Four Basic Truths of Macroeconomics
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We're seeing a lot of coming-to-terms with both the positive and negative fallout from this access.
Hopefully soon we might be able to start deriving a utility function based on what people are using the devices for, and then assigning positive and negative utility accordingly, with externalities factored in.
Then we could make an attempt at assigning dollar values, and begin to figure out what that means in an economic sense.
Of course it is very difficult to compare for entirely new product categories, though the good news is that brand new products likely are not a large portion of the consumption basket at the time they are introduced. So it shouldn't make that much of a difference. Otherwise, you are comparing each year to the next in a sort of "family resemblances" kind of way - maybe you can't directly compare a smartphone to something in the 1950s, but you can do incremental comparisons along the way.
[1] https://www.bls.gov/cpi/quality-adjustment/questions-and-ans...
How so?
This claim is crazy. Sorry. No one in the BLS or BEA is trying to “steal benefits”. They are trying to understand the very hard problem of valuing consumer goods for which prices are generally falling and quality is generally increasing.
The CPU is faster and it has more RAM but somehow the user experience is absolutely atrocious - it was not even fast enough to be able to reliably answer calls (the UI was stuttery and it took multiple seconds to unlock the screen, which by then the call went to voicemail).
It would constantly fail to do every days tasks (apps would freeze and crash, including the built-in apps) and would slow down randomly making it barely usable.
I don't think we should be including basic necessities alongside improvements in entertainment in the same statistic, because it will just hide problems.
Access to information helps you obtain and maintain a roof over your head.
> I don't think we should be including basic necessities alongside improvements in entertainment in the same statistic, because it will just hide problems.
Agreed.
And yet, it doesn't matter if you have a smartphone and internet access if there are no jobs, or if those jobs don't pay sufficiently.
Likewise, a flagship phone 5 years ago might be technically less advanced than a flagship phone today, but that doesn't mean todays flagship phone is any better at looking at job ads today than the other one was 5 years ago either.
This idea that we should weight technical improvements like this when judging how the economy is performing just seems like a (maybe unintentional) attempt to paint a rosier picture than actual reality to me.
The problem is that hosing (specifically land) is fundamentally a scarce resource, and since the 50s competition has only gotten higher (total population going up, people becoming more concentrated into cities). It's not that shelter has gotten more expensive, it's shelter in desirable places have gotten more expensive.
The housing crunch in hot markets is really just a zoning issue. For example a federal mandate that new housing must be zoned into the area when adding new office space, retail, or residential space would largely solve the issue.
A 2000 sqft house in the middle of nowhere in Wyoming might cost $200k. In SF you'll get far less for the same money. People want to be in SF, because there's more to do, but also because the better paying jobs are there. This uplifts the entire area, but also makes things like housing more expensive.
In a lot of ways I think the cost of housing is dependent on the housing density vs job density of the area. If job density is much higher than the housing density, then the price of housing goes up by a lot.
I think a similar idea can be used to explain the high costs of higher education. Every university has a limited number of spots, so people are willing to pay more and more to get a spot. Loans mean that everyone's capable of paying the money to the university, regardless what they charge.
> A 2000 sqft house in the middle of nowhere in Wyoming might cost $200k. In SF you'll get far less for the same money. People want to be in SF, because there's more to do, but also because the better paying jobs are there. This uplifts the entire area, but also makes things like housing more expensive.
Of course people follow the jobs and other things coming from there being many people around. Hence why the house in the middle of nowhere is cheap, no one wants to live there. It's a self-reinforcing feedback loop.
But would less people want to live in SF if somehow tomorrow there would be X% more housing units available on the market such that the price would be drastically lower? Of course, there being more housing would have to have other consequences which could (and probably would) effect the desirability of the city. I'm not familiar with SF, but for example in Paris that would probably mean replacing older buildings with newer, taller ones.
That would of course change many things, the first of which is its "visual character". Which would make it look more like say NY (because of the tall buildings) than it currently does. People would try to prevent that (if for no other reason than because people are sometimes against change) but, in the aggregate, would that bring less people here? I doubt it.
However, that would probably create more jobs in the city, which would bring in even more people, and so on. After all, today's big cities all started with a bunch of shacks, right?
My hope, as has been discussed in other threads, is that with remote work gaining traction, at least some people will leave the cities. I know many people who would like that because they don't particularly enjoy city life. This would allow, of course, some other people to come in who couldn't afford it but wanted it, but maybe, in aggregate, city population would be lower. I, for example, would gladly go live further out in the suburbs if I only had to come in the office once in a while (say no more than once, maybe twice a week).
I am glad to see that some companies moved south of Paris (Thalès, Bouygues, Dassault Systèmes,...) and people working there and living around our in Versailles can bike to the office.
If we managed to spread companies in the country, we would have less concentration of elitarism and pepole would live a more quiet life.
The cost of housing is dependent on job density * quality only to the point what people are able to pay, and then rest is what they are willing to pay. A lot of people buy/rent slightly above their means if they are willing to pay it. Housing price is like an auction house so willing to pay is a bigger factor than able to.
Artificially reducing number of available houses comes in a lot of reasons/pretense but in the end its just a result of people seeing/forced to see their house as an asset; You acquired your house at price X at auction. A local urban developer want to build 100 more units close to you, from prediction of demand and would be profitable at price X (or even <X), so you passively/actively work against that proposal, tell the developer that he can build up to 90 more units, so price of your estate increase X+N. Now the next 90 buyers that bought the house have a reason to keep the price of estate above X+N, tell the developer that he can only make 80 units. Rinse and repeat.
