The “Dismal Science” and Getting Back to Da Vinci’s Methodology

“Make sure that the book on the Elements of Machines with its practice comes before the demonstration of motion and force of man and other animals, and by means of these you can prove all your propositions.” – Leonardo Da Vinci

One of the things that most bothers me about economics is the supposed need to intermingle the normative with the positive, ie, the descriptive with the prescriptive.  We see it in almost all modern schools of economics.  Austrian economists build an idea of a world they envision (mainly a gold standard) and design an understanding of the world largely based on what they want and not what we have.  Market Monetarists have done this recently with NGDP Targeting and their models that eliminate banking from our world.  I only single these schools out because they are obvious examples, but the entire profession is guilty of similar exercises.  I believe this is a flawed framework resulting in vast misunderstandings and flawed conclusions.  It need not be this way.

For instance, Leonardo Da Vinci isn’t best known for his influence on the field of medicine, but his influence was vast.  And what’s interesting about Da Vinci was his rather unusual approach to medicine.  Da Vinci did not expect to solve all the problems of the human body.  Rather, he wanted to understand the human body.

Da Vinci viewed the human body as a machine and as one of the first anatomists he was able to provide the world with a better understanding of how this machine functioned.  How its pieces worked together, how it was built, how it changed, etc.  To Da Vinci, it was all about finding out what IS, not what CAN be.  The real genius of Da Vinci in this approach was that he took a simple approach.  He knew that the understanding of the human body was poor and the only way he could better understand how it worked and what caused it to do certain things, was to figure out precisely how the machine worked.  And so he became one of the first true anatomists and provided the world with invaluable understanding of the machine.

The “dismal science” need not be so unscientific.  Unfortunately, most of its practitioners are trying to be Hippocrates and not Da Vinci.    And like the surgeons of the days of Hippocrates, they do not know how the system works and while they might believe they will “do no harm” they might as well be swinging an axe with their eyes closed….That’s bad news for the rest of us because the economic machine will never get cured so long as we continue to fail to understand how it actually works….

While I am far from a Da Vinci I do approach the world of economics from a similar position.  For whatever reason, I have never had a great deal of interest in solving the problems with our current system.  Some people criticize me for that (perhaps rightfully so), but I don’t see how we can fix the problems if we don’t even understand them.  Because of this, I am interested in better understanding how the machine works so that I can perhaps help spread an understanding to those who can solve problems with our current system.  It is my hope, through MR and a true focus on understanding how the system actually works, that we can provide as close as possible to a purely positive approach to economics.  I know this is a bold task, but through focusing on the understanding of the monetary system we can then provide others with a foundation from which our problems can be solved…..

Comments
  • SS May 8, 2012 at 12:35 am

    Your passion for understanding and teaching always rings true Cullen. Thanks for all you do. Keep up the good fight.

  • Jean-Baptiste B May 8, 2012 at 1:20 am

    There’s a book you’ll love to read : Arthur Koestler’s The Sleepwalkers. Or how the most intimate desires bias thoroughly what you believe to be pure description.

    Not so many years ago, I was like you, like-minded. I wanted pure knowledge, rid of any subjectivity, any bias. I come from a purely practical purpose to extremely philosophical utter scepticism. Wittgenstein’s Tactatus Logico-philosophicus is a good reading in this regards. They I managed to be sceptical enough about scepticism for my mind to survive without becoming yet another ideologist.

    Like many things, objectivity is an ideal. You can’t reach it, but you definitely can tend to it. Why does one seek knowledge ? Never for knowledge itself, contrary to many’s words, but for a full(er) explanation of previous intuition. There’s always something else that could override what you’ve found (chaos theory is a good very scientific introduction to that), and the best way to think is a partly relativistic way : something is the ultimate (or close) thinking in its perceived context. Slight changes in the context might require adjustments, or even a comprehensive rethinking. For instance monetary stuff post gold exchange standard.

    For objectivity to be perfect, one would need to know everything, past, present and future, unparalleled cleverness, and all that at an instant. Quite a stretch.

    • Michael Sankowski May 8, 2012 at 5:33 am

      Some ideas are more true than others. Basic math is more true than the advanced math based on it, which is in turn more true than the physics based on the advanced math.

