Nick Rowe comments on an (unspecified) trendy new cult

Here’s Nick:

Fourth. A lot of economists wasted an awful lot of time and ink getting this stuff straight 50 years ago. If you start your theory with I=S as an accounting identity, it really is your responsibility to try to explain to anyone reading the difference between I=S as an accounting identity, and Id=Sd as some sort of equilibrium condition, and why that difference matters. Because, as I said at the beginning, there’s an awful lot of poor lost souls wandering around the internet who have just discovered the marvellous truth of I=S as an accounting identity, and think they have found some magical philosopher’s stone that “mainstream” economists have never heard about, and that this blinding flash of divine truth will lead them to the Promised Land. It’s a bit like being accosted at airport terminals by people with a glow in their eyes repeating “apples sold equals apples bought”. Because that’s exactly what they are saying.



29 Responses to “Nick Rowe comments on an (unspecified) trendy new cult”

  1. Gravatar of Doc Merlin Doc Merlin
    19. August 2011 at 07:26

    Its all baloney anyway, as much of ‘I’ ends up getting wasted, and much of ‘S’ is considered consumption by economists (40% of US personal savings was in the form of housing for example.)

  2. Gravatar of Gregor Bush Gregor Bush
    19. August 2011 at 07:45

    You an Nick are sure taking alot of time to respond to this stuff. Are you sure it’s worth it? I don’t think ant economists outside of the blogosphere even know what MMT is. And thank goodness for that.

    One thing I’ve noticed is that the majority of MMTers begin their comments with something like “I have no formal training in economics but…” and end with something like “mainstream economists just don’t understand accounting or how monetary policy is conducted in the real world.”

  3. Gravatar of Brian Brian
    19. August 2011 at 08:00

    I know I shouldn’t, but I frequently find myself engaging in debates with that crowd who fits your last set of quotes perfectly.

  4. Gravatar of Jon Jon
    19. August 2011 at 08:18

    Merlin, whats your point?

    The economists are right. People have been deluded into thinking they are saving when they are not. Its wrong to not consider the opportunity cost of foregone rent.

  5. Gravatar of W. Peden W. Peden
    19. August 2011 at 08:19

    Gregor Bush,

    But MMT permabears predicted the last crisis! So it must be true. Ditto Austrian Economics. And Marxism. And Monetarism. And Georgism…

  6. Gravatar of Deus-DJ Deus-DJ
    19. August 2011 at 08:40

    Gregor Bush,

    MMT, for some reason, has a rather large following of non-economists who have tried to engage economics on their own. These are the ones saying that they don’t know a lot about mainstream economics.

    Those in academia and in a heterodox school, however, have done nothing but criticize mainstream economics their whole lives(look up Fred Lee at UMKC for example) in addition to espousing a different view.
    In other words, don’t mistake the words of these followers as those who have actually done heterodox economics coursework.

  7. Gravatar of Scott N Scott N
    19. August 2011 at 09:02

    Hey people, the SF Fed is conducting a poll about which economics blogs people read the most. Get over there and vote for The Money Illusion.

  8. Gravatar of Tschaff Reisberg Tschaff Reisberg
    19. August 2011 at 10:05

    This post is nearly entirely divoted to snarky mean spirited content. Its not economics, its childish name calling. It is behavior like this, from people like you that makes me despair.

  9. Gravatar of Diatome Diatome
    19. August 2011 at 10:44

    What’s your point Gregor Bush? That because they are few in number they must be wrong? I venture to say the PhD MMTers say away from sites like this because they’d rather respond to people with a genuine desire to learn.

  10. Gravatar of Diatome Diatome
    19. August 2011 at 10:44

    What’s your point Gregor Bush? That because they are few in number they must be wrong? I venture to say the PhD MMTers say away from sites like this because they’d rather respond to people with a genuine desire to learn.

  11. Gravatar of beowulf beowulf
    19. August 2011 at 10:44

    “It’s a bit like being accosted at airport terminals by people with a glow in their eyes repeating “apples sold equals apples bought”.

    But at least that, as Henry Kissinger would say, has the added advantage of being true. The ones to worry about are the crazy people at the train station who mumble things that are manifestly not true like, say, “inflation is always and everywhere a monetary phenomenon.”

  12. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 11:11

    Ya gotta love this:

    YouTube is EVIL.

  13. Gravatar of Scott Sumner Scott Sumner
    19. August 2011 at 11:34

    Everyone, Who said anything about MMT? I didn’t. I don’t think Nick did either.

  14. Gravatar of Gregor Bush Gregor Bush
    19. August 2011 at 12:43

    Diatome, I apologize for offending you.

