Neoclassical economists have created a totally delusional methodology that they are using to direct us all over the cliff. If this were something benign, like a Minecraft simulation, no problem. But it is the real world that they are totally misinterpreting with their insane assumptions.
I don’t think that’s what he or the Michaux piece he’s championing is suggesting. They’re rather suggesting (rightly, I believe) that the minerals and natural resources we would need to fully replace fossil fuel-based energy production and consumption with renewables do not exist.
Steve Keen talks too fast and assumes his readers are steeped in math. I have 40 years experience in this math, but he loses me. I do have enough experience modeling bipolar transistors to know how different an exponential is compared to a quadratic (MOSFET transistors).
Keen's fast talking doesn't convince me. It makes me want to watch my wallet.
Hmm. My mathematics only goes to fourth year college analysis, and yet I follow him quite easily. I wonder why the fast talking of general equilibrium economists doesn't make you want to watch your wallet. Probably something to do with prior ideological commitments.
Say something that shows us how you followed him. It is easy to say you follow. I run across many MMT followers who think they understand MMT, but really don't.
I'll engage in good faith. I will be explicit about what I infer and what you actually say.
You reveal yourself when you say "understand MMT." This makes me infer you still think MMT is a "theory", in the sense of a possible explanation, or a model.
The core propositions of what people call MMT are simple.
Proposition 1. Money—in our current version of a monetary production economy—is a creation of the state. The state is the monopoly issuer of this money. Let us naively use "money", "currency", and "unit of account" as synonyms. The US dollar is a creation of the government of the United States, or its licensed agents (like the central bank and commercial banks).
Corollary: All US dollars not created by the US government— whether digital, paper, or coin—are counterfeit and illegitimate.
A conclusion from proposition 1: The United States government can never run out of the the very thing only it can legitimately create. All debts denominated in US dollars can be paid at will by the government of the United States, without constraint.
Question: If the United States can't run out of dollars then why can't the USG just give everyone everything they want?
Answer: Because the USG, you, me, the entire society CAN run out of the real resources—energy, capital equipment, people, raw materials—needed to make things.
Conclusion: There is no such thing as a "budget constraint." There is only a resource constraint.
Proposition 2: The thing we call money, US dollars, has value because all persons within the jurisdiction of the government of the United States have financial obligations to the government, payable only in US dollars. Taxes drive money.
Discussion: Let's suppose Sten, above in the thread, is a lawyer. I need a contract drawn up for a business agreement of some kind with Gabrielle. What will I give Sten in exchange for his services? Lumber? Clothes? Four dinners at his favorite restaurant? How about US dollars?
Sten takes dollars because he needs an accountant to keep track of money in his legal practice and buy his favorite bread. Herb is an accountant who only accepts payment in US dollars or Japanese yen; Robert is a baker.
Robert is a bit of a gold bug so when he opened his bakery at first he only took gold in payment. It was inconvenient but his bread is so good everyone went along with it. At the end of the year he tried to pay his federal taxes with gold but the IRS wasn't having it. So he had to exchange his gold for...US DOLLARS!
Why? Because US dollars are the only thing the USG takes in payment for taxes (and various fees). And Herb, the accountant who accepts payment in Japanese yen or US dollars has to exchange his yen for dollars to pay HIS taxes.
Taxes drive money. Anything the government of the USG accepts as payment for obligations is effectively money in the United States.
Thus, a US dollar is a tax credit. Or we can also see it is an IOU of the US government given to us which we can return whenever we wish to settle our financial obligations to the US government. As with a personal loan, you give your IOU (promissory note, loan note, mortgage, etc.) to the creditor who gives you money in return. When you repay the money the creditor returns the note, IOU, mortgage to you. The obligation is settled.
How am I doing so far? Do I seem to "understand MMT"?
So, MMT is not a hypothesis about how money and government finance work. It is a description of WHAT WE ARE ALREADY DOING.
MMT is not a policy prescription. MMT is a DESCRIPTION of what is already happening.
But once you understand the government can never run out of the very thing which it alone can create, some policies immediately come to mind.
For example: As long as we don't run out of engineers, technicians, material resources, etc. we can afford to completely overhaul the entire electrical grid of the United States. Money is not a constraint.
Resources are the constraint because we might also need engineers and technicians to make electric cars, create better batteries, etc. And the people who can do that work might also be needed to work as drivers, assembly line workers for other products, teachers, chefs, line cooks, massage therapists, NFL lineman, NBA power forwards and Major League pitchers.
