economic situation is dire

[mjmooney]

Economics... :cry:

[leviramsey]

Krugman comes across as not engaging with the arguments, and trying to simply dismiss him like the lord of the manor brushing away the tradesman. It does him no favours.

That's Krugman's standard approach.

[peterms]

Krugman comes across as not engaging with the arguments, and trying to simply dismiss him like the lord of the manor brushing away the tradesman. It does him no favours.

That's Krugman's standard approach.

There's a piece here which says he used to be very different, and has changed over time, becoming more impatient and disagreeable.

[Enda]

So do DSGE models see money supply as affected only by central banks, or do they see the banking sector as a whole having a crucial role in this?

DSGE can do whatever you want them to do. Say you want a model with endogenous capital, labour supply, and output. Then you need to specify three equations to link them together. If you want to add a housing market, you need to specify another equation linking it into the system. You're welcome to do whatever you want to include a banking sector. It's all very ad hoc, but at least you can add as many bells and whistles as you like.

No, I don't mean can DSGE models include a banking sector, I mean isn't it the case that they tend to overlook the role of debt because they are based on the idea of exogenous money creation

No. They tend to overlook debt (or at least have prior to the financial crisis) because macroeconomists don't understand debt. Why is 60% of GDP okay but 600% isn't, or why not 6% instead of 60% is not well understood. What's really so special about ~90%? Sure there's historical evidence, but why that level? Overlooking it is not because of any assumption of exogenous money creation, or any assumption on anything else. (Truth be told, and I know this sounds funny, but macroeconomists don't have a very good explanation of why people accept money in the first place.)

As interesting as it is reading Economic Theory For Beginners every evening, if I really wanted to do that I'd go into the loft and dredge up my university notes.

I'd be impressed if your university notes covered debt in a DSGE framework . But fair enough, I for one will step back a bit.

[Xann]

Truth be told, and I know this sounds funny, but macroeconomists don't have a very good explanation of why people accept money in the first place.

If we came to our senses we wouldn't.

[Enda]

(Right, last bit on Steve Keen: http://www.amazon.com/review/R3VRC3MZQZT89P is a **** magisterial take-down by Herb Gintis.)

[leviramsey]

You really have to look at the Austrians (the old school ones, e.g. Menger or at a push von Mises; Rothbard is only borderline Austrian (the strictest reading of the general tenets of Austrianism tends to imply that Rothbard's view of the 100%-reserve gold standard isn't that Austrian), so starting with him as your entree into Austrian economics will likely leave you with some questionable notions) for a reasonably coherent monetary theory. Of course, since the Austrians have long had a [mutual] antipathy with macro, that perhaps proves Enda's point...

That said, my acquaintance's macro textbook from an Austrian perspective is quite good (and I think even peterms would find much with which to agree, especially the points about monetary disequilibria):

...There is another sense in which money is a veil over real economic activity. This second sense does not require the stringent and unrealistic assumptions as above. In a monetary economy, money's defining role is as a medium of exchange, and as such it is primarily exchanged for the purpose of being exchanged in the future. This point can be seen in the various theoretical treatments of the evolution and function of money. Menger [1892] describes the transition from a barter economy to a money economy by reference to the differential marketability of different commodities. As barterers find it difficult to exchange goods due to the frequent absence of a double coincidence of wants, they discover that holding stocks of goods that are desired by a large number of other traders makes such trades more likely. As a result they trade the products of their labor for for such marketable goods and trade these marketable goods for the goods they ultimately desire. At first such trades may take place using a wide variety of intermediate goods. However, those goods whose marketability is strongest among even a select group of very marketable goods will eventually soon dominate and the process will eventually converge on one or two generally accepted media of exchange.

