Friday, December 12, 2014

JW Mason — Minsky on the Non-Neutrality of Money

I try not to spend too much time criticizing orthodox economics. I think that heterodox people who spend all their energy pointing out the shortcomings and contradictions of the mainstream are, in a sense, making the same mistake as the ones who spend all their energy trying to make their ideas acceptable to the mainstream. We should focus on building up our positive knowledge of social reality, and let the profession fend for itself. 
That said, like almost everyone in the world of heterodoxy I do end up writing a lot, and often obstreperously, about what is wrong with the economics profession. To which you can fairly respond: OK, but where is the alternative economics you're proposing instead? 
The honest answer is, it doesn't exist. There are many heterodox economics, including a large contingent of Post Keynesians, but Post Keynesianism is not a coherent alternative research program. [1] Still, there are lots of promising pieces, which might someday be assembled into a coherent program. One of these is labeled "Minsky". [2] Unfortunately, while Minsky is certainly known to a broader audience than most economists associated with heterodoxy, it's mainly only for the financial fragility hypothesis, which I would argue is not central to his contribution. 
I recently read a short piece he wrote in 1993, towards the end of his career, that gives an excellent overview of his approach. It's what I'd recommend -- along with the overview of his work by Perry Mehrling that I mentioned in the earlier post, and also the overview by Pollin and Dymski -- as a starting point for anyone interested in his work.… 
For me, the fundamental points here are (1) That our overarching vision of capitalist economies needs to be a system of "units" (including firms, governments, etc.) linked by current money payments and commitments to future money payments, not a set of agents exchanging goods; and (2) that the critical influence of liquidity comes in the terms on which long-lived commitments to particular forms of production trade off against current income.
This post is about what "capitalism" actually is based on how it works in a monetary production economy. How it works is the result of addressing key issues that the conventional approach to economics ignores by assuming the neutrality of money. Money is not neutral for very specific reasons that JW suggests need to be explored — and Minsky realized this. In doing so, he suggested how to set economics on a fresh course based on tried and trusty principle, Follow the money.

From the POV of following the money, money and banking, and finance are essential components of the study of economics, and accounting is as important or more so than econometric modeling. This being the case, law and government are also heavily involved in understanding the construction of economics systems based on the wider social and political context.

Probably the most important takeaway from JW's recent posts is his focus on the need to be asking the right questions in order to arrive at the right answers. The first step in design and engineering is figuring out what the problem actually is. Instead, economists have tended to assume that the purpose of economics is to provide explanations. The problem here is that events can have many explanations. But when dealing with a system that has variable effects depending on the construction of the system and the variable inputs, the question is about how the system works to do what it is capable of doing.

The conventional view of economists about their subject is similar to theoretical physics, whose object is "pure science," which consists mostly in constructing mathematical models. Evaluating those models based on outcome is left to experimental physicists, and then the result are passed along to applied physicists, who are called engineers. Conventional economics has tended to emphasize the theoretical, ignore the experimental, and leave the applied to a separate discipline, management science, that doesn't rely on very much on economic theory.

As Thomas Aquinas observed at the outset of De ente et essentia, paraphrasing Aristotele, "A small mistake at the beginning becomes a great one by the end.

The Slack Wire
Minsky on the Non-Neutrality of Money
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

24 comments:

Matt Franko said...

"follow the money"

Well Tom if they do this, I would advise them to start following the "money" at the true source of its origin....

I dont think many or perhaps any are doing it this way....

Tom I'm starting to think that our economic systems are NOT materialist systems... and our material systems are tertiary to our economic systems...

iow our material systems SUPPORT our non-materialist economic systems...

People seem to typically think economic systems are all about materials.... I'm thinking this is probably the wrong way to look at it... kind of simplistic...

iow in engineering we have to deal with "tolerances" due to material limitations... this is the famous "plus or minus" or "+/-"... "system will operate within these tolerances"....

In economics, we SHOULD NOT ACCEPT TOLERANCES like we have to in dealing with material systems...

We have to deal with variations in source voltages in electrical systems... the loads operate within "tolerances"... I see this same type of materialist acceptance of "tolerances" carried over into our economic systems and it is a BIG mistake imo... "tolerances" should apply to materialist systems ONLY...

