“I apprehend that bank notes, bills, or cheques, as such, do not act on prices at all. What does act on prices is Credit, in whatever shape given, and whether it gives rise to any transferable instruments capable of passing into circulation or not.”
John Stuart Mill, 1848
“The relation of changes in M (money) to Y (income) and r (the interest rate) depends, in the first instance, on the way in which changes in M come about.”
John Maynard Keynes, 1936
John Cochrane has an interesting post about a Milton Friedman article. But the post does, fifty years after Friedman published the article, still not address the Main Monetarist Mistake: ignoring credit.  The entire discussion if money is neutral is redundant as money creating credit is not. Definitely not. Changes in credit – to be more

Only after Mario Draghi’s ‘Whatever it takes’ (26 July 2012) low ECB policy interest rates started to translate decisively to lower rates for Mediterranean Eurozone borrowers. But ‘WIT’ did not only save (or at least: made live a little easier for) Italian and Spanish borrowers with legacy debts. Somehow, Dutch mortgage rates were also tied to the European bond rate instead of the ECB rate oor Dutch government bond rates (second graph) which meant that it was only after 26 July 2012, four years after the onset of the crisis, that Dutch households too could start with decreasing the amount of ‘debt service’ they had to pay (interest on savings accounts is of course also lower – but those rates did start to decline before 26 July 2012).

What does this mean for economic theory? According

According to the accepted narrative after about 1950 female participation rates started to rise thanks to inventions like the washing machine and kept rising forever after. Reality is more confusing. According to a recent book by Julia Sophie Wörsdorfer, washing machines were, contrary to the ideas of Ha-Joon Chang, not that important. Neither cross sectional data nor time series analysis yields a strong correlation between ownership of a washing machine and high female labour force participation. But there is a strong link between the rise of the washing machine and a rise of public and personal cleanliness standards – more kinds of clothes were washed more often than before in less time. The Japanese data also contradict the washing machine thesis. It explains neither the post 1960

Source: Bureau of Labor Statistics
Broad unemployment today is, compared with the period before 1994, worse than you think. A new way of estimating ‘part time workers for economic reasons’ shifted this series downward with almost 1% of the labor force. To gain a proper understanding of historical developments present day data have to be increased or historical data have to be decreased a little. 
I’m trying to write a book about the relation between economic statistics and neoclassical econ. It’s not going fast: how do you explain to non econ’s why when people like Robert Lucas or Edward Prescott (both Nobel prize winners) write ‘leisure’ they actually mean what you and I call ‘unemployment’…. Anyway, to convince such people that ‘involuntary unemployment’ exist, I was writing a

Hardcore neoclassical economist John Taylor has edited a new handbook of macro-economics. The good news: the sands are shifting. After 2008, more attention has been paid to the obvious fact that we’re living in a monetary world. Guess what: it  turns out that money is non-neutral after all. Two examples (summaries below):
(A) Bordo and Meissner claim that whenever a country has a large banking sector it has a choice, during a financial crisis. It can bail out the banks or it can try to mitigate the crisis and prevent unemployment to increase to extreme levels.
And (B): Mian and Sufi’s work implicates that the ‘representative consumer’ is bogus: differences between renters and house owners in combination with data on indebtedness and house price booms and busts explain a lot of the

From Yanis Varoufakis
At the source a link to the UK House of Commons discussion where this idea was put forward can be found.
Britain used to have wage councils that set the minimum wage per sector. Mrs Thatcher saw to it that they were abolished, together (effectively) with trades unions and council houses – thus yielding the present Precariat-Proletariat whose palpable anger and frustration is evident across the land. There is no doubt that we need to bring back a modernised for of wage councils. Not just in the UK but across Europe! It is the only way we can safeguard genuine freedom of movement. Here is why:
The oligarchs in Eastern Europe, and elsewhere, want the freedom of moving their money around and the freedom to export surplus labour from their country – people who would

