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November 17, 2016


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DP Down South

Off topic: Could you please give your take on Modern Monitory Theory as espoused (in varying degrees) by Steve Keen, Warren Mosler, Bill Mitchell and Randall Wray (amongst others).

As a non-economist, it's something I find interesting, but am, for obvious reasons, unsure of.


Economics is operating in a capitalistic (hence ideological) paradigm. Models are used to prove the paradigm fits the facts. Due to physics envy and the pseudo-scientific reductionistic paradigm, we also end up with bad models that don't fit the facts very well because we reduce actors to "forces". Of course this is ideological too.

Vicious cycles

Dave Hansell

Spot on Carol. At one level they end up knowing more and more about less and less until they know everything about nothing and at another level they make it up as they go along by assuming what they aim to deduce.

On the issue of physics envy there was a very interesting paper published a few years back by a chap named Rothchild (don't know if he was from any branch of that particular well known family or otherwise) which used a number of basic physics equations, substituting economic for physical variables, to demonstrate that fractional reserve banking was parasitic.

Luis Enrique

"so the existence of involuntary unemployment rejects RBC theories:"

I think this is wrong! if you omit something from your model by construction, because it is not central to what you are concerned with, the fact that the thing you omitted exists is reality does not mean your model is wrong. Separate question: are you concerned with the right thing.

To convince yourself of this, take any model that you thinks is right, and write down a list of all the things that exist in reality, and which are important in their own right, but which are omitted from the model.

I am probably not best placed to try to explain RBC, not being very sympathetic, but I guess a proponent might say, OK involuntary unemployment exists, but are not going to try to explain that. Rather, we think that business cycles are best explained by something happening which effects the efficiency with which goods and services are produced, and that (alongside the existence of involuntary unemployment we are ignoring) there is a rational reduction in output (and labour supply) and that trying to "correct" that with demand management is an error. Or something like that.

IMO there are lots of ways of critiquing that story, the best known is probably what we ought to see happening to wages if that theory was true. And I also think that it omits far too much that is important, and overall RBC theory is dismal. But I also think the idea that recessions are *sometimes* caused by what might be thought of as shocks to the production technology is not entirely bonkers.

This, though, gets at something Simon WL wrote, about how abstracting away from something is not to deny it, which is that if you abstract away from something and then somehow kid yourself that thing does not exist or is not important, you make whopping errors, such as those dumb papers which use RBC models to try to analyse the welfare costs of recessions (whilst excluding almost everything that matters from a welfare perspective).

Luis Enrique

hmm, having written that I am not wondering if RBC believers also believe that involuntary employment does not exist

Luis Enrique

now. not not.

Luis Enrique

I now wish I could delete the above, which I think is based on a misreading of your word "reject"

I agree that existence of large scale involuntary unemployment in recessions rejects - in the sense of meaning the RBC model is not useful - even if it does not reject RBC in the sense of proving that recessions are not driven by real shocks (and that some reduction in output is optimal).


As a Marxist, you remind me of JBS Haldane, the biologist. He found that Marxism helped him think more clearly.

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