We should NOT TOLERATE variations in outcomes in our economic systems like those that are forced upon us in our work with material systems....

rsp,

Matt Franko said...

a USD is NOT a material imo...

People discus "money" (to include the USD) like it is a material ALL THE TIME...

this is Warren's "gold standard mentality"
rsp,

Anonymous said...

Most transactions involve a good or service on one side, and are not just exchanges of one kind of financial asset for other kinds of financial assets. And that point aside, an economy doesn't just consist of transactions anyway; it also consists of production and resource utilization decisions inside firms; and consumption and labor supply decisions inside households. So representing an economy as simply a network of units engaged in financial contractions leaves out a massive quantity of essential economic activity.

I don't see how it is helpful to describe our economy as a monetary production economy. It is useful to recognize that money is not just a neutral veil or medium. Money is one of the important things that an economy produces, accumulates and employs. But it is not the only or the major thing an economy produces, accumulates and employs. Most economic agents are not in the business of producing money other than as a means to further ends. I go to work every day, and what I am trying to produce with my work consists in such things as: food for my table; gas for my cars; entertainment; travel opportunities; ownership title to my home; leisure time in the future. Money is purely a means to those further ends. Only weird, Scroogey obsessives have monetary production as an ultimate end.

I think both heterodox and orthodox economics in this era is drowning in a sea of money illusion, and has lost its grip on the real world. That's why we have had four years of stupid debate about monetary policy and various aggregates characterizable purely in monetary or financial terms - i.e. deficits, interest rates, inflation rates, etc. - while at the same time we have had systemic intellectual neglect of the real material considerations of life and the concrete decisions we have to make about how to organize that life. I've come to think of this syndrome as a feature of our postmodern intellectual decadence. In many spheres of intellectual life we have lost track of real values and the real world, and are lost in hyper-reflexive webs of representations of representations of representations, etc.

Matt Franko said...

"drowning in a sea of money illusion,"

right Dan I think you have been out front on this....


rsp,

peterc said...

Actually, I think M-C-M' sums up capitalism pretty well. Workers and humans in general obviously care about C-M-C' more than M-C-M', but that is not what drives capitalists or capitalist governments. So if we want to understand crises under capitalism, M-C-M' seems an appropriate way to look at things.

If we're talking about the kind of society and economy we want, then M-C-M' is not the way to view things. However, when the orthodoxy attempts to paint the system we have as already being about C-M-C' and claim money is neutral it is not a desire for a better society that is motivating their framing. They are trying to pretend that capitalism is driven by human needs and the production of use values rather than (monetary) value. It is apologetic.

But money can never be neutral in an economy where nothing is produced until monetary expenditures have occurred, and when what gets produced depends on the composition of monetary expenditures -- distribution of (monetary) income. The cause of unemployment, for instance, is very much monetary. There is no real reason of any legitimacy that can explain the unemployment. It is lack of monetary expenditure, pure and simple. The class-interested concern about the deficit is very much about money. It is the ruling class not wanting money to flow to Main Street. And they have hoodwinked the public into thinking the deficit is a problem. As a consequence, there is insufficient monetary expenditure and unemployment persists.

The day TPTB care about what workers want, or what the vast majority of humans want, the system might stop being capitalism and start being about C rather than M. Until then, it is not the case. And I think trying to understand the crisis and possible solutions (within capitalism) as if it was caused by real rather than monetary factors makes little sense. There is more than enough housing to go around, yet a lot of homelessness. There is more than enough capacity to produce the necessities of life, yet enormous poverty globally. There are plenty of workers willing to work but not enough jobs because of monetary factors. The crisis did not occur because of a lack of capacity to produce use values, structural unemployment or any other non-monetary factor.

The only way to get money neutrality is to do away with money. I'm not against that, but it is unlikely to happen any time soon. In the meantime, I think money matters a lot. There will be no decent step forward unless money is put to more effective use. That starts with an understanding on the part of the public that the govt is not constrained by money, only real resources and then exerting massive democratic pressure from below to compel govt to act appropriately. I'm not even sure a well meaning govt could go against elite interests in the absence of such mass pressure from below. The politicians responsible would probably end up assassinated or at least demonized, disgraced and turfed out of office pretty quickly.

peterc said...