Again, for the thousandth time: We have no financial constraints. We only have energy, material resource and human resource constraints.
Ah, but you conflated understanding MMT with understanding Keens presentation.
They are not the same.
Keen is critiquing what we now call "neoclassical" economics, within which he includes "New Keynesian" economics. Both are direct descendants of Leon Walras's ideas about equilibrium. Those ideas led to Arrow and Debreu's famous nonsense article, "Existence of an equilibrium for a competitive economy", in 1954.
This article and its evolution into "New Classical" and "New Keynesian" economics is what Keen is criticizing. A fundamental tenet of all equilibrium theories of economics (Walras, Arrow, Debru, Mackenzie, New Classical, New Keynesian) is that a monetary production economy—what we live in now—tends to move towards an equilibrium in which "markets clear."
So, how does Keen do his critique?
He shows you the Cobb-Douglas production function,
Y = A * Lˆ(1-a) * K^a, where
Y (or GDP) = quantity of output;
A is total factor productivity (some measure of how productive our technology is);
L is total labor input (in person-hours/year);
K is capital input (some measure of the capital equipment used to produce stuff).
The exponents (1-a) and (a) refer to how important the factor is.
Well, what's missing?
ENERGY IS MISSING.
Most of the elite economists—the Ivy League, Stanford, MIT, Berkeley, etc.—based their economic modeling on production functions that don't include energy expenditure.
Can you bake bread without energy?
Can you write a book without energy?
Can you mine raw materials without energy?
Can you transport finished goods without energy?
Can you perform services without energy?
Allow me one obscenity:
If your economics doesn't model the use of energy, what fucking good is your fucking economics? Economics modeling without energy is gibberish.
The Fed is full of these economists. The Bank of England is full of them. The IMF, the World Bank, etc. The economics departments of all the elite universities are full of these twats. The economics departments of the non-elite universities are also full of them. The first year textbooks are full of this nonsense.
This is what my username refers to.
All this equilibrium economics is Ptolemaic astronomy: The Earth is at the center of the universe; the sun, planets, and stars revolve around us.
Copernicus gave us his "revolutionary theory": The Sun is at the center and we revolve around it, but he kept the orbits circular. Still wrong.
Finally, Kepler got it right: Sun at center with elliptical orbits.
We need better economists who have better models of reality.
Let's return to Keen.
Keen concedes the idiots do sometimes include energy, in this production function:
Y = A * Lˆ(1-a) * K^a * E^b.
The problem is this makes energy an independent factor (or input), which is absurd. That implies labor, L, does NOT depend on energy. It also implies capital, K, does not depend on energy. This is stupid on its face. Energy is INDISPENSABLE to labor and capital.
Without energy, labor can do nothing. Without energy, capital (machines) can do nothing.
So, energy is an input to labor, and an input to capital.
The neoclassical production function says output is a product (multiplication) of technology, labor, and capital.
Keen says output is a product of "technology, labor (given some energy input), and capital (given some energy input)."
In other words, Y = A * L(E) * K(E), where A is technology, L is labor and is a function of energy, K is capital (and a function of energy), and E is energy.
Now define the functions L(E) := L * E_L * e_L and
K(E) := K * E_K * e_K,
where L is units of labor, E_L is energy consumption of labor, and e_L is the efficiency of energy use, and
K is units of capital, E_K is energy consumption of capital, and e_K is the energy efficiency of capital.
So, we get three models of our production economy:
Y = A * Lˆ(1-a) * K^a, or "Output is a product of technology, labor, and capital."
Y = A * Lˆ(1-a) * K^a * E^b, or "Output is a product of technology, labor, capital and energy."
Y = A * L(E) * K(E), "Output is a product of technology, labor using some quantity of energy, and capital using some quantity of energy."
Which model is a better model of our reality?
I say the the first function is Ptolemy, the second is Copernicus, and the third is Kepler.
We await the work of the true economist who will give us the economics analogue to Newton.
Keen's critique here is focused on neoclassical economics used in connection with climate change.
But his broader critique, especially in his books Debunking Economics and The New Economics, involves the lack of true dynamics in neoclassical modeling. I mean dynamics in the sense that applied mathematicians and physicists use the word. The general sense of dynamics is the modeling of a system as it changes over time.
He also critiques the lack of a financial sector in the macroeconomic models used by neoclassicals.
The Dynamic Stochastic General Equilibrium (DSGE) models used by neoclassical, New Classical, and New Keynesian economics are effectively useless. This is because the assumptions they use are so different from reality. See the Wikipedia article on DSGE for an example of the absurd assumptions in DSGE models.
