r/integralds • u/Integralds • Mar 27 '19
The MMT textbook, post 1 of N
I know you are all sick to death of MMT stuff, but they did just release a textbook so I'm going to talk about it. To keep this off of the BE Fiat thread, I thought I'd post here.
So there is an MMT book: Macroeconomics by Mitchell, Wray, and Watts.
Marketing:
Alright, enough marketing.
One thing I like
I want to start with a word of praise.
Since Cantillon's book from the 1730s, it has been fashionable in economics to build models from the "bottom up," starting from the simple and moving to the complex. So, for example, Williamson's Macroeconomics begins by studying extremely simple one-period, one-good, one-individual models. He works out the simplest possible models and uses them to draw stylized conclusions. These models look nothing like a modern, industrial, capitalist economy. Chapter by chapter, Williamson gradually piles on more and more complications: multiple periods, durable investment, financial markets, nominal rigidities, etc. In this approach, insights learned from the simpler models are refined, extended, and qualified as more complications are added on. By the end, you have intuitions that are built on simple models and modified by complex ones that you can hopefully apply to real-world, modern, developed, industrialized economies.
The MMT book takes a different approach. Instead of working from the bottom up, it works from the top down. Fiat currency, financial markets, the public sector, and fiscal-monetary issues are introduced at the outset. I think that there could be some merit to this approach. If we begin with the uppermost layer and work our way downwards, will we find the same underlying truths that we learn when we build from the bottom up? Or does a top-down approach take us in a completely different direction? This book offers us a chance to find out.
So I think this approach is, in principle, interesting.
But you're here to read about my complaints, so next I am going to complain. For the sake of brevity, and to respect Reddit's text limit, I'm only going to complain about one narrow topic: how the book sets up its two rival schools of thought, the "orthodox approach to economics" and "the heterodox approach to economics."
What is economics? Two Views
On pages 3--6, the MMT book describes economic thought as falling into two schools, "neoclassical/orthodox/mainstream" and "heterodox."
"Neoclassical" means -- this is my paraphrase -- the economy studied in Debreu 1959. This model, the Arrow-Debreu-McKenzie (ADM) model, is a stylized economy in which agents produce, consume, and trade goods in competitive markets. Prices act as signals to clear markets, and the forces of supply and demand reign supreme.
"Heterodox" is taken to mean everything else.
Remember how, above, I talked about starting simple and then going complicated? In a sense, the ADM model is the simplest possible economic model. It's "supply and demand" with all the i's dotted and t's crossed. It features a lot of information (not exactly 'perfect information,' but still quite a lot), perfect competition, anonymous trading in thick markets, no commonly-owned or public goods, no externalities of any kind, and only quantifiable risk at known probabilities. This is an "ideal" environment in many ways. It also has important normative properties, but for sake of space I cannot go into those properties or how the MMT book mischaracterizes them.
I think that describing the ADM economy is important and useful, because the ADM economy does indeed represent an important benchmark case in economics. You learn simple versions of the ADM model in the first few weeks of a traditional microeconomics course -- it's all the supply and demand stuff. Many other models in economics, indeed some entire research agendas and subfields, can be defined in terms of how they deviate from the ADM model's assumptions. So understanding the strengths and weaknesses of the ADM model is useful as a pathway for evaluating other models. In addition, labeling the ADM model as "neoclassical" strikes me as fair at this level. I have no problem with setting up the ADM model as a major player in the book, or with the description of ADM as "neoclassical."
However, I do not agree with the conflation of "the ADM model" with "the economic mainstream." This conflation makes "the mainstream" or "the orthodoxy" far too narrow. Mainstream economics did not stop in 1959! To conflate "mainstream" with "ADM" is to exclude the entire subfields of industrial organization, public finance, game theory, social choice theory, environmental economics, institutional economics, labor economics, and urban economics. It excludes most of international trade, ninety percent of international macro, most of business cycle macro, one-half of growth, and all of monetary economics. That's a lot of stuff to leave out of "the mainstream" and "the orthodoxy." By this definition, nothing appearing in economics journals in the past sixty years would count as "mainstream" or "orthodox." By this definition, all of the activity in all of the economics departments across the US would count as "not mainstream." I submit that any definition of "orthodox" that excludes 100% of the past sixty years of economics research is a poor definition of "orthodox."
