Read A Textbook?

I don’t really understand Nick Rowe’s suggestion that heterodox critics read a first year textbook, considering economists generally like to respond to criticisms by asserting that economics goes well beyond what is taught early on. A commenter on his post agrees. In any case, let’s take him up on his offer.

Here are some examples of how undergraduate economics is taught from two textbooks, this one and this one. The worrying thing is that these textbooks are more reasonable than average, and give the time of day to a lot of substantive criticism (although they do ignore them in the main analysis).

Economics textbook in ‘reality doesn’t matter’ shocker

…[the student] rightly assumes that few firms can have any detailed knowledge of marginal revenue or marginal cost. However, it should be remembered that marginal analysis does not pretend to describe how firms maximise profits or revenue. It simply tells us what the output and price must be if they do succeed in maximising these items, whether by luck or judgement.

Where to start?

(1) Why not get access to data and just tell students how firms actually price?

(2) A big problem with this is that it implicitly assumes a static state where firms push to capacity to maximise short term profit. But any firm that did this would be vulnerable to changing conditions – the reality is that firms generally hold a degree of excess capacity to change their level of output in response to market conditions.

(3) Firms do not experience diminishing marginal returns! This means using MC as a constraint is completely bunk. Firms are constrained, primarily, by financing and marketing considerations.

The lesson here is that, even if you think your logic for how a firm should maximise profit is sound, the evidence has the final say – it might take you an a direction you couldn’t have predicted within the confines of your own theory.

Workers are selfish and lazy, no evidence required

In many jobs it is difficult to monitor the effort individuals put into their work. Workers may thus get away with shirking or careless behaviour…the business could attempt to reduce shirking by imposing a series of sanctions, the most serious of which would be dismissal. The greater the wage rate currently received the greater will be the cost to the individual of dismissal…the business will benefit from the additional output.

What? Oh, no, there’s no evidence to support this. Aside from the fact that workers might actually want to work a decent amount, modern workplaces are tailored such that shirking isn’t really possible (Harry Braverman presented evidence for this, I cannot find it online).

Yes, neoclassical economics does teach exogenous money. Why do you ask?

Contrary to what many keep saying, economics textbooks do teach the money multiplier:

Models of the money supply multiplier link the money supply to the monetary base in a relationship of the following form:

M = mB

where

M = the money supply;
m = the money supply multiplier;
B = the monetary base.
In models such as this, m tells us how many times the money supply will rise following an increase in the monetary base.

They go on to assert that it is more complicated than a simple stable relationship. But the basic message is that, dependent on m, B will translate into a certain level of M. Banks still need deposits before they can lend out. Again, this is an inaccurate description of a credit economy, where the causation goes in the other direction.

Economists seem to have a hard time grasping that saying ‘m isn’t stable’ isn’t the same as endogenous money theory.

Inconsistency in labour supply curves

Economists can fairly be charged with weaving between speaking about aggregate and individual demand and supply curves, without regards to the fallacy of composition.

This textbook (and most ones) assert the standard labour supply story: workers trade off work and leisure up to the point where more leisure is better than more money. The two conflicting income and substitution effects mean that higher wages can either decrease or increase the hours worked, depending on how much money the worker wants. This can create a ‘backward bending labour supply curve,’ where higher wages increase hours worked up until a point, then start to reduce them (yes, economists do enjoy putting the dependent variable on the x-axis, god knows why):

The problem is that the textbook says that the market supply of labour “will typically be upward sloping” because “the higher the wage rate offered…the more people will want to do [the] job.” But if you add up many individual backward bending supply curves, you will not get an upward sloping line.

We’ve taken a bit of a leap here. Before we were talking about hours, now we are just talking about a job. The jump from hours to job requires that hours are assumed fixed – that’s fine, and actually a realistic assumption (the laws of probability suggest they had to hit one eventually), but it contradicts the earlier hypothesis that workers smoothly trade off work and leisure.

As far as I’m concerned textbooks are littered with these problems, and it seems to get worse, rather than better, as the theory gets more advanced. So, economists: your turn. Read this. Varoufakis and his coauthors are sophisticated critics of neoclassicism so you won’t find the traits you so loathe among heterodox economists. It will also give you a good idea of where your critics are coming from, when to be honest it’s increasingly clear that you don’t really know much about heterodox economics. In any case, you seem confident your ideas are strong, and if so they will be strengthened by criticism. If not, then they will need rethinking.

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  1. #1 by Aziz on August 1, 2012 - 3:19 pm

    The brutal truth is not that heterodox critics should read econ101, but that people like Nick Rowe need to read Steve Keen, and the various heterodox critics whose models (whether mathematical or informal) work relatively better in explaining the past and predicting the future than the neoclassical ones.