      I’ll grant you the fact we can’t be free of bias. But this is not an excuse to start examination and observation from a position of conscious (and in some cases extreme) bias.

      Just because something is difficult does not mean it should not be attempted. And accepting we don’t need to be perfect to be better than the current situation is a good start.

      MMR won’t be bias free. But we start from some very basic observations about the world, for example the Godley/Christ Theorem, and S = I + (S-I), and the simple observation there are benefits and problems for every policy proposal.

      I don’t personally have a problem with embracing either bias or ambiguity, or simply being flat out wrong.

      I do know the study of economics is sorely lacking people who approach the world trying just to see it as it is. And we’re 100 years behind our possible development curve because of this.

  • AK May 8, 2012 at 4:16 am

    Admirable aspirations, but difficult to do.

    I think your MMR “primer” does quite a good job at staying as un-prescriptive and factual as possible. But inevitably and unintentionally, the opinions that you and other MMRists express will be seen to form part of MMR, and thus it will lose its objective and apolitical flavour.

  • Jean-Baptiste B May 8, 2012 at 8:19 am

    Michael Sankowski
    Some ideas are more true than others. Basic math is more true than the advanced math based on it, which is in turn more true than the physics based on the advanced math.
    I’ll grant you the fact we can’t be free of bias. But this is not an excuse to start examination and observation from a position of conscious (and in some cases extreme) bias.
    Just because something is difficult does not mean it should not be attempted. And accepting we don’t need to be perfect to be better than the current situation is a good start.

    I agree on all this.

    MMR won’t be bias free. But we start from some very basic observations about the world, for example the Godley/Christ Theorem, and S = I + (S-I), and the simple observation there are benefits and problems for every policy proposal.

    MMRists says MMTers’ focus on S-I = (X-M) + (G-T) is biased and overshadows the “so important” S = I + (S-I). Have you ever noticed that, in this second equation, S could be the distance from earth to the moon in light-years and I the numbers of sockets you own, and still be correct ? It’s because the equation is pure mathematics and real-world meaninglessness. Yeah, a number equals another one plus the difference between them. True. Great. What then ? Getting the (S-I) in government sector and foreign sector ? Well, that’s why MMT loves their equation. MMR’s equation is just another way of overshadowing public sector in favor of private sector internals. I had a similar discussion with Cullen and apart from “lack of emphasis” he found nothing to complain about in MMT.

    I agree with you : MMR won’t be bias free. Indeed it is biased right now.

    Have all a nice day. :)

    jbb

    • Dunce Cap Aficionado May 8, 2012 at 9:17 am

      That’s not really correct. MMR’s S = I + (S-I) SPECIFICALLY refers to what (S-I) is eqaul to in when the sector balances equation is solved for (S-I). That is, S = I + (S-I) is a algebraic simplification of S = I+ (G – T) + (X – M). This is something that was covered thuroughly by JKH here-

      http://monetaryrealism.com/jkh-on-the-recent-mmrmmt-debates-2/

      It is not vague, it is specific to the sectoral balances, and necessarily has nothing to do with light years and sockets.

    • Cullen Roche May 8, 2012 at 9:32 am

      1. No one mentioned MMT at all in this post….

      2. That equation is just a clarification of what is and helps one view the world in a particular way. But it’s not really an opinion.

    • Cullen Roche May 8, 2012 at 9:34 am

      Certainly could happen though I’ll try my best to remain objective. While it would be great to influence the US tax code, I don’t think it necessary needs to be directly achieved by one of us….but who knows. Carlos Mucha could be the world’s next great politician! :-)

      • beowulf May 8, 2012 at 1:58 pm

        By all accounts, [William Faulkner] was a terrible postmaster — he would ignore patrons calling at the window, he delayed taking outgoing mail to the train station, and on occasion he even threw away mail. He spent much of his time in the post office writing, and other times he would play bridge and mah-jongg with friends whom he’d appointed as part-time clerks. When a postal inspector came to investigate, Faulkner agreed to resign. Later, Faulkner said about his experience: “I reckon I’ll be at the beck and call of folks with money all my life, but thank God I won’t ever again have to be at the beck and call of every son of a bitch who’s got two cents to buy a stamp.”
        http://farm3.staticflickr.com/2453/3948278376_603733c4d7.jpg

