whole economy but they have been inconsistent and unsuccessful, because there are simply too many inputs for the models to work well. Which is why they are not commonly used in macroeconomics, and stay predominantly part of microeconomics. Modern DSGE models are just a very small, underlying part of more general neoclassical macroeconomics, and are typically used to model particular systems within an economy. Not an economy as a whole, from a top down perspective which is the basis of macro.
But why not let Blanchard himself have his say on DSGE models
“Some see them as the sign that macroeconomics has become a mature science, organized around a microfounded common core”
“First, the behaviour of consumers, firms, and financial intermediaries, when present, is formally derived from microfoundations”
Let’s also be clear that Fiscal policy has not been ignored by macro. Keynesian economics and it’s successors are directly concerned with fiscal policy – probably more so that monetary policy. The whole idea of government spending in bad times to increase aggregate demand, and less spending in good times to cool it.
Indeed, your favorite tinpot theory MMT derives from Keynesianism in this regard. It’s also worth noting at this point that MMT doesn’t have any basis to claim it is the first or only theory to deal with money or tax, and nor does it really have any basis to claim it does it correctly (given its inherent flaws) other than the claims made by the small group of people who back it. In macroeconomic terms it has less empirical evidence behind it than DSGE models.
As for you, “Professor”, a PoP is a sinecure normally given for a limited time with no tenure, and are normally professionals in a given field given title for a teaching role. Normally they have no significant academic background. They are equivalent to assistant Professors in the US system (which I come from) and in the UK they would be known at Russell group Universities simply as lecturers. They have no career progression to more senior academic roles. Once your funding runs out (which I assume it will soon enough) you are not allowed to call yourself a Professor, unlike a retired tenured Professor. You’ll be back to plain old Mr. Murphy again.
Good enough for you?
This is your last post because it is all so wrong
But mostly because it is clear that you are here to troll
And you can’t even get that right. All professors lose their titles when they leave their jobs – some become Emeritus
And I was not hired to teach: I was hired to research
And PoPs are not known as lecturers in Russell Group universities – because then they’d be paid as such and I am on a professor payscale
And yes I will be Mr Muprhy again – unless I get another post. I will be open to offers.
HF economist : “General equilibrium models only deal with supply, demand and price level, so it’s hardly surprising to see it omit money and taxes.”
It is interesting to see the weird logical contortions that modern economics makes otherwise sane and intelligent people perform. It is “hardly surprising” to see a model that “deals with the price level” “omit money”? How do people pay for what they buy? Do they bring in a flock of chickens to barter with a car dealer to get a new car? Or do they use “money”? But Keen’s & others accurate comments that modern mainstream imagines a barter economy is denied.
So dealing with the price level then is “including money”, is including a theory of money, that is unrecognized, being like the water a fish swims in. And that theory in modern mainstream economics is the commodity theory of money, which is wrong (and is a lot older than Mises, who isn’t as important as Menger, and is of no importance to Keynes at all – Keynes says Mises etc is wrong, Austrian monetary and creditary theory is wrong). The commodity theory goes back to Nicole Oresme at least.
The correct theory, which is the foundation of MMT ( & less clearly, Keynes) is the credit/state theory, a more general theory that preserves what is valuable of the earlier commodity theory within it. The micro/macro distinction is fairly recent, the problem with GE is that it assumes these unfounded microfoundations are correct and somehow “found” macroeconomics and assumes the problems it can’t see out of existence. But GE is not “bottom-up”. Real world markets (micro) are founded on money (macro). That is the sort of historical and in-you-face-every-day fact that the mainstream teaches its believers/victims to deny – comparable to physicists or chemists who believe water freezes when heated. And they do believe it – to the extent of saying logically impossible beliefs, things that could hold in no possible world, are “hardly surprising”!
Further reading: Hyman Minsky’s review of (GE theorist) Frank Hahn’s book “Money & Inflation” in Journal of Post Keynesian Economics 6- 3 (1984). Minsky quoting Frank Hahn: “The most serious challenge that the existence of money poses to the theorist is this: the best developed model of the economy cannot find room for it. The best developed model is, of course, the Arrow-Debreu version of Walrasian general equilibrium. ”
The extent of Minsky’s disagreement with the second sentence is summarized by his last sentence: ” It is sad but Hahn, for all his talent and power, doesn’t even try to understand our economy.”
Dudley Dillard’s The Barter Illusion in Classical & Neoclassical Economics- Eastern Economic Journal 14- 4 (1988) also jumps off from Hahn’s book. “Hahn’s problem is how to get money into economic theory; mine is how money ever got out of economic theory in the first place. To the naive mind, it must seem incredible that “the best developed model” of the economy has found no room for money.” is a choice quote.