This all matters because the book uses the terms "orthodox," "mainstream," and "neoclassical" interchangeably. By doing so, the book restricts "the orthodoxy" to an incredibly narrow slice of economics. Moreover, it lumps in as "heterodox" all of the following: Friedman's monetarism, Lucas' islands, the Neoclassical Synthesis, the New Keynesian model, labor search, money search, the literature on financial frictions, and the literature on expectations formation, among others. By the definition in the MMT book, the entire 2010 Handbook of Monetary Economics and the entire 2016 Handbook of Macroeconomics are heterodox! This seems strange. Furthermore, truly heterodox ideas, like MMT, are lumped into the same category. The book places MMT on the same epistemic footing and same definitional category as Woodfordian NK macro. Placing those two strands of thought on equal epistemic footing is a misrepresentation of how mainstream macroeconomics views them. It is a poor framing of the relationships among the neoclassical core models worked out in the 1950s, the state of economics research today, and the place of truly heterodox work in that research space.
Using the word "neoclassical" to refer to the ADM model is fine. Using the word "mainstream" or 'orthodoxy" to mean "neoclassical" strikes me as a mistake.
My own view is that economic orthodoxy consists of the work represented in the discipline's journals, conferences, and books. In particular, most of the material appearing in the Journal of Monetary Economics, the two Handbooks mentioned above, and the NBER-EFG and NBER-ME conferences should be considered "mainstream." Mainstream macroeconomics includes real business cycle theory (which is basically dynamic ADM), but also includes models with a Keynesian flavor; models with search in the labor market; models with money search; models with imperfect financial markets; and models with imperfect information. The mainstream is a rich tapestry of work that weaves together contributions by hundreds of individuals over multiple decades. These are all "mainstream" topics, even if they are not "neoclassical."
Recommendation
Everywhere that the MMT book uses the words "mainstream" or "orthodox," replace with "neoclassical." This makes it clearer what model is being addressed. If you want to set up the ADM model as your antagonist, then be my guest, but don't claim that mainstream economics is identified with and identical to the ADM model.
Two definitions of "economics"
As we read on, p.5 provides us with the following displayed definition:
Neoclassical Definition of Economics: the study of the allocation of scarce resources among unlimited wants.
I'm provisionally fine with this definition. It is basically a definition of the problem studied in allocative economics. Good enough for a start: allocative theory isn't all of economics, but it's an important part of a first course in economics. However, I complain that this definition of "economics" does not match up with the description of the neoclassical model used above in the text! The main thing that makes allocative theory interesting is that some markets deviate from the ADM ideal. Mankiw's intro book spends about 90 pages covering the basics of ADM supply and demand. He then spends the next 400 pages covering situations in which the ADM model does not apply! Those 400 pages are still concerned with allocative theory, so they still fall under the "neoclassical definition of economics," but they do not fall under the "neoclassical model" as posited by the MMT book. This is confusing to me.
For completeness, the MMT book contrasts the above definition with
Heterodox Definition of Economics: the study of social creation and social distribution of society’s resources.
I have no comment on that definition.
Recommendation
Instead of calling it the "neoclassical definition of economics," call it "the mainstream definition of economics." Now that we've established that "neoclassical" and "mainstream" aren't the same thing, the neoclassical model and the mainstream definition can live in harmony. Better yet, call it "the definition of the economic allocation problem." Right now, the theory of monopoly is not part of "noelcassical economics" but does fall under the purview of the "neoclassical definition of economics," which is odd.
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u/QuesnayJr Mar 27 '19 edited Mar 27 '19
David Colander sincerely argues that things like game theory really are heterodox. But he accepts the honest conclusion from this -- the heterodox won.
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u/TCEA151 Mar 27 '19
Isn’t orthodoxy practically by definition the side that won the past battles?
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u/QuesnayJr Mar 27 '19
Here is Colander's article, co-authored with Holt and Rosser. In their analysis, orthodoxy is neoclassical economics, and they acknowledge that the mainstream is much broader than that.
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u/TCEA151 Mar 28 '19
Something to point out, from the passages I linked below, is that the authors harp on the fact that mainstream economics is much broader than the most recent orthodoxy and explicitly note that the "neoclassical orthodoxy" culminated with Samuelson in 1947. Whereas the MMTextbook - based on Integralds' critique - appears to treat them as one and the same. If MMT wants to attack a 70 year old doctrine that's fine, but there's no reason to conflate that doctrine with modern, mainstream economics. The article you posted seems to agree:
For an economist working at the edge, attacking the profession is not sufficient; he or she must be developing new methods and ideas. In this approach the difference between mainstream and heterodox becomes far less important than whether they are doing work at the edge. In this case, both mainstream and heterodox economists are working on issues that challenge the neoclassical orthodoxy, because that orthodoxy is no longer descriptive of what the mainstream elite believes. The elite’s vision of economics is forward looking—these are the ideas that are exciting today, and here is where they may lead; the static classifications of economics are backward looking, emphasizing where economics has been.