C-M-C, not C-M-C'. Not sure why I was advocating unequal commodity exchanges and associated skulduggery ... :)

Tom Hickey said...

Good points, Peter.

Neoclassical economics assumes C-M-C', with substitution automatically adjusting for decrease in demand for consumption goods by increasing production of capital goods instead, assuming that reduced consumption = increased saving = increase investment. According to Say's law, there is never a market gut in the long run.

In this model, capitalism is an after-thought, in that this is the "natural order of things" that applies always and everywhere under economic liberalism and only does not apply where economic liberalism is not fully present.

This is a fairy tale. As Joe Stiglitz observed, "There is no invisible hand." The assumption that market forces drive economic liberalism in long-run equilibrium iaw economic laws is fanciful.

The questions then become, 1) how does this system work naturally, and 2) what is preventing it from working naturally so that these imperfections can be removed. The answer, of course, is chiefly government intrusion into the natural working of markets.

This approach isolates economics from anthropology, sociology and psychology, which study human behavior and motivation. The findings indicate that human action and interaction are complex and networked, with layers embedded in layers. Assumptions made without considering the context in which action and interaction are embedded are likely to be unrealistic and models developed from them non-representational.

The starting point of inquiry must be with the whole that provides the context for the study. From the POV of economics, this is presently the monetary production economy, which is an aspect of the cultural and institutional structure of a society.

Since there is no universal homogenous context, there can be no general theory, only special cases. However, there may be similarities among these cases to the degree that the contexts overlap.

Historically, increasing social and political liberalism has resulted in greater economic liberalism. As a result the power base of societies shifted from the feudal to the republican and the rise of the ownership class to elite status replacing the feudal lords.

Rulership is about power and its distribution. With the fall of feudalism, power was redistributed from the warrior class to the acquisitive class.

Previously, wealth had been acquired by institutionalized force in an agricultural age in which territory was predominant. Under the chiefly industrial system controlled by the acquisitive class it would be controlled by productive capital and finance capital. Thus, the key fundamental of capitalism became M-C-M' as the elite sought chiefly to consolidate power through wealth accumulation.

Tom Hickey said...

"C-M-C, not C-M-C'. Not sure why I was advocating unequal commodity exchanges and associated skulduggery ... :)"

Schumpeter's argument is that entrepreneurism and technological innovation lead to C', which accounts for the increasing wealth that gets distributed to entrepreneurs as its creator rather than extracted from worker exploitation as Marx argued. In this model, the entrepreneur is Über-Arbeiter that not only assumes risk but also adds organization. I think that is view has merit and needs to be incorporated into analysis.

However, in a monetary production economy, investment is basic and that means that finance capital is foundational. This is not necessarily a bad thing anymore than capitalism is inherently a bad thing. It's certainly a step up from feudalism. But it can become neo-feudalism through the creation of oligarchs and dynasties, as has happened.

In an organization power is always basic. Organizational "politics" is about the distribution of power and its use. Under previous systems, power was mostly based on force and the ability to apply it.

Social and political liberalism were about changing this emphasis on force and hereditary status and power once established. Economic liberalism came along with this liberalization. However, owing to the institutional structure of liberal republics with monetary production economies, power has devolved to the acquisitors and the emphasis shifted from raw power and hereditary position to possession of wealth. and the ability to hold it and increase it.

This is summed up in M-C-M'. Owing to changes since the time of Marx, for example, the huge increase in productivity owing to technological innovation, the analysis now needs to be somewhat different to take these shifts into account. But as long as acquisitors rule in a monetary production economy, M-C-M' will apply as a general rule of economic and social motivation when status and power are determined by wealth, and the basis of "meritocracy" is wealth accumulation rather than force and heredity.

But there may also be a place for C-M-C' in the analysis to the degree that the economy is entrepreneurial and technological.

Anonymous said...

peterc, the way you describe it, moving between the M-C-M' picture and the C-M-C' picture is really just a change of gestalt, not anything fundamental to economic analysis. It's like debating

Chicken-Egg-Chicken'

vs.

