dagblog - Comments for "Doing What Needs to Be Done: Facing the Future with Full Employment and a Renewed Public Sector"

Thanks. That looks good.

Dan Kervick — Sat, 04 Feb 2012 03:31:46 +0000

In reply to Don't have to time to barge

Thanks. That looks good. The Australian economist Steve Keen has also been very interested in the application of non-liner dynamics and non equilibrium models to economics.

Every form of causal

Dan Kervick — Sat, 04 Feb 2012 03:28:45 +0000

In reply to Your first graf describes

Every form of causal explanation explains or analyzes some kinds of causal relations in terms of other causal relations that are not themselves explained, but are only posited. That's not an inherent problem with the Newtonian style model or any other causal model, including mechanistic "billiard ball" models, or mechanical wave models or field models. The question is just how well the model applies to the phenomena you are trying to explain or predict. And my claim in this case about economics is that the Newtonian style of action-at-a distance model is not a very good one for the phenomena being studied in that field.

Neither I would say is the roughly "thermodynamic" model that a lot of economists seem fond of a good model, in which certain law-like relations and formulaic identities are posited to hold among a few different aggregate quantities. The problem with such models is that the causal relations go both ways in the model, but in the real world of human institutions they probably don't. In thermodynamics, you can tweak pressure by changing the temperature, or tweak temperature by changing pressure. Economists who think this way might believe in some law-like relation relating employment, inflation and the money supply, for example. But then it turns out they have big disagreements about whether you can influence employment by juicing inflation, or influence the price level by suppressing employment, or influence either by tweaking the money supply, etc. Anyway I think that whole approach is just way too crude.

I think economists should think more like doctors or engineers. Basically, we wouldn't think much of a doctor who attempted to treat all sorts of specific pathologies by tweaking some simple aggregate quantity like the blood volume or the bone weight. But I read economists making these kinds of recommendations all the time. Doctors think of a human organism as a very complex system made up of a large number of interacting subsystems with a large number of extremely important and uniquely articulated parts. They try to understand both general systematic relationships and fine specific details. There practice doesn't consist of applying an abstract theoretical model.

Empirical observation is essential, but there are different ways to do it. A lot of contemporary economic strikes me as too hung up with an inductivist picture of their science. They acquire a lot of statistical information, which is good, and then attempt to distil from that information some new general law or principle of the kinds that people aim at in physical science. That strikes me as a technique of limited usefulness in understanding human behavior and institutions.

I once got into an argument with an economist because I claimed that, based on my own experience in the business world, the economist didn't understand the causes and persistence of unemployment during the current downturn. Of course, I admitted, my understanding might be flawed because it was limited by my own personal experience. I suggested that to understand why people weren't hiring, the best approach would be to simply interview and otherwise study a random selection of actual firms. You want to know why companies don't hire? Ask them. You will learn a lot.

He was aghast at my naivety, and argued that the economy runs on abstract, global macroeconomic principles upon which the human elements making the local decisions couldn't possibly shed any light simply from their own deliberations and observations. In other words, business people don't know why they aren't hiring and it is pointless to ask them, just as it would be pointless to ask the individual atoms of carbon and oxygen in a burning log why the fire in the log is dwindling.

To me, this is the kind of pseudo-scientific scientism you find in a lot of economics, and reflects both a woeful lack of common sense as well as a complete misunderstanding of the best ways to study, predict and modify the behavior of the kinds of complex institutional and social systems that economists are actually supposed to be studying. I think it reflects a misunderstanding of the differences between the physical sciences and the human sciences. It's the kind of response that come across fairly frequently in my reading, and has made be very skeptical of the recommendations and analyses offered by mainstream academic economists.

And I feel even more confident about my initial instincts these days, because it seems to me that a lot of economists eventually came around to understanding the recession the way I did, which was basically to say that the problem wasn't some kind of supply side "credit crunch", or a case of "tight money" but a demand side loss of spendable income out in the world of customers. Yet I encountered economist after economist early on who seemed to be of the opinion that because the recession began with a liquidity crisis or financial crisis, business's lack of hiring and investment was due primarily to a shortage of credit, and not their perceptions of the existence and size of an actual market for the new production filled with customers with money to spend. This is one area in which academic economists consistently fail. They are not active participants in the systems they are studying, but examine them and theorize about them from a distance, and thus miss things that are painfully obvious to participants in the system.

By "art", I don't mean expression or imagination. I'm talking about practical or industrial arts. Being a good carpenter or mechanic or plumber does require precise measurement and careful thinking and problem solving, and an intimate causal understanding of the system they are working on. But it doesn't require a lot of theoretical knowledge of the physics of carbon atoms, water and steel. And the people who do understand those physical principles, even though they sometimes make contributions to improvements in the practical arts, might often be very crappy carpenters, mechanics or plumbers. I wish more economists would aspire to be excellent artisans who knew how to fix and improve broken or poorly running economic and social systems, and didn't aspire to be theorists looking for the simplest laws and principles governing the fundamental elements. Or at least of they do aspire to be theorists, they shouldn't hold themselves out as people who actually know how to fix a broken economy.