    • #2 by Unlearningecon on August 2, 2012 - 4:43 pm

      Unfortunately they tend to dismiss Keen on the grounds of the Lucas Critique, after appealing to predictive power over the realism of assumptions. Slippery customers indeed…

  2. #3 by Matías Vernengo on August 1, 2012 - 3:38 pm

    On Nick Rowe I suggest the following post by Robert Vienneau http://robertvienneau.blogspot.com.ar/2012/07/nick-rowe-fool-or-knave.html

    • #4 by Unlearningecon on August 1, 2012 - 5:36 pm

      Yes I did link to this. No idea why Nick blocked Robert saying something similar in his comments.

      • #5 by JakeS on August 1, 2012 - 7:39 pm

        Because Robert was being a flaming asshole about it.

        Which, incidentally, is bad propaganda as well as bad form. Not because you might be wrong, but because you might be right. Because if you really are right and that guy is an idiot (which Rowe, incidentally, isn’t), then you’ve just given him a perfect excuse to dismiss everything you said.

        – Jake

      • #6 by Unlearningecon on August 1, 2012 - 7:54 pm

        I agree with the commenter Hedlund that Robert’s comments have “something of an edge to them,” but I wouldn’t say he was being a “flaming asshole.” I can understand his frustration with Nick, who seems to misunderstand endogenous money theorists and then conclude that they must be mistaken/ignorant.

      • #7 by JakeS on August 2, 2012 - 11:42 am

        I can sympathize with the frustration. But there is a time and a place for coarse language, and the first comment you make on a blog is normally not it.

        – Jake

  3. #8 by ivansml on August 1, 2012 - 5:09 pm

    I find it amusing when someone “refutes” exogenous money with that Kydland & Prescott paper. The same paper that argues money plays no role in business cycles, written by two hardcore neoclassical/freshwater macroeconomists. Oh, wait…

    On a more serious note, K&P certainly do not prove any causality – all they do is compute correlations from HP-filtered cyclical series. Unfortunately, such correlations can be sensitive to the choice of filtering method (see here or here).

    • #9 by Unlearningecon on August 1, 2012 - 5:35 pm

      I can’t get into that Taylor & Francis paper, but it seems that the result is debatable rather than that Prescott & Kydland were mistaken. In any case, there is further substantial evidence to support endogenous theory, and most importantly it’s quite clear that this does differ from exogenous money, despite the claims of Rowe and others.

      I don’t think it’s a problem for critics that Prescott is an RBC theorist – on the contrary, I think it’s funny that he obviously set out with neoclassical models in mind and came to an incredibly heterodox conclusion.

    • #10 by KenryHissinger on August 1, 2012 - 5:44 pm

      Isn’t this a problem with undergrad. text books though. Take Williamson for example, he presents so-called ‘stylised’ facts and shows correlation coefficients of time series. For example, a more robust and less disingenuous way of exploring macro relationships would be to see if the series are co-integrated and the direction in which the (Granger) causality runs.

  4. #11 by KenryHissinger on August 1, 2012 - 5:28 pm

    I was fortunate enough to enter ‘Econ’ at the postgraduate level so I got to miss the ‘fun’ of studying undergrad text books. I thought the likes of Romer [Advanced Macro], Hal Varian [Micro Analysis] and Mas-Colell [Micro Theory] were bad enough, but when I first picked up Williamson’s Macro book I couldn’t hold back the laughter.

    Undergrad. books, like Williamson’s, are poorly written and very superficial. Questionable details are taken as absolute facts and poorly explained. For example Williamson’s idea that Adam Smith’s invisible hand is embodied in the intersection of the production possibilities frontier and consumers indifference curve is something I laughed about for at least a week.

    It’s just a load of f*cking vitalism. ‘Which way does the curve go when shock x happens, what ‘forces’ are play’. Really, undergrad. econ. would be better off being named ‘Curveology’.

    • #12 by Unlearningecon on August 1, 2012 - 7:04 pm

      The amusing thing about Williamson’s idea is that Adm Smith, of course, never used the invisible hand to mean anything like that. Well, that and the fact that utility has no units and is therefore Not Even Wrong.

      I agree about ‘curveology.’ It’s funny how economists appear to be able to reduce everything – capital, labour, investment, commodities – to two intersecting diagonal curves. Who knew the world was so easy to model! A friend of Steve Keen’s called the Hicksian compensated demand function – used to separate the income and substitution effects in a market demand curve – “tobogganing up and down your indifference curves until you disappear up your own abscissa.” I believe that applies to all of utility economics.