Egg-Chicken-Egg'

Maybe there are big time egg lovers who are all about the eggs, and chicken lovers who are all about the chickens, but they are both just focusing on different parts of the same cycle. Maybe when we are thinking only about financial markets and how to regulate them, we should focus on the monetary production gestalt. But despite the fact that capitalist finance is a dangerously large part of the economy, it is still far from the whole economy. And there are many horrendous structural deficiencies in our present way of economic life (in the US at least) that go way beyond the threat of recurrent financial instability.

Money isn't neutral, and can't be ignored. But the US has gigantic problems with the systems we use to support the lives of retired people; with the way we educate young people and others; with the ways in which we deliver health care to our population; with the ways in which we produce, store, allocate and deliver energy for work; with the ways we connect healthy working age people with the useful forms of employment to keep society thriving and divide up and deliver incomes to the people who do all that work. I have been following discussions in the economic blogosphere since 2009 fairly closely, and as far as I can tell, they have made close to zero progress on those issues - and in most cases don't even seem to possess the intellectual tools needed to think about them in a fully coherent and useful way. I think that's because our economic thinking has become money-addled, and so people don't even know how to ask the right questions any more.

Anonymous said...

(cont.) Some of the bizarre alleyways the economics discussion has gone down over the past few years reflect this money-addled thinking: for example, bitcoins, scrip, greenbacks, coinage, etc. All of these approaches err in thinking that the main things really wrong with our economic life have to do with the monetary handles we use for moving goods and services around, and not the underlying institutions for organizing the production and distribution of these goods and services. Everybody seems to be floating above the monetary cloud layer, looking down, and saying "there is something wrong with the money!" Nobody has their feet on the ground.

The fact that we employ a fiat money system is potentially relevant to some problems: such as the problem of unemployed capacity and cyclical downturns within the institutional boundaries determined by our existing economic institutions, and the problem of adjusting prices for international trade. But it has nothing very important to do with the deeper structural problems I mentioned, since those problems will continue to exist whether we are operating at relatively full capacity or not. The general Anglo-American paradigm - whether New Classical, Keynesian, post-Keynesian, what have you - is oriented toward cyclical problems, and tends to break down catastrophically when confronted with questions and issues about fundamental economic institutions and arrangements. That's why economists are currently making very minimal contributions to long-term social progress.

I don't agree that in our society nothing gets produced without a monetary exchange. Today I came home from work, took some food out of the refrigerator and produced some dinner. In other words, I took some capital, applied some labor and produced some output. Then my wife and I consumed the output. Elsewhere, some people were applying labor to their cars and delivering a transportation service to their kids. Some other people were applying labor to their snowblowers and producing a clear driveway. Some were applying labor to a venue and personal connections and producing an enjoyable social gathering. Some were applying labor to the machinery of paper and pencil and producing mathematical knowledge in their kids' brains. Much (possibly most) of the economy consists of these forms of production and distribution. The only reason we tend to think that economic processes don't happen without money is because we have all been brainwashed to adopt an econometric paradigm in which the only things that exist are the things we have measured, and the only things we measure are those processes that involve a recorded monetary transaction.

Anonymous said...

Tom, I don't think the issue of automatic optimization via invisible hands vs. the potential aggregate demand deficiencies has much to do with the M-C-M vs. C-M-C pictures. All you need to tell that part of the Keynesian story is to have money in the economy: something that is very liquid and for which the demand could conceivably become approximately infinite (it could even be some other good for which there is an unpredicted surge in demand that disrupts expected patterns of production and exchange.) It is not necessary that monetary production be the basic organizing principle of the economy.

Anonymous said...

The whole idea of a circuit with an "endpoint" - whether C or M - makes no sense at the macroeconomic level in a real-world economy existing in evolving historical time. Money is constantly being converted into goods, which are constantly being converted into money, which are constantly being converted into goods, which are constantly being converted into money, etc., etc. There is no endpoint.