The assumptions fail because they are created for the model to produce a desired result—our economy tends toward equilibrium in a linear way.
Again, neoclassicals BEGIN with a fanatically cultish belief that our monetary production economy "tends toward equilibrium."
Then they work backwards to create models that "prove" this.
A simplifying assumption is only useful if it serves to model what actually happens.
For example, in freshman physics you model the flight path of a projectile near the surface of the earth with a quadratic equation, y = axˆ2 + bx + c. There is no term to account for friction. But the simplification doesn't matter in the beginning because that equation is actually quite good for predicting the path of most projectiles to a reasonable precision.
The difference with economics is in physics you don't assume that projectiles always move in a certain way and then you create an equation to match that. That is what neoclassical economists do.
In physics you observe reality, take measurements, and then stumble your way along to an equation that models reality.
Your inference of my understanding of MMT is all wrong. I know full well that it is a description of what is. I am a little concerned that it bases itself on an accounting truism, without mentioing that accounting is a quasi-static discipline. For instance, in accounting for money, there is talk that private banks create money that is balanced by an equivalent debt. There is no mention that the "money" is created instantaneously, but the debt may be paid back over 30 years. There is an awful lot of reality that takes place between the time the "money" is given out and the time the debt is repaid.
To make more sense of reality, I like to say that private banks create "promises of money", but they don't create actual money. If private banks could create actual money, then there would never be a run on a bank that would need backup from The Federal Reserve.
When people like Stephanie Kelton say that USA bonds are like money, I say, "They are like money in certain ways, but there are a list of ways that they are not like Federal Reserve Notes." Take a USA bond to the grocery store to try to buy a loaf of bread with it. In WW2 how were USA Govt bonds used to tamp down the problem of inflation? People deferred their attempts to buy consumer goods with their money as long as that money was held in the form of bonds.
What MMT advocates say in social media is the equivalent of a high school explanation of MMT. There is a deeper version for the graduate level explanation of MMT.
When you talk about friction in physics, you recognize that it can frequently be ignored in many real world situations. If you want to understand the role of friction, you don't look at situations where it does not matter. To understand friction, you have to look for the situations where it does matter. It is easy for the high school level explanation of MMT to stick to the examples where certain things can be ignored for the purposes of simplification. As a modeler of real physics, you have to know when your simplification is valid and when it is not. If you send rockets into outer space, there are all sorts of aspects of physics that you have to take into account, that are less important for smaller objects staying in earth's gravitational field
NOW you have said something interesting. NOW we have a conversation.
1. You said, "I am a little concerned that it bases itself on an accounting truism, without mentioning that accounting is a quasi-static discipline."
Not sure what you mean by this. I assume the "it" in your sentence is MMT. You say, "IT bases itself."
No. It doesn't. MMT merely says (at least) the two simple propositions I presented.
i. Money is a creation of the state. The only legitimate US dollars are those created by the US government or its licensed agents.
ii. Money has value because we all need it to pay obligations to the state we indirectly control through our elections.
Steve, that's MMT. Stop looking for anything more. That's it. Everything else that people call MMT is only a consequence of those undeniable, irrefutable facts.
(How much our government really is Of the People, By the People, and For the People is a different question. For now let us agree we the people may not always be the most influential actors.)
2. You say, "There is an awful lot of reality that takes place between the time the "money" is given out and the time the debt is repaid."
True. And so what? What point do you make with this? The loan note—the asset—sits on the balance sheet for the duration of the loan.
Does this "contradict" MMT (taking MMT as the two propositions I've put forward)?
Nope. It doesn't.
It just means a more accurate reflection on the balance sheet of the thirty year life of the asset—the loan note—is to depreciate it yearly on the balance sheet as the loan is paid.
This has nothing to do with MMT.
3. Whatever you call what the commercial bank creates—"promises of money" or "money"—if I can use it to buy something or to pay my taxes, then it's money. Don't make this more complicated than it needs to be.
4. Of course there can be a bank run on an FDIC-insured bank, Federal. The demand for withdrawals is a flow. If this flow rate depletes available cash quickly, the bank must get cash elsewhere. If it sells assets to quickly and publicly, the price of those assets will fall very fast. That means less cash. The bank might not be able to use much of its equity because of capital requirements. So the source of funds to cover withdrawals must come from somewhere else. If the flow of withdrawals is high, the inflow of cash might come from borrowing, if other institutions are willing to lend. It might come from the Fed itself, if the Fed is willing to lend.