        :o)

        • Dunce Cap Aficionado May 8, 2012 at 2:19 pm

          If you ever go into public office I’ll be more than glad to play bridge and Mah-jong with you if you’ll hire me :)

    • Greg May 8, 2012 at 9:52 am

      Jean-B

      Seems to me that one way to parse the differences you and Mike are having here is simply a different notion of scorekeeper. Its certainly true that the banks are “keeping score” of more things in the economy. They are the primary scoreboard in the minds of most people. Financial markets are what everyone watches to find out how they are doing.
      I see MMT as saying, “Yes the financial markets keep their own score, but we (govt) keep THEIR score too, In fact we actually provide them extra points to keep score with when they lose track of all the games they have going on”

      So I dont think its correct to say MMR looks at reality while MMT doesnt. Its simply two different aspects of the same reality. You want to look at what financial markets are doing and how banks “fund” the growth of our economy….. fine. Thats very worthwhile information but dont forget who the ULTIMATE scorekeeper really is. Ultimate does not mean best or even superior it just means that when all the scores need to be settled, they do it.

      One thing we HAVEN’T lacked the last 20+ years is a focus on private financial markets. Its time I think to add the balance

      • Cullen Roche May 8, 2012 at 10:05 am

        I am confused why MMTers are hijacking the thread here making this about what MMT is. We all know what MMT is. It is an “inherently progressive” view of the world. That’s fine. But I don’t know what it has to do with this post at all.

      • Michael Sankowski May 8, 2012 at 12:24 pm

        Well, I’d add a bit of nuance to this because while we’ve been dominated by private financial markets, there has been very little actual study of how the machine works.

        MMR will continue to throw out policy proposals – I don’t think this can be avoided and they sure are fun.

        Then, MMT seems to me to be a vision of how the world “should” work. There are parts of MMT where there is a distinct progressive policy. That’s fine! But in the end, progressive policy is only one form of policy.

        Check out this quote from John Carney’s latest:

        “it’s possible to hold the position that government should not facilitate economic growth if private spending and borrowing is contracting. Perhaps such an economy should be allowed to simply contract, market processes driving economic outcomes. The deficit spending advocated by the modern monetary approach is only mandatory if you hold—as most people of any political stripe seem to—that the government should facilitate economic expansion regardless of private spending habits.”

        Now, I don’t agree with this policy. I think it’s entirely wrong-headed for most scenarios we will see in our economy. But as John Carney points out, it’s possible and perhaps even reasonable to hold this policy position. Perhaps Tyler Cowen would embrace the accounting identities we’ve defined to be true and still hold a position where more government spending is not a good thing.

        • beowulf May 8, 2012 at 7:05 pm

          If I may counter-hijack this thread, I think many MMTers have an unconscious belief that any policy that Tyler Cowen or Scott Sumner or Brad DeLong could possibly endorse must be wrong. A better approach is to start by planting the flag on something a wide range of people could endorse. The general idea is to grow your team and shrink the other team, not vice versa. And yes JKH, all roads lead to the Coin. :o)
          “Crank up the mint for the platinum coin”
          http://marginalrevolution.com/marginalrevolution/2011/07/crank-up-the-mint-for-the-platinum-coin.html.

          “Is coin seignorage Obama’s magic bullet?”
          http://www.themoneyillusion.com/?p=10109

          “I Must Say I Do Think It Is Time to Start Minting the Platinum Coins…”
          http://delong.typepad.com/sdj/2011/08/i-must-say-i-do-think-it-is-time-to-start-minting-the-platinum-coins.html

          • Tom Hickey May 8, 2012 at 11:09 pm

            May I suggest it’s time for a new post on the coin to catch us all up on developments.

            BTW, IIRC Scott was the first academic economist to pick up on the coin. Is that your view?