I agree there isn't that much difference anymore between people like Krugman and Galbraith. But there used to be - especially on issues related to public debt. And Krugman has been harping on central bank policies for some time now. I think he's barking up the wrong tree. Why does he think the Fed can "credibly create inflation"?

Don't have to time to barge

Saladin — Sat, 04 Feb 2012 02:56:43 +0000

In reply to Your first graf describes

Don't have to time to barge into your interesting debate about the art of economics but I do want to share this link on the Santa Fe institute.

http://tuvalu.santafe.edu/~wbarthur/Papers/Pdf_files/ADL_Intro.pdf

I had a book somewhere that discussed the initial meeting in great detail, but I can't quite recall the name, so this link will have to do.

Clearly things are not

Richard Day — Sat, 04 Feb 2012 02:51:37 +0000

In reply to Doing What Needs to Be Done: Facing the Future with Full Employment and a Renewed Public Sector

Clearly things are not working out....

haahahahahah

Yeah.

Forget the lost, those who find are to be congratulated!

Forget the incompetent; for they must find their own way!

Forget the losers for they shall always be with us!

There is so much needed to be done.

There are so many ready, willing and able to work on what should be done.

Good Blog!

Your first graf describes

DF — Sat, 04 Feb 2012 01:40:00 +0000

In reply to Newtonian mechanics was an

Your first graf describes observations, not causal mechanisms. Newton observed the interaction of forces, but he didn't actually explain the causal interaction. If I push on a wall, why doesn't my hand go through it? He wouldn't have really known how to answer that question, except maybe perhaps to just deflect it by talking about "solids." Newton didn't have an understanding of what we now call the normal force. And he was very dissatisfied with the role gravitation played in his framework, but couldn't seem to do better than "action at a distance." I guess you can't fault him for that, because no one since has cracked that walnut. EDIT: This reads a bit sloppy to me, but I'm going to leave it as is. The point simply this: Newton did not have causal explanations for things like gravity or the normal force. He had an observational account that he turned into a theoretical model - a theoretical model that has been proven not to be correct except for within the limited scope of "human scale" physical interactions. And the whole reason I'm raising that is because you say you have a problem with economics because it doesn't offer mechanistic causal explanations. Well, neither did Newton. For that matter, how about Kepler? Kepler's law is true, but he didn't even have a theory for it, much less a mechanistic explanation - except the data supported it. This is not at all unlike many of the findings of modern economics - Okun's law for example.

But the point is, you were criticizing modern economics for failing to be about "causal narratives." You said it should explain mechanisms of causal action. I agree, but I think that's exactly what modern economics seeks to do.

I don't really care much for your usage of "practical art." Art is human expression. Science is human understanding. That doesn't mean those things don't interact, but they aren't interchangeable. Understanding how an engine works, in terms of being able to describe its operation, is not at all the same thing as understanding why it works - in other words, understanding things like thermodynamics, thermal expansion, compression of gasses, electricity, etc. You don't actually need to know the theoretical underpinnings any of that stuff to describe the process of an engine working. But fixing the damned thing is no art. I fix and ride old motorcycles. There might be art in the ride, but making sure the thing runs right could be the difference between a good ride and a seriously bad day. You can bet I approach that task as a scientific endeavor, demanding precise measurement and thorough testing, not as an exercise in expression or imagination.

Unfortunately, your description of the task just being too complex and "physics envy" sounds a bit too Austrian to me. It's basically the same way Mises and Hayek used to talk about their counterparts. It's no more true now then it was then. In fact, much less so.

RE: who speaks for MMT, I have no idea. I do know that Galbraith, who seems to be regarded as one of the leading proponents, has gone back and forth on this with Krugman over the past couple of years and the end result was that they agreed on what should be done. If you think Krugman, DeLong, et al. wouldn't want what you're asking for, I'm forced to conclude you just don't follow them very closely. Pretty much the entire saltwater school was howling for more during the first two years of Obama's term. You may have noticed that since then we've composed an even less cooperative Congress. To the extent that those guys have demurred in terms of what they're calling for, it's because they did it for two years to no avail. So now they're focusing on advocating initiatives that a) have some chance of helping and b) have some chance of happening. That doesn't mean they wouldn't welcome circumstances that were conducive to much bolder action.