If no source of funds to cover withdrawals is available, then the bank will fail.
This has nothing to do with the bank being FDIC-insured. The psychology of depositors who wish to get their money, for whatever reason, is what can cause the run.
I am talking about sector balances in MMT. That is where the accounting truism comes up.
If private banks create money, then when there is a run, why don't private banks create the money to satisfy the run. Why are you trying so hard not to understand me?
If deeper questions than the superficial MMT explanations can answer bother you, then maybe you don't understand MMT as well as you think you do. I had the discussion of "promises of money" with Warrren Mosler. He thought that just saying private banks create deposits was good enough, and you should not ask deeper questions. That was not a satisfying response to me, so I let it drop.
To discuss any of your longer responses would require the graduate course in MMT that I am not prepared to offer on a YouTube thread.
5. You said, "When people like Stephanie Kelton say that USA bonds are like money, I say, "They are like money in certain ways, but there are a list of ways that they are not like Federal Reserve Notes." Take a USA bond to the grocery store to try to buy a loaf of bread with it. In WW2 how were USA Govt bonds used to tamp down the problem of inflation? People deferred their attempts to buy consumer goods with their money as long as that money was held in the form of bonds."
Duh, yeah. Kelton says US bonds are like money. You say they are like money in certain ways. She also says they are unlike money in other ways. You say they are unlike Federal Reserve notes in other ways.
You are saying the same thing. What, exactly, precisely, is your objection to her saying "US bonds are like money"?
No one has ever claimed US bonds can be used to buy bread. We merely say the concept of money is analog, not digital. A thing is not either money or not-money. A thing has a greater or lesser degree of money-ness.
Bonds? They have a lot of money-ness. Bonds don't have as much money-ness asFederal Reserve notes, coins, and bits on the electronic ledger that keeps track of your bank balance. But bonds can very quickly be turned into cash which you can use to pay taxes. Thus, they have a lot of money-ness.
Gold? Well, it can be turned into cash but with a tiny bit more work. Also, it's value in dollars fluctuates more than the value-in-dollars of US bonds. So gold has less money-ness.
How about real property? Will people take it as payment for something? Sure. Real property has some money-ness.
Will the US government take real property in payment of taxes? Nope.
So real property has some money-ness but less than US bonds and less than gold (because you can exchange gold for cash faster than you can exchange property for cash).
If you wish to understand the concept of money-ness, read Hyman Minsky's work.
6. What's wrong with a simple, high school level understanding if it's good understanding?
The high school explanation of gravity and Newtonian motion is accurate enough to make an accurate potato cannon. I know because I've done this.
The college explanation is a little better. It's much more accurate than necessary for good shooting. I also know this personally.
The graduate explanation of gravity is even more complicated, and so on.
My point is, so what if the social media understanding of MMT is simple?
If all person understands is that money is created by the state and taxes drive money, then that person already understands more about money than EVERY fake Nobel prize winner in economics. Or at least that person knows more than the fake Nobel prize winners are publicly admitting they know.
Yes, there's a deeper, graduate level version of MMT. I got a very small glimpse of it at the Levy Institute's Minsky seminar last summer.
It was a tiny fraction of what you learn in a semester of graduate study. But it was still eight days of diving into the details, drinking from a firehose, and it was glorious.
You should attend it next year. You'd love it.
7. Yes, I agree you have to know when your simplification is valid and when it is not. I also like to say a simplification is "useful" or not "useful."
And THAT is part of the substance of Keen's critique.
Here is the crux of the problem.
Keen shows you three models (equations). They are:
Y = A * Lˆ(1-a) * K^a, or "Output is a product of technology, labor, and capital."
And
Y = A * Lˆ(1-a) * K^a * E^b, or "Output is a product of technology, labor, capital and energy."
And
Y = A * L(E) * K(E), "Output is a product of technology, labor using some quantity of energy, and capital using some quantity of energy."
Keen also lays out the simplifications of each. The question is, which of those models do YOU think has valid simplifications and which have invalid simplifications?
To help you decide, Keen shows you how each model's predictions compare to measured data.
The rest is up to you, brother. Be a neoclassical cult follower or be an empiricist observer/modeler of reality.
Incidentally, the Minsky software is awesome for learning through modeling.
Another step in breaking the stranglehold of neoclassical economics over university economics departments.
Seminaries...
Brilliant seminal work. One of the very best videos that you have ever don on this..
Brilliant seminal work. One of the very best videos that you have done.
