How the Economy Actually Works & Why Austerity Doesn’t July 27, 2014Posted by Larry in economics, MMT.
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These links are of pdf files of PowerPoint slides and associated document pages containing the notes associates with the slides and should be viewable in your browser but if not, you will have to open the files from your browser in a pdf viewer. These documents will not display properly in Firefox, for example. I don’t know why. But most recent revisions to the browser further incapacitate the browser’s ability to view certain kinds of image files instead of improving it. In short, the browser is becoming a pain in the ass to use. So, if Firefox displays a note that the file might not be properly viewable, close it and a pdf viewer dialog box should open that will enable you to view the file.
The first link consists of the slides themselves, while the second link consists of the notes that accompany each slide (with the slide residing at the top of the page). The first link will take you to your default browser if it is compatible. The second link will do the same. The notes are of varying length and on some you may have to scroll, depending on your screen resolution and other factors. Some of the font sizes may appear small on some screens – they were altered in order to fit on the same page as the slide. And in some cases, the slides themselves have been shrunk in order to better accommodate the comments associated with the given slide. I hope this causes no serious inconvenience, though it may cause some. These adjustments were unavoidable due to the limitations of current technology.
I should warn some readers that a few of the slides and their notes are of a rather technical nature, but they are, I think, in the minority. Most are I hope accessible to most readers of this blog. Unless it is in the commons, all non-original material is, I believe, properly referenced. It will be obvious that I along with others have built on the work of our predecessors. And some of those from the thirties and forties appear to have understood the workings of the economic system better than many contemporary commentators. This is a scandal that has so far only been discussed by some heterodox economists. And even many of them shy away from the issue of fraud, which is endemic particularly accounting fraud, although that is beginning to change. I myself only make a few references to it. And this is because I am not sufficiently deeply informed about accounting fraud and how it can take place. Hence, I rely on the blog posts of Bill Black and others for this. Black, a former financial regulator and now a criminologist at the University of Missouri, Kansas City, is an expert on accounting fraud and is on the faculty of the university just mentioned, which is a haven for MMT (Modern Money Theory) economics, the paradigm that fundamentally informs the approach of this post. Along with Randy Wray of UMKC, I cite Bill Mitchell of the University of Newcastle, Australia. You will find their works along with those of others in my reading and reference lists. I should point out that not everyone I cite is an MMTer, as they are known.
Perhaps I also should point out that MMT is built on the work of others, most particularly, Keynes, Kalecki, Hyman Minsky, Wynne Godley, and Abba Lerner, to name only the most prominent. The principal founders of this particular paradigm, which is the best alternative to the neoclassical economic world view there is, are Bill Mitchell, Warren Mosler, and Randy Wray. If I have left anyone out, apologies.
Victoria Chick and Paul Davidson (a Post-Keynesian) both probably know as much about Keynes’ work as anyone alive. Davidson has said effectively that if you have read Keynes’ General Theory without having read the corrections he made in response to critics over the following two or three years (most of which can be found at JSTOR), then your understanding of the theory is incomplete. I know this to be true, as I discovered myself before having come across Davidson’s statement. Two corrections are of especial importance. One is Keynes’ theory of investment, which is corrected by Kalecki in a review of the book. Another is to note that another type of motivation for liquidity preference needs to be added to the General Theory that is in the Treatise on Money but left out of the General Theory, finance preference. Keynes added this in response to a critic later. It is of some importance to note that Hicks admitted in a letter he sent to Davidson that he, Hicks, had been wrong about his IS-LM theory (as it came to be known) and told Davidson that he no longer felt it accurately reflected Keynes’ theory. Davidson notes this in his The Keynes Solution (2009).
Taub shows complete lack of understanding of how a contemporary monetary system actually operates July 27, 2014Posted by Larry in economics.