Even if we move away from the macro economy and focus on the goals of the individual capitalist agent, and assume that agent's goal is to accumulate wealth, it is still the case that wealth exists in many different forms. For example, if you look at the balance sheets of most companies, you will see that property, plant and equipment, along with goodwill and other intangible assets, form a larger portion of the company's assets than cash and other financial instruments.

Tom Hickey said...

Dan "But the US has gigantic problems with the systems we use to support the lives of retired people; with the way we educate young people and others; with the ways in which we deliver health care to our population; with the ways in which we produce, store, allocate and deliver energy for work; with the ways we connect healthy working age people with the useful forms of employment to keep society thriving and divide up and deliver incomes to the people who do all that work. I have been following discussions in the economic blogosphere since 2009 fairly closely, and as far as I can tell, they have made close to zero progress on those issues - and in most cases don't even seem to possess the intellectual tools needed to think about them in a fully coherent and useful way."

These are not economic issues but political ones. A basic political issue is the kind of economy to have, e.g., one in which distribution takes place through rationing by markets on the basis of price (and therefore income) or one based on centralized command in which goods and work are apportioned based on, "From each according to ability and to each according to need." Of course, there are other means of distribution, too, such as have been used previously in history and continue to exist in some places.

These are political choices and they are generally made by those whose power puts them in the position to do so.

Contemporary economists function within an existing system that has already been imposed by political decision. The leading economists generally are spokespeople for competing factions within that system.

Contemporary capitalism is based on market-based distribution in a monetary economy in which different monetary regimes are possible and in use, and different economic policies also. This is reflected in political choices made by different nations.

There are two major challenges for economists here. First is getting the analysis of the existing situation correct, which most economists and policy makers fail to do, often in important ways with broad and deep consequences. Secondly, the context is heavily dependent on the competing and therefore usually conflicting ideology of the dominant factions. Economists need to stop pretending that what they are doing is entirely positive and fess up to the normative aspect of their assumptions. Then there could be an informed and honest debate. Now it is to a great extent ill-informed and dishonest.

Complicating this is the embedding of economies in a larger social and political context of cultures, subcultures and institutional arrangements within a global context that is dominated by geopolitics, geostrategy and geotactics.

As a result, economics is mostly whistling in the dark that has very little to do with actual outcomes other than as rationale for different agendas and rhetoric to advance them.

The study of economics as it is presently pursued is pretty much "metaphysics" in the sense of ideological justification. This rationale is now being used rhetorically in the service of promoting neoliberalism as the only viable alternative for globalization.

Most contemporary economics are heavily math-oriented and clueless about the big picture of what is really going on. Those that are, are heavily ideological and use their intellectual tools to advance their position. Most would be better employed using their math skills productively instead of as physicists manqué and amateur philosophers. The ideological one should just be politicians or hire out as political operatives to be honest about what they are doing.

Tom Hickey said...

The whole idea of a circuit with an "endpoint" - whether C or M - makes no sense at the macroeconomic level in a real-world economy existing in evolving historical time. Money is constantly being converted into goods, which are constantly being converted into money, which are constantly being converted into goods, which are constantly being converted into money, etc., etc. There is no endpoint.

The question over C and M as starting and endpoint is the way causality runs in motivating human action in a monetary production economy. In a monetary production economy based on economic liberalism (capitalism), the motivation of consumers (workers and owners of capital as consumers) is to consume. The motivation of owners of capital, both real and financial, is capital accumulation as wealth (net worth). Consumption drives demand and investment the producers response to demand in order to accumulate more capital as well as to consume.

If Say's law held in a monetary production economy all would be well. Capital would formed as consumption increased at full employment. But Say's law doesn't hold because there is financial capital in addition to real capital. Owners don't either consume or productively invest exclusively but also save, creating demand leakage that affects circular flow. Consequently, unemployment is a chronic condition of capitalism unless government offsets the leakage. But this increases the wealth of the owners and puts them in a position to capture the system in liberal democracy and convert it to oligarchic democracy unless controls are in place to prevent or correct this.

Of course, a monetary production economy is not the only option. But when it is chosen, then certain things follow given economic liberalism and the representative democracy or modern republics.

JW Mason said...

Thanks for the comments, Tom. I'm glad you understand what I am trying to do.