It seems that at this moment in time lower unemployment does not lead to higher inflation but to increasing wages, lower profits and increasing productivity.
Since 2008, the (European) world has been characterized by high unemployment, a double dip (2008-2013), a historically unprecedented stalling of productivity and low interest rates. This situation seems to be changing. Since 2014, employment is increasing and unemployment is declining. New growth sectors (like ‘information and communication’ and ‘tourism and hospitality’) are thriving. And in countries like Germany, the Czech Republic and Switzerland, the latest (but only the latest) data seem to indicate that productivity is on a roll again – while large swathes of especially these countries at this moment know medium and, more

On this blog neoclassical economics are regularly discussed. Thorstein Veblen is credited with introducing, around 1900, the phrase ‘neo-classical’ (see the excerpt below). A lot of his criticisms of neo-classical authors still apply today: they assume what they should explain. The Keynes in the text is the father of John Maynard Keynes. Veblen was a very talented writer – which shows when you read the excerpt (and the entire text) twice. From the website of the AFEE.
Of the foundations of later theory, in so far as the postulates of later economists differ characteristically from those of Mill and Cairnes, little can be said in this place. Nothing but the very general features of the later development can be taken up; and even these general features of the existing theoretic situation

S
Source (p. 32)
Oops. Mark Gertler (with Kiyotaki and Prestipino) does it again: “There has been considerable progress in developing macroeconomic models of banking crises. However, most of this literature focuses on the retail sector where banks obtain deposits from households.” After ‘obtaining’ deposits, these banks are supposed to lend the ‘money’  to households and companies. Source: the 2000+ pages Handbook of [neoclassical, M.K.] Macroeconomics edited by John Taylor. As we know, this is not true. In reality, ‘loans create deposits’. A joint act of lender and borrower, in my 1975 Dutch textbook this was called ‘wederzijdse schuldaanvaarding’ or ‘mutual acceptance of debt’. The lender has a liability towards the borrower (the deposits on the account have to be freely available to

John Taylor edited the new 2000+ pages plus ‘Handbook of macro-economics’, effectively a ‘Handbook of neoclassical macroeconomics’. Neoclassical economics is known for its illicit use of garbled language which hides and convolutes instead of explains. As the title of the book exemplifies. An interesting example is the chapter by Edward Prescott, titled ‘RBC Methodology and the Development of Aggregate Economic Theory’ (ungated version). Let’s first give the floor to him (emphasis added), mind that ‘leisure’ means ‘measured unemployment’.:
“What turned out to be the big breakthrough was the use of growth theory to study business cycle fluctuations … based on micro theory reasoning, dynamic economic theory was viewed as being useless in understanding business cycle fluctuations. This

Eurostat made new data on broad unemployment available. For some countries (Ireland, Greece, Switzerland), these show a less rosy picture than the ‘normal’ unemployment data. Only the Czech Republic has low normal as well as low broad unemployment though Poland, Hungary, Bulgaria (!) and Germany seem to be heading that way. Altogether, labor slack is still immense. At this moment, wage increases are still low in non-Eastern European countries. Considering the slack this might stay so for a while, though there are more opportunities to obtain a better paying job.
In my country, the Netherlands, the labor market shows signs of normalizing. “Help wanted’ signs are becoming are becoming normal (a sign of a normal labor market, NOT of an overheated one) and ‘normal’ unemployment is down

Martin Sandbu is, in the Financial Times, wrong about neoclassical macroeconomic models. Let me explain by responding to his text, paragraph by paragraph. No links, I might add these later.
What do macroeconomists actually do? Without an answer to that question, it is difficult to articulate what they might be doing wrong. The rebuilding macroeconomic theory project is useful also to non-economists — perhaps especially to them — because it takes the time to dwell on how macroeconomists do what they do, in order to argue what they must do better.
Two points.
Sandbu answers this question by discussing what some macroeconomists do. To be precise: what neoclassical macroeconomists do. Stock and flow consistent modelling is left out of the discussion. NBER business cycle analysis is left