Exactly. But you can buy a 50" TV today for less than the price of a car! That hardly matters to anyone struggling to pay rent and the supermarket bill.
I'm pretty sure that the vast majority of homeless people would disagree vehemently.
Not only does smartphone make it much easier to find a job and get back to the point where you can afford a roof over your head, it allows you to stay in touch with people you care about, people who may help you out now and then. And it gives you access to lots of useful information that can improve your life, like sources of free food.
Luckily I haven't been homeless yet, but there were times when I was too poor to have enough phone credit for internet or even regular calls. Granted, there are places that offer free wifi but only with an order if you are a paying customer, which I think most homeless people aren't.
And most homeless people absolutely can afford to be a paying customer somewhere - a low-cost gym membership for access to showers is fairly common.
A homeless person is just someone who can't afford a home. They're not all your stereotypical pan-handling drug addict in torn, dirty clothes.
I was disagreeing with the statement "if you can't afford to have a roof over your head I'd argue the smartphone is irrelevant".
Contrary to that, if you do not have a home, a smartphone is extremely useful and valuable. In the hypothetical sitation that you find yourself homeless with nothing except clothes and $100, a cheap smartphone is absolutely the best possible use of that money.
Of course I 100% agree that a phone can be used to improve your situation, and I'm sure the OP agrees as well. But a phone isn't enough to be able to go find housing for most people. While it can help you find cheaper shelter, or maybe over time allow you to learn skills that lead to better paying job opportunities that allow you to afford housing, you wouldn't need any of that if housing was simply affordable in the first place.
Ultimately OP isn't saying phones suck and homeless people should sell their phones for a couple nights in a shelter. What they're saying is that phones being cheap does not make up for housing being expensive - no matter how useful the phone is, ultimately the end goal is to have shelter, and if you can't afford shelter then it doesn't matter how cheap anything else is.
I can't agree with that either. Housing is not everything. Even if you are homeless with no prospects of getting out of that situation, it still matters a lot how cheap many other things (food, clothes, access to showers, communication with friends and family, even entertainment) are. A phone with internet access is not just important as a tool to get out of homelessness, it also represents a significant improvement in your quality of life.
Admittedly, this may look somewhat different in climates where a lack of shelter can be fatal.
A cheap phone is vastly cheaper than rent. It's tiresome to see people online act like "If only you would not extravagantly piss away $7/month on a phone, you would be back in housing!!!"
Internet access and a phone number are essential for job hunting and an earned income is a common means to get off the street. You can also do online banking and other essential things much easier than dealing with going in person on foot to the bank and so forth.
but if you can't afford to have a roof over your head I'd argue the smartphone is irrelevant.
A phone and tablet and internet access were essential to my ability to cope and eventually get back into housing. They aren't irrelevant.
If you want to argue we need to do a much better job of making housing something people can afford, I totally agree. If you want to argue that homeless people just are supposed to entirely cease to exist and not care about anything people in homes care about or something....no. That absolutely doesn't work as an argument.
The internet is a really massively helpful thing for people who are homeless.
So no one here is arguing that homeless people shouldn't have phones or internet or anything like that, rather they're arguing that we'd have better housing opportunities if shelter was what had become so cheap, rather than phones. So measuring inflation based on the prices of non-critical goods is fine if you already own a house, but it fails to reflect reality for people who are struggling to make rent.
When I say that, inevitably someone argues against it and tells me it's slum housing. So we have a world in which the folks with money and the folks who have the power to create housing only want to approve upper class housing and then act like homeless people are just lazy and not trying hard enough or something.
Before life got in the way I wanted to be an urban planner. I've had pertinent college classes and managed to find a hundred year old SRO and that's how I got off the street.
Would I like something better? Sure I would. But I don't have the money and this beats the hell out of being homeless.
I've talked about this stuff for years. I mostly get flak.
What makes this really bad is there are a lot more households with fewer than four people than there were when we invented the suburbs. But suburban single family detached housing designed for a family of 4.5 people is our default mental model for "proper housing" and now it's that on steroids and let's not let reality get in the way of our development of this kind of completely inappropriate housing that doesn't even fit the needs of our current demographics.
Yes, I'm cranky. I lived this crap. I've studied it. I get nothing but blown off, usually by people who know way less than me about these issues.
I think your post makes sense.
Land is valuable and to maximise returns, building these SROs wouldn’t make sense in our profit uber alles system.
SROs don’t have too look like concrete blocks from ex communist systems.
This is what design thinking can achieve... just one example https://nestron.house/
It seems there is no money in helping the homeless or people with low income. I guess short term thinking doesn’t consider the cost of a gradually fracturing system, it doesn’t recognise the value of a cohesive society.
It’d be amazing if there was an incentive to build a million tiny houses.
Luxuries change century to century and within decades but those hardly matter for inflation since those are by definition not necessities.
Even with the necessity bucket, things change century to century which I think should not be considered luxury. Electric utility service and internet access I do not consider luxuries, but they were obviously not available in 1850 and 1950, respectively.
I know that this is a tangent to your point and I'm not trying to be pedantic, but it always crosses my mind when people mention "access to all the knowledge and entertainment" — how much that would actually cost someone, even with the internet?
For knowledge — You have access to Wikipedia and it's a great resource for what it is, and more and more, universities are making some of their material available for free. But there's still an awful lot of academic knowledge that's locked up in research journal subscriptions and a huge amount of knowledge & expertise in e.g. industry text books from publishers like O'Reilly.
