Monday, February 14, 2011

Heterodox money

Heterodox economics is frustrating because it keeps working in a self-referential vacuum, consistently ignoring advances in orthodox economics. This is not how progress can be made, and in particular this is not how you can get results from heterodox economics accepted or at least considered in the mainstream. It is now as if there were two parallel universes and no portal between them.

A good example is a recent paper by Randall Wray, grandiosely entitled "Money" that is supposed to teach us what money is. It lays on three principles (I quote):
  1. Money buys goods and goods buy money, but goods do not buy goods.
  2. Money is always debt; it cannot be a commodity from the first proposition because if it were that would mean that a particular good is buying goods.
  3. Default on debt is possible.
It then proceeds to talk about how to understand this and how this defines money, with references to Keynes, Marx, Sraffa and Kaldor, and their disciples.

But have we not made some progress since? The only mention of the mainstream in the paper is a criticism of representative agent models where agents pay money to themselves and thus never default. Really? Really? Modern models that try to rationalize the use of money explicitly have heterogeneous agents and explicitly take into account that some may refuse money for payment. And this is not exactly an obscure and recent literature, Kiyotaki and Wright, for example, dates back to 1989 and already has all these ingredients. This money search literature is mentioned nowhere. The same applies to the literature on trading posts, which has rationalized the emergence of particular commodities as money (See recent post).

Also, why this reluctance to use formulas to make arguments and assumptions explicit? In this paper, there is implicit talk about budget constraints and accounting identities, but they are never explicitly laid out, which can make it easy for the author to sweep something under the carpet (I am not saying Wray does, though). But there is something essential about writing an equation: it forces you to define variables precisely, and it forces to use a logical proof of your arguments. Only then will your arguments be water tight.


Joey said...

The most interesting part for me is the author quoting this:

"'We can conclude that taxes drive money (Wray 1998). The government first
creates a money of account (the dollar, the pound, the euro), and then imposes tax
obligations in that national money of account. In all modern nations this is sufficient to
ensure that many (indeed, most) debts, assets, and prices will also be denominated in the
national money of account'"

VIlfredo said...

EL, you could also have mentioned Kocherlakota's "Money is memory" that formally proves some of the points this paper babbles about.

Economic Logician said...

Link: Money is memory (ungated).