Neoclassical economists have created a totally delusional methodology that they are using to direct us all over the cliff. If this were something benign, like a Minecraft simulation, no problem. But it is the real world that they are totally misinterpreting with their insane assumptions.
No one tells it like Prof Keen. Love him.
Keen is most likely wrong regarding the assumption that mineral shortages will seriously dampen the current exponential growth of renewables: https://rethinkdisruption.com/part-1-the-mythology-of-mineral-shortages/
I don’t think that’s what he or the Michaux piece he’s championing is suggesting. They’re rather suggesting (rightly, I believe) that the minerals and natural resources we would need to fully replace fossil fuel-based energy production and consumption with renewables do not exist.
Thank you for sharing this Stephanie!
Steve Keen talks too fast and assumes his readers are steeped in math. I have 40 years experience in this math, but he loses me. I do have enough experience modeling bipolar transistors to know how different an exponential is compared to a quadratic (MOSFET transistors).
Keen's fast talking doesn't convince me. It makes me want to watch my wallet.
Hmm. My mathematics only goes to fourth year college analysis, and yet I follow him quite easily. I wonder why the fast talking of general equilibrium economists doesn't make you want to watch your wallet. Probably something to do with prior ideological commitments.
Say something that shows us how you followed him. It is easy to say you follow. I run across many MMT followers who think they understand MMT, but really don't.
I'll engage in good faith. I will be explicit about what I infer and what you actually say.
You reveal yourself when you say "understand MMT." This makes me infer you still think MMT is a "theory", in the sense of a possible explanation, or a model.
The core propositions of what people call MMT are simple.
Proposition 1. Money—in our current version of a monetary production economy—is a creation of the state. The state is the monopoly issuer of this money. Let us naively use "money", "currency", and "unit of account" as synonyms. The US dollar is a creation of the government of the United States, or its licensed agents (like the central bank and commercial banks).
Corollary: All US dollars not created by the US government— whether digital, paper, or coin—are counterfeit and illegitimate.
A conclusion from proposition 1: The United States government can never run out of the the very thing only it can legitimately create. All debts denominated in US dollars can be paid at will by the government of the United States, without constraint.
Question: If the United States can't run out of dollars then why can't the USG just give everyone everything they want?
Answer: Because the USG, you, me, the entire society CAN run out of the real resources—energy, capital equipment, people, raw materials—needed to make things.
Conclusion: There is no such thing as a "budget constraint." There is only a resource constraint.
Proposition 2: The thing we call money, US dollars, has value because all persons within the jurisdiction of the government of the United States have financial obligations to the government, payable only in US dollars. Taxes drive money.
Discussion: Let's suppose Sten, above in the thread, is a lawyer. I need a contract drawn up for a business agreement of some kind with Gabrielle. What will I give Sten in exchange for his services? Lumber? Clothes? Four dinners at his favorite restaurant? How about US dollars?
Sten takes dollars because he needs an accountant to keep track of money in his legal practice and buy his favorite bread. Herb is an accountant who only accepts payment in US dollars or Japanese yen; Robert is a baker.
Robert is a bit of a gold bug so when he opened his bakery at first he only took gold in payment. It was inconvenient but his bread is so good everyone went along with it. At the end of the year he tried to pay his federal taxes with gold but the IRS wasn't having it. So he had to exchange his gold for...US DOLLARS!
Why? Because US dollars are the only thing the USG takes in payment for taxes (and various fees). And Herb, the accountant who accepts payment in Japanese yen or US dollars has to exchange his yen for dollars to pay HIS taxes.
Taxes drive money. Anything the government of the USG accepts as payment for obligations is effectively money in the United States.
Thus, a US dollar is a tax credit. Or we can also see it is an IOU of the US government given to us which we can return whenever we wish to settle our financial obligations to the US government. As with a personal loan, you give your IOU (promissory note, loan note, mortgage, etc.) to the creditor who gives you money in return. When you repay the money the creditor returns the note, IOU, mortgage to you. The obligation is settled.
How am I doing so far? Do I seem to "understand MMT"?
So, MMT is not a hypothesis about how money and government finance work. It is a description of WHAT WE ARE ALREADY DOING.
MMT is not a policy prescription. MMT is a DESCRIPTION of what is already happening.
But once you understand the government can never run out of the very thing which it alone can create, some policies immediately come to mind.
For example: As long as we don't run out of engineers, technicians, material resources, etc. we can afford to completely overhaul the entire electrical grid of the United States. Money is not a constraint.