FWIW, the differences that you mention don't seem very important to me. Again, they strike me as more or less semantic and primarily descriptive. No, the fractional reserve banking story that is taught to undergrads isn't accurate, but it gets them beyond thinking of money as green pieces of paper. They don't teach the double-book story in grad school. And that's why New-Keynesian PhDs don't seem to find any of what the MMTers are asking for the be controversial. They agree that we can afford it. They agree that QE funds are piling up in the banking system. Again, I wonder how diligently you actually read Krugman et al., because he certainly doesn't think QE might work because of hitting some magic money supply number. He thinks it will work if and only if the Fed can use it to credibly create credible inflation. Go back and read the exchange between Krugman and Galbraith on this. There is no daylight between them on this point. For their small disagreements on how inflation might eventually show up, they both agree that we are nowhere near enough to that point to be concerned and should actually welcome 4 or 5 percent.

Finally, all of this has caused me to rethink what you said about comparative statics in the first place. The thing is, the simple supply and demand graphs that are used to teach freshman are just the beginning. It's the first baby step in trying to understand a system that is complex and dynamic. But here's the thing: they're derived from analytical relationships that in most cases have some pretty strong empirical evidence. Not only that, but they are used precisely to build causal narratives. They help you understand how things move if supply changes or demand changes or a tax is introduced or whatever you might want to entertain. They're not temporal because they're not supposed to be. It's a starting point, not the totality or even the crowning achievement of economics. And it's only one tool of many.

All in all, it almost seems like you believe in some kind of mainstream economic dogma that I'm not sure exists. This stuff isn't lost on practicing economists (except when it is). Basically nothing that you're complaining about is found beyond freshman courses and even then it is not taught or regarded, at least in my experience, as you seem to think. IMHO, much of what you've written here seems to misrepresent what is in economics textbooks, what's being taught in courses and what practicing economists are actually out there saying.

I'm sorry if that comes off too prickish. I'm really not trying to be rude or offensive. I've just spent too much time studying this stuff not to defend the parts of it that I think are worthwhile. I just don't think your description of modern econ, as an academic discipline, is all that accurate. It may be true of some people (Fama, Cochrane and Taylor come immediately to mind, though I think they say what they because of the political implications more than because they don't understand what's going on), but I don't think it's a very fair characterization in general.

Economics is not perfect. And it shouldn't simply ape physics or any other discipline. What it should do is follow the scientific method: observe, theorize, test. That has always helped to increase understanding. The answer is not to somehow sever it or compartmentalize it from science as some "practical art." The answer is more science. That doesn't necessarily mean more mathematical complexity. It means an honest and disciplined cleavage with what is, with empirical reality. Like all other scientific disciplines, genuine progress depends on Feynman-esque "bending over backwards" to be honest about methodology, findings, claims to knowledge.. everything.

If you go to the Mike Norman

Dan Kervick — Sat, 04 Feb 2012 01:04:01 +0000

In reply to Yes, there is, although I

If you go to the Mike Norman Economics blog, and search back over the posts for the past month or two, you will find numerous posts on the job guarantee, which became quite heated for a while. Also, there is a very good post by Pavlina Tscherneva at New Economic Perspectives on the topic. I believe its about a month old.

Yes, there is, although I

Dan Kervick — Sat, 04 Feb 2012 00:58:56 +0000

In reply to Thanks, DF--that was my guess

Yes, there is, although I tried to avoid direct discussion of the controversy in my piece.

There has recently been a rift of sorts over the job guarantee proposal between some of the more conservative or moderate MMTers, who often work in the financial world and are mainly draw to the MMT description of the financial system and are generally antipathetic to or suspicious of government intervention, and the more lefty MMTers who tend to be economists connected with the post-Keynesian and institutionalist tradition.. The job guarantee or "employer of last resort (ELR)" proposal is specifically put forward by MMTers as a tool for macroeconomic stabilization. They claim it "stands the Phillips curve on its head" by showing how a government can achieve price stability by offering a job to anyone willing and able to work and maintaining a permanent buffer stock of government-employed workers, whose wage would effectively set the floor wage in the economy. The result would be, essentially, a zero-unemployment society. Part of the debate hinges on theoretical disputes about "chatalism" - the view that government taxation is primarily responsible for setting and maintaining the exchange value of the public currency.

I didn't want to get in the middle of this debate, partly because I thought it was missing the point lately. I wanted to advocate a full employment economy on a combination of moral, social and economic grounds which don't depend too much on the outcome of the JG/ELR debate.