In 1921 King, Macaulay and Mitchell published their milestone ‘Income in the United States: Its Amount and Distribution, 1909-1919’ which estimated time series of nominal and real income in the USA. Why did they measure this? The last sentence of their introduction reads: “Last but most interesting of all, we shall consider the way in which the National Income is distributed among individuals”. Distribution was paramount. The authors were also well aware of the limited nature of their estimates of monetary income: it was not a measure of welfare or prosperity. To quote them again: “Following common practice once more, we do not count as part of the National Income anything for which a price is commonly not paid. On this score we omit several of the most important factors in social

In 1898 Thorstein Veblen asked ‘Why isn’t economics an evolutionary science?’. At the ASSA 2018 conference Avsar, Duroy and Scorsone mused about this. Below, the abstracts of their papers. Here, Mark Thomas about this.
Avsar’s article is, with its link to neurology, truly Veblenian in spirit. An interesting question is: it seems that the behavior of hunter-gatherers, who have little property as they can’t carry it with them, have behavior that is more economic rational than the behavior of people with a lot of property. Does the institution of property itself destroy economic rationality? And if so, how does this relate to market behavior?
Duroy’s article is about the question if selfish behavior, which sometimes is good for individuals, destroys groups on which these people depend for

Some (institutional) stuff from the ASSA conference, the first one with nice definitions of trust and control (but there might be more empirical stuff). The second one on the role of the ideology of judges in economic cases when there are no clear legal rules. More tomorrow.
Claudius Gräbner, Johannes Kepler University-Linz Wolfram Elsner. To trust or to control: Informal value transfer systems and computational analysis in institutional economics
Here, the PPT
This paper illustrates the usefulness of computational methods for the investigation of institutions. As an example, we use a computational agent-based model to study the role of general trust and social control in informal value transfer systems (ITVS). We find that, how and in which timeline general trust and social control

A variable like GDP (Gross domestic Product) receives a lot of flack from economists. Much of this is misguided. The economists should not look at GDP but at the national accounts (of which GDP is one, but only one, variable). And they should not criticize the accounts but praise them. A 2016 ECB working paper about the flagship ECB ‘EAGLE-FLI’ neoclassical macro-model (Bokan e.a. (2016)) shows why: neoclassical have no idea about how and what to measure. National account statisticians do.
According to the abstract of the ECB paper new features of the EAGLE-FLI model were the inclusion of ‘deposits’ and banks. Bokan e.a. go on to state: ‘banks collect deposits from domestic households’.
Auch
Banks don’t collect  deposits. As they can’t collect what they already have. At least, the

Recently, Eurostat published data on the sharing economy. Its huge (graph, source: Eurostat). And this digital enhanced sharing economy should be (and is) included in GDP. But the private, non-monetary use of digital GPS apps which enhance your life as they enable you to find your way when, after attending a wedding, you get lost in rural Kent, 2:00 AM (happens…): not. There is a discussion going on if GDP tracks the changes in our life caused by the use of all kind of digital gadgets. It doesn’t. And it shouldn’t. But it should track the rise of the sharing economy – as this is a monetary economy. Aside: if wisely regulated, airBnB is of course important for the sustainability of our societies, as it means that much less hotels have to be built. While it possibly exerts a benign

Source
On 24 December 1717, three hundred years ago today, a northwesterly storm hit the coasts of North Europe. About 14.000 died, over 2.000 of these in the Dutch province of Groningen but only 150 in neighboring Friesland. Why this difference? We do know the answer: Friesland had better coastal defences. Frisian ‘dijken’ were better designed, higher and, especially, better maintained than in Groningen. As Frisian public governance of these public goods was better. In 1716, the Groningen government had been warned, see the extensive report by Thomas van Seeratt, the newly appointed ‘master of coastal defences’, available and transcribed here. After 1717, money became available and the very able and dynamic van Seeratt did a good job to improve the Groningen ‘dijken’. The history of