For entertainment, leaving aside piracy (as otherwise a discussion on costs seems odd), how much would it cost you to be able to access all TV, films, music, books? You'd probably need recurring subscriptions to multiple platforms to even cover main-stream (Prime, AppleTV, Disney+ etc.) Then there's titles that aren't on any subscription service, etc.
I wonder how many days labour it would cost to actually get access to all of these?
Or how much of the world's knowledge is actually relevant to what you want to access at a given moment.
30 years ago was 1991. That was one year before the IBM Simon was announced - https://en.wikipedia.org/wiki/Smartphone#Forerunner People definitely imagined smartphones back then. When it went on sale a couple of years later it cost a little over $1000, or less with a cellular phone contract.
You couldn't get the internet on it though. Web access on mobile devices didn't arrive until about 1999 with things like iMode.
I think your assumption of malice is unfounded. A likely benign explanation is that Cowen focused on areas there economists are in broad agreement without intent to mislead.
The Mont Pelerin Society was specifically founded to promote a certain view of economics, and the Chicago School was supported financially by some very rich sponsors who wanted a a pet academic alternative to progressive slant of Keynesianism.
The "consensus" in neoliberal economics and its core ideas - including "rationality" and "efficiency" - is a wholly manufactured political project, not an organic open-minded attempt to find credible scientific foundations.
Behavioral economics, which concerns itself with the effects of this phenomenon on economic decision-making, is one of the major branches of the subject studied today.
They don’t have heterodox people (eg marxists, Austrians, or MMT). Nor should they. CS departments won’t hire people who (for example) believe computers work via magic. Dollars and tenure lines are scarce and can’t be wasted on BS. There is a lot more diversity of thought in economics departments than commenters here know, but there are limits, as there are in every field.
This is literally the foundation of macroeconomics AFTER Keynes. This is (one of several) reasons why Keynesianism was rejected.
Every single macroeconomist in every mainstream department in the country (and everyone in a central bank anywhere) would agree with exactly what you said AND say that it is precisely that fact which makes macroeconomics really hard.
This is why, for example, even the bare-bones simplest macroeconomic model you learn in your first year graduate macro class must include some notion of the agents' expectations.
It would be an error if we didn't do that. But fortunately, it's been at least 50 years since we started thinking about exactly that problem.
Econ departments don't have Marxists for the same reason philosophy departments don't have Buddhist scholars: it's just not where they belong. The Buddhists belong in religious studies, and the Marxists belong in the political science department.
This is *complete* nonsense. No one pays me to think or say anything. No one pays anyone in my department anything to take a particular position.
For a simple example of what nonsense your claim is: the economist’s definition of rationality is that preferences are (1.) complete and (2.) transitive. That’s it. (See any microeconomics textbook for proof. Sometimes (3.) reflexivity is included, sometimes smaller sets of axioms which imply the others are used instead.)
How “political” is that definition?? Did someone rich guy pay Paul Samuelson or Gerard Debreu or Kenneth Arrow to use that definition 80 years ago? Obviously not - moreover Arrow and Samuelson at least were on the political left! (And I simply don’t know Debreu’s politics. He could have been on the left too.)
Your comment is *entirely uninformed* and *totally unfair* to an entire profession.
How do economics professors get hired? By impressing other economics professors. And by having the power to win funding for the department. Who are the people that tend to fit those criteria? Mostly, those who already agree with the existing establishment, and those who already have views amenable to the well-resourced bodies that distribute funding.
This claim is true.
> Who are the people that tend to fit those criteria? Mostly, those who already agree with the existing establishment
This claim is false. If you can empirically support a result which shows that something most other economists believe is likely false and can do so convincingly, you can write your ticket to any department in the country. Some of the most successful graduate students every year do things like this (not all, because it's very hard to do). But the profession is 100% open to this kind of work.
> And by having the power to win funding for the department.
This demonstrates a misunderstanding of how economics departments are funded. Grant funding is a very small part of the departmental budget everywhere. We are not (to take an example where department funding does depend on grants) health policy departments.
It's almost impossible to do that though isn't it? Economics isn't a hard science, it's not like you can run RCTs or experiments. And all actually-existing economic systems are situated within an actually-existing political, social and historical context, meaning we only ever observe a tiny fraction of the possible universe of economic systems. There is no possibility to explore counterfactuals.
> This demonstrates a misunderstanding of how economics departments are funded. Grant funding is a very small part of the departmental budget everywhere
I never mentioned grants, departments still have to be funded somehow, whatever that process is, it will introduce selection biases.
Not at all. It IS hard, but that's because research is hard. If it were possible to easily show widely-held beliefs to be wrong, someone would have done it already. (No different from any other scientific field!) But it does happen.
>Economics isn't a hard science, it's not like you can run RCTs or experiments.
Also wrong. You can in many areas. Indeed, there is a gigantic literature on field experiments, and the whole field of development economics runs on RCTs. In macro it is difficult, because no one is going to give you a whole economy to play with, but lab experiments in macro exist. Most empirical work in macro is not based on experiments.
But that does not make it impossible to learn anything, it just makes it hard. Indeed, that is why we have spent years developing methods to solve this problem, then more years criticizing and refining our own methods. That process will never end.
> And all actually-existing economic systems are situated within an actually-existing political, social and historical context, meaning we only ever observe a tiny fraction of the possible universe of economic systems. There is no possibility to explore counterfactuals.
Again, this is what makes it hard. It is not impossible. To answer certain questions for certain models may be impossible b/c there is no way to identify the parameters in question empirically.
You make these claims like it makes our whole enterprise worthless or impossible. We have taken it as a challenge to attempt to develop interesting methods to answer hard questions.