            • Cullen Roche May 8, 2012 at 11:41 pm

              Tom,

              Don’t take this the wrong way, but I am really curious about your obsession with approval by “academic economists”. Haven’t academic economists largely discredited themselves in the last 30 years? I hate to generalize, but it’s my opinion that a general lack of real-world experience has most of these academics viewing the world from a totally incorrect pedestal. Even the MMT academics are guilty of this….I know MMTers are aware of this, but you seem to make an exception (almost an exceptional exception) for a particular few….Thoughts?

              Cullen

              • Tom Hickey May 9, 2012 at 8:58 am

                As my nemesis, Zanon, often observed in comments at Warren’s, policy is determined largely by the chairs of the major universities because, their signing off on something, which basically means their proposing it since they are not followers, a policy option is unlikely to be seriously considered, and if they oppose it, then it won’t happen. So,according to him, if we are ever to see the principles espoused by MMT (MMR didn’t exist at the time), then we were going to have to wait until academia has signed off on it — one funeral at time.

                Politicians that set policy aren’t going to take a chance on going against the prevailing academic viewpoint, which now is neoliberalism. Neoliberalism has not yet run its course, either in the US or West. Killing Godzilla isn’t going to be easy. He is going to have to be attacked from many angles, but eventually the attack has to be frontal, i.e., academic, since academia is the arbiter of knowledge and the top schools rule the roost.

                I think it is significant that the you are already having an impact on the financial sector, and I am sure that the other MMR folks will, too. It’s a good sign, and the financial sector has a lot of clout in policy formulation, so it is possible that the path lies along this route.

                However, I think that Zanon is very likely correct. One can use the knowledge to profit in trading, but until the top academics adopt it, and here Zanon means chiefly Harvard and Chicago, it will likely not become US economic policy.

                So it is important to get academia involved. So far, its only on the periphery there. The most prominent supporter, Jamie Galbraith, is pretty much alone and he isn’t all that big an influence, Neither is even Paul Krugman.

                Tough slog, which is why I emphasize writing tightly argued papers with solid substantiation for claims, and hooking up with academically trained economists to make sure that the background is adequately considered. Blogging alone is not going to cut it here. It’s good for getting ideas out, but they have to go somewhere to make a difference.

                Think operations. Theory > policy > strategy > tactics.

                beowulf is very talented wrt pragmatic political tactics. But to kill neoliberalism, which is necessary to change course significantly, means overthrowing the theory in order to establish a new approach to policy formulation and new direction for policy. Otherwise, it is chipping at the edges.

                • Cullen Roche May 9, 2012 at 11:06 am

                  Gotcha. Thanks for clarifying and as rational as always. Looks like we’re in that war together even if we disagree on some things. And MMR’s climb uphill is even tougher since we don’t have the ivory tower crew on our side!

                  • Tom Hickey May 9, 2012 at 12:32 pm

                    “And MMR’s climb uphill is even tougher since we don’t have the ivory tower crew on our side!”

                    Yes, but you can make alliances. Be careful though, or you may be hijacked.

                    • Cullen Roche May 9, 2012 at 1:01 pm

                      You can’t hijack reality.

                    • Tom Hickey May 9, 2012 at 2:02 pm

                      “you can’t hijack reality.” You’d be surprised at what clever people can and will do to get ahead of the game.

                      I have been around long enough to have seen some very clever hijacks in a number of areas by people one would never have expected it from.

            • beowulf May 9, 2012 at 12:01 am
              • Tom Hickey May 9, 2012 at 9:12 am

                Jamie Galbraith summed it up when he called Warren an “inspired amateur.” Warren is a finance type, not an economist.

                This is not necessarily a hard barrier. Keynes wasn’t an academically trained economist, nor were Adam Smith, David Ricardo, or Karl Marx. Hayek had doctorates in law and poli sci but not economics. Wynne Godley was trained as a musician rather than an economist. So the exception proves the rule, I guess.

                But by and large, academia is a “club,” and it is both formally and informally hierarchical institutionally. The academy is the new temple, and academics are the new priesthood. This is true in most disciplines and certainly in economics.

                However, there have been successful revolts in academia. In psych, Abraham Maslow succeeded in knocking doyen B. F. Skinner (Harvard chairman) and opening academic psych to new thinking — humanistic and transpersonal — breaking the iron grip of behaviorism. So it can be done.