  5. #13 by Min on August 1, 2012 - 6:41 pm

    Thanks. That backward bending supply curve helps to explain why CEOs get paid so much for so little value. ;)

  6. #15 by Luis Enrique on August 2, 2012 - 10:54 am

    Stop moving the goal posts. It will be quite plain to anybody reading that mainlymacro thread that I having been arguing all along that the money multiplier should be understood as an accounting identity not a causal mechanism, which is where the unstable m comes in, as I have painstakingly explained to you, and you have repeatedly failed to grasp/acknowledge. I have also demonstrated that mainstream textbooks present the money multiplier in that fashion despite you suggesting otherwise by selective quotation. If m was stable, you would have a causal mechanism, but it ain’t, so you don’t.

    Nowhere have I said anything about this being the “same as endogenous money theory” and I really think you have behaved disgracefully throughout this argument and are doing so again here. If you had asked me about exogenous/endogenous money, I would have said that yes the money multiplier is accompanied by an exogenous money story in 1st year text books, to the extent that the central bank chooses B (although the determinants of m are endogenous). If you want to say that central banks have no discretion over B but react passively to the demands of the banking system, you can say B is endogenous and guess what the money multiplier identity still holds because accounting identities don’t take a position on what determines their arguments. Again think of profit=margin*revenue. That is true no matter what story you tell about what determines revenues. And EVERYBODY KNOWS that in the short-run if the central bank is targeting an interest rate, B is endogenous, the dispute is over whether central banks can “choose” B (to some extent) by doing things like changing their target rates.

    • #16 by y on August 2, 2012 - 2:23 pm

      Luis, the term “money multiplier” in itself necessarily implies a causal mechanism from monetary base to overall money supply.

      It implies that banks take a given quantity of base money and “multiply” it through loans into the overall money supply – that base money “multiplied” by m equals M. This is how it is depicted in first year econ textbooks, along with pretty graphs that start with a little block of base money and multiply it through numerous lending and re-lending steps, until the process peters out and you have the overall money supply. The “money multiplier” makes it look as if banks operate by the same rules as everyone else, as if they actually “get money in” and then “lend it out”. It makes it look as if banks simply “lend out” people’s savings.

      Almost everyone in the real world not involved in finance or economics in any way actually believes this cute little fraudulent story. Even Nobel laureates like Paul Krugman believe it.

      Like practically everything in first year econ textbooks however, the “multiplier” story serves to gloss over the actual reality: that banks create so-called “savings” by increasing the level of private debt owed to banks.

      As the text referenced above says:

      “In models such as this, m tells us how many times the money supply will rise FOLLOWING an increase in the monetary base.”

      The term “multiplier” only makes sense if the causation is assumed to be from a) base money to b) money supply.

      • #17 by Luis Enrique on August 2, 2012 - 4:04 pm

        If you know m, it does tell you that – if you know “margin” it will tell you how much profits will increase if revenues do. But if when you try to increase revenues, margins change, you don’t have a causal mechanism to exploit. Ditto if you print B but reserve ratios change because bank ain’t lending, you don’t have a causal mechanism to exploit. That’s why its important that the text referenced above goes on to discuss the stability of m.

    • #18 by Unlearningecon on August 2, 2012 - 4:01 pm

      Luis I’m not exactly sure what I’ve done to offend you – the goalposts have always been in the same place: neoclassical economics does not teach endogenous money.

      ‘y’ nailed the substance before me, and very well – the way the ‘money multplier’ is taught and even named implies a causal relationship from B to M, constrained by m. Obviously M = mB is at least tautologically true, but to me ‘m’ is just a meaningless variable that doesn’t tell us anything.

      • #19 by Luis Enrique on August 2, 2012 - 4:11 pm

        “Economists seem to have a hard time grasping that saying ‘m isn’t stable’ isn’t the same as endogenous money theory”

        did you bother reading my comment #14?

      • #20 by Unlearningecon on August 2, 2012 - 4:33 pm

        Luis I actually think you have a lot to offer so I just edited out the swear word instead of blocking your comment.

        Yes, well, you have now made it clear that you do not regard endogenous theory as the same as the neoclassical theory. But look at your original comments. Look at pontus’, Wren Lewis’, Rowe’s and Krugman’s in his Keen debate. It is quite clear that many economists think the heterodoxy is attacking a strawman when it asserts that economists model the money supply differently to them.

      • #21 by anon on August 2, 2012 - 4:36 pm

        Luis, if you understand that, then why would you write “If you know m, it does tell you that ” or “Ditto if you print B but reserve ratios change because bank ain’t lending, you don’t have a causal mechanism to exploit?” There is NO causal mechanism to EVER exploit there! There is no intuition to be gained from thinking that way.

        It’s not at all like business profits, where if you tell me a business pulled in $100M in revenues, and its margins lately have been 50%, I can make a reasonable guess that profits will be around $50M. I could get it really wrong because margins changed to 30%, but the thinking behind my calculation was coherent, since I know that profits depending on how much margin I can get out of revenues.