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The taxpayer meme is once again causing havoc and preventing deeper analysis and, down the line, effective legislation. Dodd-Frank got through by the skin of its teeth. This extract from NYT is by Jennifer Taub of the Vermont Law School. I have never been able to get anyone to understand that taxpayers do not pay for anything, that the taxes they pay leave the monetary circuit never to return, that it is not a Peter-Paul situation or a zero-sum game. Nothing seems to get through, But Taub should be able to see through this. That she doesn’t should be deeply worrying to us all.
Taub ends her piece thus.
Delivering fruit and flowers is relatively easy compared with the need to tend to the deeply rooted practices of excessive leverage, over-reliance on short-term funding, and too-big-to-fail, and too-big-to-manage institutions, that persist.
Delivering fruit and flowers is also easy compared with the need to get a handle on how he money system actually works so that battles based on faulty premises can then end. If this is anything like her book, Other Peoples Houses, published by Yale last May, the book couldn’t fail to be deeply misleading, in this respect at least. OMG.
Orderly resolution was created as an alternative to the distasteful choice between a chaotic Lehman-like bankruptcy and a taxpayer -funded bailout. It involves the Federal Deposit Insurance Corporation quickly liquidating a large failing bank holding company or systemically important non-bank financial firm that is on the brink of collapse and poses a significant risk to our financial stability. Many wonder whether this process can function well across borders. If it works out as intended, however, a single bank’s failure will be isolated, and losses will be imposed on shareholders and creditors, and managers replaced.
Getting this right is critical. As the Fed chairwoman, Janet Yellen, testified in February, she is “not positive that we can declare, with confidence, that ‘too big to fail’ has ended until it’s tested in some way.” The test she suggested was putting a failing firm through the orderly resolution process.
As it stands now, upon F.D.I.C. takeover of a falling giant, taxpayers will advance the money needed to oversee the process via a line of credit from Treasury. If the proceeds from the F.D.I.C.’s sale of the failed institution are not enough to pay back the loan, then the large surviving banks will be assessed several years after.
For those who claim Dodd-Frank “enshrines” taxpayer-funded bailouts, an easy remedy would be a simple amendment to create a bank pre-paid risk fund. Bank assessments could be based upon risk factors including size, leverage, and dependence on short-term funding. In addition to avoiding Treasury fronting the funeral bill, a pre-paid fund would create better incentives for banks to monitor each other.
A $150 billion bank pre-fund was part of the House version of the reform bill, but was dropped during the Dodd-Frank legislative process after intense industry pressure. In Orwellian fashion, congressional opponents contended that bank pre-funding was a taxpayer-funded bailout.
What Taub says here about how the FDIC is supported or works is so far from being right that you can’t really say that it is wrong. “Wrong” is too weak a descriptor of what her piece is saying about the workings of the monetary system we actually have.
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In a recent post about debt-free money, Randy Wray makes some remarks about the relationship between the role of taxation and the movement of the monetary circuit. It is my purpose here to explore the character of this relationship from a logical perspective. Wray contends that taxes are a sufficient but not necessary condition for driving the monetary circuit. As his comments were not entirely clear to me, I asked him what he meant. Among other comments he made, which we will get to, he made these remarks.
If I said “taxes are a necessary and sufficient condition” then that means you must have taxes and nothing else will do. I don’t say that.
If I said taxes are a necessary condition, then that means you must have taxes, but maybe that alone is not enough. I don’t say that.
If I say taxes are a sufficient condition then that means if you have taxes you will drive a currency. However something else might drive it, too.
I think these statements are relatively clear even if not entirely logically so. In order to show what I mean by this, let me specify, how, logically, necessary and sufficient conditions are specified. First, we have a variable, x, that ranges over taxes. Now, we are in a position to specify the exact character of necessary and sufficient conditions relevant to Wray’s concerns.
Sufficient condition (for tax to drive monetary circuit): if x is a tax, then x drives the monetary circuit.
Necessary condition (for tax to drive monetary circuit): is x drives the monetary circuit, then x is a tax.