                • Colin, S.Toe May 14, 2012 at 11:42 am

                  Agree on both the importance and the resistance of the Academe’s role.

                  (Aside: Maslow did not really succeed; ‘humanistic psychology’ never developed scientific rigor, and had no presence at the U. of C. in the ’80′s’. The true successor to behaviorism was ‘cognitive psychology’, which was an improvement, but became nearly as limiting in its overemphasis on statistics, and avoidance of social and emotional aspects. Real progress since has come from outside the discipline – from the neurosciences. And your ‘temple/priesthood’ analogy is straight out of Weber – whose groundbreaking work has seen at best limited development in any of the social sciences.)

                  The one factor you may be overlooking is real-world crisis/change. If the GFC/Great Recession is just a prelude to the kind of transformations the world saw in the half century or so after 1914, academics – and politicians – will have change forced upon them.

        • Tom Hickey May 8, 2012 at 11:04 pm

          “But as John Carney points out, it’s possible and perhaps even reasonable to hold this policy position.”

          Might be reasonable if you are an economist and not a politician facing an upcoming election. I love the way Austrians recommend liquidationist policies to purge malinvestment in order to reset the economy, as if the voting public didn’t exist.

    • Michael Sankowski May 8, 2012 at 12:11 pm

      It’s because the equation is pure mathematics and real-world meaninglessness.

      As a former physics and math geek, I fully appreciate the seemingly inane S = I + (S -I). I am also aware trying to program this into R would not be beneficial.

      http://www.r-project.org/

      This statement is meaningful in economics because S and I have definitions which should be well known, but get really slippery once you start to think about them. When you look at what something is, sometimes it’s extremely helpful to define clearly what it is not. This is where S = I + (S-I) shines and provides extremely useful contrast to S and I.

      S and I can be (and perhaps even should be) nominally dimensionless until (S-I) is introduced to give them perspective. I think MMTers should find this observation extremely useful to their views on the relationship between the state, money, and levels of money.

      Then, as soon as nominal dimensions are placed on S and I with real world values, you can clearly see S and I tend to dwarf (S-I). Again, this is very basic math, and you don’t need much bias to say “Across most of human history, S > (S-I) and I > (S-I).”

      And I don’t disagree MMR has bias – every observation does. I am not a god and I would not want to be one. But this doesn’t mean we shouldn’t strive to be objective in our observations, at least part of the time.

  • Dunce Cap Aficionado May 8, 2012 at 10:15 am

    Yeah, but then its like -10 for grammar, punctuation, syntax and (probably) spelling…..

    • Cullen Roche May 8, 2012 at 10:26 am

      Good thing this isn’t a spelling/grammar contest because I would have lost a long time ago!

      • Dunce Cap Aficionado May 8, 2012 at 10:41 am

        If only my college professors had the same mindset! :)

  • Mike Riddell May 8, 2012 at 11:17 am

    The debate about the Austrian or Chicago schools of economics is a little academic since the discipline deals with the allocation of scare resources. But those theories are old-fashioned now that the industrial economy is coming to a close and being replaced by the knowledge economy. The most basic raw material of all – and one that cannot be exhausted – is information, and that changes the fundamentals since it isn’t scarce.

    I’m told data is the new oil. Interesting times right around the corner.

    • Michael Sankowski May 8, 2012 at 12:13 pm

      Very much agree.

      We’re close to effective robots. My sons will compete with knowledge based robots in their 50′s all the time.

      • beowulf May 8, 2012 at 9:28 pm

        This,
        “We are standing right now on the threshold of the robotic era. Once robots start arriving in the job market in significant numbers — something that we will see happening within a decade or so — they have the potential to dramatically change the world economy… There is no reason to expect that the economy will suddenly figure out a way to create high-paying, exciting, fulfilling jobs for these tens of millions of people displaced by robots. If the economy could do that, it would be doing it now. ”
        http://marshallbrain.com/robotic-freedom.htm

        will bring back this,
        “and some form of income support, such as the negative income tax that came within inches of passage under Nixon.”
        http://www.tnr.com/book/review/moderate-republicans-rule-ruin-geoffrey-kabaservice

        • Tom Hickey May 8, 2012 at 11:15 pm

          And then there is the eliminationism conspiracy theory that both left and right accuse each other of.