Resources are the constraint because we might also need engineers and technicians to make electric cars, create better batteries, etc. And the people who can do that work might also be needed to work as drivers, assembly line workers for other products, teachers, chefs, line cooks, massage therapists, NFL lineman, NBA power forwards and Major League pitchers.
Again, for the thousandth time: We have no financial constraints. We only have energy, material resource and human resource constraints.
Ah, but you conflated understanding MMT with understanding Keens presentation.
They are not the same.
Keen is critiquing what we now call "neoclassical" economics, within which he includes "New Keynesian" economics. Both are direct descendants of Leon Walras's ideas about equilibrium. Those ideas led to Arrow and Debreu's famous nonsense article, "Existence of an equilibrium for a competitive economy", in 1954.
This article and its evolution into "New Classical" and "New Keynesian" economics is what Keen is criticizing. A fundamental tenet of all equilibrium theories of economics (Walras, Arrow, Debru, Mackenzie, New Classical, New Keynesian) is that a monetary production economy—what we live in now—tends to move towards an equilibrium in which "markets clear."
So, how does Keen do his critique?
He shows you the Cobb-Douglas production function,
Y = A * Lˆ(1-a) * K^a, where
Y (or GDP) = quantity of output;
A is total factor productivity (some measure of how productive our technology is);
L is total labor input (in person-hours/year);
K is capital input (some measure of the capital equipment used to produce stuff).
The exponents (1-a) and (a) refer to how important the factor is.
Well, what's missing?
ENERGY IS MISSING.
Most of the elite economists—the Ivy League, Stanford, MIT, Berkeley, etc.—based their economic modeling on production functions that don't include energy expenditure.
Can you bake bread without energy?
Can you write a book without energy?
Can you mine raw materials without energy?
Can you transport finished goods without energy?
Can you perform services without energy?
Allow me one obscenity:
If your economics doesn't model the use of energy, what fucking good is your fucking economics? Economics modeling without energy is gibberish.
The Fed is full of these economists. The Bank of England is full of them. The IMF, the World Bank, etc. The economics departments of all the elite universities are full of these twats. The economics departments of the non-elite universities are also full of them. The first year textbooks are full of this nonsense.
This is what my username refers to.
All this equilibrium economics is Ptolemaic astronomy: The Earth is at the center of the universe; the sun, planets, and stars revolve around us.
Copernicus gave us his "revolutionary theory": The Sun is at the center and we revolve around it, but he kept the orbits circular. Still wrong.
Finally, Kepler got it right: Sun at center with elliptical orbits.
We need better economists who have better models of reality.
Let's return to Keen.
Keen concedes the idiots do sometimes include energy, in this production function:
Y = A * Lˆ(1-a) * K^a * E^b.
The problem is this makes energy an independent factor (or input), which is absurd. That implies labor, L, does NOT depend on energy. It also implies capital, K, does not depend on energy. This is stupid on its face. Energy is INDISPENSABLE to labor and capital.
Without energy, labor can do nothing. Without energy, capital (machines) can do nothing.
So, energy is an input to labor, and an input to capital.
The neoclassical production function says output is a product (multiplication) of technology, labor, and capital.
Keen says output is a product of "technology, labor (given some energy input), and capital (given some energy input)."
In other words, Y = A * L(E) * K(E), where A is technology, L is labor and is a function of energy, K is capital (and a function of energy), and E is energy.
Now define the functions L(E) := L * E_L * e_L and
K(E) := K * E_K * e_K,
where L is units of labor, E_L is energy consumption of labor, and e_L is the efficiency of energy use, and
K is units of capital, E_K is energy consumption of capital, and e_K is the energy efficiency of capital.
So, we get three models of our production economy:
Y = A * Lˆ(1-a) * K^a, or "Output is a product of technology, labor, and capital."
Y = A * Lˆ(1-a) * K^a * E^b, or "Output is a product of technology, labor, capital and energy."
Y = A * L(E) * K(E), "Output is a product of technology, labor using some quantity of energy, and capital using some quantity of energy."
Which model is a better model of our reality?
I say the the first function is Ptolemy, the second is Copernicus, and the third is Kepler.
We await the work of the true economist who will give us the economics analogue to Newton.
Keen's critique here is focused on neoclassical economics used in connection with climate change.
But his broader critique, especially in his books Debunking Economics and The New Economics, involves the lack of true dynamics in neoclassical modeling. I mean dynamics in the sense that applied mathematicians and physicists use the word. The general sense of dynamics is the modeling of a system as it changes over time.
He also critiques the lack of a financial sector in the macroeconomic models used by neoclassicals.