    I know I’m going to regret asking this, but how does MMT deal with situation in which an economy has a substantial output gap, but fiscal policy is contracted and yet economy recovers strongly? Canada in the early 1990s is an example of this, as is Ireland in the 1980s. A more recent example is Sweden seeing a much stronger recovery than Denmark despite the latter’s much more aggressive fiscal easing.

    Old Keynesians, New Keynesians and monetarists have an answer for this: monetary policy was kept easier than it otherwise would have been and this offsets the contraction in fiscal policy. In fact, MMT seems to be the exact opposite of modern NK models in which fiscal policy doesn’t do anything because the central bank is targeting inflation (or the price level. So how does MMT account for recoveries in which there was clear fiscal contraction?

    For that matter, how does MMT account for situations in which household balance sheets, corporate balance sheets and the government’s balance sheet are all improving simultaneously (Canada 1993-97, US 1933-36?)
    Scott, I apologize for this in advance.

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. August 2011 at 14:25

    A “vulgar” Austrian responded to a comment I wrote recently by writing the following:

    “Wow, it has taken decades for the central planners to even look at the recession of 1920-21 and they are spinning like a top.”

    (In vulgar Austrian speak, “central planner” of course refers to anyone who disagrees with them.)

    In response, I pointed out the following.

    Hayek mentioned the 1920-21 recession only casually in “Monetary policy in the United States after the recovery from the crisis of 1920”, instead choosing to focus on monetary policy as a precursor to the Great Depression. Rothbard would do a similar thing, but that would not happen until 2002 (in “A history of money and banking in the United States: The Colonial Era to World War II”). And Mises does not appear to have written about the 1920-21 recession at all. So the first “Austrian” economists to have written about the 1920-21 recession seem to have been Murphy, Powell and Woods, and their (separate) articles were not published until 2009.

    If you perform a (tedious, even with Google Scholar) search of economics articles on the 1920-21 recession, you will turn up literally hundreds of them. And I believe the first person to write extensively on the 1920-21 recession was actually Thomas Wilson in chapters 11 and 12 of “Fluctuations in Income and Employment”, which was published in 1941. (Although I disagree with his old school Keynesian interpretation.) So it’s actually the vulgar Austrians that have only recently discovered the 1920-21 recession, and as usual, they get most of their facts wrong.

    But, imagining the glow in his eyes at having discovered something new, I truly felt sorry to disabuse him of his illusion.

  16. Gravatar of Scott Sumner Scott Sumner
    19. August 2011 at 16:20

    Gregor, No need to apologize.

    Mark, Yes, I’ve always been fascinated with the 1921 recession. It was quite deep, and yet the recovery was fast. Expectations probably adjusted quickly as the WW1 price level was viewed as an anomaly. With wages highly flexible, output recovered fast. But it was still a severe recession. Like 1929-30 and 1937-38, it was a nominal shock without any banking panics or re-allocation problems.

  17. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. August 2011 at 16:58

    Yes, it’s a fascinating recession, mostly because (in my opinion) it has enourmous implications for price level or NGDP level targeting. If the general public views the price level as an anomaly then adjustments should occur quickly (and relatively painlessly).

    But vulgar Austrians are often drawing supply side conclusions that, although I might somewhat sympathize with, are ill founded.

  18. Gravatar of Neal Neal
    20. August 2011 at 03:52

    Coming from a physics background, I would argue that I=S could also be thought of as a conservation law. It is an equation that lets us take two perspectives of the world (the seller’s and the buyer’s) and compare them, much like the law of conservation of energy lets u take the physical states before and after a(n elastic) collision and compare them.

  19. Gravatar of Neal Neal
    20. August 2011 at 03:53

    Argh, sorry about the “u”. I am posting from an iPad and the autocorrect feature is screwy. #thegreatstagnation

  20. Gravatar of Diatome Diatome
    20. August 2011 at 04:36

    Gregor Bush,

    I hope you don’t regret asking these questions. I’m glad you’re curious. Unlike some MMT students I am not of the hostile variety, it’s usually the hostile verity that are the least educated anyways.

    What are the sources of aggregate demand? Private, Government and Foreign. In the case of Canada, I trust the work of professor Mario Seccareccia of the University of Ottawa. In his paper “Whose Canada?” he states while the government reduced demand from the economy, expansionary monetary policy increased consumer spending, and high growth in the US, Canada’s largest trading partner combined with a sharply declining Canadian dollar pushed export’s share of Canadian GDP to 45% which is now close to 25%.

