Wednesday, April 9, 2008
Scandalous
It is scandalous that nowhere in what passes for mainstream macroeconomics will you find anything that helps you understand what Hyman Minsky called "financial fragility" - the inherent instability of the credit system - and the implications for the real economy. No models - nothing!! - Nothing in a macroeconomics textbook that would aid in understanding the current crisis, and countless previous cises in the history of capitalism, therefore. Here is an exception which miserably confirms the rule: in Mankiw's intermediate level text, he gives passing mention to Fisher's debt-deflation account of the Great Depression. But the key insight of Fisher's article (not by any means original to him - see Hawtrey, Marx and others) , i. e., the self-amplifying nature of credit expansions and contractions - is not mentioned at all. Instead, Fisher chez Mankiw is made to say that Fisher saw falling prices redistributing wealth from debtors with a high marginal propensity to spend out of wealth to creditors with a low marginal propensity to spend out of wealth, thus reducing consumption. And that's it. It would be funny if it weren't so sad.
You are right, and when I mention it on various blogs the answer is usually stony silence. However, some take such effects as something that exists in reality in reality if not in their models. Hence the occasional digs about (their) "inner Austrian" - particularly directed at Paul Krugman and Dean Baker.
ReplyDeleteIt also explains why I have seen a massive disconnect in recent years between the views of those considering balance sheets and those considering only income flows on the health of the economy. Steven Roach is a good example of a balance sheet guy.
ReplyDeleteThe attitude of the Libertarians at the moment amazes me. Everybody is either exited, or very concerned or both and they seem completely uninterested in developments in the real economy. I'm not sure whether that means they have complete confidence that everything will automatically instantly revert to equilibrium, or else they just regard it as everybody's just deserts for (alternatively) leaving the gold standard, or setting up the Fed or the new deal or whatever other market imperfection they care to decide is important.
But maybe there is a hint from the word balance sheet. We don't really incorporate balance sheets in macro-economics do we. We just assume that assets slowly and predictably accumulate.
Kevin,
ReplyDeleteYou are certainly right about the textbooks. However, your remarks are not on the money regarding the people at the top of the Fed. In particular, Ben Bernanke first made his name in economics with a paper in the AER back in the 1980s with Mark Gertler on financial fragility. They even managed to cite Minsky, if a bit grudgingly. But, the hard fact is that he is a deep student of the topic, if one not quite in a Post Keynesian vein.
They have been losing sleep for some time. I do not know what I would do if I were in their shoes. To a substantial degree they inherited a problem that was the doing of Big Al, although Bernanke could be partly held to blame in that he was a strong supporter back in 2003 of a very loose monetary policy, ironically justified to avoid possible financial fragility from falling into a Japanese style deflation, Ben being an inflation targeter and we were under his preferred targeted rate.
Of course the cynical view would be that he and Big Al were imposing easy monetary policy in 2003 in order to ease the reelection of their fellow Republican, George W. Bush...
Barkley
Barkley, yes I should have mentioned Bernanke and Gertler - this gets at the link between financial system and the real economy - through the cost of intermediation. But it still doesn't recognize the endogeneity of financial disorder a la Minsky.
ReplyDeleteReason, yes I think it was the "inner Austrian" comments that may have been in the back of my mind when I wrote this.
About textbooks, here's a trade secret. In my intro macro text, if I ever get to write it, I will present a balance sheet approach to the circular flow right at the outset and distinguish between revenue and credit flows. This also makes it possible to bring in the balance of payments accounts seamlessly. Then its a monetary economy all the way to the end.
ReplyDeleteSince I may never have the chance to do this, I'll post it here and give some other scribe the idea.
What is a "textbook" anyway? The closest I ever got to one was when a professor friend tentatively offered me a job writing chapters of a TB (in a field in which I was not a specialist) she was negotiating for with a publisher. My impression was that textbooks are corporate projects that are endorsed by a celebrity academic "author". What fascinates me is not what is left out of the textbooks but "textbook lore" that is repeated in textbook after textbook but has no scholarly basis in the discipline itself.
ReplyDeleteSandwichman,
ReplyDeleteThere is great inertia in textbooks for specific established courses because the established teachers of those courses do not like to change their class notes very much. David Colander, author of several textbooks, including a pretty successul Econ Principles one, has stated the "15% rule." This says that if you wish to write a textbook that will actually sell some copies, then it cannot vary from the existing most widely used textbooks by more than 15%. If it does, well, it might be a great project, but professors will not adopt it, except for maybe a few odd ducks.
Barkley (a textbook author)
Of course the 15% variation can't include a discussion of the economics of textbook writing, either. Right?
ReplyDeletethe dot.com bubble went on and on as prices went up as more and more buyers had credit to buy more and more, until....
ReplyDeletethe housing bubble went on and on as the prices went up as more and more buyers had credit to buy more and more, until....
the commodities bubble went on and on as the prices went up as more and more buyers had credit to buy more and more........
the bubbles go on and on as economists use more and more words debating "free" markets, "free" trade and the awfulness of the common good, while some profited immensely