The Dynamic Stochastic General Equilibrium (DSGE) models used by neoclassical, New Classical, and New Keynesian economics are effectively useless. This is because the assumptions they use are so different from reality. See the Wikipedia article on DSGE for an example of the absurd assumptions in DSGE models.
The assumptions fail because they are created for the model to produce a desired result—our economy tends toward equilibrium in a linear way.
Again, neoclassicals BEGIN with a fanatically cultish belief that our monetary production economy "tends toward equilibrium."
Then they work backwards to create models that "prove" this.
A simplifying assumption is only useful if it serves to model what actually happens.
For example, in freshman physics you model the flight path of a projectile near the surface of the earth with a quadratic equation, y = axˆ2 + bx + c. There is no term to account for friction. But the simplification doesn't matter in the beginning because that equation is actually quite good for predicting the path of most projectiles to a reasonable precision.
The difference with economics is in physics you don't assume that projectiles always move in a certain way and then you create an equation to match that. That is what neoclassical economists do.
In physics you observe reality, take measurements, and then stumble your way along to an equation that models reality.
How am I doing, Steve?
Do I sound like I understand Keen and MMT?
Your inference of my understanding of MMT is all wrong. I know full well that it is a description of what is. I am a little concerned that it bases itself on an accounting truism, without mentioing that accounting is a quasi-static discipline. For instance, in accounting for money, there is talk that private banks create money that is balanced by an equivalent debt. There is no mention that the "money" is created instantaneously, but the debt may be paid back over 30 years. There is an awful lot of reality that takes place between the time the "money" is given out and the time the debt is repaid.
To make more sense of reality, I like to say that private banks create "promises of money", but they don't create actual money. If private banks could create actual money, then there would never be a run on a bank that would need backup from The Federal Reserve.
When people like Stephanie Kelton say that USA bonds are like money, I say, "They are like money in certain ways, but there are a list of ways that they are not like Federal Reserve Notes." Take a USA bond to the grocery store to try to buy a loaf of bread with it. In WW2 how were USA Govt bonds used to tamp down the problem of inflation? People deferred their attempts to buy consumer goods with their money as long as that money was held in the form of bonds.
What MMT advocates say in social media is the equivalent of a high school explanation of MMT. There is a deeper version for the graduate level explanation of MMT.
When you talk about friction in physics, you recognize that it can frequently be ignored in many real world situations. If you want to understand the role of friction, you don't look at situations where it does not matter. To understand friction, you have to look for the situations where it does matter. It is easy for the high school level explanation of MMT to stick to the examples where certain things can be ignored for the purposes of simplification. As a modeler of real physics, you have to know when your simplification is valid and when it is not. If you send rockets into outer space, there are all sorts of aspects of physics that you have to take into account, that are less important for smaller objects staying in earth's gravitational field
NOW you have said something interesting. NOW we have a conversation.
1. You said, "I am a little concerned that it bases itself on an accounting truism, without mentioning that accounting is a quasi-static discipline."
Not sure what you mean by this. I assume the "it" in your sentence is MMT. You say, "IT bases itself."
No. It doesn't. MMT merely says (at least) the two simple propositions I presented.
i. Money is a creation of the state. The only legitimate US dollars are those created by the US government or its licensed agents.
ii. Money has value because we all need it to pay obligations to the state we indirectly control through our elections.
Steve, that's MMT. Stop looking for anything more. That's it. Everything else that people call MMT is only a consequence of those undeniable, irrefutable facts.
(How much our government really is Of the People, By the People, and For the People is a different question. For now let us agree we the people may not always be the most influential actors.)
2. You say, "There is an awful lot of reality that takes place between the time the "money" is given out and the time the debt is repaid."
True. And so what? What point do you make with this? The loan note—the asset—sits on the balance sheet for the duration of the loan.
Does this "contradict" MMT (taking MMT as the two propositions I've put forward)?
Nope. It doesn't.
It just means a more accurate reflection on the balance sheet of the thirty year life of the asset—the loan note—is to depreciate it yearly on the balance sheet as the loan is paid.
This has nothing to do with MMT.
3. Whatever you call what the commercial bank creates—"promises of money" or "money"—if I can use it to buy something or to pay my taxes, then it's money. Don't make this more complicated than it needs to be.
