Thanks to Dick Marshuetz for thoughtful criticism about my earlier post on Modern Monetary Theory. And also for letting me post this for him.
I’ve written another post in response to Dick. You can find it here, or will as soon as I post this one and that one.
Some observations about the piece you wrote on Modern Monetary Theory. You may post it (or any of our exchanges about filling the Supreme Court opening) to Beyond Labels if you like.
Flaws in Keynesian Economics: Questions remain about whether Keynesian Economics has ever worked. For example, the US Great Depression returned in 1936-7 after some moderate recovery and a lot of government spending. And with respect to your discussion of the recent past–since 2008–there has been virtually no correlation country-to-country between government spending on stimulation and growth rates afterward. One problem is the lack of attention to double-entry bookkeeping. If government is to spend, it has to get the money somewhere–tax it away from people, borrow it away from people or print money and rob people of purchasing power. Another is the choice of what to spend money on–the benefits of building roads and bridges with lasting benefits are different from, say, spending to “save” a company that’s been so poorly managed that it has been losing market share for 50 years. Another is our inability to enumerate the relevant variables (immediately below).
Too Many Variables: Economics is not remotely comparable to the physical sciences. In your piece you write of a ball thrown from a moving train and the fact that the velocity of the ball is additive to the train’s relative to an observer on the ground absent friction! In the case of the behavioral sciences, we aren’t even certain of the relevant variables, let alone know how to control for them. In the case of the Great Depression, many say that government stimulus really did work after we got into World War II. But there were many hard to replicate variables at work. For starters, we conscripted 20 million young people and rationed consumer goods and food so that people couldn’t spend even their below-minimum-wage earnings. By 1946-7 they had not been able to buy the things they wanted for five or six years whether or not they had money to spend. They had mostly paid off any indebtedness and there was huge pent up demand. The GI’s came home with a whole lot of spending capacity and the energy and drive, discipline and propensity to take calculated risks to start families, go back to school, buy houses, cars, play pens, clothes, start businesses and buy whiz-bang technology. They both created and filled jobs. Many smart people at the time predicted a recession deriving from demobilization as had happened elsewhere and in the aftermath of many wars but instead they created a boom. As for the fallacy of the stopped clock that’s correct twice a day, we have the fallacy of prediction where from a series of predictions by a large number of predictors there will be some who were correct the first time; out of that group will be a few who turn out to be correct twice in a row; out of that group maybe a handful will have been correct three, four, five times in a row. Similar to flipping a coin and coming up heads a few times in a row, one can get that result purely by chance but to the very few who did no more than flip heads a few times in a row will likely–and incorrectly–be ascribed a predictive quality to what they say about the future.
Inability Of Current Theories to Predict Anything! Will those who have guessed right about the stock market be able with any certainty to predict where the stock market is headed now? Some will do better than others but nobody gets it right consistently. Even Warren Buffett is chary about the direction of the “market” although he has a better-than-chance record of picking companies with strong competitive positions and good management. But as for predicting the market’s direction in the short run, no one has undisputedly proved that it is anything but a random walk, in other words much more art than science. And when it comes to art, consider the mind-experiment of giving a challenge to two accomplished painters to create the right painting for over your mantel piece. They might ask you questions for a decade before painting anything and both eventually come up with very different works to which you might give A’s or F’s. Try reducing that to laws of science. Closer to home, we have many smart people who worry about money in politics and talk about superpacs buying votes. They virtually never give much attention to who might be selling votes (of course few people would admit to that) and I have not seen post-mortem’s concerning how many voters later say that they voted for the wrong person because advertising persuaded them (e.g., “now that you know the results of the Bush or Obama presidencies, do you think the candidate you voted for bought your vote and that without advertising you would have voted differently?). Tallying the spending of winners and losers doesn’t seem to explain why Big Spenders lose, in fact some really big spenders in the current primary–for example, Jeb Bush–have lost to small spenders.
Within Limits. Sure, we know now that Newtonian physics is flawed. But in many cases and for 200-250 years, it represented a great leap forward and worked well enough. For every action there is really an equal and opposite reaction within limits. And bodies in motion tend to stay in motion absent friction. Einstein did indeed advance the ball and I would offer that much of what he said was indeed intuitive. For example, if one were on a tram moving away from the clock tower in Bern at the speed of light, it seems intuitive that the hands of the clock would appear to the traveler not to move. What’s that saying? Time slows with speed? But that’s not the end of the story once again. A short time ago gravitational waves were detected for the first time, something that Einstein predicted off and on a century ago. But it is possible that in following the implications back in time, closer to the Big Bang, we may reconcile quantum mechanics with Relativity and find that Einstein got some things wrong. Does that debunk all he said? I’d say no more than he debunked all of Newton’s theories that still form the bases of most of freshman physics.
Complexity Leads to Obfuscation. You mentioned that Social Security is sustainable. If so, why do we find it necessary to obfuscate the way it works with such words as Trust Fund and Paying Into. Why have government actuaries giving us meaningless estimates of when the Trust Fund will run out when in fact there is no “fund” in any sense of a store of value or some assets tucked somewhere. Social Security pure and simple is a tax on productive people to pay non-productive people, mostly retirees. There are no funds,nothing of value sitting waiting to be doled out.. Those who are paying the payroll tax today are simply paying their parents and grandparents, they aren’t paying into anything. So the ratio of receivers to payers and the amount received by the receivers dictates how much must be paid by the payroll taxpayers of the future–how can any theory make it otherwise?
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I may read the book you mention hoping it has more to offer than the Piketty book. Either way, I hypothesize (that’s also a key underpinning of the scientific method) that while it may reduce my colossal ignorance somewhat, it is in no way revolutionary to economic theories, monetary or fiscal.
Cheers and with respect,