Reader Valissa has taken to providing economist jokes in comments, but the members of the discipline so often seem eager to make themselves the object of ridicule that efforts like hers sometimes seem redundant.
The latest sighting is a remark by Scott Sumner, a professor of economics at Bentley University. As you will see, it criticizes Modern Monetary Theory because it is….realistic.
Too much verisimilitude is a cardinal sin in economics, since it becomes hard to write things up in formulas hard enough to scare laypeople but not so hard that you’d need to be a real mathematician to devise them. So they posit hyper-rational consumers with perfect information and amazing computational powers in pretty simple situations, when in reality people have crappy information and aren’t all that smart and reality is really really complicated and kinda scary too. Which is also enough to make anyone plenty emotional.
Cullen Roche has graciously allowed me to cross post his commentary on the Scott Sumner remark in question, which I suspect will become a classic, in a bad way. From Roche:
One of the greatest strengths of the MMT approach is that it is not based on theory or mythology. This is why I often say that the name can be misleading. The core of MM “Theory” is just a description of our fiat monetary system’s “Reality”. When MMTers discuss the actual operations of the monetary system we are not theorizing. We are discussing the actual operations. This is why we reject so much of the economics that is taught in textbooks predicated on defunct gold standard beliefs and the thoughts of men and women who have never actually been involved in monetary operations or the mechanics of what makes an economy and/business work in the real world.
And therein lies one of the great problems with modern economics. It is based too much on pie in the sky thinking and not based on what is happening on the ground, in the trenches. Warren Mosler, widely regarded as the founder of MMT, created the theory because he was in the trenches and recognized that what his textbooks taught him did not reflect the reality of the operations he was involved in on a daily basis. And while no economic theory is perfect, I think this is by far MMT’s greatest strength. We can all theorize about how best to implement our conclusions from MMT, but the heart of the operations of our autonomous currency issuing fiat monetary system are undeniable.
That is why I am astounded by recent comments such as Scott Sumner’s, who today writes:
I wasn’t able to fully grasp how MMTers (“modern monetary theorists”) think about monetary economics (despite a good-faith attempt), but a few things I read shed a bit of light on the subject. My theory is that they focus too much on the visible, the concrete, the accounting, the institutions, and not enough on the core of monetary economics, which I see as the ‘hot potato phenomenon.’
That’s exactly right. We don’t create Crusoe Islands (as Robert Murphy does) or monetary systems without banking systems (as Sumner does). We are working within our reality and applying analysis and solutions based on that which is visible, concrete, provable through accounting and obvious through the institutions who implement these operations. If you want to know why we’re in this current mess look no further than the thought process above which claims that we need to focus less on reality and more on mythology. They got us into this mess and now we’re all sitting around waiting for them to get us out. Meanwhile, those of us working in the trenches in reality just get ignored…..
Sumner’s comment reads like a case example straight out of Thomas Kuhn’s The Structure of Scientific Revolutions. Most people brought up in an old paradigm (and Sumner was trained at Chicago) find it hard to wrap their mind around divergent ideas. We cited other examples in ECONNED, of Paul Samuelson being unable to understand Keynes’ General Theory and instead relying on a line of argument that Keynes explicitly rebutted to shoehorn it into neoclassical economics, or Paul Cootner and other economists rejecting Beniot Mandelbrot’s findings that financial market price data was not normally distributed but fell into wilder, more difficult to model patterns of randomness.
If nothing else, this remark shows that MMT is now beyond Gandhi’s “First they ignore you” stage of revolutions and is somewhere between being ridiculed and fought, which is considerable progress.