“Heterodox” Economics is not so Heterodox Anymore, Part II

Cullen wrote a great response about Heterodox economics to Noah Smith’s rantish post on the same.

Noah said, and I think it is a fair assessment:

“On those rare occasions when a heterodox person does link me to a PDF purporting to explain the new methodologies, the content of the document is usually just more criticism of mainstream methodologies (see here, for example). Suppose I already believe that mainstream methodologies suck, and that something better is needed, and all I want now is to see people’s ideas for that something? These documents will be mostly useless to me. Critiquing the old is fine and good, but it is not the same as inventing the new.

There’s an even more fundamental problem here. If you’re going to introduce a new methodology into a discipline, you really don’t want to keep it behind a curtain of mystery. You do not want to force people to do massive amounts of work or pay money in order to grasp even the basics of the new methods. That kind of obscurantism — forcing people to commit time, effort, and money before they can be enlightened with the True Way — is the behavior of a cult, not of an academic school of thought.”

This happens way too much from the heterodox people. They think everyone should drop what they are doing for the next year and slog through papers so finally the important idea can be uncovered. I had to go through this for a few years just to understand some of the core ideas.

The only reason I dove into MMT was I happened to stumble across Mosler exactly as I was beginning to have some real doubts about how the bond markets worked. I also needed to find out how to structure my futures product for the swaps market, and so I thought it would be useful to have a new perspective on interest rates. I was talking with one of the guys who was a futures broker for Moslers fund, and he pointed me to Mosler. Never would have heard of him otherwise!

Cullen is a great writer, so is able to write clearly and concisely about everything he decides to write about. He has slogged through all the hetrodox papers, so was able to give Noah a great response:

Now, Noah has a different perspective on things than I do because he teaches economics in a university, but as far as market practitioners go I don’t see heterodox economics as being all that heterodox anymore.  I personally know dozens of people at large banks  and financial institutions who use a heterodox model for understanding the financial system and the economy. Some more public figures include:

Those aren’t exactly lightweights. We’re talking about some of the heaviest hitters in the most important institutions in the world.  This makes sense since heterodox theories like Post-Keynesian Economics focus a good deal on accounting, stock-flow consistent models, banking, etc.  The fact is, A LOT of people on Wall Street find PKE insights to be very useful because they reflect a highly accurate description of the way the financial system works. In my opinion, if you work on Wall Street and you don’t understand Post-Keynesian Econ then you’re at a major disadvantage.

Cullen flatly states it is worth your time to slog through the papers as an academic, because some of the very best and brightest practitioners did it and think the PK model is worthy of time and effort.

I will add:

  • the Bank of England fully supports Endogenous money – a core Heterodox position. Honestly, this paper reads like the monetary realism position.
  • Paul McCulley – one of the best out there – has repeated used something close to the PK model to talk about the world of finance

These heterodox ideas have become completely mainstream. Prominent mainstream people and institutions are endorsing core parts of the Post-keynesian model. The central bank of England and the chief economist for the most prominent investment bank in the world both use important parts of the PK model as how they think about the economy.

It’s worth getting into the details to find out more, it really is, just to keep up with what is happening in the world.


Expert in business development, product development, and direct marketing. Developed strategic sales plans, product innovations, and business plans for multiple companies. Conceived the patent pending Spot Equivalent Futures (SEF) mechanism, which allows true replication of spot and swap like products in the futures space.

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8 Comments on "“Heterodox” Economics is not so Heterodox Anymore, Part II"

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Cullen Roche

Looks like Jason Smith is piling on also:


I don’t know why people outside of finance can’t understand how essential accounting is to the functioning of the financial system….Economics is the study of how individuals, governments, & firms allocate resources. They allocate those resources according to monetary contracts. Those monetary contracts are all interconnected through basic accounting constructs. It is literally impossible to understand a monetary economy properly without understanding accounting. It is not just essential to good economics, it is probably the most important component of what any good economist does!