      • Heterosensible May 9, 2012 at 10:46 pm

        I think it’s naive in the extreme to think that “unlimited information resources” (whatever that means) or robots will have any fundamental effect on the relevance of understanding the allocation of scarce resources. Robot fishing boats don’t solve the problem of depleted fisheries.

        Oil, not information, is the new oil. And there’s more to economic “realism” than modern monetary operations.

  • Sergei May 8, 2012 at 2:40 pm

    Modern economics is like string theory in physics. It is nice and elegant and noone can understand. But when it comes to testing it against reality it is impossible to prove or disprove it. A mathematically super cool theory but utterly useless in real life. Exactly like the string theory.

    • Cullen Roche May 8, 2012 at 3:02 pm

      I disagree with this. I think most of this is observable if not provable. Of course we can’t run a provable test on whether an autonomous currency issuer can “run out of money”, but we can observe whether this is true or not. I firmly believe we can look at the machine and understand almost precisely how it works and how it generates a certain outcome. Da Vinci was known for asking remarkably simple questions and then answering them. “How does a bird fly”. Then he took birds and dissected them until he could figure out how the machine resulted in the ability to create flight. How its muscle structure functioned, how its proportions were designed, etc. I think the same thing can be done with the monetary system. We can dissect the system and understand how it achieves certain results. But we can’t generate the results if we don’t first understand how the system is designed. Most of modern econ intermingles the two resulting in an incomplete understanding of the system we have as opposed to the system economists want.

      • Oilfield Trash May 8, 2012 at 4:54 pm

        What makes economics different from and inferior to other sciences is the irrational tenacity with which it holds to its core beliefs in the face of either contrary factual evidence or theoretical critiques that establish fundamental inconsistencies in its intellectual apparatus.

        My experience is the development of economic theory over time has been propelled by the desire to make every aspect of it conform to the preferred economic model.

        An example is infinitesimals ain’t zero; throughout the economic analysis of perfect competition, the assumption is made that the perfectly competitive firm is so small, relative to the overall market, that its impact on the market can be treated as zero.

        This kind of logic is OK when you are dealing with local approximations – such as whether you can regard the ground on which you stand as either flat or curved – but it will not do when those local approximations are aggregated together.

        When those who have basic calculus skills insist that infinitesimally small amounts are not in fact zero, the apparently watertight logic behind the comparison of monopoly and perfect competition sort of falls apart.

        When faced with this economist do what they do best, revert to personalized attacks or if they are nice guys they politely ignore you and kick you out of their club house.

        • Cullen Roche May 8, 2012 at 6:48 pm

          Nice thoughts oilfield. You see that also in the micro with people taking micro experiences and extrapolating out. Often, the observable can be an illusion if not considered part of the whole. This happens in science also….

          • Oilfield Trash May 8, 2012 at 9:26 pm

            Fresh water and salt water economist have made many attempts to model the entire economy by extrapolating from microeconomic theory about the behavior of individual consumers, which has led to this current state of Macro:

            It consist of a single consumer, who lives forever, consuming the output of the economy, which is a single good produced in a single firm, which he owns and in which he is the only employee, which pays him both profits equivalent to the marginal product of capital and a wage equivalent to the marginal product of labor, to which he decides how much labor to supply by solving a utility function that maximizes his utility over an infinite time horizon, which he rationally expects and therefore correctly predicts.

            The economy would always be in equilibrium except for the impact of unexpected ‘technology shocks’ that change the firm’s productive capabilities (or his consumption preferences) and thus temporarily cause the single capitalist/worker/consumer to alter his working hours.

            Any reduction in working hours is a voluntary act, so the representative agent is never involuntarily unemployed; he’s just taking more leisure. And there are no banks, no debt, and indeed no money in this model.

            We wonder why none of the current batch of neoclassical did not see the crash coming. LOL

  • Dexter May 8, 2012 at 3:43 pm

    And I think what Cullen is describing is what defines actual science. Real science is the process of discovery through obervation, reasoning, and experimentation…there is no practical or prescriptive component.