        In contrast, say the monetary base is currently 100, the money supply is 1000, and therefore the ‘multiplier’ is 10X. You cannot in the same way make a reasonable forecast that an injection of 100 monetary base will increase the money supply by 1000. It will probably in most case increase it by nothing much at all. Monetary base doesn’t lead to the money supply depending on some multiplier. The base expands due to demand for money supply and the particular reserve requirements that are in place. You cannot use the same intuition used in the profit calculation.

      • #22 by anon on August 2, 2012 - 4:42 pm

        One clarification- the base CAN expand due to the CB’s actions (not just money supply demand). BUT, without interest on reserves, this will drop the FFR to 0%.

      • #23 by Hedlund on August 2, 2012 - 6:07 pm

        If the term itself is not helping, then maybe a rebranding is in order. Personally, I’ve been calling it the “money attenuator” ratio.

      • #24 by Unlearningecon on August 2, 2012 - 7:32 pm

        That’s a good name!

  7. #25 by y on August 2, 2012 - 7:57 pm

    M = B multiplied by ‘mystery’, is tautologically true perhaps.

    • #26 by Unlearningecon on August 2, 2012 - 7:58 pm

      Ah, so that’s what the m stands for.

  8. #27 by Luis Enrique on August 3, 2012 - 8:49 am

    You really don’t understand why I would be angered to read I have a “hard time grasping that saying ‘m isn’t stable’ isn’t the same as endogenous money theory” when I had been arguing that m isn’t stable means the money multiplier is best understood as an accounting identity, and had said nothing at all about endogenous money.

    I assume it’s a lack of understanding that’s stopping you from apologising.

    Do you understand that if you wanted to claim the money multiplier is not a causal mechanism because money is endogenous you just had to say the central bank cannot control B? It’s not clear you do, you fail to make this point.

    On mainlymacro I wrote that a first year student should know that if B increase M won’t necessarily increase, and be able to cite recent data. You wrote: great no true Scotsman. I then showed that anybody reading the very textbook you cited in an attempt to prove economists think the money multiplier is a straightforward causal mechanism, should know that if B increase M won’t necessarily (same goes for readers of Mankiw). You don’t understand why I was not impressed by your failure to acknowledge any of this. Shall I assume again this is explained by a lack of understanding?

    Why have you failed to understand any of this? Because you are not trying to understand. You are solely interested in tending to your religion that mainstream economics has got it all wrong. What you project onto economists you are guilty of yourself.

    I am very flattered to learn you think I have something to contribute, thank you very much. I think you might have something to contribute yourself if you completely rethink your attitude towards economists and economics. To you the MWG example on Worthwhile Canadian (where you have still failed to acknowledge you got that wrong too) you assume that economists reading that section are going to think it’s fine to assume blah blah because they think assumptions don’t matter. You have made that up. Those are your unrealistic assumptions leading to erroneous results. You have a terrible case of confirmation bias.

    • #28 by Unlearningecon on August 3, 2012 - 10:35 am

      You first try to paint me as ignorant/unable to understand, then you have a tantrum when it becomes clear that I do understand but still criticise.

      Do you understand that if you wanted to claim the money multiplier is not a causal mechanism because money is endogenous you just had to say the central bank cannot control B? It’s not clear you do, you fail to make this point.

      The CB does not have the level of control over B implied by the money multiplier, and m is a meaningless tautology. I pointed out here and elsewhere that the causation goes from M1+ > M0 and not in the other direction.

      I then showed that anybody reading the very textbook you cited in an attempt to prove economists think the money multiplier is a straightforward causal mechanism, should know that if B increase M won’t necessarily (same goes for readers of Mankiw)

      They think it’s a causal mechanism. I’ve always said that nobody thinks m is stable, and never tried to say it was simply linear or some such.

      To you the MWG example on Worthwhile Canadian (where you have still failed to acknowledge you got that wrong too) you assume that economists reading that section are going to think it’s fine to assume blah blah because they think assumptions don’t matter. You have made that up. Those are your unrealistic assumptions leading to erroneous results. You have a terrible case of confirmation bias.

      First you try to suggest that he is not using the example for demand curves. Then when I point out he thinks that is a necessary conditions, you change your goalposts: suddenly, it is ridiculous, but surely everyone reading will realise that. Maybe some do, but as I pointed out he doesn’t seem to draw much attention to it, and there are many other examples of economists using inctredibly odd and restrictive assumptions to justify the leap from individual to aggregate demand curves.

      You can shout ‘religious’ all you want, but the fact is that if you look through my blog posts I always present arguments and generally evidence, too. That is the opposite of religion.

