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How the Economy Actually Works & Why Austerity Doesn’t July 27, 2014

Posted by larry in economics, MMT.

LB-HowEconomyActuallyWorks&WhyAusterityDoesn’t(RevisedFinal)Slides-Jun2014 LB-HowEconomyActuallyWorks&WhyAusterityDoesn’t(RevisedFinal)Notes-Jun2014

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).



1. postkey - July 28, 2015

” 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 . . . ”

According to Patinkin, Keynes approved of Hick’s IS/LM interpretation?


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