Newtonian mechanics was an

Dan Kervick — Sat, 04 Feb 2012 00:40:45 +0000

In reply to I've spent a lot time over

Newtonian mechanics was an extremely successful project. But the attempt by economists to model their thinking on Newtonian models, with their small numbers of law-like quantitative relationships holding among aggregate quantities, is one of the ways in which economists frequently go awry. There is absolutely nothing in the world of human behavior, operating at the level at which economists looks at the world, that fits well into a Newtonian paradigm. Nothing. In Newtonian mechanics, the force exerted by one massive body on other is transmitted instantaneously or non-locally. In fact, even to describe it as "transmitted" is misleading. It's just a fact in a Newtonian world-model that the force exerted by one body on another corresponds to an equal and opposite force exerted by the latter body on the former, and that these forces operate at exactly the same time, no matter what distance exists between the two bodies. As the system evolves in time, the forces evolve with the system, and are always equal and opposite. There is no spatial or temporal lag. The changes in one body do not have to get transmitted from one body to the other, in the way, say, that mechanical waves are transmitted in some medium. Also, the laws describe the behavior of entities that have no internal complexity and are all virtually identical, and the description is highly abstract.

Newtonian mechanics replaced earlier mechanical models in which most physical changes were thought to be propagated by patterns of local contact propagating outward in space, in a continuous path and over a continuous interval of time, with the cause always preceding the effect. The world of human beings and their social institutions is much more like the world of those earlier models than the the Newtonian models. There is nothing in the world of human economic relations that approximates the action-at-a-distance regularities of Newtonian mechanics.

Also, human beings and human institutions like corporations, partnerships, commodities exchanges, unions, households and the like are all very complex and individual, each with a large number of quirks and unique contingent features that are the result of an ever- evolving, novelty generating historical process, where equilibria can only be rudimentary fictions to get a temporary grip on something much more dynamic. This is nothing like Newtonian mechanics. It's not even like a more macro-level area of physics like statistical mechanics or thermodynamics. It draws on the art of social and psychological understanding which is a high-level human cognitive capability for dealing with profound complexity in the human world, and employs cognitive tools that are very unlike the abstract simplicities of models of physical systems.

I think of economics as a scientifically informed practical art. The art of understanding how an engine works is actually a much better model for understanding the the study of human economic institutions than the limited and abstract world of Newtonian mechanics. Physics envy is a route to bad thinking in the study of human beings and their highly complex and contingent institutional system. (I actually had a philosophy professor as an undergraduate who was both a philosopher of science and an engineer who was a leading national expert on a particular kind of aircraft engine. In his classes he emphasized that the study of physics, while essential prefatory work, told you little of importance about the design and functioning of the engine in question.)

The MMT writers would completely agree with you that they are engaged in a predominantly descriptive task, with minimal theoretical elements. They regard that as a strength of what they do. They are just attempting to describe how a modern monetary system such as we have in the United States is actually designed and actually functions. You may think what they come up with is uncontroversial, but I can tell you that they get in frequent, strenuous debates with other economists, and not just over semantics. One of their themes is that the economics profession overall has a woeful understanding of the actual banking system, and that as a result, they make a variety of causal predictions, and policy proposals based on those causal predictions, that have little basis in reality. For example they reject the "money multiplier" and "loanable funds" paradigms, which are often very central to mainstream policy recommendations for central banks.

You say the MMTers and Krugman agree on:

Get money out there, whether you want to call it fiscal or not, until inflation starts to actually show up.

That is not accurate. MMTers, as far as I am aware, are very much opposed to the Phillips curve-influence picture of an inherent tradeoff between inflation and employment, and do not believe that engineering inflation plays any inherent causal role in boosting employment. In fact, whether they are right or not, they regard it as a strength of their approach that we can have full employment and price stability at the same time.

But crucially, their approach to boosting demand and employment isn't based just on "getting money out there", and the idea that there is some simple quantitative relationship between the "money supply" - measured in any of the popular ways in can be measured - and economic activity. They think it all depends on how the money is actually spent into the economy. What they argue is that a monetarily sovereign government can always afford to carry out the needed demand-side fiscal interventions, and they are adamant that central bank quantitative operations are mostly impotent.. They are not tremendously far from the New Keynesians, but there are some very important differences.

Krugman, Romer, Yglesias and DeLong have all been bogged down for months calling for additional rounds of Fed QE or other new central bank policy wrinkles like NGDP level targeting. But the MMTers all seem agreed that this is a massive waste of time and intellectual energy.

D'oh! I has fixed it.

DF — Sat, 04 Feb 2012 00:17:31 +0000

In reply to freshwater (Keynes Friedman)

D'oh! I has fixed it.

freshwater (Keynes Friedman)

Saladin — Sat, 04 Feb 2012 00:13:19 +0000

In reply to Keynes identified what he

freshwater (~~Keynes~~ Friedman) and saltwater (~~Friedman~~ Keynes)

dagblog - Comments for "Doing What Needs to Be Done: Facing the Future with Full Employment and a Renewed Public Sector"

Thanks. That looks good.

Every form of causal

Don't have to time to barge

Clearly things are not

Your first graf describes

If you go to the Mike Norman

Yes, there is, although I

Newtonian mechanics was an

D'oh! I has fixed it.

freshwater (Keynes ​Friedman)

freshwater (Keynes Friedman)