Jason Smith
Hi Cullen, I think “piling on” is a bit exaggerated: I list 3 pluses (one of which is that it tends to be right) and 4 minuses (2 of which are shared with mainstream economics) of PK. But yes, I do specifically call out the accounting approach. I don’t think it is “wrong”, it just has two issues that a lot of econ fails to come to terms with: 1. Implicit modelling: writing down a stock-flow analysis represents making a lot of assumptions about how the “nodes” (households, firms, central banks) work. Specifically, linearity assumptions. Those assumptions are usually valid 2. Emergent properties: things like sticky prices and liquidity traps may not exist for individual markets, but only as an aggregate. Rational agents may be an emergent construct as well — that only exist near equilibrium. In any case, I am planning on doing a post where I take a stock-flow analysis and try to rewrite it in terms of information equilibrium. As the basic equations are essentially about stocks and flows of information (that is conserved in information equilibrium), I don’t see any impasse to this approach. What I imagine is that the result will require “k = 1” … basically a series of accounting identities. But things like endogenous money where banks create money by lending using fractional reserve banking mean growth rates of things like M2 are only *proportional* to growth rates of e.g. physical currency … the “k > 1” scenario. When commercial banks create money (deposits) via loans, they don’t always lend to the maximum extent legally allowable based on their reserves. For one, because they can’t force people to take out loans. Stock flow analysis tells us that banks create money (deposits) via loans — and how that balances out, but it can’t tell… Read more »
Cullen Roche

Hi Jason,

Yes, you’re right that there are limitations to the SFC model and PK economists are very aware of those limitations. But there are limitations to any economic model given the inherent uncertainty and behavioral problems of the model’s nodes. I mean, any financial analyst knows that their research is going to have the limitations you mention. Warren Buffett doesn’t pick up an 10-K and start making assumptions about “equilibrium”, rational agents and crap like that. A SFC model is just a much broader version of a 10-K or multitude of accounting statements. Is it a dynamic and imprecise model? Of course. But as far as this imprecise science goes, it’s got a much better track record of correctly explaining the economy and potential outcomes than just about any other school. Accounting is imprecise, but there isn’t a financial institution in the world that would say it’s ” not be terribly useful” just because it has limitations.

Also, Noah Smith clearly doesn’t understand what PKE is so I’d be careful reading into too much of his commentary on this matter.


Joe Schmo

Testing this out

Cullen Roche

Just a test.

Changing the comment system here since there seemed to be a problem with the default system after the last WordPress upgrade.

I hope this works better….

Cullen Roche

“Great writer”. That is the most questionable assertion in this post.

I can’t believe I forgot McCulley! He basically ran PIMCO for two decades….

Anyhow, Noah didn’t seem to understand PKE at all as he said some things that were wrong even at the most basic level. I emailed him and didn’t get a response which tells me that he’s probably not very interested in trying to understand these things. I think he’s just toeing the mainstream line. Although, if I had to guess I would have no idea what Noah Smith actually believes in when it comes to economics…..The fact that he teaches finance and basically rejects SFC models is kind of amazing to me. Anyone who rejects accounting in finance can’t be very serious about what they’re trying to achieve. He’s a smart guy and could digest all of this material if he really wanted to, but I don’t think he actually wants to. There’s probably too much career risk aligning himself with a heterodox school.

Great post Mike.

Brian Romanchuk

I would say agree that it is career risk. But if you are an academic, saying that you do not want to pay for a textbook (or go to the library) to do a literature survey is frankly embarrassing. I was taught that was the first place to do your background work. Reading random lecture notes is not going to give you a coherent introduction to a new field. It may be that the youngsters have become too dependent on this “world wide web” thingy.

Cullen Roche

Hi Brian. Yes, if anything, I would think that academics would be more prone to being open-minded. Especially economists who want to be thought of as scientists. Experimenting with new ideas and theories should be central to their work and teachings. Some of the ideology we see in economics is disconcerting. If there’s one thing I’ve learned it’s that I should be extremely open-minded when discussing these topics. I think we could all benefit from a bit more of that approach when discussing such a theoretical and dynamic topic such as economics….

Love your blog by the way so thanks for all your hard work on it.