Neither are so far from Howard Reed. IMHO Modern macroeconomics that takes GE so seriously- “doesn’t even try to understand our economy” – to be economics at all.
Finally, on “Economists don’t leave money out of their thinking, and don’t view the world as a barter system.” here is (from Dillard’s paper) Arrow & Hahn, General Competitive Analysis. Holden-Day (1971) :
“The economy we have been considering … is essentially one of barter; all acts of exchange are completed between two households exchanging one good for another.”
That’s pretty damning
And highly effectively so
@ Marco Fante
“you could start with your real name”
Shouldn’t you be doing the same? Or is it OK to post under a pseudonym if you support Richard Murphy?
I am not giving my real name here simply because I have been warned that Richard Murphy has come after people who have disagreed with him and complained to their employers.
As for you points on MMT:
1. I can’t think of any mainstream economists that DO take MMT seriously. In the academic world it is only it’s proponents who don’t seem able to see it’s problems, so it is the same group (Randall, Wray, Mitchell, Kelton et all) behind every pro-MMT paper. The list of papers and economists pointing out the flaws of MMT is so long it is not worth reproducing.
In the central banking and government worlds, as well as the business world, MMT is simply not a serious theory. It has no application because of the flaws in the underlying model, or lack of model entirely.
2. Microeconomics is bottom up, macro is top down. It’s a general rule but good enough. DSGE is not normally considered macro because of that, and the models are typically not very good because of the number of constraints to make them function, and the huge number of inputs and complexities they would need to turn the model into one functioning for a system into that for an economy. So they are not typically used in any great sense in macroeconomics.
They are used when assessing a system within an economy, which might give rise to information used in more general applications. E.g. House price data which feeds into a bigger picture model.
3. Not sure what you are getting at here. There are plenty of macro theories out there, of varying levels of utility and value. In real terms most of them have strong areas and most have weak points – which is why most practical or applied macroeconomics uses a variety of different, normally hybridised models to try and mimic the real world as best they can. These models are fettled and back tested repeatedly to try and give useful outputs. Academia might strongly focus on one theory or school or another, but macroeconomics “in the wild” and as used by public and private sector analysts tends to try and take the best from all schools when applicable.
Where I strongly disagree with what Steve Keen and his proxy, Richard Murphy, say, is that macroeconomics doesn’t deal with tax and money. It does, at great and tortuous length.
I also strongly disagree with their claim that only MMT does, and only MMT does it properly. As a theory it only scratches the surface of tax and money whilst making a series of lurid claims – much like the ones made by the above article.
I think your time here is up HF
First I have no reason to doubt Marco Fante’s name
Second, I definitely do not know yours
Third, it seems gratuitous attacks are your stock in trade. I have never reported someone to their employer. it is true I did once confirm the identity of a blogger who wrote extremely crude and offensive comment about me to his professional institute, who also happened to be his employer. They found him guilty of professional misconduct but that had nothing at all to do with me and I gave no evidence and made no complaint. What you do prove is that you are a member of a paranoid group of rather unpleasant right wing blog trolls when saying this.
Fourth, MMT is fact: it describes how money creation works. Any serious economist denying it now denies acknowledged truth. Re macro: you really do reveal what you do not know. And macro is DSGE, and so it does not do tax and money.
There is nothing more to discuss: you are just offering meaningless diatribe.
Mystery solved.
HF economist says:
“…….. in the US system (which I come from) ….”
Say no more.
HF economist says:
“I am not giving my real name here simply because I have been warned that Richard Murphy has come after people who have disagreed with him and complained to their employers.”
Wuss !
Not true anyway. He sends ‘the boys’ round.
After dark of course. 🙂
You’re a great help Andy
“Your favored MMT is just a follow on theory from Keynes and Neo-chartalism, and is hardly the first theory to take into account money and tax. ”
So is it just Misean theory you’re trying to direct us to or can you point us to non-Misean theory. I’d like to know please.
@Schofield
I pointed out Keynsian economics, and it’s more modern successors already. But the Austrian (Mises) school and various other macroeconomic theories all take money and tax into account, which is something Murph is claiming is not the case, and only MMT does (which is funny in itself).
Who is this Murph?
You are showing decidedly troll like traits here
Much abuse and little knowledge are but the start of them
“Who is this Murph?”
I guess that’s what HF ‘Horse F****r’ calls you. Perhaps he’s inviting you to use his pet name too 🙂
Perhaps he too, thinks this is Facebook where name calling is common currency and passes for discussion.
