Subscribe to The Economist? Then – good news! – you get a huge (and welcome) dollop of education every week. But – bad news! – if you also have a fulltime job, you also face a choice…either skip articles…or slowly, inexorably, fall behind in your reading.
Right now I’m w-a-a-a-a-a-y behind.
That’s why I found myself reading an article entitled Marginal Revolutionaries in the December 31-January 6th issue, more than a week late, on the eve of the AMS Annual Meeting,. I wanted to draw everyone’s attention to it at that time…but was under the gun to try to blog instead on Annual meeting topics that enjoyed some currency (a vain hope, as it turned out).
The Economist article summarizes three schools of thought in economics. Rather than try to paraphrase the material in the article, with a loss of fidelity, I’ve excerpted the introductory material verbatim:
“…[Mr Mosler] champions a doctrine on the edge of economics: neo-chartalism, sometimes called “Modern Monetary Theory”. The neo-chartalists believe that because paper currency is a creature of the state, governments enjoy more financial freedom than they recognise. The fiscal authorities are free to spend whatever is required to revive their economies and restore employment. They can spend without first collecting taxes; they can borrow without fear of default. Budget-makers need not cower before the bond-market vigilantes. In fact, they need not bother with bond markets at all.
The neo-chartalists are not the only people telling governments mired in the aftermath of the global financial crisis that they could make things better if they would shed old inhibitions. “Market monetarists” favour more audacity in the monetary realm. Tight money caused America’s Great Recession, they argue, and easy money can end it. They do not think the federal government can or should rescue the economy, because they believe the Federal Reserve can.
The “Austrian” school of economics, which traces its roots to 19th-century Vienna, is more sternly pre-Freudian: more inhibition, not less, is its prescription. Its adherents believe that part of the economy’s suffering is necessary, an inevitable consequence of past excesses. They do not think the Federal Reserve can rescue the economy. They seek instead to rescue the economy from the Fed.”
With any luck, this’ll pique your interest, and you’ll turn to the fuller article, for a more complete read. [Let me start with a caveat…these three schools don’t enjoy the same standing and legitimacy among economists. In addition, my understanding of economics is so impoverished that I can’t guide you intelligently through all the ins and outs here. Maybe when it comes to economics, I’m in a position not unlike that of economists struggling to stay current on climate science…but further exploration of all that might take us to a dark place.]
Rightly or wrongly, the article with these three widely divergent views of how the universe of economics works reminded me of all the discussion in the world of physics about parallel universes. You can find some background here, in the Wikipedia entry on the Many-Worlds Interpretation of quantum mechanics. This idea, which has been popularized in science fiction, holds that “all possible alternative futures and histories are real, each representing an actual ‘world’ (or universe’)… Prior to many-worlds, reality had always been viewed as a single unfolding history. Many-worlds, however, views reality as a many-branched tree, wherein every possible quantum outcome is realised.”
[Again, a confession. I probably know less about this bit of physics than about economics.]
Is all this sounding a bit pointy-headed? Please bear with me. We’re almost to the main idea.
Of course what the physicists tell us is that getting from one of these parallel realities to another is a difficult stretch, especially when the parallel universe represents any significant departure from the one we’re in.
And that is the intriguing piece. The three economic models are vastly more divergent than the parallel physical worlds, and yet immeasurably more accessible. They could actually be put into force. The consequences might (most likely) be horrific or (…less likely) an improvement, but they are realizable.
This is unnerving…especially when it’s possible to contemplate yet another universe of economics…one which is more comprehensive, and incorporates full accounting for the use of renewable and non-renewable resources in a way which makes explicit the tradeoffs inherent in the use of each. There was no hint of such a constraint in any of the three models making up The Economist piece. Yet something like such a synthesis will likely be needed if we are to progress toward more sustainable approaches to Living on the Real World.
Very interesting blog.
I look forward to reading more.
I believe that taking historical perspectives on most issues is very wise.
By the way, I read “neo-chartalism” at first as “neo-charlatanism”. After reading more closely, I saw the difference, but think my first reading was in a way more accurate.
Bill, the three approaches discussed in The Economist are outside the mainstream, and the paper notes that “mainstream economists continue to look at all the options askance.” And they are all dealing with particular aspects of macroeconomics in which “full accounting for the use of renewable and non-renewable resources” is not relevant. So don’t get too concerned at this stage!
Economics has long had the idea of “externalities” or “spillovers” – positive and negative impacts of an economic decision that are not taken into account by the decision-makers – e.g, where an industrialist causes pollution, which is not recognised in his cost or revenue calculations, but has a cost to society; and some measures have been taken to reflect these factors, e.g. emissions charges or regulatory restrictions on permissible discharges. But it is not an exact science – for example, there are arguments for government subsidisation of R&D on the grounds of positive externalities, but case studies suggest that when the parties to innovation are correctly identified, they tend to capture the gains, leaving no grounds for subsidies.
A free-market pricing mechanism is usually the best way to take account of all costs and benefits of resource use, as it reflects the actual value people give to those resources. This pricing will reflect scarcity where it exists and viability in respect of more costly renewables. The “synthesis” you suggest – which to me implies an element of central direction, which has rarely if ever improved on market-driven outcomes – might not be needed.
As for “more sustainable approaches,” everything changes, nothing can be indefinitely sustained, humans have made great progress through their inventiveness and adaptability in the face of ever-changing circumstances. This is our biggest resource, and it is one which is constantly growing rather than being depleted.
Michael…I greatly appreciate your commenting on this. It needed the attention of a card-carrying economist…and I was hoping someone would come forward.
The Economist was careful to suggest the thinking and thinkers it covered were outliers. What I occasionally find unnerving is that even with globalization of commerce, economies worldwide display such a variation. I guess I have to get used to the fact that each nation is free to score its economy differently…that we then have the responsibility to understand those variations country-to-country…and that economic scorekeeping is not in the same league as say physicists’ calculations of conservation of energy, mass, momentum, etc…where things are more universal and the sums have to balance exactly.
And I have learned from your discussion of externalities…what still concerns me a little is that the price corrections are or have the potential to be belated…and thate their effects have the potential to be large, even catastrophic. Is that correct or am I overreacting?