Exploring unseen counterfactuals on the basis of parameters estimated from models given existing data is literally my bread and butter EVERY day (I am not a macroeconomist, but I am an economist). And it is the bread and butter of many of us.
Give us some credit, an overwhelming majority of us are not conservative ideologues. And if you really want to know how it works, HOW we learn things from data (in macro and elsewhere) I can provide references.
Last week, I thought divining an Erdős Number for economics would be amusing.
My casual effort hasn't identified a sole patient zero, prime mover, economic Eve (or Adam). The MPS roster has multiple candidates.
Any suggestions?
https://en.wikipedia.org/wiki/Erdős_number https://en.wikipedia.org/wiki/Mont_Pelerin_Society
Taking the first claim as an example (decline in demand leads to unemployment and recession, because sticky wages etc.), I suppose one could argue that just because we've seen this happen before doesn't mean it's an inevitability of human nature. I can imagine a society with a higher level of cooperation and shared responsibility, where everyone _does_ agree to take a small reduction in pay so that others can stay employed and the overall economy suffers less.
If you agree with that argument, my best response to it is that these macroeconomic "theorems" are supposed to be phenomenological rather than prescriptive. They have predictive power in the present economic system but are not necessarily useful in a society radically different from ours.
I agree that it would be an error to treat these emergent properties as some sort of inevitable laws of nature, which is a tendency that I've seen in debates.
The assumptions are set in stone before you can begin to do macroeconomics, given to you when you take Macro 101, to lay the foundation of your future work, rather than examined and challenged.
I don't think this is exactly malicious, but it bothers me that the field largely operates on, and draws research conclusions from, unchallenged assumptions.
What do you know about the research done by contemporary macroeconomists? Anything? Do you know how it is taught in graduate programs?
If you did, you would know that all macroeconomists have opinions about where their assumptions (basic and otherwise) limit their models and spend their careers trying to extend them and make them more realistic and take them to the data.
I am not a macroeconomist but I will defend how my colleagues approach the subject. You don’t know how difficult it is until you’ve tried to formulate a model that you can actually solve and made an attempt to take it to the data.
The field absolutely does not operate on “unchallenged assumptions.”
If a professor presents these assumptions as "truths" (as they have done, quite literally, via this article), graduate students are strongly disincentivized from thinking about challenging or contradicting them - if they want to pass their course, if they ever might want to get a job in that department, etc.
What contemporary graduate macro everywhere teaches you is a set of tools. You then have to ask and answer your own questions. There isn't any "indoctrination" as you seem to be imagining. It's not different at all from doing a math PhD and taking a first-year analysis sequence, or a CS PhD and taking an algorithms class. It is exactly the same.
If you can take these tools and show that any of the truths presented in this article are false and can do it in a convincing way, then (as I have said elsewhere in this thread) you are going to be able to get a great job in whatever department you want.
Understand something about the incentives in science - surprising and counterintuitive results, convincingly demonstrated, can have enormous payoffs.
The way you seem to be imagining things work in economics departments and graduate programs bears little relationship to the way things actually are.
This is not the opposite of taking those as axiomatic truths.
You're also calling them truths and saying it's on me (as a novice) to show them false? This only proves my point that they are not properly examined.
Like I said, it bothers me.
I'm not trying to be glib here, but that seems to fit with the intent and title of the piece, does it not?
He says "The first and most important thing [..] is that a strong negative shock to demand [..] leads to a loss of output and employment"
Fair enough. Not even a comment of what causes the demand shock, but it's OK.
And then he jumps to:
" Nominal wages are sticky, for a complex mix of sociological reasons, and so employers do not always respond to lower demand with lower wages for workers. Instead they lay some people off, and that can lead to a recession."
The are a lot of assumptions there than are not for discussion, are just part of the framework.
He says: "The third thing to know is that if central banks go crazy increasing the money supply, the result will be high price inflation."
This is just not true, the central bank can increase the money supply all that they want, if the money is not spend in the economy there is not going to be inflation. This has been tested empirically by Japan in the last decades and the Fed and ECB more recently, but it seems that the theory is not going to change, not matter what the reality says.
The fourth truth is truth, I think :-)
Nominal wage stickiness, recessions etc has been the subject of an enormous amount of study (and wage stickiness is sufficient, but not actually necessary to cause recessions). And the exception to the rule that increasing the money supply is dealt with by the very next sentence from the one you've singled out as a gotcha. Liquidity traps were already baked into the theory.
Imagine if somebody dismissed the field of computer science as a distraction from database problems based on a blogger listing CAP theorem as one of its essential conclusions
>"And the exception to the rule that increasing the money supply is dealt with by the very next sentence from the one you've singled out as a gotcha."
I disagree with that. There is evidence that the mainstream view is wrong on this, but it's never recognized, not even discussed because it's one of the "truths of macroeconomics" (and because the rest of the building would start to wobble if recognized).
There is a good way to see it. If you know the mainstream model of macroeconomics, you can make predictions, are the predictions about the last decades right or wrong? What the model (the framework that the author is defending) says about what would happen with big increases of bank reserves in the system?
Because the predictions were wrong, instead of changing the theory, they speculate that the world has change while they were not looking. It seems to me that would not be allowed in other sciences.
Repeating a falsehood does not make it any less false. QE policy was designed by mainstream economists who did not want to see massive inflation, and as they predicted they did not see massive inflation, for reasons [partly] explained in the second sentence on that topic you have for some reason overlooked. The concept that the relationship between money supply and inflation was contingent on another variable called "monetary velocity" dates back to 1911 and the extent to which monetary stimulus produce growth rather than inflation in recession is the fundamental debate of macroeconomics. QE and Zero Lower Bound debates were not new in 2008 either.
