I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text by the end of this year. Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.Note: The material is not being presented in order so don't be concerned about missing anything due to the numbering.
Chapter 9 Introduction to Aggregate Supply
Read it at Bill Mitchell — billy blog
Some notes on Aggregate Supply
by Bill Mitchell
13 comments:
A bit (!) beyond me. Is it me or is it also a bit rambling?
Tom,
It's hard to imagine a greater simplification than an aggregate supply function or an aggregate demand function. How do you know such mappings exist? Isn't this the sort of thing that you've been criticising other economists for?
vimothy, I think we'll have to wait and see what the book looks like before coming to conclusions. This is a draft by only one of the authors. I don't see anything problematic in the presentation, and it seems pretty straightforward.
Bill has asked for input and I've complied to the degree I am able, not being trained in economics. If you see issues, you should let him know in the comments there.
But as I've said, I don't have a problem with simple models that illustrate basic points. It's when they get interpreted as saying something beyond their scope that I have issues.
The question, I think, is what the best introductory way to explain basic economics concepts is that 1) conforms to the way economists do things in general, and 2) integrates MMT into a general understanding of economics. So those completing the course that never take another course in economics should have a basic grasp of the fundamentals and be able to speak coherently with others about economics, and those going forward in economics also have a grasp of differences between the other views they will be studying in economics and the MMT/Keynesian angle, again concerning differences over subject matter, methodological approach, critical assumptions, key terms, and important conclusions.
"It's hard to imagine a greater simplification than an aggregate supply function or an aggregate demand function."
The way I understand this in terms of what Bill has written in the post is that certain basic factors can be seen as contributing to overall influence on supply and demand in a general way, i.e., "in aggregate." Logically, that's how I would approach a topic like this in an introductory way.
This is pretty much standard Keynesian cost based approach without even getting much into marginal cost of production yet. As far as I can tell nothing out of the ordinary being assumed here and a rather historical approach featuring Keynes. Am I missing something you are seeing?
I suppose I'm trying to relate your criticisms of economics to some concrete examples.
What would be "beyond the scope" of a model? Could you give examples?
The money multiplier, which appears in intro texts and gets the direction of causality wrong immediately comes to mind.
But as I think a said previously, simple model are built on presumptions that are often unstated like ergodicity when uncertainty and reflexivity apply, rationality when there are also "animal spirits," and utility when a loose definition of usefulness can be interpreted to cover just about anything. So many people come away with the wrong idea that economics is more predictive than it is. Later on people rely on the pronouncements of major economists, often couched in the 101 terms they know people understand superficially, coupled with naive common sense, since these pronouncements are made without qualification. That's overreach.
Nick Rowe wrote an interesting post recently about teaching supply and demand in econ 101 without oversimplifying, since the oversimplification of it in the way econ 101 generally taught is not only useless but also misleading, even as an intro teaching tool involving the basics. I was never told this as I recall.
vimothy, here are some links to Yves Smith's criticism that I found interesting and they seem to be on point here.
Economists Defending the Use of Models
Economics Debunked: Chapter Two for Sixth Graders (Very funny and snarky)
Robert Shiller Has Arrow-Debreu Derangement Syndrome
Tom,
I agree that the money multiplier does not describe a causal relationship. (Where I studied, we were actually taught to regard it as more of an accounting identity.)
That seems like an instance of an econ101 model not matching up with real world practice particularly well. But is that an example of a methodology which is good in general being applied inappropriately here, or an example of a methodology which is bad in general?
It's also true that people build or draw on simple models, especially as heuristics for teaching undergrads. This is precisely what Bill Mitchell does in the excerpt you link to. I'm not sure how else it could be done.
Reading those links reinforces my impression that you have a standard against which MMT should do at least as bad as mainstream economics--since its claims are, in some sense, a lot greater, and its means necessarily more limited. And yet, MMT gets a free pass. How come?
So far MMT and PKE has done pretty good based theory of observable and accounting without a much resort to assumptions that are stipulated and turn out to wrong in addition to unsubstantiated.
For example, Friedman's QTM was wrong, because it is based on a wrong understanding of M and V, and the associated causality. MMT explains that, why it is wrong, and what a correct understanding of M and V is.
But this at the close of the second link above is what I think captures the essence of the issue in terms of pragmatics:
(1) Economists should be honest about when they don’t know what will happen in the future so that people don’t rely on them in ways that they shouldn’t.
(2) Economists should admit that in economies some people want some things to happen and other people want other things to happen. They should be honest about what kind of world they want to live in, and not pretend like they know how to find a world in which everybody will be overjoyed.
(3) Economists should work less at trying to find reasons not to listen to people, and try harder to learn about the economy, even from theories that they don’t like, methods like interviews that don’t involve numbers, and from the ideas of people who are not economists.
Tom,
Let me make a distinction between, (1), a set of methodological tools, and, (2), how those tools are used in particular instances.
It seems like what you're saying here lies in (2). We can agree or disagree about whether MMT's understanding of the price level is as good or better than that offered by the quantity theory, but it doesn't look like a difference in methodology to me.
vimothy I think that economists are pretty well agreed on the basic methodology. While they disagree over substance, they are all playing on essentially the same field wrt procedure. Because there is basic agreement, there can be progress within the discipline.
The differences lie in the assumptions and definitions, as well as selection and prioritization of factors. For example, nothing wrong with Arrow-Debreu as a theoretical model, it's simple and elegant. But it is not very representative and so its is a terrible basis for a policy model. It should consider it as a base case for teaching instead, and then start adjusting the assumptions in the direction of the real world to see how complexity develops. As a result, it would be more useful in teaching and make people much more reticent to use it for policy justification.
The push for a new paradigm and new methodology is coming from outside the field of economics as in "economic department." The life and social sciences are pressuring economists to pay more attention to what is happening in these fields because they see much relevant to economics and policy science.
Significantly, it was Antonio Damasio who was called upon to give the keynote at INET Berlin, apparently in recognition of this. Soros probably played some role in this choice due to his theory of reflexivity. He seeded INET because he believes that the present state of economics and finance is inadequate to global challenges. Evolutionary theorists and life scientists (like Roger Erickson here at MNE) would agree that humanity is at a crisis point, in part due to inadequate economic and financial understanding and inadequate policy based on it.
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