(this account, btw, is entirely compatible with the chartalist account: by only accepting one particular good as payment for government services (the primary service being directly paid for with taxes is an assurance that you will not be kidnapped by the government...), a government can exert a fairly substantial influence over marketability)

What this implies is that the 'real' exchanges actually taking place in a money economy are ultimately goods and services for goods and services. Money's role is to facilitate exchanges by making them easier. Note that this is not the same thing as saying that money merely facilitates exchanges, with the implication that absent money the economy would look more or less the same, ignoring holdings of money and changes in transaction costs. Rather it is money's medium of exchange function that makes possible the complex division of labor and variety of consumption and production goods that characterize advanced market economies. The emergence and use of money fundamentally changes economic relationships, and the further monetized an economy is, the better it will perform, ceteris paribus.

This perspective also has implications for understanding demand for money. If money is a medium of exchange, then the rationale for holding a stock of money is to have it available for when exchange opportunities arise. Money is the placeholder between the sale of our assets or services and our purchase of the assets or services of others. This is particularly relevant when we consider that all of these exchanges are taking place in a world of uncertainty. Money is needed not just because there are temporal differences between receipts and expenditures (although this important), but also because it is uncertain precisely when the need or opportunity to make certain exchanges will arise. Money helps us to overcome that uncertainty (as do other institutions) by providing a reservoir of purchasing power for when it is needed. Demand for money, then, is the demand to hold balances of purchasing power. Money is providing the service we demand of it when we hold stocks of it waiting until purchasing opportunities arise.

Money can accurately be described as a veil in the sense that the increasing production and consumption of goods and services, not increasing money balances, comprise economic growth. The transition from barter to monetary exchange facilitates growth, but more money is not equivalent to greater wealth. Money is fundamentally a claim to wealth, not wealth itself. In the same way that a ticket to a sporting event is a claim to a seat and not the seat itself, money is just a claim. Just as printing more tickets to a sporting event than there are seats at such an event will not cause the number of seats to increase, so do changes in the quantity of money by themselves not cause a change in the amount of wealth in the short run.

On the other hand, money is not a veil in the sense of it being unable to affect the structure of prices. Changes in the supply of money can affect the price structure in ways that undermine the economy. Although it is the underlying exchanges of goods and services that ultimately matter, inappropriate changes in the money supply can have real effects on those exchanges and the prices that emerge. Money might best be described as a fluttering veil. Ideally we want the veil not to flutter and we want changes coming from the money side to not systematically distort the pattern of exchanges (particularly intertemporal ones) in a market economy. Monetary equilibrium represents that ideal.

To understand monetary equilibrium, we can think of it in terms of the circular flow of consumption goods and services trading for labor and other factor services through the use of money. Each output and factor has a market and price of its own. We can also talk of supply and demand for money. However, money, unlike other goods, has some unique circumstances of its own that make clearing its market a more complex task. The most important of these is that money has no market of its own and thus no price of its own. If the quantity supplied of money exceeds the demand, there is no one price that can adjust to remove the excess supply. The same is true of an excess demand for money.

In fact excesses or deficiencies in the supply of money will make themselves felt across every market through changes in the prices of all goods and services that exchange against money. As Yeager [1968] succinctly put it: "Because money is traded on all markets, and because it has no single price of its own to come under specific pressure, an imbalance between its supply and demand has far-reaching consequences." Recalling that demand for money is the demand to hold real balances, suppose that the money supply is increased to an amount beyond the amount that the public desires to hold. As this excess supply works its way through the economy, people find themselves with larger money balances than they wish to hold. This excess money will be spent on goods, services, or financial assets driving those prices up and eventually settling at a new equilibrium. The increase in the price level normally associated with excess supplies of money is reflective of these individual increases.

It should be clear that there is no reason to expect that the percentage increase of each and every price should equal the percentage increase in money supply that triggered those price increases. Although it may be true that a sufficiently broad price index would increase by a percentage more or less equal to the change in money supply, that need not mean that each and every price does so. The changes in relative prices are the problem with excesses or deficiencies in the money supply. Keynesians might reply that the interest rate can perform the equilibrating function here. Some of the increased spending arising from the excess supply of money may well go into interest-bearing financial assets, driving up their prices and thus driving down interest rates. However, orthodox Keynesian analysis essentially assumes that purchase of interest-bearing financial assets is the only alternative to holding a money balance.

