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Sunday, May 21, 2017

Two Paper Trolling

I am tied up with Victoria Day Weekend gardening and outdoor maintenance activities, and was planning on skipping writing a blog article. (Happy Victoria Day to my readers who celebrate it.)  However, I saw an attempt at trolling MMT that was such an intellectual horror show that I decided to take the bait.

Noah Smith At It Again

Noah Smith started the show with his "Two Paper Rule" article. I would roughly summarise his argument that people who defend a school of thought saying that there is "a vast literature" is just an attempt to create a "mud moat" around the literature, protecting it from criticism. If you cannot cite two papers that are exemplary examples of the methodology in a field, it's not worth studying.

I have not spent a lot of time thinking about Noah's article; there are certainly some grains of truth to what he wrote. That said, I believe his views reflect his educational background: just because he studied physics, all other scholarly fields need to emulate physics. Try applying the "two paper rule" to Philosophy, History, Political Science, Control Systems Engineering, or whatever, and you would see that this is a rather reductionist methodology. An additional problem is the collapse of standards in academic publishing as a result of the "publish or perish" imperative: well over 90% of the article published after 1990 in almost all academic fields deserve to be ritually burned. In other words, there is a "vast literature" about practically anything that has a literature at all; and most of the literature is going to be chaff. All the key valid points within the "vast literature" may be buried in a multitude of papers, which may be of uneven quality, and using a variety of methodologies. In most cases, the sensible starting point is a graduate text/monograph, not journal articles; you only wade into the journal articles once you are attempting to build up a citation trail.

If I were to take the corner of the control systems literature that I mainly worked on ("anti-windup control"), the "two paper" criterion would have been meaningless. A lot of key results (in my view) were developed in the 1950s and 1960s, using mathematics that was sloppy. The "modern" (early 1990s, when I was working on it) was (largely) mathematically sound, but the application areas were of less interest, as the useful results were mined out. How could you represent that literature with two papers?

Furthermore, his comments on business cycle macro appear quite dubious.

When applied to economics, he says we can ignore the entire post-war literature because of the "Lucas Critique." This is convenient for people who wish to pretend that ancient debates are actually brand new and exciting, like the so-called "Neo-Fisherian effect." A somewhat less sympathetic view is that such an attitude is just a rationalisation by unscrupulous academics to bury the relevant literature in order to make said clique sound original.

Turning to the Lucas Critique, I have been forced to piece together the real mathematics that lies behind DSGE macro, as opposed to the hand-waving that passes for mathematics in most published papers. As a result, I have some appreciation for the critique, but my argument is that the critique does not say what most people think it says. If we take a narrow reading, it just suggests that a particular optimisation technique used for policy analysis was incoherent. Although interesting, any optimisation technique for policy analysis is inherently a stupid way to proceed. Therefore, the narrowly-defined Lucas Critique is not telling us very much. If we take a wide definition of the Lucas critique (which is what I usually see on the internet), most modern mainstream papers could be skewered by the same reasoning.

In any event, Noah is basing his argument on a dubious analogy to Physics.  "It's about evaluating the quality of the literature's methodology." There is a hidden assumption that the business cycle can be easily modelled. If this is not the case, any attempts at analysing the business cycle are going to be buried in struggles with the details of particular economics institutions. Any attempt at providing a clean and simple model for the business cycle is doomed.

Gerard Piling On

Like clockwork, Gerard MacDonell piled on, complaining about Modern Monetary Theory (MMT). Gerard's MMT criticism can be summarised:
  1. He read Warren Mosler's "Seven Deadly Frauds."
  2. He did not like it.
  3. Like the Commander-in-Chief of his adopted country, he doesn't need to read any more books.
Needless to say, it is very hard to debate against that position.

I will once again repeat what I have written many times: MMT is a school of thought within the broad post-Keynesian tradition. It is an attempt to create a single internally-consistent world view within a literature that is fractured into multiple competing schools of thought. Although most "MMT" articles focus on a few topics that are of the most interest (Job Guarantee, free-floating currency economics, governmental financial operations), "MMT" implicitly covers all of economics. Meanwhile, many of those papers will have been written by authors who are not considered to be "MMT." (For example, MMT uses the stock-flow consistent modelling methodology, but the key papers in that area were written by people who were explicitly not "MMT.")

Realistically speaking, you need to specify what area of economics you are interested in before asking for the two papers. Furthermore, the papers you might be offered might not be written by "MMT" authors. If that disappoints you, you were not paying attention. Ask an academic philosopher which two articles summarise "Philosophy," and I imagine the response would be a rather curious expression.

Gerard's Attempt to Summarise MMT

Since he refuses to read the MMT literature, Gerard has a hard time finding what it says ("what did you expect?" is a question many might ask). As a public service, I will attempt to help.

Gerard attempted to summarise MMT's views towards fiscal policy as follows. 
The public sector budget constraint is either non-existent or a trivial accounting identity with no practical implication.  Accordingly, tax and spending policy should be set without  any regard to the deficit and long-run trajectory of the debt/GDP ratio.  Fiscal policy may occasionally need to be tightened, but the signal for that would be only an acceleration of inflation to an undesirable pace. Worrying about the trajectory of the debt itself is merely a reflection of a misunderstanding of how the payments system works, and is pointless.
I think it is close, but it needs some amendments. (My added text is in italics.)