Necessary & Sufficient condition (for same): x is a tax iff x drives the monetary circuit.
It is probably apparent that my formulations do not quite conform to Wray’s formulations. We can ignore the stipulation about tax being a necessary and sufficient condition for driving the monetary circuit, as it is obviously false. Therefore, we need concentrate only on the other two. First, we must note that Wray is engaged in a complexly compacted argument. Let us take sufficient condition first.
The first sentence is nothing more than a statement of what a sufficient condition is. When he mentions that other factors may drive the circuit, he is merely pointing out that for something to be a sufficient condition for something else, this does not rule out the possibility of other sufficient conditions being operative. He is right about this; it is a logically elementary feature of the context.
When we come to Wray’s discussion of necessary conditions, we encounter a little prolixity. When Wray says that were taxes a necessary condition, this would mean that one must have taxes but that this might not be enough, it is not entirely clear, logically, what he is trying to say. For tax to be a necessary condition,this means that if you don’t have taxes (via an application of modus tollens), the circuit will stop unless some other factor can drive the circuit (like the situation with the sufficient condition). While Wray may be clear what he means, the logical structure of what he is trying to get across certainly isn’t.
However, in denying that taxes are a necessary condition for the movement of the monetary circuit,he seems to be saying more than that if x drives the monetary circuit, then x is a tax, from which follows, if x is not a tax, then x does not drive the monetary circuit. This situation does not allow one to contend, as Wray does, that if taxes were a necessary condition of monetary motion, one must have taxes. Additional assumptions are needed in order to derive this conclusion. Hence, I can do no other than to conclude that Wray’s comments in this regard obfuscate the point he is trying to make. Which I think is a straightforward one. it is that the stipulation that taxes are a necessary condition for the driving of the monetary circuit are false because he denies the implication that if something isn’t a tax, then it doesn’t drive the monetary circuit. From which one can conclude that only taxes can do this driving. Which is false. There are other factors that can drive the monetary circuit besides taxes, such as fines, tithes, and the like.
Taxes as a sufficient condition allow for these additional factors to be drivers of the monetary circuit along with taxes. Hence, Wray’s contention that taxes are only sufficient but not necessary.
Upshot: while the logical structure of Wray’s argument isn’t entirely clear, he is consistent. And the role he assigns taxes vis-a-vis the monetary circuit seems to be more than reasonable.
Public Debt Vs. Private Debt July 5, 2014Posted by Larry in economics, Philosophy.
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While it can be generally agreed that the terms ‘public debt’ and ‘private debt’ on their own don’t imprint themselves easily on the mind, I think there is a way around this seeming impasse. And this is to link them to simple equivalences. This can be accomplished by emphasizing the direction of the debt relationship. And this can be done quite simply. Public debt = what the government owes its creditors, while private debt = what members of the public, including firms, owe their creditors.
To further spell this out, you can then elaborate who the creditors are in each case. In the case of the public/government debt, the primary creditor is the public as a collective, and this is shown on the so-called US national debt clock (which ought to be called the US national public resource clock). In the case of private/individual debt, there may be many creditors – in short, anyone you owe money to, which would include the government. I am including business firms within the penumbra of the public qua collective for the sake of simplicity. It is important to note that it is not particular individuals with whom the government has this general indebtedness relationship, but the public considered as a collective body. When we speak of public debt in general, it is the public as a whole to whom the government is indebted, not individual members of this public (though such relationships do exist, though not in this sense).
Logically speaking, debt is an asymmetric relationship, analogous, say, to temporal relations. Taking two logical individuals, A and B, to say that the indebtedness relation is asymmetric is to say that the nature of the indebtedness of A to B and that of B to A are distinct in character. Using the general terms, government, creditors, and individuals (persons or firms), we can put the relationships between the three this way.