Although the preceding discussion was framed in terms of an excess supply of money leading to a general increase in prices, all of the same points apply with equal force but opposite direction to the case of a deficient supply of money.

In the long run, any supply of money will be an equilibrium supply. Sticking with the example from above, consider the effect of rising prices on the demand for money balances. Changes in a nominal variable will not affect the real demand for real balances (purchasing power) but will affect the demand for nominal balances. In order to maintain the same purchasing power, actors will have to increase their nominal balances as prices climb, thus increasing demand for money. As the nominal demand for money rises, the excess supply falls. This process brings the price increases to a halt.

In this sense, the quantity of money does not matter. Any supply is the long-run optimal one. The problem with this view is that it is stuck in comparative statics and false aggregation. If movements from one supply of money to another were costless, then indeed it would not matter what the supply was, as any increase or decrease in that supply could be costlessly adjusted to by changes in the price level. But comparing two money supplies at different points in time and assuming that there is such a thing as a "price level", distinct from the array of individual prices, that bears the burden of adjustment, overlooks the reason that monetary disequilibria are to be avoided. Adjustments to the money supply are, in fact, not costless and are not made only through changes in nominal variables. That money supply changes cause such differential effects on individual prices is what makes it necessary to study the path from one equilibrium position to another.

Monetary disequilibrium is a short-run phenomenon: it contains in itself the process by which a new equilibrium is reached, i.e. changes in the price level. Monetary equilibrium holds when the supply of money equals the real demand to hold it at the prevailing price level. To return to the real vs. nominal distinction, as with any real variable, there are two ways to change the real supply of money: one can change the nominal supply or change the price level. If the demand for real balances should change, either the nominal money supply or the price level can adjust to restore long-run monetary equilibrium. We are only in monetary equilibrium if the changes in the demand for money are met with changes in the nominal money supply, not the price level. The primary task of a monetary system is to avoid money-induced changes in the price level [regardless of the direction -- LR], precisely because they are not costless and can wreak much havoc on economic performance and long-run growth. Unlike any other good or service, we do not want the price of money to bear the burden of adjusting in disequilibrium because that price can only be adjusted by changes in all other prices, the effects of which undermine the economy.

Two points should be made. One is that there is no necessary relationship between monetary equilibrium and general equilibrium. It might be true that a monetary regime able to maintain monetary equilibrium will be creating an environment where individual markets work as well as they are capable, but even then, there is no reason to equate "as well as they are capable" with "general equilibrium".

The second point is that this argument should not be read as endorsing or criticizing a particular monetary regime. It is theoretically possible for any monetary regime to see maintaining monetary equilibrium as a desirable policy goal. A central bank might well be convinced by this argument (both so far and to follow), that monetary equilibrium is superior to alternative monetary policy goals and try to put that belief into practice.

There're great takedowns of Keynes (a preview of which is in there), Friedman, and Rothbard in that text.

[peterms]

(Right, last bit on Steve Keen: http://www.amazon.com/review/R3VRC3MZQZT89P is a **** magisterial take-down by Herb Gintis.)

The Walrasian orthodoxy has been the mainstay of graduate education in economics now for a half century. This model, however, is not even discussed in Keen's book.

Walras, L., 34, 167-8, 177-83, 209-18, 255-6, 261, 390; Elements of Pure Economics, 409; view of equilibrium, 182

Walras' law, 205, 222-3, 224, 236, 261; fallacy of, 218-21

That's quite a lot of references to miss, in a book review. Especially when the claim he makes is that the person he's criticising has overlooked something...

[leviramsey]

To be fair, Walras's original contributions to economics are more or less total bullshit. The instant an economist argues based on general equilibrium, you can pretty much safely ignore them.

Mengerian marginalism pwns Walrasian marginalism...

[peterms]

The instant an economist argues based on general equilibrium, you can pretty much safely ignore them.

You have a sympathiser from a very different school of thought:

When arguing about economics, if your opponents starts with 'if the economy is in equilibrium...' it's safe to stop them there.