What the mainstream refers to as "the public sector budget constraint" is either  non-existent (the infinite horizon statement, which is based on a raw inability to do stock-flow consistent model accounting*), or a trivial accounting identity (the one-period accounting statement) with no practical behavioural implications.  Accordingly, tax and spending policy should be set solely primarily based upon the inflationary implications of policy, as well as other real constraints, assuming that government is issuing liabilities in a currency tied to a central bank it controls. In other words, fiscal policy for a free-floating sovereign should be set without without  any regard to the deficit and long-run trajectory of the debt/GDP ratio.  Fiscal policy may occasionally need to be tightened, but the signal for that would be only an acceleration of inflation to an undesirable pace. Worrying about the trajectory of the debt itself is merely a reflection of a misunderstanding of how the payments system works, and is pointless, and reflects a complete lack of understanding of private sector behaviour with respect to savings accumulation.

Although this is a decent summary of Functional Finance, it is certainly not "all of MMT."


* The Fiscal Theory of the Price Level provides the only mathematically coherent mechanism to save the infinite-horizon version of the governmental budget constraint.

(c) Brian Romanchuk 2017


  1. I'm beginning to wonder whether most people attempting to do 'economics' in the traditional way are actually functionally autistic.

    Which is why they struggle with a social science.

  2. Summarising MMT without the financial to real anchor function of the Job Guarantee is to misunderstand MMT completely. The target is full employment and price stability.

  3. It is very good of you to take on this public service- thank you Brian. I had been trying to help Mr. MacDonell with his understanding of MMT to the extent that I was able to, but given that he won't read no stinkin books or papers about it from the economists themselves, I was afraid I would not be up to the task. Very happy a more professional educator is willing to try to learn him. Good Luck!

    1. Yeah, I don't get his problem with MMT. It is pretty clear from the quotes that dislikes Warren Mosler's writing style. But it seems silly to complain that MMT is "all wrong," while ignoring the academic literature. I hate DSGE macro, but I am still going through the juicy bits of a 1300 page, dense tome that promises to do the mathematics properly. (Fun quiz: try finding a definition of "general equilibrium" that is applicable to a macro model that can be converted into a formal mathematical statement about sets or elements of sets.)

      It seems that it would be a much simpler strategy for Gerard to wait until there's a substantive debate, and then see what the MMT position is in that debate.

  4. "Ask an academic philosopher which two articles summarise "Philosophy," and I imagine the response would be a rather curious expression."

    Not am not sure whether my response would be a belly laugh or an eye roll. This would be entirely dependent on which school of thought one prefer and what one's preferential method is.

    There is often a predominant school but this varies by country and region.

    1. Although "MMT" is often framed narrowly, it implicitly covers all of economics. How do we relate fiscal policy to inflation? Well, we need a theory of inflation. And so it goes. So for the philosophy analogy, we're not just worried about one school of thought, it would be ethics, logic, and whatever else philosophers write about....

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  5. "Try applying the "two paper rule" to Philosophy, History, Political Science, Control Systems Engineering, or whatever, and you would see that this is a rather reductionist methodology."

    Hit the nail on the head.

    Nice post.


  6. The Blog Roll here usually provides a link to the Mainly Macro blog. Today I discovered a post there dated Mar 16, 2016 appearing in a keyword search as: Mainly Macro mmt not so modern. There are links in the article to two papers by Thomas Pailey that appear to be useful summaries of MMT with constructive criticism. I will read both papers fully when I have time to spare later this week.

    1. The usual response of mainstream critics is to cite those two articles without actually reading MMT papers. To say that's slipshod scholarship is an understatement. The possibility that Palley has an axe to grind seems to have been missed. (MMT is overshadowing Palley's preferred version of post-Keynesian economics.) Randall Wray already had a long response to his criticisms (article title something like "a response to critics; I believe it's on the New Economic Perspectives site.)

      MMT is not perfect, nor are the main MMT "founders" infallible. But at the same time, it's part of a long-established literature, and is not going to be "debunked" by a single article.

    2. There is at least a trilogy of papers. I am not putting up direct links to online papers to avoid rejection by spam filters.

      1. Palley-1, Money, fiscal policy, and interest rates: A critique of modern monetary theory.

      2. T&W-1, Modern Money Theory 101: A Reply to Critics.

      3. Palley-2, Modern Money Theory (MMT): the emperor still has no clothes.

      Based on preliminary reading Palley argues that MMT is integrating mostly old ideas associated with Chartalism and Keynes. To my knowledge no one associated with MMT denies that their ideas are rooted in old ideas so the objection is to the use of the word "modern" as a semantic debate. If one accepts that Palley has some understanding of Keynesian thought then it is possible to learn from the debate how other Keynesian economists think and distinguish between MMT and its Keynesian critics which I find quite helpful in efforts to understand Keynesian economics.

