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Against Economics

Really interesting article questioning classical economics and traditional monetary policy: https://nybooks.com/articles/2019/12/05/against-economics/

It begins thus:
There is a growing feeling, among those who have the responsibility of managing large economies, that the discipline of economics is no longer fit for purpose. It is beginning to look like a science designed to solve problems that no longer exist.

A good example is the obsession with inflation. Economists still teach their students that the primary economic role of government—many would insist, its only really proper economic role—is to guarantee price stability. We must be constantly vigilant over the dangers of inflation. For governments to simply print money is therefore inherently sinful. If, however, inflation is kept at bay through the coordinated action of government and central bankers, the market should find its “natural rate of unemployment,” and investors, taking advantage of clear price signals, should be able to ensure healthy growth. These assumptions came with the monetarism of the 1980s, the idea that government should restrict itself to managing the money supply, and by the 1990s had come to be accepted as such elementary common sense that pretty much all political debate had to set out from a ritual acknowledgment of the perils of government spending. This continues to be the case, despite the fact that, since the 2008 recession, central banks have been printing money frantically in an attempt to create inflation and compel the rich to do something useful with their money, and have been largely unsuccessful in both endeavors.

We now live in a different economic universe than we did before the crash. Falling unemployment no longer drives up wages. Printing money does not cause inflation. Yet the language of public debate, and the wisdom conveyed in economic textbooks, remain almost entirely unchanged.

Comments

  • Hi LewisBraham,

    It is an interesting but long article. Thank you. For the reference.

    One universal truth is that change always happens, sometimes faster with more impact than at more quite periods.

    Maynard Keynes once was challenged for altering his position on some economic issue. “When my information changes,” he remembered that Keynes had said, “I change my mind. What do you do?”

    I lifted that quote from. https://quoteinvestigator.com/2011/07/22/keynes-change-mind/

    Economic theory and practice is simply reflecting the real world. No surprises here whatsoever.

    Best Wishes
  • Economic theory and practice is simply reflecting the real world.
    The whole point of the article is that for many decades economics hasn't reflected the real world at all.
  • Hi Again LewisBraham,

    If the model does not reasonably reflect the accumulated data it is a bad model. Models often fail and need a rework., especially on subjects like economics. On such subjects, expert forecasts have little value except perhaps as a form of entertainment. Perhaps I exaggerate just a bit.

    Best Wishes


  • “Hard-money philosophy nonetheless becomes, or is reinforced as, simple universal common sense.”

    Kind of points to the problem with “common sense”. The elite may know better ... but it sells in Pieoria.
  • edited December 1
    Following is a slightly abridged crucial excerpt from the December 2019 article "Against Economics" :
    Before long, the Bank of England (whose economists are most free to speak their minds since they are not formally part of the government) rolled out an elaborate official report called “Money Creation in the Modern Economy,” replete with videos and animations, making the same point: existing economics textbooks, and particularly the reigning monetarist orthodoxy, are wrong. The heterodox economists are right. "Private banks create money".
    Following is a slightly abridged crucial excerpt from the 1975 book "Money- Whence It Came, Where It Went" , by John Kenneth Galbraith:
    Inevitably it was discovered that [a] stroke of the pen would give a borrower from the bank, a loan. The original depositor could be told that his deposit was subject to such use, and perhaps be paid for it. The original deposit still stood to the credit of the original depositor. But now there was also a new deposit from the proceeds of the loan. Both deposits could be used to make payments, be used as money. "Money had thus been created." The discovery that banks could so create money came very early in the development of banking.
    Nothing much new here, folks. As David Graeber, the author of the "Against Economics" article says:
    "Is money best conceived of as a physical commodity, a precious substance used to facilitate exchange, or is it better to see money primarily as a credit, a bookkeeping method or circulating IOU—in any case, a social arrangement? This is an argument that has been going on in some form for thousands of years. What we call “money” is always a mixture of both"
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