[Enda]

(Right, last bit on Steve Keen: http://www.amazon.com/review/R3VRC3MZQZT89P is a **** magisterial take-down by Herb Gintis.)

The Walrasian orthodoxy has been the mainstay of graduate education in economics now for a half century. This model, however, is not even discussed in Keen's book.

Walras, L., 34, 167-8, 177-83, 209-18, 255-6, 261, 390; Elements of Pure Economics, 409; view of equilibrium, 182

Walras' law, 205, 222-3, 224, 236, 261; fallacy of, 218-21

That's quite a lot of references to miss, in a book review. Especially when the claim he makes is that the person he's criticising has overlooked something...

Well played :oops:

As I was saying, I'll try stay out of this thread :winkold:

[leviramsey]

Keen is practically an Austrian, though... about the only thing keeping him from taking the plunge (by his own admission) is a reluctance to accept value as completely subjective.

[Risso]

Keen is practically an Austrian, though... about the only thing keeping him from taking the plunge (by his own admission) is a reluctance to accept value as completely subjective.

and the absence of family members imprisoned in his cellar.

[peterms]

Keen is practically an Austrian, though... about the only thing keeping him from taking the plunge (by his own admission) is a reluctance to accept value as completely subjective.

Not really. He likes some things about the Austrians, especially avoidance of equilibrium models and the focus on the role of innovation, but his summary is

Overall, I regard the Austrian school as too close to its neoclassical cousin to make a major contribution to a reformed economics.

But he says that many current neoclassical people might make the jump to Austrian if neoclassical becomes discredited - though more for ideological reasons than anything else, and he thinks the way the Austrians shun maths would be a problem for many of them.

[peterms]

George Osborne - an appreciation.

[Risso]

I've been enjoying the irony of a News International title exposing tax avoidance by Jimmy Carr and Take That.

[peterms]

Sounds like Mr Cameron doesn't know which way to turn on the taxdodging thing. Carr bad, Barlow - we don't comment on individuals. What's happened to previously announced plans to disclose tax affairs of cabinet ministers? Well they said they would, that's enough, isn't it? They don't actually have to do it.

...But prime minister David Cameron, who had led the criticism of Carr, declined to do the same to the Tory-supporting Take That singer Gary Barlow, who has also been accused of using another complex scheme to avoid paying millions of pounds to HM Revenue and Customs.

"I am not going to give a running commentary on different people's tax affairs. I don't think that would be right," Cameron said at a press conference in Downing Street. "I made an exception yesterday [with Carr] because it was a very specific case where the details seemed to have been published and it was a particularly egregious example of an avoidance scheme that seemed to me to be wrong and I made that point."

On a day of fast-moving developments, Downing Street also raised eyebrows by suggesting it may now abandon plans for David Cameron and senior ministers to disclose their tax returns.

Cameron said in April that he expected information about his finances to be made public, and was relaxed about the prospect. But on Thursday No 10 said there were no current plans to do so.

The prime minister's spokeswoman said the proposal for ministers to reveal their tax details was still being "looked into". Ministers were "not closed to the idea", but it was "not a very near-future thing", the aide said...

[Chindie]

Cameron has been stupendously naive in singling out Carr, it's just opening up himself for criticism. A bit stupid, really, though I guess refreshing that he's not smart enough to be rather more careful how he's dealt with this.

On Jimmy Carr himself... the apology today almost annoys me more than the act itself.

[Chindie]

Oh and this has done the rounds today, won't be news to many here I suspect but worth a post just for the ludicrously outrageous mental-ness involved.

You wonder why Vodafone's UK base isn't currently surrounding by a torch wielding baying mob, somehow.

[coda]

The prime minister's spokeswoman said the proposal for ministers to reveal their tax details was still being "looked into". Ministers were "not closed to the idea", but it was "not a very near-future thing", the aide said...

You'd think after the expenses scandal they might have got their finances in order. These millionaire MPs, their families and party donors (and footballers ) are up to their necks in this.