      • #29 by Luis Enrique on August 3, 2012 - 10:53 am

        for crying out loud!

        what sort of causal mechanism do you have, if M=mB but when you change B you don’t know what happens to m? Why can’t you grasp the point that this means you don’t have a useful casual mechanism unless m has some stability? Accounting identities are tautologies, they are also useful to know.

        “First you try to suggest that he is not using the example for demand curves. Then when I point out he thinks that is a necessary conditions, you change your goalposts: suddenly, it is ridiculous,”

        No, you said that initially claimed MWG made that assumption so that demand curves slope downwards, I pointed out you utterly misunderstood and in fact that assumption in a necessary condition to allow welfare analysis based on consumer surplus. There’s no “suddenly it’s ridiculous” about it – why do you think he pointed out that you need such an extreme assumption to permit welfare analysis of that sort? Here we see your confirmation bias at work – you assume that was written not as a warning that welfare analysis of that sort is only valid under an extreme assumption, but with the intention of sweeping that under the carpet and carrying on regardless.

        meanwhile still no acknowledgement that you were wrong to write what you did about me in this post. Shame on you.

      • #30 by Unlearningecon on August 3, 2012 - 11:09 am

        I have a causal mechanism where M increases first, then B!

        No, you said that initially claimed MWG made that assumption so that demand curves slope downwards, I pointed out you utterly misunderstood and in fact that assumption in a necessary condition to allow welfare analysis based on consumer surplus.

        Look, I’ve reread the entire passage about 10 times to try and get it clear. He states:

        For it to be correct to treat aggregate demand as we did individual demand…there must be a positive representative consumer. However, although this is a necessary conidition for the property of aggregate demand we week, it is not sufficient. We also need to be able to assign welfare significance to this fictional individual’s demand function

        He then goes on to use the dictator example to shore up the social welfare function required to do this. He takes the dictator example in his stride – “we shall now assume, a benevolent central authority, perhaps” and goes on without really drawing any attention to it. That is not consistent with an rhetoric along the lines of ‘since we can only do this under a restrictive example, it is worthless.’ It is clearly more consistent with an ‘assumptions don’t matter as long as we get the conclusion we wanted’ mentality. I don’t know what was going on in MC’s head when he wrote that so I can’t say for certain, but if he does find the assumption ridiculous, he should make it clear.

        meanwhile still no acknowledgement that you were wrong to write what you did about me in this post. Shame on you.

        OK: in your case, I’d say you weren’t arguing that. But I still think it’s true in general (Rowe, Krugman, Wren-Lewis, pontus) – I just rushed to find an example to link to.

  9. #31 by Luis Enrique on August 3, 2012 - 8:57 am

    anon #21

    you can make a reasonable forecast of how much M will increase if you can make a reasonable forecast of m, same as the profit/revenue case. If you think the behaviour of banks is a “mystery” then m stands for mystery, if you think you understand the current economic context well enough to forecast bank behaviour, you can forecast m. If you think that when B increases banks are going to expand their balance sheets, you can forecast increased M. Everybody craps on about endogenous money, well if you think B only increases when banks want to expand their balance sheets, then you also think M is going to increase when B does.

    You write “It will probably in most case increase it by nothing much at all” – I think that in most cases increases in B are associated with increase in M because in most cases expansionary monetary policy has been accompanied by monetary expansion, meaning that if you graphed m=M/B it has mostly been well above zero. Of course central banks haven’t targeted M for years, so all this is academic – if you want to argue that if the central bank did try to target a big increase in M but the banking system did not want to play along, it would not be able to hit its target, I would agree with you.

    • #32 by Luis Enrique on August 3, 2012 - 9:24 am

      ” in most cases expansionary monetary policy has been accompanied by monetary expansion” should read “accompanied by credit expansion”

    • #33 by y on August 3, 2012 - 9:45 am

      The quantity of reserves is largely irrelevant. The interest rate my have an effect on borrower’s desire to borrow and banks willingness to lend, however, depending on circumstances.

      The entirety of the government debt could be held as interest bearing reserves. The interest rate can be altered by the central bank simply setting it at a different level. No need to add or withdraw reserves.

      The whole business of changing the quantity of reserves to hit a target interest rate makes it look like government has to borrow money from banks to fund its deficit spending. The reality is that government does not need to borrow from banks. Bonds are simply a convoluted mechanism for controlling interest rates. Banks have a privileged position within the hierarchical monetary system, in which they receive a free interest subsidy directly from the government which they pocket as profit.

      “Money multiplier” as taught leads to endless misapprehensions which conceal the reality of the monetary system. Government does not need to borrow from banks, banks get free handouts from government.