With G = government, C = creditors, and I = private individual(s) or firms, public debt is one where G is indebted to C qua q, while private debt is one where I is indebted to C qua r, where q and r characterize, in general terms, the two different modes of indebtedness. The characters of the two distinct types of indebtedness are distinct in many ways while simultaneously possessing fundamental underlying similarities. These two modes of indebtedness are logically distinct from one another. The nature of government indebtedness is different in essential ways from the indebtedness of the individual citizen or resident. This difference is captured I think by formulating the indebtedness relationships in this way. The formulation is quite abstract, but that is by necessity.
While the nature of creditorhood in both types of indebtedness may be so similar as to be effectively identical in the two cases, the character of the indebtedness relations themselves will not necessarily be similarly similar (ugh).
When spelled out in this way, it is easy to see that the debt relationship goes both ways but in distinct respects. To reiterate, while there are differences, there is a fundamental similarity and this similarity can interfere with appreciating the differences between the two types of indebtedness relations. Formulating the two distinct indebtedness relations in this way can, I trust, render the differences more salient without allowing the underlying similarity to inhibit understanding the fundamental characteristics of this relationship. Or so I would argue.
Therefore, when the terms, ‘public debt’ and ‘private debt’, are used, they should be considered to be parsed in the way I have suggested above and displayed starkly in the picture at the top. In this way, hopefully whatever confusion there might be between the two terms will vanish or become insignificant. And we can, therefore, go on using the two terms without confusing ourselves.
Don’t use UPS to deliver dog food April 28, 2014Posted by Larry in Uncategorized.
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UPS, a US based company, is not as reliable as its advertisements say it is. What a surprise, I hear you say. The problem is that the delivery person may be so lazy or so pressured by the company to deliver or else that they can, and have, delivered parcels to addresses the addressee has never heard of or knows. Therefore, they are unable to go there to retrieve their parcel. Should you ask UPS customer service, they will tell you what you already know, that your parcel was delivered to an address you never heard of and have no idea where it is. Royal Mail can and will do better than this.
Definition of the Situation April 24, 2014Posted by Larry in Culture, Frame Analysis, Philosophy, Psychology.
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The concept of the definition of the situation originates with William Isaac Thomas, possibly in Thomas and Florian Znaniecki’sThe Polish Peasant in Europe and America (1918-1920). The concept was given new vigor and poignancy in the fifties by Erving Goffman in his study of roles in face-to-face social interaction in Presentation of Self in Everyday Life (1957). Goffman agreed to a significant extent with what has become known as the Thomas theorem (1928): “If men define things as real, they are real in their consequences”.
Most situations bring their histories along with them. To do well in a situation, it pays to know something of its history. And to successfully redefine a situation, it may be essential to know that situation’s history. Sometimes the history can be daunting and intimidating thereby rendering the situation daunting and intimidating.
The concept of the definition of the situation is closely related to frame analysis, although this relationship is not always explored, to the detriment of both approaches, I think.
Varoufakis on corrupt statistics in respect of Greece debt April 24, 2014Posted by Larry in Abuse of power, economics, Jefferson Airplane, Statistics.
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Varoufakis begins his post with this graphic, which reminds me of a song by Jefferson Airplane. Here they are appearing on The Smothers Brothers show. A hilarious TV program. It begins with White Rabbit but continues with (Do You Want) Somebody to Love whose first line is “When the truth is found to be lies”. The following line: “All the joy within you dies”. Sometimes I wonder whether members of the elite and their economic lackeys have been taking some of Alice’s pills.
[In case the video is not shown, here is the link: https://www.youtube.com/watch?v=hnP72uUt_pU]
Varoufakis argues that the statistics from Eurostat that show that Greek debt isn’t as great as it was thought to be is little more than a political ploy by the Euro elite in order not to upset the upcoming European elections in May. It is a short piece. You can read his argument for yourself.
Happy listening and reading.
Bank of England governor admits central MMT axiom April 24, 2014Posted by Larry in economics, MMT, money.