    Engineers and technologists then take the properties discovered through science ,and find ways to apply them towards the betterment of humankind.

  • Cullen Roche May 8, 2012 at 7:55 pm

    Geez. Ignore these people. They don’t even realize it, but they’re defeating themselves by acting like this. If Kervick wants to push the “inherently progressive” ideas of MMT he has to win people over with evidence proving that their agenda is in fact correct. Not by tricking people into thinking that I am promoting their ideas. If their case is convincing they will win people over. If it’s not they will fail. It’s up to them.

  • JK May 9, 2012 at 2:25 pm

    Hey Cullen,

    When you’ve got a minute can you drop by the comments section at MikeNormanEconomics for the post “China May Understand MMT, …”

    I just posted a comment asking Tom Hickey to elaborate on a point under discussion. I think it may relate to a point MMR makes about a current account deficit not necessarily being a ‘net benefit.’ Or maybe it’s my misunderstanding. You’ll see my comment/question for Tom Hickey there.

    (by the way, i’m not trying to start an MMT/MMR debate, just looking for honest clarification on difference)

    thanks.

    • Cullen Roche May 9, 2012 at 6:02 pm

      JK,

      You can repost here. I am not trying to get involved in MMT websites any more. They’re not conducive to anything positive. If you want to repost here then fine, but I refuse to comment on those sites or be associated with their style of debate (unless it comes smacking me in the face here of course).

      Thanks,

      Cullen

    • Tom Hickey May 9, 2012 at 6:11 pm

      Why not just say it here. I usually keep up with the comments if I have time.

    • JK May 10, 2012 at 3:31 am

      The crux of what I’m seeking clarity about is the MMR position (I think in opposition to Mosler), that imports are not necessarily ‘net benefits.’

      Tom made the point: “China gets a great deal from ramping up exports to the US that are largely manufactured in China with foreign investment and foreign knowledge and technology. This is allowing China to acquire state of the art industrial capacity without have to reinvent the wheel.”

      What is the MMR position on the U.S.-China relationship? i.e. at what point, or to what extent, is being in a trade deficit damaging to the U.S.?

      And, if China is going to do whatever they have to do to maintain a realtively weak currency comapred to the U.S. dollar, what does MMR suggest the U.S. ought to be doing in response? And how does the MMR position differ from what MMT suggests?

      My understanding is that the U.S. can deficit spend to make up the difference, but deficit spending tends to exacerbate the trade deficit. So, is it ‘out of our hands’? i.e. so long as China wishes to accumulate dollars, that’s just the way it’s going to be?

      thanks.

      • JK May 10, 2012 at 2:23 pm

        Sorry. It just occurred to me that I was asking for MMR policy proposals but one of the main reason of starting MMR was to get ouf of the prescriptive and stick to the descriptive.

        Can I rephrase my question? What is the danger in an ever expanding trade deficit with China?

        • Michael Sankowski May 10, 2012 at 8:48 pm

          Well, I was going to respond to you with something like “The policy proposals aren’t really MMR, but I think…” but you beat me too it.

          One thing very important to understand is not everything is easily measured by money, and the CAD seems to have a bunch of issues related to non-monetary value.

          If you look at the math, a CAD is someone giving you something for free. If you look at the real world exchange, you’re giving up making something in exchange for having someone else make it for you.

          Now, before I make this point, I want to make a brief observation. I could pay you to work out for me, but the point of working out isn’t to increase aggregate muscle tone and health in the wider population. The point of working out is to increase my muscle tone and health.

          The CAD gives us real world goods, but sometimes the aggregate goods owned isn’t the most important thing. Sometimes making something has value above just the physical goods produced. Doing something allows the possible capability of doing something better, and this possible real world value does not get reflected in the market transaction of money for real world goods.

          Now, this is not in the accounting, but any pragmatic evaluation of exchange needs to take this into account. As far as I can tell, this value is entirely outside of any economic evaluation and school. This value is ignored even though economists will go through many years of schooling in areas of highly concentrated learning environments. You’d think they’d pick up their heads and see how geographic concentration of factors and skill enhancement by building on prior knowledge are important parts of an economic transaction.