4. Of course there can be a bank run on an FDIC-insured bank, Federal. The demand for withdrawals is a flow. If this flow rate depletes available cash quickly, the bank must get cash elsewhere. If it sells assets to quickly and publicly, the price of those assets will fall very fast. That means less cash. The bank might not be able to use much of its equity because of capital requirements. So the source of funds to cover withdrawals must come from somewhere else. If the flow of withdrawals is high, the inflow of cash might come from borrowing, if other institutions are willing to lend. It might come from the Fed itself, if the Fed is willing to lend.
If no source of funds to cover withdrawals is available, then the bank will fail.
This has nothing to do with the bank being FDIC-insured. The psychology of depositors who wish to get their money, for whatever reason, is what can cause the run.
I am talking about sector balances in MMT. That is where the accounting truism comes up.
If private banks create money, then when there is a run, why don't private banks create the money to satisfy the run. Why are you trying so hard not to understand me?
If deeper questions than the superficial MMT explanations can answer bother you, then maybe you don't understand MMT as well as you think you do. I had the discussion of "promises of money" with Warrren Mosler. He thought that just saying private banks create deposits was good enough, and you should not ask deeper questions. That was not a satisfying response to me, so I let it drop.
To discuss any of your longer responses would require the graduate course in MMT that I am not prepared to offer on a YouTube thread.
5. You said, "When people like Stephanie Kelton say that USA bonds are like money, I say, "They are like money in certain ways, but there are a list of ways that they are not like Federal Reserve Notes." Take a USA bond to the grocery store to try to buy a loaf of bread with it. In WW2 how were USA Govt bonds used to tamp down the problem of inflation? People deferred their attempts to buy consumer goods with their money as long as that money was held in the form of bonds."
Duh, yeah. Kelton says US bonds are like money. You say they are like money in certain ways. She also says they are unlike money in other ways. You say they are unlike Federal Reserve notes in other ways.
You are saying the same thing. What, exactly, precisely, is your objection to her saying "US bonds are like money"?
No one has ever claimed US bonds can be used to buy bread. We merely say the concept of money is analog, not digital. A thing is not either money or not-money. A thing has a greater or lesser degree of money-ness.
Bonds? They have a lot of money-ness. Bonds don't have as much money-ness asFederal Reserve notes, coins, and bits on the electronic ledger that keeps track of your bank balance. But bonds can very quickly be turned into cash which you can use to pay taxes. Thus, they have a lot of money-ness.
Gold? Well, it can be turned into cash but with a tiny bit more work. Also, it's value in dollars fluctuates more than the value-in-dollars of US bonds. So gold has less money-ness.
How about real property? Will people take it as payment for something? Sure. Real property has some money-ness.
Will the US government take real property in payment of taxes? Nope.
So real property has some money-ness but less than US bonds and less than gold (because you can exchange gold for cash faster than you can exchange property for cash).
If you wish to understand the concept of money-ness, read Hyman Minsky's work.
6. What's wrong with a simple, high school level understanding if it's good understanding?
The high school explanation of gravity and Newtonian motion is accurate enough to make an accurate potato cannon. I know because I've done this.
The college explanation is a little better. It's much more accurate than necessary for good shooting. I also know this personally.
The graduate explanation of gravity is even more complicated, and so on.
My point is, so what if the social media understanding of MMT is simple?
If all person understands is that money is created by the state and taxes drive money, then that person already understands more about money than EVERY fake Nobel prize winner in economics. Or at least that person knows more than the fake Nobel prize winners are publicly admitting they know.
Yes, there's a deeper, graduate level version of MMT. I got a very small glimpse of it at the Levy Institute's Minsky seminar last summer.
It was a tiny fraction of what you learn in a semester of graduate study. But it was still eight days of diving into the details, drinking from a firehose, and it was glorious.
You should attend it next year. You'd love it.
7. Yes, I agree you have to know when your simplification is valid and when it is not. I also like to say a simplification is "useful" or not "useful."
And THAT is part of the substance of Keen's critique.
Here is the crux of the problem.
Keen shows you three models (equations). They are:
Y = A * Lˆ(1-a) * K^a, or "Output is a product of technology, labor, and capital."
And
Y = A * Lˆ(1-a) * K^a * E^b, or "Output is a product of technology, labor, capital and energy."
And
Y = A * L(E) * K(E), "Output is a product of technology, labor using some quantity of energy, and capital using some quantity of energy."
Keen also lays out the simplifications of each. The question is, which of those models do YOU think has valid simplifications and which have invalid simplifications?
To help you decide, Keen shows you how each model's predictions compare to measured data.
The rest is up to you, brother. Be a neoclassical cult follower or be an empiricist observer/modeler of reality.
Incidentally, the Minsky software is awesome for learning through modeling.