On (Un)Learning Economics

Regular readers have likely witnessed the way I’ve changed course a bit in the last year.  I would say, by far, the most difficult thing I battled in 2012 was the creation of Monetary Realism.  Of course, I was previously very sympathetic to the post-keynesian schools which I believe present a much more accurate view of our monetary system than most neoclassical schools.  But something was just not quite right there.  Their were loose ends in these descriptions that needed further development.  Our evolution to MR is the result of what I like to think of as a growth, learning and evolving process.  I guess you could say I was wrong to some degree prior to founding MR with Mike, JKH, Carlos and Brett.  That’s fine.  I am happy to admit when I am wrong.  I embrace being wrong because it’s in being wrong that we learn to be right.  And I think that the development of MR has resulted in a much clearer and more accurate description of the current monetary system AS IT IS.

Anyhow, I got to thinking about this as I read Paul Krugman’s piece this morning in which he described how he also shifted gears a bit in 2012:

“Paul Solman has a post on Greg Mankiw’s attempt at a gotcha over my views circa 2003 on the consequences of deficits. As Solman notes, not only are the situations very different, I’ve also long since acknowledged that I was wrong, and have explained how and why I modified my views as a result. Extra bonus: notice how Mankiw, faced with the failure of his gotcha, immediately tries to claim that he wasn’t actually saying what he was, in fact, saying.

Anyway, as I told Joe Weisenthal, you’re supposed to change your views when events don’t pan out as you expected. The real gotchas should come on people who stick with their ideology no matter how badly it performs in practice.”

That’s a big comment.  Here we have a Nobel prize winning economist who is admitting that his thinking has evolved as the facts have proven his previous thoughts incorrect.  We’re all learning and evolving with this dynamic monetary system.  No one knows everything.  But if we’re open-minded enough to learn to evolve with the system then we’re a lot more likely to obtain a superior understanding of that system.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. WOW, NOT ONE BUT TWO

    economists admitting they were wrong! Should be a Noble there somewhere. Oops already got one prior to the revision! Now what was that about?

    • The trail-blazing research work Krugman has done on international trade, for which got the Nobel prize in 2008, is still very much valid.

      Milton Friedman’s Nobel prize on the other hand should be withdrawn, that one was a mistake: his naive views on monetarism and free markets were discredited by Japanese deflation and by the 2008 crisis.

      So you would be right if you suggested that not all Nobel prizes stand up to the test of time.

      • Very funny about deflation is Japan since the early 90s.

        Bulletin – it’s false.
        See the facts – JPNCPIALLMINMEI at Fred

        Bulletin – Friedman is still basically correct, at least for those with more than a biased or incomplete understanding.

  2. “That’s a big comment. Here we have a Nobel prize winning economist who is admitting that his thinking has evolved as the facts have proven his previous thoughts incorrect.”

    When it comes to Krugman you can be assured everything is tendentious. What’s evolved for him in his viewpoint is the party now occupying the Whitehouse meets his political ideology. Deficits will matter to him once again assuming a Republican wins the Presidency.

    • I hope you’re wrong. I know you’d be right if you inserted a ton of other names, but they’re politicians and pundits not economists

    • I’d be a lot more impressed and relieved if he got it right the first time and didn’t keep pushing an incomplete economic understanding which prevented him seeing so much over the last 8-10+ years.

    • Well, to be fair deficits can be the result of different policies. I’m sure Krugman would be more critical of a deficit resulting from large tax cuts or defense spending than one resulting from a recession or entitlement spending.

    • Almost all economists don’t understand banking and don’t include it in their models. So, they have no idea what deficit spending even is. Deficit spending is always a redistribution of existing bank money. When the govt taxes it takes from Peter to pay Paul. When the govt deficit spends it sells a bond to Peter to Pay Paul with Peter’s money. The difference is that deficit spending results in a net financial asset in the bond whereas taxation just results in the spending. This isn’t terribly complex so I am kind of stunned that it took the creation of MR to explain that this is how the process works. But it’s not surprising that economists, who don’t understand banking, wouldn’t get this.