    • #34 by Luis Enrique on August 3, 2012 - 10:17 am

      sorry, error there, graphing level of m is irrelevant, you need to know something about dm/dB

      • #35 by y on August 3, 2012 - 11:00 am

        Please elaborate…

  10. #36 by Roman P. on August 3, 2012 - 12:52 pm

    Yes, unfortunately neoclassical textbooks are broken beyond repair, populated with ‘modls’ (to borrow a term from Leijonhufvud) that do not represent reality around us. The most important results are forgotten, locked in the dusty journals that nobody reads. For example, F. Fisher (1983), using progressively more realistic assumptions for the GE model, arrived to the point where Walras’s Law will not hold because of the differing expectations amongst agents. Ironic, considering todays quibbles about microfoundations. Yet, I am not sure if his contributions are used today at all. It is kinda like if Lavoisier’s theories were forgotten and physicists still discussed phlogistons.
    I wonder if there is some important problem with critical thinking amongst economists. They are intelligent enough to solve their way out of those monstrosities like Mas-Colell’s textbook but not to question why are they doing that at all? A riddle.

    • #37 by Unlearningecon on August 3, 2012 - 4:55 pm

      Great paper, thanks for the Hat Tip and comment.

  11. #38 by srini on August 3, 2012 - 3:06 pm

    Luis doesn’t understand the meaning of an accounting identity. Like most neoclassical economists he needs to go back to reading some 101 stuff–accounting, finance, and possibly English. An accounting identity is something that arises out of double entry book keeping. Such as saving=investment. Increase in FX reserves=capital account+current account, etc. They can be derived from the underlying decompositions of the terms in the identity. What exactly is the accounting framework here that relates M=mB? None. I can define m=M/B and say that I have an identity in M=mB–but that shed no light because m has no intrinsic meaning outside this definition whereas saving and investment are independently meaningful economic entities.

    He needs to get off his high horse–instead of expecting an apology–he needs to find some humility. Unlearning–you are being too kind to this kind of behavior. BTW, I checked my Money and Banking book by Hubbard and sure enough it has the usual multiplier BS. Mainstream economists are prevaricating and scrambling desperately and it shows.

    • #39 by Luis Enrique on August 3, 2012 - 3:19 pm

      srini
      here is another accounting identity:
      Y=C+I+G+(X-M)
      Where does double entry accounting come in? It just says “we are going to divide output up into these categories”. Because it’s an accounting identity, you can’t say things like if G rises, Y will rise, because the other components aren’t necessarily going to hold constant. See also: M=mB.

      You can get a long way by breaking down the national accounts and thinking carefully about them – you might have heard of stock-flow consistent modelling by Wynne Godley.

      We have been using M=mB as an abbreviation – m can be broken down. The money multiplier is derived by manipulating identities, at least it is in all the text books I have seen (I haven’t read Hubbard)..

      • #40 by srini on August 3, 2012 - 4:02 pm

        Clearly you have no clue about accounting. The left hand side is product and the right hand side is expenditures–both of which have independent and clear meaning to most people. It is like saying assets equals liabilities. It is NOT the same as dividing one side–production–into its various components. That would be like dividing production into goods and services.

        Another way to think about it is the left hand side is income and the right hand side is expenditures. And indeed in the NIPA, the income and expenditure terms are collected separately and the difference is called statistical discrepancy.

        Show me the derivation for M=mB–no hand waving. Then let us talk.

    • #41 by Luis Enrique on August 3, 2012 - 3:20 pm

      and why can’t I ask for an apology when somebody claims I have done something I have not?

  12. #42 by Luis Enrique on August 3, 2012 - 3:10 pm

    I don’t think your unable to understand, I think you aren’t really trying. I think you probably are ignorant; I certainly am, and I’ve been learning economics for longer than you have. I think it’s good practice to acknowledge your interlocutor’s points in blog debates, and you had plenty of opportunities very early on in this exchange to engage with what I was arguing in a way that would not have left me so exasperated/infuriated with you. Thank you for finally acknowledging your error, I wish I hadn’t had to beat it out of you.

    MWG is a very dry formal book and expects a lot of the reader. How much attention do you have to draw to a statement like “you need to assume a benevolent dictator redistributing etc.” if you credit your readers with any intelligence? If you tried to submit a paper that used aggregate consumer surplus as a measure of consumer welfare, a good referee should sent it back saying this isn’t valid see MWG page 168. MWG proceeds under that assumption, and see where you can go from there. Perhaps in some contexts distributional concerns aren’t concerns, so the theory will be useful. A whole lot of economics consists of “exploring” theory to see where it can take us.

    I would not even come close to arguing most of economics is “right” and most economists never overstep the limitations of their methods, but I really do think you aren’t going to get anywhere unless you credit them with more sense. It is just plain wrong to think, for example, that economists “deny the importance of reality” and if you are going to write things like that, your protests that you don’t think textbook authors or economists are idiots, ring hollow.