      Footnote 11 of Palley-1 states in part: "Post Keynesian economics is now unwittingly re-inventing the stock–flow consistent ISLM model as evidenced by the much cited work of Godley and Lavoie (2007)."

      Palley-2 has equation (13) on page nominal page 9:

      I - S = HsubD + BsubD

      which I regard as a very clearly articulated version of the MMT idea that a budget deficit injects net financial savings into the aggregate economy. "These relations are present in every stock-flow consistent ISLM model, showing there is nothing new in this aspect of MMT which is another exercise in reinventing the wheel."

    3. The "modern" refers to a joke by Keynes about Chartalism - "modern money" is 4000(?) years old.

      MMT is explicitly built on pre-existing foundations. Debates about the originality of MMT are academic and missing the point. Whatever school of thought Palley represents is effectively moribund. (ISLM? Seriously?) Sure, if you're an academic, you should go back into the Keynesian literature if you are citing theoretical antecedents (a point where I disagreed with Noah Smith), but at the same time, most MMT papers appear to have credible literature citations. Academic politics is extremely petty, so we need to take complaints like Palley's with a big grain of salt.

      MMT is an attempt to revitalize policy debates in a new direction, and the policy analysis is certainly original. Although one can argue that there are roots in earlier proposals, we cannot pretend the policy environment even slightly resembles the situation in the 1960s.

    4. I thought the adjective "modern" refers in part to a floating exchange rate currency which is a departure from the less modern custom of maintaining an international gold standard.

      Palley at least tries to articulate a model of MMT according to his understanding. He compares that with his economic models while making criticisms. He claims no intention of using MMT as a straw man and I think he means it even if one does not agree with his analysis.

      Palley-2 (per my previous comment) is the only reference I have seen which explicitly derives the identity for budget deficits and private sector saving. Palley says MMT reinvents the wheel on this theme although I think they are only trying to advocate a more effective use of this "wheel" via policy reforms.

      Also, I note from another paper on the origins of stock-flow models, that Morris Copeland appears to be the father of flow of funds analysis. Palley argues in footnote 5 that many Yale students learned a stock-flow consistent model developed by James Tobin (1982). There seems to be a paternity dispute within the Keynesian schools about who is the more legitimate father of certain stock-flow models: Tobin or Godley. If Palley is in part grinding this particular axe he does a fairly good job making his arguments.

    5. The private savings accounting identity has been around for a long time. Realistically, the latest possible "original source" would have been around the time of the early work of Godley and Cripps.

      If you read Godley & Lavoie's "Monetary Economics", there is a whole section on the differences between the approach used by the "Godley school" and the "Tobin school." It has all the details you could possibly want, without actually going through the original literature.

      I come from an academic citation tradition where it would be enough to cite a textbook that covers the base theory being used; there was no attempt to trace back through the history of real analysis and linear algebra to determine who did which fundamental result first. So long as you are not deliberately burying older authors, this is the only realistic way of presenting papers that do not devolve into 20 page "history of thought" snoozefests, with 1 page of new results.

      Palley is free to complain, and the rest of us are free to ignore his complaints. Let the historians of economic thought - who do not have a dog in the citation fight - iron the dispute out. Unless the MMT papers are exact copies of earlier research, it is never going to be proven one way or another.

    6. I read a friendly critique of MMT by Lavoie. I find that some aspects of MMT are clarified by reading its more intelligent critics. Regarding disputes over history of thought when a court dispute arises there are witnesses who do not agree on events and at least two side to every story told in court. So history is in part a made up story even if it is the effort to document the history of empirical methods.

    7. There is a 12 page paper authored by Fullwiler, Kelton, and Wray available from 2012 via keyword search:

      SSRN - Modern Money Theory: A Response to Critics

      This paper attempts to describe the intellectual foundations of MMT, its roots in the Post-Keynesian (PK) circuit approach where finance must originate somewhere without reference to infinite regress (accepting the PK concept of endogenous money), and its extension of the circuit flow to operations of the central bank and Treasury in a system having either a consolidated or bifurcated monetary authority acting in concert with the fiscal operations of the federal government. The discussion is about 10 pages. There is no detail in this short paper of the job guarantee or of other policy proposals to establish full employment with price stability.

  7. I will stay out of this contest.

    I view the economic system as a machine with inter-meshing parts. My focus is on making all the parts fit together. Parts must fit together smoothly if we are to have a smoothly running machine.

    In my mind, stock flow accounting is a smooth running process. The accounting is in terms of "money" but we can't persuasively claim to understand the creation of money, not even fiat money. I find a mismatch of parts here.

    I like the idea that money represents labor expended. Seems to me that there should be some link between labor and the creation of money. I think this is a second mismatch of parts.

    There are many more mismatches. A coherent description of one process is probably only part of the picture (or wrong) if the description does not seamlessly mesh with descriptions of meshing processes.

    As a final goal, we should be able to foresee failure in time to make sensible repairs.

  8. We are sure this information will be of great help. There are different elements involved in research paper topics. It is important to cover all the elements. Academic paper

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