HF economist
“But the Austrian (Mises) school and various other macroeconomic theories”
I asked you to point to those “various other macroeconomic theories” you’ve failed to do so. Some “economist” you’ve turned out to be!
If money in essence is a “caregiving claim” then it is a form of “unconditional barter” in the sense that a mature individual recognises that caregiving must begat caregiving to enable human societies to flourish. So from the caregiving you received as an infant, the caregiving you give to your own children and the rest of society, to the caregiving you give to your parents when they’re old, a continuous cycle. Money lubricates other-caregiving but so few recognise this as the true reason for its invention predominantly seeing it for the purposes of self-caregiving and immediate family.
I like that
I’ve been wondering what an MMT economist would put on bank notes instead of “I promise to pay the bearer on demand the sum of X pounds” in order to clarify what money is?
Something like “The government is indebted to the bearer to the sum of X pounds. Acceptable as payment of government taxes”?
That’s quite neat
HF Economist
Lets cut to the chase here. Why is Economics so, lbbh, shite? Why do we tolerate this pseudo-science when, it becomes abundantly clear, it can never forecast anything? What is it hoping to achieve?
If I ran a weather centre & the meteorologists routinely forecast rain only for there to be sunshine or v/v, I’d sack the fakers. But, in economics, it seems that an entire inability to see anything, including a train coming down a track, is not in any way seen as a fault. It is all a “learning opportunity”.
I remember 2006-08 when, in fairness, Martin Wolfe repeatedly stressed the instability & potentially catastrophic nature of the economy. There were hundreds of economists saying everything was sound & reasonable & as expected. TTBOMK not a single one of them has hanged himself, or put his head under railway tracks or even drunk a bottle of vodka mixed with sleeping pills. Why not? Do you fellows really have no sense of shame or dignity?
Well,
The forecasting or denial of the GFC has long been a test of credibility in my estimate. Funnily enough “HF Economist” to whom you have addressed this comment, has chosen to deride Steve Keen who was famously one of the select handful of economists who predicted the GFC – well in advance, accurately with correct explanation etc.
That particular test of credibility remains intact.
Marco Fante says:
“Well,…” Curious way to open a comment when so much is patently ‘unwell’, but let that pass. 🙂
“…..Steve Keen who was famously one of the select handful of economists who predicted the GFC — well in advance, …….”
As opposed to GFC2 which EVERYbody is predicting and certainly were doing so far in advance of the crash that it hasn’t happened yet.
“……accurately with correct explanation etc.” Ah, well (sic). Now, that’s clever.
I hope someone is keeping a close eye on the Thai Baht.
Um yeah, whatever.
As an independence supporting Scot, with no great interest in financial matters can I ask, naively perhaps, have any of you seen this…
https://www.nytimes.com/2018/04/13/business/china-communist-party-foreign-businesses.html?emc=edit_mbe_20180416&nl=morning-briefing-europe&nlid=6945252820180416&te=1
What implications might this have for Scottish businesses hoping to do/increase trade with China? All this, obviously, in the light of our First Ministers recent visit to China…..
Ian Sanderson says re:
https://www.nytimes.com/2018/04/13/business/china-communist-party-foreign-businesses.html?emc=edit_mbe_20180416&nl=morning-briefing-europe&nlid=6945252820180416&te=1
“What implications might this have for Scottish businesses hoping to do/increase trade with China? All this, obviously, in the light of our First Ministers recent visit to China….. ”
1) Note that this is an article from the New York Times. The US is currently engaged in a trade war with China. Dare I suggest this may not represent a balanced account ?
2) The Americans have a completely irrational hatred born of fear) of ‘Communism’. The implication of the prefixing nearly every reference to the Chinese government with the tag ‘Communist’ is an automatic reflex trigger. You are intended to infer that the US government is implementing rules for purely political reasons and that the US doesn’t (nay, wouldn’t dream of anything so underhand)
3) Post Brexit we will be forced to Kowtow (!) to American trading terms if we wish to trade with the US. We already do to a large extent, their rules are not EU rules,; we conform or we don’t have access to their market. That’s no different to the Chinese declaring their terms of trade. We can chose not to deal.
I know for a fact that we have had Scottish trade delegations (or ambassadors or whatever they get called) in China for well over twelve months. Probably nearer two years. That China wishes to talk directly with the First Minister is not particularly sinister.
Don’t be surprised to find the Westminster government seeking to put a spanner in the works. The UK government plan doesn’t allow for Scotland acting independently of the US/ Liam Fox agreements which we don’t know about yet. Never forget that Whisky is a ‘British’ export. And Americans are inordinately fond of Scotch. And if you’ve tasted the industrial cleaning fluid they manufacture in Kentucky it’s fairly obvious why 🙂