    • #43 by Unlearningecon on August 3, 2012 - 3:59 pm

      I feel like you’ve taken this whole thing more personally than you needed to and it seems to me that you simply don’t like seeing economics criticised. If Nick Rowe asks me to read a textbook, I’m not going to hold back from criticising anything I regard as unscientific.

      I personally have never seen any economist reference the restrictive conditions required for individual demand function to take the same form as aggregate demand functions, except when they are discussing that specific concept in a paper/presentation devoted to it. Elsewhere they just pretend it isn’t a problem.

      The passage I reference on MC=MR, and the 1953 Friedman paper on which it leans, are a denial of the importance of reality. And ‘wrong’ is not the same as ‘stupid.’

      I do not think economists are stupid – Roman’s sentence above sums up my view succinctly:

      They are intelligent enough to solve their way out of those monstrosities like Mas-Colell’s textbook but not to question why are they doing that at all? A riddle.

      Economics is initially counter intuitive and it takes a while to get the logic. Once you have broken into this I think you generally have a different, and, in my opinion, profoundly unscientific attitude towards the theories – I have seen it develop in friends who have taken economics.

      • #44 by Luis Enrique on August 3, 2012 - 4:14 pm

        oh come on UE,

        ” individual demand function to take the same form as aggregate demand functions, except when they are discussing that ”

        First, it was the other way round – he wanted to be able to treat aggregate demand functions like individual ones, not vice versa. Secondly, it’s not the “form” of the demand function he’s talking about, it’s whether you can aggregate consumer surplus (i.e. the area under the curve, whatever form the curve takes) to measure welfare. i.e can you treat the blue triangle as a measure of welfare when you’re dealing with aggregate demand.

        Of course it’s stupid to study economics and “deny the importance of reality”. Saying that it’s worth understanding the conditions for profit maximization under specified conditions is not the same thing as saying you don’t care about what happens in reality.

      • #45 by Unlearningecon on August 3, 2012 - 4:43 pm

        Luis, if economics textbooks came off as scientifically as you state them, I’d agree with you – honestly. But they don’t act like it is ‘under certain conditions;’ they simply state the theory then say that real firms ‘should’ approximate MC= MR if they maximise profit. As with demand and the money multiplier, the rhetoric of the textbooks simply doesn’t match how you are trying to paint them.

  13. #46 by id on August 3, 2012 - 3:59 pm

    This is the kind of ideological shite I was expected to swallow when I took an econ course at uni:

    “Efficient markets ensure optimal resource utilization by allowing for price to motivate independent actors in the economy. If buyers and sellers are free to choose how to allocate resources, prices will direct resources towards those who value them most and can utilize them most effectively.”

    “those who value them most”.

    Puke.

    • #47 by Unlearningecon on August 3, 2012 - 4:00 pm

      Dear god that is awful. Is that from a textbook? From everything I’ve seen, the ones I have are about as reasonable as it gets.

    • #49 by Luis Enrique on August 3, 2012 - 4:19 pm

      see now there you go – that should have a qualification concerning initial endowments – OBVIOUSLY if some people are richer than others, resources go to the rich. Doesn’t your source say anything about that?

      here also “efficient market” means a market free from all manner of things that are excluded from the model, that mean only an idiot would think you can read straight from a very very simple model to reality.

      • #50 by id on August 3, 2012 - 4:48 pm

        so something which is obvious, and has always and everywhere been the case at all times, is excluded so that a model which bears no relationship to reality whatsover can be created, and then described as if it represents the basic logic and reality is just an exception?

        There is no such thing as an ‘efficient market’ free from all things ‘excluded from the model’, and there never has been.

      • #51 by Unlearningecon on August 3, 2012 - 4:50 pm

        This ties in quite well with my next post, which separates the different types of assumptions – the conditions described as ‘efficient’ are ‘domain assumptions,’ for which the theory only applies as long as they apply. Ideally a domain assumption applies in as many situations as possible – if, as with these ones, it never does, then the theory derived from it is practically useless.

  14. #52 by id on August 3, 2012 - 4:57 pm

    “If some people are richer than others, resources go to the rich.”

    That’s what it should say on page 1 of every first year economics textbook.

    • #53 by Unlearningecon on August 3, 2012 - 5:00 pm

      Absolutely. All other social sciences, in my experience, take a highly critical look at capitalism, history and the status quo in general. In history classes I learned a lot about the origins of capitalism (grim); in political theory I learned that there is no reason to obey the law. In economics I learned we should probably abolish the minimum wage.

      • #54 by id on August 3, 2012 - 5:13 pm

        Yes because the minimum wage makes markets less “efficient”.
        Blurring the distinction between a fantasy world in which resources go to those that “value” them the most and can use them “most effectively” and the real world of power structures (that has always existed), seems to happen quite a lot.