Previous posts in this series on central banking: ideas of Willem Buiter, Richard Werner, Thomas Mayer, excerpts from a recent paper by Mike Konczal and Josh Mason, Edward Harris and ideas from the German Handelsblatt shadow council. Today: the European Commission.
Why? A lot of people want to change (European) monetary policy and central banking. This includes the members of the European Commission. They want 2 things:
A larger Eurozone
Some kind of ‘transfer’ union which somehow transfers either investments or income or financial funds to members in need (but also restricts discretionary powers of members to increase or decrease government spending).
The first point is delusional. The idea behind the second point: the Eurozone is a ‘free flow of funds’ zone. As freely flowing funds

“We too must bring into our science a strict order and discipline, which we are still far from having…by a disorderly and ambiguous terminology we are led into the most palpable mistakes and misunderstandings – all these failings are of so frequent occurrence in our science that they almost seem to be characteristic of its style.”
– Eugen von Böhm-Bawerk (1891: 382-83)
What William White writes about inflation is wrong, sloppy and seems a conscious effort to derail the discussion. Today again a bit about central banking but this time more critical. On the prestigious Project Syndicate site, William White (former deputy governor of the Bank of Canada, and a former head of the Monetary and Economic Department of the Bank for International Settlements, Chairman of the Economic and

Even more about central banking. Why so much? Partly because people are writing very good stuff about it (like the AAA piece from Edward Harris below (excerpt)). Partly because we seem to see the end of the era of ‘pure’ inflation targeting. And (part of this last trend?) partly because soon Merkel and Macron will sit together to redesign the Eurosystem. Previous posts: ideas of Willem Buiter, Richard Werner, Thomas Mayer excerpts from a recent paper by Mike Konczal and Josh Mason and ideas from the German Handelsblatt shadow council.
As the Federal Reserve meets today [last week: M.K.] to decide how to communicate its messaging on future rate hikes and balance sheet reduction, financial stability will play a key role. Yesterday, I wrote about the Bank of International Settlements new

Some years ago, Cladio Borio from the BIS introduced the ‘financial cycle’. Here, a Borio/Lowe paper from 2002. What’s the financial cycle? From the twenties of the twentieth century onwards Wesley Mitchell and the NBER (National Bureau of Economic Research) perfected the (monthly) measurement of the classical business cycle (a still ongoing project). The concept of this business cycle of the ‘flow’ economy was and is the cornerstone of much macro-economic theorizing. ‘Chicago style economists’ rationalized the idea that low and stable inflation (1) could be engineered by the central bank and (2) was enough to control this business cycle. The idea of Borio (and others) is that, next to this cycle, there also is a financial cycle related to credit and assets, mainly houses which can not

We’re publishing some expert ideas about the future of the ECB and monetary policy. Three days ago some ideas of Willem Buiter were published, two days ago some ideas from Richard Werner and yesterday ideas from Thomas Mayer. Today some excerpts from a recent paper by Mike Konczal and Josh Mason. They are not part of the Handelsblatt Shadowcouncil but their ideas often tally with those already published:
Pure ‘inflation targeting’ is (mortally?) compromised
Hence, central banks are overburdened and need to share responsibility for stable economic and financial development with (other parts of) the government
But there are serious coordination issues (this looms larger in the Eurozone than in the USA) with regard to management of monetary/fiscal policy as well as with regard to macro

We’re publishing some expert ideas about the future of the ECB (and hence Euro money). Two days ago some ideas of Willem Buiter were published, yesterday we published some ideas from Richard Werner. Today some ideas by Thomas Mayer. Beware the last sentence.
EMU is incomplete and dysfunctional The European Monetary Union (EMU) is incomplete and dysfunctional. First, it is incomplete, because the quality of book money created by banks through credit extension differs from country to country (depending on the quality of the banks’ credit portfolios and the financial capacity of the governments to support weak banks in their jurisdiction). We have a paper currency union (as euro notes are the same in all member countries), but no monetary union (as deposits differ). Second, EMU is