      • Your posts on the operational side of the US banking system have been the most illuminating for me since I stumbled upon your site in late 2008. Been a loyal reader since. I work in law, but was educated in the Austrian school back in the day, and would agree 100% that economists simply do not study banking enough. Thanks for all the great work–it’s appreciated. Here’s to a great 2013.

      • “Almost all economists don’t understand banking and don’t include it in their models.”

        And almost all politicians don’t understand how our monetary system works. Economic theories might become economic laws when governments are functional and effective. When they’re not, chaos theory starts to look pretty good. Monetary Realism has to evolve to remain true to its name.

  3. Krugman still hasn’t admitted that all that he is discovering since 2008 MMT knew all along.

    • I think you’re going out on a limb assuming that MMTers are the only people who understood that a sovereign currency issuer can’t default. After all, Woodford understood this back in 2000. :

      A government that issues debt denominated in its own currency is in a different situation than from that of private borrowers, in that its debt is a
      promise only to deliver more of its own liabilities. (A Treasury bond is simply a promise to pay dollars at various future dates, but these dollars are simply additional government liabilities, that happen to be noninterest-earning.) There is thus no possible doubt about the government’s technical ability to deliver what it has promised…” (Woodford 2000: 32,
      original emphasis)

  4. State theory of money monopoly has been the hardest for me to shake.
    Though our nations past is wrought with private money so I understand and all, however the US treasury and the Central bank having the ability to print ex nihilo and does have the keys to the vault/press has caused me to spew this concept to many.
    Now back tracking to others I have discussed with previously brings me to state where a M R approach is the challenge with out getting into the proverbial “you said, you said”….

    • The government outsources money creation to private banks. The state theory of money and the MMT explanation is BS. The banks control the money supply.

      • Yes, however it is still the sole monopoly agent of it.
        I have been thinking about this and I think it is akin to how we have privatized our prison systems.

        They (private sector) are allowed to lock up the bad guys at a profit, but the Govt regulates legalities and in the end could just round everyone up a’la internment camps.

        • The govt could theoretically do many things. The fact that the money system is designed so that the govt doesn’t impose some sort of authoritarian power is intentional. Implying that the govt has a money monopoly just because it could, in theory, enforce this sort of power, does not make it a reality.

          • MR C, when you say “the money system is designed so that the govt doesn’t impose some sort of authoritarian power is intentional.

            What is the “Intentional” part? Who or what Act did this?
            TIA..

            • The USA is a capitalist economy. The system has been designed in a manner so that the govt does not control the money supply. The entire system is designed so that no entity has too much power. You could argue that having control of the money supply is the absolute ultimate power in any system. So, the USA is designed to disperse power of money creation away from govt. It does this by giving banks the legal authority to create money. This is perfectly in keeping with a capitalist economy since the banks are private entities who compete for the ability to issue money to customers (via loans). So it’s the private sector through a market based system who dominate money control. In essence, WE control our money supply. Yes, in theory the govt could issue all the money and impose its power over the pvt sector, but the system is specifically designed so that the govt doesn’t have this power.

              • “in theory the govt could” Which is why this all seems so nuanced; at least to me anyways.
                But in the end, I think your positive approach to seeking out the truth, being both open and honest about debate will in the end help everyone in the Prag cap community to gain a better understanding of how things are.
                Thanks MR C and Everyone else in the Prag Cap community for all your input.
                Happy and Learned New Year.

              • Cullen, what you say about the privatization of money creation is correct. However, there is still/also the Central Bank, which has the job of controlling inflation, money supply and hopefully unemployment. And one of the tools of that central bank is buying up government bonds. The selling of which is “fixed”, as you explain so often here. So in that sense, money creation is indeed completely privatized to banks, but at the same time a sovereign government has a lot of power of money creation as well (indirectly, through selling bonds, running deficits, etc).
                Wouldn’t you agree?

  5. Not a Krugman fan, but give him credit for being willing to admit he was wrong–for a tenured academic that’s a huge admission.

  6. Classic
    Krugman was wrong then, but now he’s 100 percent right, and anybody who disagrees with him (then, or now, or ever) is a rigid idealoge.
    Conventional Wisdumb has it right — Krugman has a political idealogy and he will change his economic argument to advance his policies.