In any kind of analysis, we have to substitute a simplified picture for complex social reality. The point isn't that the simplification of thinking in terms a system of money payments and commitments is "true" and the simplification of thinking in terms of exchanges of goods is "false". The point is that there are insights that are easier to reach by the first kind of simplification than by the second.

The other point, as Peter brings up, is that the most important decision makers in our economy are playing the game of M-C-M', which is scored in money. So regardless of how we might think about money as organizing exchange in a simple market economy, under capitalism it has a special additional role.

Anonymous said...

The ‘neutrality of money’ seems to be a humongous and obvious joke to me – the 1% pissing all over the people.

Some people put everything through a blender (DanK ?); and some people put everything through a sieve. A sieve can retain everything that is good or everything that is bad.

The 1% sit on top of the world and they have a sieve. And they keep as much of M to themselves as they can for the obvious reasons.

How anybody can talk about the sequence of M and C is behind the Moon! Which is where most economists seem to have lunch!

There is nothing more powerful on the face of this earth than human kindness: how to unfold that potential is the problem.

peterc said...

"I don't agree that in our society nothing gets produced without a monetary exchange. Today I came home from work, took some food out of the refrigerator and produced some dinner."

Dan, I very much agree that lots of production occurs outside the wage labor relation. But capitalism doesn't value it (zero price).

This is partly why I would support a BIG, a participation income or a very broadly defined job guarantee that included all sorts of productive activity currently being performed without remuneration. (Personally, I prefer a complete separation of income from work, but it is unlikely to occur any time soon.)

Anonymous said...

"These are not economic issues but political ones."

Tom, while I certainly agree that they are political issues, in the sense that they involve decisions that must be made through some political process, I think they are also economic issues and that we can't draw a dividing line political and economic choices. Any decision that people can make about the allocation of scarce resources to various human projects, and about the production, exchange, distribution and employment of things of value, is a fortiori an economic decision, whether it is made via political processes or some other process.

I agree that most economists tend to think of their field in a much more narrow way, and aspire to be nothing more than technicians tending to actually existing and historically given economic institutions, I would submit that such a limiting conception has nothing in itself to do with the ideals of economics as a social science, but is an artifact of the institutional capture of that academic field by the major powers in the existing institutional framework, and the ideological biases of the economists who have sought employment within that field.

I would suggest that economists with a more exalted feeling for human potential and a less narrow grasp of the full scope of economic science work to liberate themselves from this capture, and develop a more capacious view of the field that tolerates a wider set of live options for discussion.

Anonymous said...

I agree with everybody's point that under modern capitalism money plays an especially important role. But objection is only to the idea that this means that monetary production is the defining characteristic of our economy, and to the idea that we can adequately understand the economy by modeling it as a set of agents accumulating stocks of money (and promises for money) and participating in flows of money (and promises of money). I think this leaves out the most important economic processes.

I think the Say's Law issue is a red herring. First, because we don't need to introduce money to understand the possibility of economies in which Say's Law is violated. And second, because even if we posit a hypothetical economy in which Say's Law is true, it doesn't follow that that economy would have no problem with employment, underutilized capacity, sluggish growth, etc. Say's Law just says that if producers increase output by X%, effective demand will also increase by X%. But even if that were always true, there is no guarantee that producers will increase output in a sub-capacity economy until it reaches capacity. Producers can get locked in a Nash equilibrium in which they have a interest in expanding output as a group, but in which each individual producer has no self-interest in expanding output and so the optimizing action never occurs.

Also, and again even if Say's Law were true, production decisions in an economy are made by the owners of the means of production. There is no reason to think that the action that collectively maximizes the utility of the owners of the means of production will fully employ the population among which those owners happen to live. The size of that population is an external variable.

JW Mason said...

"I would suggest that economists with a more exalted feeling for human potential and a less narrow grasp of the full scope of economic science work to liberate themselves from this capture"

OK. So what are some good examples of positive economics along the lines you want to see? Hic rhodus, hic salta!

Tom Hickey said...

Dan, I very much agree that lots of production occurs outside the wage labor relation. But capitalism doesn't value it (zero price).