Your assertion that economists' reaction was to "speculate that the world has change while they were not looking" no discussion is a confession of your own ignorance of contemporary macro, nothing more. (There's nothing wrong with being ignorant of contemporary macro - more exciting hobbies than reading macro papers exist - but plenty wrong with dismissing an entire field of study by reading and understanding only the first sentence of a summary paragraph)
I go back to my CAP theorem example. It would be possible to conclude from a one-line summary of CAP theorem that computer scientists cling to theory as an excuse for not working on better sharding technologies or anticipating the possibility of building databases at social media scale. But it would also be laughably wrong.
-Japan have been monetizing the debt for decades, what is the consequences predicted by the textbook mainstream for inflation and interest rates? And what mainstream think are the consequences of its high public debt?
-In 2011-2012 there was a crisis of sovereign debt for some countries of the Euro-area. The reason was that "the markets" perceived the debt of those countries as too risky, so, they demanded a high return. How was, by textbook macroeconomics, the crisis solved? Currently, those countries have bigger public debt that then, and, a very big (Covid) crisis in their hands. How mainstream economics explain that the returns demanded by the market are so low now compared to then?
-When was the last time that a country payed its public debt and what would happen if they do (by textbook macro)?
-What is the mechanism that produce inflation when you increasing reserves (monetary policy) instead of spending in the economy (fiscal policy) and why has not worked (except for the stock market)?
-What are the measures that Cowen is talking about when he says: "[..] central banks simultaneously act to decrease the velocity of money — that is, if they take measures to reduce borrowing and lending [..]"
1) Japan's public sector debt has risen over time, but is not unusually high by global standards. Mainstream macro suggested that Japan would struggle to stimulate further growth once its interest rates hit zero (structural reasons why Japan's economy slowed down is a book length topic) which is of course what happened to Japan before the rest of the world. QE was a slightly unconventional way of achieving the textbook macroeconomic goal of injecting more money into the economy when it slows down.
2) The European Central Bank announced emergency measures to ensure all governments affected by COVID have access to reserves of Euros. In 2011-2012 it didn't, taking the view that countries with massive deficits should resolve their problems by cutting spending. Bond buyers didn't trust that they would, which made national debt servicing even more expensive, though these countries would have had problems even without that.
3) I'm not aware of any country repaying all its public debts or any textbook macro suggestion that this would be a remotely sensible goal for them to aim for. Textbooks would imply that continuing to aim for the necessary fiscal surpluses during an economic slowdown would result in massive recessions long before the debt got near zero.
4) Monetary policy produces inflation from credit becoming cheaper resulting in more money being available to spend on goods and services (and less reluctance to lend or spend based on concerns about the cost of debt service). The responsiveness to monetary policy is reduced when people still don't want to borrow more and central banks can't make it any cheaper to borrow money than it already is. More unconventional interventions like buying stocks obviously directly and immediately increase stock prices, but the average stock holder is less likely to go out and buy more goods, services or staff with their returns than the average borrower, so doesn't necessarily boost the economy/inflation as much as injecting money to reduce interest rates.
5) Cowen's phrasing is, admittedly, vague and crap here. Much of the velocity of money decrease has already happened because people are not spending or investing or borrowing as much in the middle of an economic crisis. On top of that, you've got much of the additional spending being ring fenced or restricted to those not spending.
This is an interesting discussion but I don't want to extend it ad infinitum. A parting thought:
Your answer about ECB tell me that you agree that central banks can control bond yields. So, I have to ask myself who is the "mainstream economics" that we are discusing about. Maybe we are thinking of different people.
Was not Martin Feldstein? (1) is not Paul Krugman? (2)
(1) - http://bilbo.economicoutlook.net/blog/?p=33094 (2) - http://bilbo.economicoutlook.net/blog/?p=13970
You'll forgive me for not bothering to defend the half dozen articles Mitchell takes exception to in the second post (though I will say Krugman is given to glib generalisation when writing for mainstream audiences. A quality shared with pretty much every MMT blog going...)
https://mru.org/principles-economics-macroeconomics-0#
> The Economics of Choosing the Right Career Defining the Unemployment Rate Is Unemployment Undercounted? Frictional Unemployment Structural Unemployment Cyclical Unemployment Labor Force Participation Taxing Work Women Working: What’s the Pill Got to Do With It?
Summary of Truisms:
1) During recessions, employers tend to lay off rather than reduce wages
2) Central bank stimulus helps recessions
3) Too much stimulus causes run-away inflation
4) Non-monetary problems like oil shocks and pandemics can cause recessions
5) Increasing population helps economies. ("Hump to de-slump?" Or immigration?)
Summary of areas of disagreement and mysteries:
1) Acceptable level of debt
2) Acceptable level of inflation
3) Effectiveness of public sector versus private sector stimulus. (The left emphasizes first, the right second.)
4) Measuring the true value of intellectual property
There's a good reason for that. I've seen both done. An across-the-board wage reduction means your most productive leave. A layoff is getting rid of the least productive.
Additionally, immigration increases both labor supply (obviously) but also labor demand (more consumption, because immigrants buy stuff and services just like anyone else) and as a result wages are flat even when a lot of immigrants join the economy in a short amount of time.
"This has been tested under conditions such as the Mariel Boat Lift, where a large number of Cuban immigrants all joined the Miami labor market in a short period of time, increasing labor supply by 7% very quickly. Research found that there was practically no impact on wages and employment for locals."