          When I build something and sell it, I don’t just get some money, I also can improve my skills to build the next generation even better.

          Our friend Ramanan likes Lord Kaldors take on this, and I do too.

          You there Ramanan?

          • JK May 10, 2012 at 9:59 pm

            Thanks for the response Michael.

            It seems like in the story that you tell, when you have someone else make something for you, it builds their skills while yours (can) deteriorate.

            In the realm of international trade, a country like Saudi Arabia could be a good example. Suppose no one their worked or studied, they just sold oil to the world, collected money, and then imported all of their consumption.

            The problem then becomes if demand for oil every drops off, the Saudis have no “skills” build up?

            Bringing it back to the U.S. and China…

            Is there no problem with a current account deficit, even a very large one.. SO LONG AS the country with the current acccount deficit doesn’t turn into my hypothetical Saudi Arabia above. That is, if the CAD country invests wisely in it’s own population’s education and skills?

          • geerussell May 10, 2012 at 10:38 pm

            There’s something else the CAD gives us:

            If you were unconstrained by time you could, in theory, consume all that the producer can produce. Theoretically, this chicken and egg story can go on forever. Of course, the greatest luxury of all is quite finite. We are always constrained by time. The entrepreneur offers us the opportunity to take advantage of the ultimate luxury by giving us more time.

            Unless we assume that as a country we will simply squander time and not use it to innovate and produce other things, it should be a net positive, no?

            • beowulf May 10, 2012 at 10:54 pm

              “Unless we assume that as a country we will simply squander time and not use it to innovate and produce other things.”
              ha, squander time and not use it to innovate and produce other things =
              output gap and unemployment

              • geerussell May 10, 2012 at 11:10 pm

                So if deficits are used to mix time with money, something good should come of it :)

                • Cullen Roche May 11, 2012 at 9:07 am

                  Of course, “it depends”…. :-)

  • Dan Kervick May 9, 2012 at 11:05 pm

    I don’t understand why you see this as causing some kind of trouble LVG. Cullen graciously said in his article that:

    “I believe few schools have been more helpful in recent years than so-called Modern Monetary Theory and its offshoot, Modern Monetary Realism.”

    and then later said:

    “Heterodox schools of thought, such as MMT, predicted this trend. They stated that banks are never actually reserve constrained. This proved to be true in the wake of the crisis as more reserves failed to boost lending or cause catastrophic inflation.”

    I just thought readers might be wondering, “What is this MMT business?” So I provided a link. I didn’t say Cullen was an MMTer. I said this was the body of thinking he described in his article.

    • Cullen Roche May 9, 2012 at 11:38 pm

      What’s the point of starting an argument here Dan? Do you guys really have to start a flame war with everyone who says anything remotely negative about MMT? We all know your agenda. And we all know I wasn’t writing for the FT to promote MMT, but you jumped on the opportunity to give that appearance (you even said elsewhere that I was writing an MMT article which is flat out absurd). I was trying to offer you guys an olive branch and you all flamed me and attacked me on your various websites even though I said nothing remotely negative about MMT in the piece. Several people who helped me edit the piece told me not to mention MMT and that I was being too generous, but I thought it was a nice gesture. Lesson learned. I’m done promoting your agenda in any way whatsoever. I’ve tried to make it clear that we can be allies going forward, but maybe that was naive of me to believe.

      • Dan Kervick May 10, 2012 at 12:16 am

        Cullen, I am not starting and argument or a flame war. LVG lied about what I said, and I have a right to set that record straight. I thought the things I wrote were complimentary and non-confrontational.

        • Cullen Roche May 10, 2012 at 12:30 am

          I don’t see it as a lie at all. You said the article was an MMT article even though you’re perfectly aware that I don’t represent MMT. You jumped on the opportunity to spread your agenda and imply I represent it. You shouldn’t have done that. But it’s your “right” to do whatever you want and we know MMTers will do just about anything to get their progressive agenda pushed forward so honestly, what’s the point of arguing about it? Perception matters. Don’t forget that….