        It would be good if first year econ textbooks also included a history of money which wasn’t based on a load of assumptions with zero evidence to back them up. It seems to have quite a bearing on the way things develop from there on in. Including the “money multiplier”.

  15. #55 by britonomist on August 4, 2012 - 12:41 am

    Hi Unlearningecon, I just wrote a post about neoclassical economics and whether it is actually mainstream. You can see it here: http://neweconomicsynthesis.wordpress.com/

    I’d like to see your thoughts.
    ~Brito

  16. #57 by Luis Enrique on August 4, 2012 - 9:03 am

    The objective in economics should be welfare maximisation. The impact of minimum wage depends on its level and labour market conditions. I don’t think anybody should be teaching economics says we ought to abolish the minimum wage, although some lecturers may let their own views leak into what they teach. Where were you taught that?

    Economics certainly is unique amongst the social sciences in that there ar many right wing economists and economics can be pressed in to the service of right wing ideology. Does that make it more or less “ideological” than other social science that are almost exclusively left wing?

    But it’s true, economics is embraced by the right and there are all to many glib right wingers claiming economics validates their position. as it happens I think macro has had a right wing bias, see my comment here:

    http://noahpinionblog.blogspot.co.nz/2012/02/are-macroeconomic-methods-politically.html

    Fwiw most of my favourite economists are critical of what you might call orthodoxy, people like Solow, Howitt, Cabellero, Rodrik. I just think there are good criticism and bad ones.

    • #58 by Unlearningecon on August 4, 2012 - 11:57 am

      All mainstream economists I have been taught by/spoken to have said that they would probably advocate abolishing the minimum wage, though to be fair usually with some offsetting measures. Friends who have studied economics take a similar position.

      There are two problems with how you formulate your second paragraph:

      (a) Just because other social sciences are more left wing (I’d say rebellious) doesn’t mean it’s OK for economics to be more right wing or conservative. It could be that they are simply right to adopt a more critical perspective on society.
      (b) A big problem with economics is that it claims to be value free. I disagree – it is built on a number of value judgements (just to give an example – competition is ‘good’).

      I have argued something similar to Noah in that piece.

      • #59 by Min on August 4, 2012 - 10:47 pm

        Well, Nick Rowe showed me the light about the minimum wage over a year ago. The problem is not (assuming a union of the whole) that wages at the bottom are too low, it is that wages at the top are too high.

        I don’t know if he would agree with where I have gone with that in my thinking, but the point is fairly obvious. Capping compensation at the top causes less distortion that putting a floor under the bottom.

        So let’s bring back 90%+ marginal tax rates. :)

        If you don’t like the politics of that, then raising the minimum wage is second best, right? ;)

  17. #60 by Luis Enrique on August 4, 2012 - 12:55 pm

    Id #50 it’s not excluded from the model. You have to specify initial endowments in the model. How could you have a model of trade without that? It may be missing from some people’s gloss on the model.

  18. #61 by Min on August 7, 2012 - 6:36 pm

    Before this discussion gets too stale, I have a question. :)

    Preamble: I was shocked at the patent anti-labor bias about shirking workers. Shades of the “happy slaves” of yore. OC, one suspects a lurking anti-labor bias in economics, but it is surprising to see it so openly and shamelessly expressed.

    Is it not economic dogma that “The Price is Right” (more or less), by the Efficient Market Hypothesis? If that is so, aren’t the employers getting what they pay for? More industrious workers would be paid higher wages, right? So what is the problem? Why this talk of shirking?

    • #62 by Unlearningecon on August 13, 2012 - 12:30 pm

      Well yes some ‘free market’ economists do resist shirking because it is an example of a ‘market failure,’ and they do similar things with monetary stimulus, which they see as a market failure in the form of sticky wages (see Tyler Cowen resisting NGDP targeting, Arnold Kling denying wages are sticky).

      Denying the clear empirical reality of sticky wages is, for me, one of the clearest signs that economics is degenerative.

      • #63 by Min on August 14, 2012 - 4:38 pm

        Thanks, Unlearning. :)

        “Market failure” seems to be used in at least two ways.

        1) The market fails to do what we think it ought to do.

        2) A market for certain things does not exist. That is, there is a failure to have a market, and existing markets fail to do what that market would do, because they cannot.

        The two senses are related, of course.

        Have I got that more or less right?

      • #64 by Unlearningecon on August 14, 2012 - 5:21 pm

        I wouldn’t say that is ‘right,’ or ‘wrong;’ I’d say it’s an interesting perspective. Public goods could be said to be (2), whilst externalities, information asymmetry and so forth could be said to be (1). Obviously if a (1) is too severe, as in Akerlof’s Market for Lemons Theory, it will become a (2).

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