The problem with all of these studies is that they only apply to the specific circumstances of the study which will probably never happen again anywhere.
What happens if the immigrants send more of the money they make back to their home countries? What happens if the minimum wage is lower, or the immigrants have a higher skill level, so that the potential downside for wages is larger? What if the unemployment rate or labor demand is different, affecting the number of new workers that displace existing workers? What happens if immigrants' wages are taxed at a higher rate and the money goes to cronies and corporate welfare instead of being recirculated in the economy?
Measuring what happened at a different time in a different place doesn't really tell you much.
What it misses, obviously, is the negative impact on where they have come from.
One areas net immigration is another area's brain drain - hence why you have concentrations in cities and poor rural areas.
It wasn't the oil shock of the 70's that caused recession. It was our response to it - Nixon's oil and gas price & allocation controls. We came out of that when Reagan repealed it.
Our current recession is not caused by the pandemic, but the lockdown response to it.
Why stop there? By that logic the recession is not caused by the lockdown but by less businesses being open and reduced consumer spending.
I don't think there is a coherent notion of cause and effect where both covid does not cause the recession and the lockdown does. I can see very restricted notions of cause and effect where neither "cause" it, and more normak notions where both cause it, but not one where one causes but not the other.
And that's ignoring the absolutely rediculous premise that the covid death toll and long term disability toll has no effect on the economic downturn and it was purely caused by the lockdown. There are reasonable arguments that lockdown has been a net positive for the economy in the long run (even more so for non-usa countries that did it competently)
I didn't write it had no effect. I wrote it wouldn't have caused a recession.
> purely caused
I didn't say "purely", either.
I have an acquaintance that runs a box factory. Their COVID outbreak resulted in only one death, but it knocked one whole building out for about 2-3 weeks. Reportedly their competitors each had 3-4 such outbreaks.
Every country in the world was subjected to oil shocks. Not every country had price controls. Every country experienced a recession.
Likewise, every country experienced the pandemic. Not every country had lockdowns. Every country experienced recessions.
Posts that had simple explanations for complex phenomena are almost always wrong, especially when they fail to account for the evidence of other countries.
> Likewise, every country experienced the pandemic. Not every country had lockdowns. Every country experienced recessions.
I can't speak to #1, but #2 is not a strong argument. Lockdowns covered enough of the world that you would expect to see a recession, on those grounds alone, in every country with any exposure to international trade.
"This paper examines the drivers of the collapse using cellular phone records data on customer visits to more than 2.25 million individual businesses across 110 different industries.
...
While overall consumer traffic fell by 60 percentage points, legal restrictions explain only 7 of that. Individual choices were far more important and seem tied to fears of infection. Traffic started dropping before the legal orders were in place; was highly tied to the number of COVID deaths in the county; and showed a clear shift by consumers away from larger/busier stores toward smaller/less busy ones in the same industry. States repealing their shutdown orders saw identically modest recoveries--symmetric going down and coming back."
The evidence is very strong that Nixon's actions caused the gas lines in the US.
I was initially going to post this to refute freddie_mercury, but when I looked at the data it's more suggestive that he's right, and the recession actually is caused by the pandemic.
We can examine this by looking at countries that had no lockdowns and seeing how they did relative to countries that did.
Taiwan had no lockdown, instead relying on incredibly strict quarantine procedures, robust contact-tracing, and being an island. South Korea also had no lockdown, but managed a few surges through very thorough test, trace, & isolate procedures. Those two countries had the smallest economic declines, with Taiwan barely registering a recession at -0.6% and South Korea at -3%:
https://www.taiwannews.com.tw/en/news/4008495
New Zealand had a very strict lockdown in March and April, a steep recession (-17%), but then eradicated COVID and ended the lockdown. They had a sharp V-shaped recovery (+14%) in Q4:
https://www.nzherald.co.nz/business/nz-economy-bounces-out-o...
But there's a potential conflating effect: the countries without lockdowns usually lacked them because they didn't have many cases. To remove the conflating effect, we can look at Sweden, which had no lockdown but lots of COVID cases (and more deaths than its neighbors). Sweden had a -8.3% fall in its Q2 GDP. By comparison, Norway (strict lockdown, few cases) had -5.3%, Denmark (strict lockdown, fair number of cases) had -8.5%, and the UK (initially no lockdown but reversed course when they had lots of cases) had -21.7%.
This would seem to indicate that it's the pandemic itself (and resulting societal fear) rather than the lockdown that caused the GDP fall.
Japan has been doing that for decades now, and none of the mainstream macroeconomics prediction came true.
>>"If central banks simultaneously act to decrease the velocity of money — that is, if they take measures to reduce borrowing and lending — then price inflation will be limited accordingly."
What are those measures he is talking about?
The flip side is of course when you rely on imports to produce your exports (natural resources for example)
> Alternatively, why can't exporters just lower their prices without weakening the entire currency?
Because then they wouldn't be able to make a profit after paying their local employees and suppliers.
My personal take is that the field is stuck in an existential local minima and are self-conscious about it: similar to how astronomy was stuck on the model of concentric spheres. I think everybody who practices the field is unconsciously aware of it too which is why they lean on hand-waving charts and opaque math that anybody in a harder science would instinctively call bullshit on. How psychology got to be the poster boy for the replication crisis in the social sciences and not economics is baffling given the scope and depth of influence the field has had on the world.
But don't take my word for it... https://academic.oup.com/ej/article-abstract/127/605/F236/50...