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I gave a presentation recently at a Radical Statistics conference where one of my contentions was that money was nothing more than a legally binding promissory note, or as Randall Wray like to refer to it, an IOU, much like it states on US bills themselves. Now, we have Carney, the Candian BoE governor, saying exactly the same thing publicly.
The Bank of England, as reported by David Graeber, finally admits publicly what I contended in my talk at the RadStats conference, that the UK is not finance constrained and that money is just a legally binding promissory note [or as he says, an IOU]. As Graeber notices, this completely contradicts Osborne’s justifications of his austerity program, which it appears he may mention again in his budget statement tomorrow along with further comments about the [nonexistent] recovery. Labour’s problem is that There Is An Alternative [TIAA], MMT, which would completely undercut Osborne’s entire economic program, but they continually fail to utilize it.
Here is the link.
Update: it seemed that Osborne might mention what the BoE governor said about the nature of money in a contemporary economic system, but he didn’t. This is not surprising, as to do so would have seriously undermined his entire economic program. He and Cameron have since then, for what would seem to be obvious reasons, combined to form a double act extolling what they claim is an economic recovery. That there is no such thing, I take here as read.
Lakoff on his own frames April 24, 2014Posted by Larry in economics, Frame Analysis, George Lakoff.
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Harry Feldman has brought to my attention that in terms of his reading of Lakoff, Lakoff fails to appreciate that he is speaking from within a particular frame and seems to be using it unanalytically. Quoting Harry directly, according to him, Lakoff
seems oblivious to the frames underlying what he himself says – that there is something he calls ‘American values’, that the Democrats are somehow ‘progressive’, that there is something natural about a ‘family’, nurturing or otherwise… Ultimately, the message appears to be that if ‘progressives’ are to defeat ‘conservatives’, they have to play by the conservatives’ rules by jettisoning rational argument and appealing to their perceived audience at a visceral level. It’s not at all clear how this differs from dishonesty.
To be frank, the phrase ‘American values’ puts me off some of Lakoff’s stuff. Which is why I have stuck with Goffman and others on this. (Perhaps it is apposite, parenthetically, to point out that we are not limited to Lakoff’s approach to frames. In addition to Goffman, there is also Kahneman and Tversky’s Choices, Values, and Frames,which I heartily recommend. Not all the articles in that volume are relevant to our concerns here, but some are.)
Harry’s point about Lakoff’s obliviousness seems well taken, but I alter L’s approach by marrying the two, the so-called emotional and the evidential, including the general framework. Or try to anyway. For Lakoff’s emotional, however, I prefer the term, conceptual, and its cousin, conceptualization, which are both more general and more specific. Since data isn’t value-free, that is, comes with conceptual baggage and, as Lakoff would no doubt point out, a concomitant emotional commitment, in the fight we have at hand against the neoclassical economic worldview, it is not going to be sufficient to attack the data alone. The framework in which the data has been encased must also be undermined. (This is, I think, part of Galbraith’s point about Piketty’s interpretation, or framing, of his data.)
Balls, who I think is a good example of how not to do things, had a piece in the Guardian, on 14 April, and a more vacuous set of utterances I have yet to see. All fluff and no substance. Here is the link: http://www.theguardian.com/commentisfree/2014/apr/14/labour-party-cost-of-living-crisis
If I may, possibly, over-generalize just a tad, philosophers of a certain stripe think the best way of disarming the other guy is to show that his argument leads to contradiction, while certain psychologists think the best way of disarming the other guy is to undermine his value assumptions. Both approaches, however, require some sort of “factual” information to work with or they won’t fly. With Balls there is little or nothing to work with. And, in addition, he assumes that the other guy’s framework is the way to “frame” the debate. There is a way of doing this that might work but Balls isn’t doing that. In the case at hand, the attack on the NHS, the benefit “reforms”, the general attack on the poor, and the like, Balls has so far discussed the situation in ways laid out by the Tories. He needs to re-frame the debate. But since he basically accepts the way in which they have laid out the terms of the debate, he may be incapable of doing that.
