With apologies to RFK. Cullen Roche makes a cogent observation about the state of economics:
It is based too much on pie in the sky thinking and not based on what is happening on the ground, in the trenches. Warren Mosler, widely regarded as the founder of MMT, created the theory because he was in the trenches and recognized that what his textbooks taught him did not reflect the reality of the operations he was involved in on a daily basis. And while no economic theory is perfect, I think this is by far MMT’s greatest strength. We can all theorize about how best to implement our conclusions from MMT, but the heart of the operations of our autonomous currency issuing fiat monetary system are undeniable.
That is why I am astounded by recent comments such as Scott Sumner’s, who today writes:
“I wasn’t able to fully grasp how MMTers (“modern monetary theorists”) think about monetary economics (despite a good-faith attempt), but a few things I read shed a bit of light on the subject. My theory is that they focus too much on the visible, the concrete, the accounting, the institutions, and not enough on the core of monetary economics, which I see as the ‘hot potato phenomenon.'”
That’s exactly right. We don’t create Crusoe Islands (as Robert Murphy does) or monetary systems without banking systems (as Sumner does). We are working within our reality and applying analysis and solutions based on that which is visible, concrete, provable through accounting and obvious through the institutions who implement these operations. If you want to know why we’re in this current mess look no further than the thought process above which claims that we need to focus less on reality and more on mythology.
Lest you think Sumner is taken out of context (and, for the record, he’s pretty bright), he concludes:
The best way to understand modern sophisticated central banking is to study the most primitive monetary system possible-a medieval king debasing his money in a country lacking banks.
Sweet Baby Intelligent Designer. That statement does make it clearer how this post I wrote came to be.
I get Sumner’s concern about prices–I think some MMTers are far too sanguine about prices, stickiness, and inflation (not to mention human psychology–most people don’t think in terms of inflation-adjusted prices). But this is a misdefinition of the problem we face right now:
The easiest way to see the process work is to imagine an economy without banks, where the new money goes right into circulation as currency. Most people can instinctively grasp that more currency, without any increase in real goods being produced, will lead to inflation.
What most MMTers would argue is that the limitation in the production of real goods is often due to a lack of currency. Right now, the demand for–and thus production of–goods is weak. Certainly, that’s the case right now with industrial capacity hovering around 80% utilization in most sectors, and under- and unemployment affecting one in six Americans (and that would be worse, were it not for record high levels of incarceration).
Reality is a good thing, even if it’s depressing and hard to quantitatively model.
Nice write up, thanks!
For more, read “the 7 deadly innocent frauds” free online at
And unless you think we need 16% unemployment to keep prices down…
I’m learning, very slowly, about MMT.
And finding it ….illuminating.
I find the blog of Bill Mitchell[Prof of Labour Economics at Newcastle Uni Australia] very helpful.
Sumners statement is like saying
“In order to understand the workings of modern jet plane, I have to go back to the basics. Since the the plane appears to have rotating parts, I will look at the most basic rotating object. A ball! Studying the ball also has the advantage that a ball if thrown flies in the air. Therefore to understand how a modern airport works, I have taken up golf!” 😉
Except for that limited branch called “resource economics”, the whole discipline (who could call it a science?) deals with epiphenomena.
Just about all their data come from second-hand sources, each with an incentive to distort the numbers in one way or another. And few, if any, economists, even perceive the problem of “externalized” costs: compare to an ecologist trying to evaluate a biome while denying the existence of parasites.
And the majority of US economists hobble themselves even further by attempting to deny/ignore the concept of “class”, and don’t even acknowledge the career biases which provide motivation for such systematic blindness.
Since I’m not a monetary economist, I’m not going to address the issue of monetary theory.
However, I want to respond to Pierce Butler’s comment.
(1) Mr. Butler say: “Just about all their data come from second-hand sources…” This is false. Many economists collect data on various social experiments or natural experiments. For example, consider Esther Duflo at MIT and Dean Karlan at Yale in development economics, or all the various work of the folks at MDRC in analyzing various social welfare, job training, and education programs in the U.S., or the work of Roland Fryer at Harvard.
(2) Mr. Butler says “few, if any, economists, even perceive the problem of “externalized” costs”. This is also false. The concept of externalized costs is central to the entire field of public finance/public economics. Externalities and public goods are central to any economics course considering microeconomic policy issues. In fact the term “externalities” or “external costs or benefits” was I believe invented by economists, although the concept I believe has been around a long time in a less formal way.
Tim Bartik @ # 5: “Just about all their data come from second-hand sources…” This is false.
So the economists you cite all go out and (e.g.) follow job trainees around to produce figures on their respective outcomes, rather than asking the training programs for their follow-up data? Good for them, but I would think rather exceptional within the field.
The concept of externalized costs is central to the entire field of public finance/public economics.
How long since you’ve seen, say, a report on building a highway which factored in the increased burden on asthmatic children downwind of the plants producing the cement? Or even a calculation of contribution to global warming from said road’s construction and use?
Does anybody even try to work out a Net Domestic Product figure?
(1) In trying to measure earnings of participants in a job training program, versus some comparison or control group, in general economists would not use data collected by the program itself. In addition, if possible, economists would try to avoid directly surveying the households, as this is subject to serious non-response and other biases. It is more common these days to try to use administrative data, for example from wage record data used to administer the unemployment insurance program or data from the IRS. These are data collected for other purposes by a third party. There is no reason to believe that any errors in such data will be biased for or against the job training program.
(2) If possible, a full benefit-cost analysis WOULD consider all benefits and costs, regardless of who experiences them. This would include the external costs you mention of the highway project. This is standard benefit-cost analysis. Of course, in practice, it may be difficult to fully trace all non-market costs and benefits. This is one reason many economists favor pollution taxes, in order to “get the prices right”, which would provide the right pricing signals to everyone, including benefit-cost analysts.
You appear to be assuming that any failures in accurately measuring all social costs or benefits would bias the analysis in favor of the highway. Not so. For example, if there is high unemployment among highway construction workers, in principle the cost of labor used in the project should be reduced to account for the “employment benefits” provided by the project under conditions of involuntary unemployment. However, in practice this is difficult to do because of controversies over what social cost of labor to use.
Tim Bartik @ # 7: … administrative data, for example from wage record data used to administer the unemployment insurance program or data from the IRS.
Last I heard, such data was collected under strict conditions of confidentiality. Does the IRS really open up all its safeguards every time an Eek professor wants to do a study? And what do their quality checks tell us about the reliability of the information they receive?
… in practice, it may be difficult to fully trace all non-market costs and benefits.
A sampling bias which favors which class of economic actors? Where collecting even enough data to begin estimating the error bars will jeopardize careers funded by which sector? Name any other “science” so fraught with systemic conflicts of interest.
… many economists favor pollution taxes, in order to “get the prices right”…
If not to compensate those directly and indirectly harmed by said pollution. And where’s the comprehensive data set from which to estimate what’s “right” in each situation?
You appear to be assuming that any failures in accurately measuring all social costs or benefits would bias the analysis in favor of the highway.
In favor of the highway-building contractors, actually; secondarily in favor of large landowners & developers in areas “served” by the new road.
… in principle the cost of labor used in the project should be reduced to account for the “employment benefits” provided by the project under conditions of involuntary unemployment. However, in practice this is difficult to do because of controversies over what social cost of labor to use.
So if economists can’t even work out the relatively simple implications of (un)employment among a finite set of workers subject to boom-&-bust fluctuations over several generations, why should we expect them to be able to calculate the damage wrought by dumping tons of mercury into the wind?