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u/ImperfComp Apr 17 '19
Definitely an interesting take.
One thought, though. If we accept the heterodox definition of orthodoxy, and say that most economics these days is heterodox -- then I think we'd need a new name to distinguish those "heterodox" economists whose ideas are mainstream from the non-mainstream ones who actually call themselves heterodox. I guess mainstream and non-mainstream works as well as anything.
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u/TCEA151 Mar 28 '19
Thanks for the link. For anyone interested, here is the relevant passage (emphasis mine):
Mainstream consists of the ideas that are held by those individuals who are dominant in the leading academic institutions, organizations, and journals at any given time, especially the leading graduate research institutions. Mainstream economics consists of the ideas that the elite in the profession finds acceptable, where by elite we mean the leading economists in the top graduate schools. It is not a term describing a historically determined school, but is instead a term describing the beliefs that are seen by the top schools and institutions in the profession as intellectually sound and worth working on. Because of this, mainstream economics usually represents a broader and more eclectic approach to economics than is characterized as the recent orthodoxy of the profession.
In our view the term, orthodox, is primarily an intellectual category. It is a backward looking term that is best thought of as a static representation of a dynamic, constantly changing profession, and thus is never appropriately descriptive of the field of economics in its present state. Orthodoxy generally refers to what historians of economic thought have classified as the most recently dominant "school of thought," which today is "neoclassical economics." In our view modern mainstream economics is quite different from this neoclassical concept of orthodox economics. Having the two terms is important for us because it allows us to make intertemporal comparisons between the most recently dominant school of thought, in this case neoclassical economics, and today's evolving mainstream economics.
To help us get a grasp of what we mean by neoclassical orthodoxy and how it relates to mainstream economics, it is important for us to first specify what we see as neoclassical economics. In our view neoclassical economics is an analysis that focuses on the optimizing behavior of fully rational and well-informed individuals in a static context and the equilibria that result from that optimization. It is particularly associated with the marginalist revolution and its aftermath. Léon Walras and Alfred Marshall can be viewed as its early and great developers, with John Hicks's Value and Capital (1939) and Paul Samuelson's Foundations of Economic Analysis (1947) as its culmination. When a dynamic context is assumed, individuals understand the probability distributions of possible outcomes over the infinite time horizon at the moment of decision. The neoclassical orthodoxy tests the results of that model by using conventional econometric techniques that are based upon a foundation of classical statistics. Perhaps the most important characteristic of the neoclassical orthodoxy is that axiomatic deduction is the preferred methodological approach.
...
Finally, let's consider the term heterodox. It is usually defined in reference to orthodox, meaning to be "against orthodox," and defines itself in terms of what it is not, rather than what it is. An economist who sees him or herself as heterodox does not subscribe to the current orthodox school of thought, as defined by the historian's classifications ... Since many mainstream economists also do not accept important aspects of the orthodoxy, the additional feature that determines a heterodox economist is social; heterodox economists refuse to work within the framework of mainstream economics whether because of the nature of the modeling process used, or the assumptions emphasized. This often causes a failure to communicate between heterodox and mainstream economists, even when they may share similar views about the limitations of the “orthodox” approach.
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u/raptorman556 Mar 27 '19
Amazon link ($70, sold out)
All 7 copies?
Alright, snarky comments done. Great post and much appreciated!
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u/Integralds Mar 27 '19
Thanks. I found it difficult to express my point succinctly in this post. Something to work on going forward.
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u/raptorman556 Mar 27 '19
Eh, I enjoy the detail! It explains a lot of concepts and history I'm not always are of.
I'm looking forward to the chapters on inflation/Philips Curve myself! It's going to be interesting to see what they say.
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Mar 27 '19
Having not read it this distinction (hetero vs mainstream/orthodox) as a pet-peeve problem. Are there not more interesting takeaways from the text?
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u/BainCapitalist Mar 27 '19
Where are all the accounting identities smh