This is a key issue under neoliberal globalization. The agenda is monetizing the informal economy and completing the enclosure of the commons on the assumption that what is not priced in markets, which implies transfer of legal ownership, is "valueless." This is not just economic, but largely a legal matter.

For example, DeSoto equates economic development with legal ownership, e.g., land title, that involves enclosure of the commons. This is what's happening in the emerging world right now as they "liberalize" under the influence (spell) of neoliberal globalization.

This has been and is still the basis of the Big Ripoff.

Tom Hickey said...

Tom, while I certainly agree that they are political issues, in the sense that they involve decisions that must be made through some political process, I think they are also economic issues and that we can't draw a dividing line political and economic choices.….

Dan, I am not disagreeing with what you are saying here. Of course, political choices should be founded on informed deliberation. What I am saying is that now this is largely not what is happening because the information and advise being offered by "experts" is either ignorant or partisan pretending to be positive.

Social sciences, including economics, cannot be positive sciences similar to the natural sciences, as much conventional academic pursuit assumes it can. The Lucas critique aims at this but then Lucas goes down the rabbit hole in presuming that econometrics based on microfoundations can overcome it. This is simply another assumption of methodological individualism that is based on an unstated assumption of ontological individualism.

These assumptions about individualism are called into question by studies by other social scientists, including some economists, as well as psychologists, about reality being socially constructed, human action being largely socially determined, and individuals knowledge and volition being influenced heavily by cognitive-affective biases that readily identifiable and exploited by propaganda such as PR, and marketing advertising. Choices turn out to be largely rule-based, and "rules" is another term for norms.

Natural science studies entities that don't have choice in this sense. The rules that natural sciences discovers can therefore be generalized as laws. This is simply not the case in social science. Individuals are not atoms. Human action is not constant but highly variable.

This is what Keynes meant by saying that since economics is a "normative science,
econometrics is barking up the wrong tree in his criticism of Tinbergen.

This is where Post Keynesians are coming from. I agree with JW that the criticism of conventional approaches to macro are sufficient. What is lacking a a viable replacement. Actually, this is the answer of conventional economists to heterodox economists: What we have may have issues, but you don't have anything better. If you do, let's see it.

Conventional economics is not going to be replaced just by criticizing it or even mostly by criticizing it. It will be replaced when there is an alternative that shows itself to be superior, and economists have to to adopt it, or be left behind.

IMHO, the way to do this is to approach macro as a policy science that is similar to architecture and engineering, which begin with a design problem — as socio-economist Adolf Lowe suggested, for instance.

This requires understanding the larger context in which issues are embedded, that is, society as a complex system.

It also requires debating fundamental philosophical issues such as the conception of human nature rather than assuming that humans are well-described behaviorally as stimulus-response mechanisms that respond automatically ("naturally") to signals concerning material satisfaction. Maslow was able to knock B. F. Skinner from his perch as king of the mountain in psych by offering humanistic and then transpersonal alternatives. Maslow also exported these views of human being into management science.

Homo economicus is a puny view of human being. As John Stuart Mill said in response to Bentham's conception of utility, "It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied." This is the problem with oversimplification in modeling. It can convey a false impression of reality, and this is often brought to bear rhetorically as the results of positive science. NOT!

Tom Hickey said...

Oops. Should read, "I agree with JW that the criticism of conventional approaches to macro are insufficient."

Alternatively, one could say that they have sufficiently accomplished the task of discrediting the conventional approach. What is needed now is a replacement.

If these folks were not dethroned as a result of the GFC and dismal recovery for all but the wealthy, further criticism won't do it either.

The fact is that the dominant faction — neoliberals — have dibs on conventional economics as the textbooks go to show.

Moreover, the Libertarians also have a well-constructed position that is gaining in popularity.

On the other hand, the left is represented by the so-called Keynesians that are not actually Keynesians at all, but largely monetarists. Even Krugman and DeLong self-identify as neoclassical economists.

The heterodox economists are nowhere to be seen. other than nipping at the heels of the conventional economists.

Matt Franko said...

" Individuals are not atoms. Human action is not constant but highly variable."

Right!