Since their view of the economy, or Osborne’s anyway, is at the root of everything they are doing, it has not been sufficient to attack their lack of evidence for the policies and programs they have introduced. The way they view the economic system must also be shown to be completely mistaken. This involves a conceptual reorientation, or as Lakoff would say, a re-framing of the debate, root and branch. If this can be done successfully, the data themselves can be seen in a new light and acquire new relevance. While you can’t do without data or evidence, more is needed, and this is why I say: data isn’t enough.
Only by marrying the conceptual with the evidential can Osborne’s way of viewing society and how it works be placed in the coffin where it belongs and buried in the ground along with the rest of such conceptual detritus. Perhaps we may then regain some control of the debate.
I realize that I haven’t directly addressed Lakoff’s way of doing things. But I hope I have shown how we can avoid the pitfall that you point out may lie in Lakoff’s path by altering the frame framework (!?) in certain ways. Goffman and Kahneman and Tversky’s approaches aren’t so subject to the pitfall in question.
As an aside, related to all this is the notion of the “definition of the situation”, so well discussed by Goffman so many years ago. While highly relevant, this must be left for another occasion.
The Commercialization of Everything April 22, 2014Posted by Larry in economics.
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George Monbiot has brought up once again the essential issue of the commercialization of the environment, which is part and parcel of the neoclassical economic worldview. In his discussion, he mentions an interview of George Lakoff done by the Guardian last February. Lakoff states outright why he thinks the Liberals lose and will continue to lose every time against the conservatives. I will not summarize the arguments of either, but Lakoff’s argument is more important than ever, and the Labour Party and the TUC and others are failing to get it. It isn’t about facts or money, it is about moral perspective. Whether you agree with Lakoff or not, it is now essential to engage with his argument.
The interview refers to Lakoff’s book, Don’t Think of an Elephant: The Essential Guide for Progressives (1990). Since Lakoff’s argument relies on what are known as frames, ways of framing a point of view or an argument, I think it apposite to mention one of the first works in this area, that of the late Erving Goffman’s Frame Analysis (1974). It is unlikely that Lakoff is not aware of the book, but Monbiot has never mentioned Goffman with respect to this issue. I have not myself read this particular book of Lakoff’s, but if you have read Goffman, you may not need to.
Frame analysis, which can be tricky, is quite straightforward. It isn’t going to be sufficient for Miliband & Co. to have read Piketty’s Capital, they had better read Lakoff in addition and frame their ethical stance allied to the data without worrying about what the Tories are saying. It is data married to ethics that is required. Not simply pointing out the other chap’s empirical errors. These errors must be placed in an appropriate frame of reference.
Balls’ thinking has been captured by the alternative party’s position, as shown by virtually every statement he makes. He just tries to make it more acceptable. It seems doubtful to me that he can change. But Miliband might have a chance, if he can make himself cognitively and emotionally independent of those around him. I realize that this is nontrivial but I don’t know what else can really work in turning around the cultural capture of the economic system and its ancillary institutions that has taken place by adherents of the neoclassical worldview over the past 30 or so years. For this set of vested interests, for whom data is an irrelevance, if you have seen one Redwood tree, you’ve seen them all (attrib. Reagan). A more dangerous perspective is difficult to imagine.
Utilizing frame analysis, one could argue that Galbraith’s criticism of Piketty lies in what Galbraith conceives is a poor choice of frames of reference for analyzing and even cataloging his data. If Galbraith’s critique is accepted, this need not vitiate Piketty’s entire analysis, only that care must be used in assessing some of his conclusions and possibly some of the operations he carries out on his data. Whatever its faults, Piketty’s analysis is of greater worth than the dynamic duo’s upcoming sideshow on the so-called British economic recovery. Claims adduced will be either mendaciously inaccurate or at best misleading. Piketty is at least attempting to unravel what might be conceived to be the truth surrounding the issue of economic inequality.