    The trouble is people take the wrong lessons from Canada’s experience. The US can’t expect to export its way out of the recession, especially with the eurozone on the brink of collapse, China looking to come in for a hard landing, and the Yen at record highs against the dollar (so much for high debt and low interest rates an FX killer). Low interest rates won’t help consumers who have switched from borrowing mania to debt payback/saving mode (although the debt service ratios have improved since the peak), and businesses won’t invest unless they predict they can sell their increased output as we see they are sitting on mountains of liquid assets. Lower interest rates by the Fed we know isn’t stimulating bank credit creation. They have no way to force borrowers to take loans. This is why for the foreseeable future, fiscal policy is the only game in town, however our political leadership has decided it’s time to try expansionary austerity. We already see how well this concept is working in Europe.

    I’m not familiar with the details of the Irish, Danish or Swedish experiences, but MMTers apply (for lack of a better name) the sector balance model of aggregate demand to analyze any economy. You can read about it here: Those who learn how to use it find it is much more powerful than IS/LM.

    “How does MMT account for situations in which household balance sheets, corporate balance sheets and the government’s balance sheet are all improving simultaneously?”

    Trade surpluses and/or credit write-downs.

  21. Gravatar of Leverage Leverage
    20. August 2011 at 10:33

    Well, maybe if you cared to engage academic papers we wouldn’t have these problems. But no, you don’t, it’s better to ignore them.

    This is all about egos and wasted careers. Accepting you can be wrong is hard, I know it. And yes, there is plenty of academic literature either on ‘austrian economics’ or on ‘MMT’.

  22. Gravatar of Scott Sumner Scott Sumner
    20. August 2011 at 14:11

    Mark, I agree.

    Neal, But conservation laws aren’t tautologies, are they?

    Leverage, I’ve read some papers on MMT and Austrianism. But what does that have to do with this post?

  23. Gravatar of flow5 flow5
    20. August 2011 at 17:02

    S never equaled I. Savings held within the commercial banking system are lost to investment, indeed to any type of expenditure. But Milton Friedman didn’t understand that.

  24. Gravatar of bill woolsey bill woolsey
    21. August 2011 at 04:42


    Investment is spending by firms on capital goods.

    Saving is that part of income not spent on consumer goods.

    Saving in the banking system is lost to investment makes just about no sense.

    It sounds to me that you are identifying investment as purchasing stocks, bonds and real estate.

    That is rather possible means of saving–along with accumulating money balances one way or another or paying down debts.

    That people who save must purchase stocks, bonds, or real estate, and so saving equals investment misunderstands the meaning of investment.

    That people who save purchase newly issued stocks and bonds, and the firms who issued the stocks and bonds use the funds to purchase newly produced capital goods would be in the right neighborhood, but it is not necessarilly true.

    People can save without purchasing newly issued stocks and bonds and firms can fund investment without issuing new stocks and bonds .

    However, consumption and investment are both negatively related to interest rates. And so saving is positively related to interest rates. While there might be some peculiar circumstance, there should be some interest rate (perhaps less than zero) where saving and investment are equal, even given the amount of saving and investment that occur when income equals output with full employment of resources.

    At that interest rate, people can save by purchasing stocks, bonds, or real estate, accumulting money, or paying down debt. And firms can fund investment by selling off holdings of stocks, bonds, or real estate, issuing new stocks or bonds (going into debt,) receiving repayments of existing debt, using existing money balances, or using newly created money balances. Lots of things.

  25. Gravatar of Scott Sumner Scott Sumner
    21. August 2011 at 06:27

    Flow5, Saving and investment are equal by definition. Saving is simply the resources put into investment projects. See Bill’s response.

  26. Gravatar of flow5 flow5
    21. August 2011 at 12:21

    No, you & Keynes are both wrong.

    General Theory: John Maynard Keynes gives the impression that a commercial bank is an intermediary type of financial institution serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor and his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”

    The fact is that never are the CBs intermediaries in the lending & investment process.

  27. Gravatar of ssumner ssumner
    22. August 2011 at 05:37

    Flow5, Savings and investment are equal by definition, just like expenditure and revenue.

  28. Gravatar of Ron T Ron T
    22. August 2011 at 09:27

    I posted a response on Nick’s blog on why he is confused that S-I=0 (in absence of govt) requires anything like an equilibrium to occur. It is an accounting identity, a definition of S in this setting.

    More generally, in presence of government S-I=G-T at the lever of every single itransaction in the economy, no matter how small.
    Therefore any combination of the transactions no matter its composition, will also obey this identity.
    (warning, my post has 5 parts)

    Equilibrium has nothing to do with it.

  29. Gravatar of ssumner ssumner
    22. August 2011 at 17:11

    Ron, Nick knows it’s an accounting identy, and says so in the final paragraph of the post.

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