We investigate two critical dimensions of the credibility of empirical economics research: statistical power and bias. We survey 159 empirical economics literatures that draw upon 64,076 estimates of economic parameters reported in more than 6,700 empirical studies. Half of the research areas have nearly 90% of their results under‐powered. The median statistical power is 18%, or less. A simple weighted average of those reported results that are adequately powered (power ≥ 80%) reveals that nearly 80% of the reported effects in these empirical economics literatures are exaggerated; typically, by a factor of two and with one‐third inflated by a factor of four or more.Some of the smartest people in the field are actively trying to obscure its limitations. The author of this article is more modest but even still it’s a PR rebuttal and a bullshit fear tactic: a “You know what? Things are really bad but what would be worse is if you didn’t listen to us”.
Hand-waving charts are how the subject is taught to indifferent undergraduates. And the charts aren’t hand waving, though they may seem like it when the undergraduates don’t understand. (Source: “hand-waving” chart using economics professor, though I do my best to help them understand.)
Research as practiced in university departments does not rely on “hand waving charts.” You’ve probably never been to a research seminar in economics. It is all about how parameters in a model are identified.
Whether “the math is opaque” I cannot say. Is it more opaque than computer science? Or math in math departments?
If you can find a simple, not opaque way to do the same, the world’s macroeconomists will beat a path to your door to learn from you. They’ll even nominate you for their fake Nobel. You can refuse it if your conscience (or the sprit of Alfred Nobel!) demands it, but like all Nobel prizes it comes with a cash reward.
Also... no one in the field cares that it’s the “bank of Sweden memorial prize in honor of Alfred Nobel”. Make it just the “bank of Sweden economics prize” and we’ll still be excited about it. We could care less that it has Nobel’s name on it.
The paper you cite is published in... an economics journal! And it is not the only one on the topic. We are aware that the standards for empirical work may need to be higher. Indeed, this is the second time in thirty years we have come to that conclusion. This problem is not unique to economics.
Maybe I shouldn't speak for all of us: probably some actually could care less than they do, while maybe others couldn't care less.
I am in the "couldn't care less" camp. Call the prize whatever you want.
The math says that inflation has destroyed what was rightfully a much stronger currency because of the work that went into it.
There is no shadowy cabal of elites, it's a blatant effort of independently greedy overprivileged beneficiaries who are in position to thrive better the more that the general financial malaise of working people becomes overwhelming. Lots of the wealthiest have never built their original family fortunes any other way.
There's not supposed to be a need for a consumer economy.
Remember how it was, over the last 50 years of macroeconomics? There are equations for this.
Every single recession was never going to end until consumption picked up.
Too bad consumers are just about tapped out, so naturally it's going to be worse than ever.
That's no conspiracy, that's just what the math said.
What if we would have had a producer economy instead, or even just a more reasonable balance?
How do you like it when your equations show what you thought was a negative was reversed back into positive territory like the 21st century has never seen?
Remember in expensive places like San Francisco or New York City, the small single-family homes which are out of reach for all but the most fortunate today, were the exact same homes that were well within reach for a wage earning factory worker, the kind who eventually retired without significant raises over their career while producing products which required no price increases since there was no serious inflation. Their passbook savings accounts provided a secure retirement after their home was paid for, and property tax at the time was still insignificant compared to today. Only a single income was necessary for that kind of security.
If you had a better-than-average job, like being an engineer or something, and had the disposable income for more meaningful investments than mere passbook savings, your single-income family would not have needed to settle for the smaller homes and you would have been able to retire someplace like Florida or Hawaii for instance in perhaps more deluxe accomodations than you had during your working years.
The old folks' UBI of Social Security came along just for those who missed the boat altogether. Wasn't really needed until after the Fed had settled in a while.
Remember, there's not supposed to be a widespread need to raise your socioeconomic stature unless something is wrong to begin with.
It's just nice having that opportunity if you would like to take it, and productive capitalism can be one of the efficient options but there are others which are even quicker, with many of the quickest not actually productive in the _macro_ sense.
As we have seen.
The math says that inflation has devastated the US dollar and the vast majority of American workers with it, because that's the only dollar they were working for.
People are so desperate some of them would probably rather work for some imaginary coin now in way that would never have been considerable when silver dollars still had their intended $1 face value.
Hindsight's 20/20, if your equations do not yield the actual outcome you may just need to brush up on your business math.
All kinds of math could be more accurately done, right now we've got 45 comments remaining but it says 139 at the top of the page.
Apparently over half the comments at the time have now been retracted, maybe it was bad math on all sides?
The fourth great truth barely counts as a statement, really. You can't make the first great truth that demand drops cause economic shocks through layoffs, argue that's not obvious, then make the fourth great truth that things other than demand drops can cause economic shocks.
https://www.amazon.com/Macroeconomics-William-Mitchell/dp/11...
Moreover, when serious macroeconomists have tried to engage with MMT on its own terms (which they do!) the MMT people always get evasive and vague in response to the very simple question: “why didn’t your monetary ideas work for Venezuela/Zimbabwe/Weimar Germany?”
There are much better textbooks available. Wolfers/Stephenson is a recent one I’ve thought about using in class.
What a bizarre response. They weren't even attempted there as the literature shows.
https://gimms.org.uk/2020/11/14/weimar-republic-hyperinflati...
Presumably you also believe heavier than air flight is theoretically impossible because bad pilots crash planes.
As I said, it's really hard to get MMT people to sit down and describe exactly what they are claiming, b/c they have to face up to these counterexamples. Like: "why couldn't Venezuela print money indefinitely to pay for what it wants?"
To which the MMT response is some version of: "Well, I didn't mean that!"