As I stated yesterday we will publish some ideas about the future of the ECB. Yesterday some ideas of Willem Buiter were published. He wanted to abolish national central banks, to change the mandate, more transparency and an end to the prohibition of monetary financing. Today: Richard Werner. He warns us that it’s not just about the central bank but also about the ‘normal’ banks. More localism is needed. And the ‘tool’ credit guidance plus more localized banking may be more important than a mandate: let decentralized decisions rule money creation (as long as it is not for purchasing existing assets)!
The ideal central bank does not have the legal status of ECB or Reichsbank [the pre-1946 central bank of Germany, M.K.], but that of the Bundesbank
In my analysis of the ECB, published

The future of Europe is at stake. Yesterday, the European commission published a Roadmap for deepening Europe’s Economic and Monetary Union. coincidentally, the German Handelsblatt ‘EZB Schattenrat’ (‘ECB shadow council’, of which I’m a member) today discussed the ideal European Central Bank. The coming days I will post some (written) remarks made by members of the shadow council as well as some stuff relating to the Roadmap. No mention will be made of individual verbal remarks. Recurring themes were however the tension between centralization and decentralization, the inadequacy of pure inflation targeting (but what has to come next?), the importance of financial stability, the wish that some kind of ECB prosperity mandate has to become more explicit and the need for accountability.

What was the cause of the infamous Euro Area 2011-2013 double dip? Answer: a grave policy mistake. Already high ECB interest rates were increased (13 April 2011 13 July 2011) at the same time when fiscal policy was tightened (‘austerity’), unemployment was at record levels (graph 1) and use of capacity was still lowish (less important, core inflation was low, too). As a consequence, Euro Area unemployment started to increase at a time when Japanese and USA unemployment continued to decrease while UK unemployment started to decrease, despite the Eurozone dip. Brad Seltser has written a very good post about the demand side of this (second graph).

Readers of this blog won’t be surprised by his data but he gives a more detailed and systematic overview than I’ve seen up to now. Aside – his

Did the growth of money caused by QE in the Eurozone (graph) stimulate economic activity? Not enough. According to John Maynard Keynes, in ‘The general theory’ (1936),
“The relation of changes in M (money) to Y (income) and r (the interest rate) depends, in the first instance, on the way in which changes in M come about.”
Put differently: credit and not money makes the world go round. Money creating lending to enable household purchases of existing homes has a quite different effect on the economy than money creating lending to exiting new companies which hire lots of labor to produce live saving medical equipment (or the latest craze, L.O.L. balls, works too). Quantitative easing by central banks is a nice albeit dismal empirical example which shows that the amount of money did grow

One of the advantages of marketeers, compared with neoclassical economists, is that they do not assume things about consumers but observe them or ask them questions. So did Nielsen India, a large marketing company, less then a month after the infamous Indian demonetisation. The report is ungated and, for one thing, contains valuable information about the female experience. An excerpt
PART B: DECODING CONSUMER SENTIMENT (Source: Nielsen India)To pick up the consumer sentiment at this point in time, where they would have startedadjusting to this new reality, we ran a consumer measurement of sentiment and reaction. We reached out to nearly 800 people* in an online survey carried out between 25th November and 1st December 2016. Findings were quite revealing (Cities covered: Mumbai, Delhi,

What I did not expect: In my lifetime I’ve seem countries in and around Europe disintegrate. The Soviet Union. Yugoslavia. Czechoslovakia. Iraq. Syria. And, work in progress, the UK. Spain seems to be next in line. In many fo these countries this process was accompanied by war.
Vaclav Havel was the last president of Czechoslovakia and strongly opposed splitting up. Being a wise man, he resigned instead of using violence when he saw that it had become inevitable. Thanks to him we know that splitting up a country can be a relatively orderly and, especially, peaceful process.
Spain and Catalunya are heading the other way.
At this moment, provoking the opponent is a winning strategy for radicals at both sides which means that the radicals have all reasons to ‘cooperate’ with the other side