Well ok - WHAT did you mean? They are always slippery and evasive (at best) about what they do mean. They do not engage with conventional macroeconomists for the most part. And that's not because conventional macroeconomists don't try to engage with them! If it were possible to do what they propose, that would be amazing! You would have wide agreement on that within the profession.
I share many of their political goals - I'm on the left too. But I don't see how it is remotely possible to achieve the goals they propose in the manner they suggest.
But yes, they seem to be preferring to talk past rather than engage with mainstream macroeconomists. The sheer rhetorical effort they devote to convincing their readers the money multiplier is the wrong foundation that underpins all modern macro and not a simple pedagogic device for explaining how leverage works and why deposit insurance became a thing....
If you have a model that have the components right but the causality going in total opposite direction, I think is kind of fair to criticize its pedagogic value.
The week after, students learn about money markets, credit and money demand as liquidity preference.
And MMTers aren't saying "the second week of undergrad teaching could be improved by refining this model", they're saying "mainstream economics is built on this foundation that only we are clever enough to know isn't true".
Props for the Pratchett quote though. Sounds like something Detritus would have said. :)
MMTer: Public debt can be monetized, inflation is created by spending (public or otherwise) not by more reserves, central banks can control the interest rate independently of the quantity of reserves in the system.
Anti-MMTer: Wait, if you add reserves to the system, banks can lend more! That's inflationary!
MMTer: Banks can lend always anyway if makes business sense. Their only limit is the capital requirements of every particular bank. If lending makes business sense, banks can find the legally required reserves, they are not constrained by reserves.
Anti-MMTer: But the Money Multiplier!
MMTer: Facepalm
I wish I could remember in what book was the Terry Pratchett quote. It's a great quote.
Literally every single central bank's policies are designed and implemented by mainstream macroeconomists, as were the capital requirements. "Banks can lend always anyway if it makes business sense" is the system mainstream macro built. Of course, mainstream economists also consider the "if it makes business sense" bit (and to a degree the "capital requirements" bit) matters, and have models observing that the flow of money actually injected into the economy at a given interest rate being finite and relatively predictable, and they can make it go up or down in different circumstances by changing that interest rate. They also (since the 80s, at least) have a sophisticated enough grasp of inflation to figure that how the dollars are injected into the economy matters rather a lot.
MMT doesn't claim anything like that. MMT says that a government that have its own floating currency its not financially constrained (the key word here is financially). They also claim that the size of the public debt (but not the deficit!) of such a government it's irrelevant.
Governments (that spend its own floating currency) can't spend indefinitely in a period of time because they are constrained by the real capacity of economy of the country. If they spend beyond that capacity inflation happens. This is cannon in MMT, it's not a complicated idea, it's even in the most superficial introduction to MMT and it's beyond me why somebody, acting in good faith, would keep changing, what the MMT economists are saying.
Your hyperinflation comments have been answered elsewhere in this thread.
As someone who is the furthest from being an economist...
The conceptual difference between Keynesian and MMT comes down to:
- How much relative emphasis is placed on federal deficits vs interest rates wrt inflation. Keynesians don't decouple deficits and interest rates.
- Emphasis on monetarian vs fiscal management. MMTs focus on fiscal. Keynesians straddle the two. (Chicago/Austrian schoolers focus on monetarian.)
Said another way, the MMTs are simply pointing out that with 2008 and the aftermath, Keynesian models and predictions were not correct wrt to QE and inflation, and so are floating alternative theories, primarily explicitly adding interest rates to the models.
They're very high quality
Not to mention that the entire economy is such a complex system, and my experience with complex systems is that we can't predict them, we like to come up with causal explanations for observed events, and we're almost always wrong on closer scrutiny.
With all that in mind, I have started my economics journey not on the macro picture, but on the details. Book recommendations include:
- The Kelly capital investment criterion: a collection of historic peer-reviewed papers about what it says on the tin: how to allocate resources to risky ventures (read: how to size bets.)
- Red-Blooded Risk: a wandering tale about quantitative risk management and how it entered the world of finance in the seventies--eighties. As always with Aaron Brown, it contains lots of information on economic matters that aren't directly related to the main subject.
- The Economic Function of Futures Markets: a correct, for once, exposition on how futures markets are not about locking in prices (any regular contract can do that) or hedging (the people who supposedly would hedge don't) but about creating an implicit loan market for commodities, among other things.
- The Poker Face of Wall Street: a wandering tale on the similarities between betting, speculation in financial instruments, and insurance, among other things.
- The (Mis)Behaviour of Markets: Benoit Mandelbrot summarises some of his research into modeling markets with multifractal geometric ideas.
- Fortune's Formula: a more pop-sci friendly version of the Kelly criterion paper collection.
- Regression Modeling with Financial and Actuarial Applications: basic techniques used everywhere for statistical modeling of things.
- Moneyball: finding not the best, but the most undervalued through quantitative reasoning.
- Inadequate Equilibria: a framework for thinking about when economic incentives align with a desired outcome and when they don't.
I have also started a fairly advanced prediction market at work to get a better sense for how such things work, and I'm the guy who you either love or hate playing Risk and Monopoly with, because I invent derivative money and all sorts of exotic contracts as an aid to diplomacy.
But then again, I generally build knowledge by generalizing from specific concrete experiences. Maybe that bottom-up approach works badly for some people.
Edit: I should say that these are some of the books I have read and can personally vouch for. There are several more like them in my stack of books to read. I can list some of those that I think are more promising, but I can't personally vouch for them yet.
Second edit: oh, I almost forgot some of the most important parts. I don't have a specific reference, but double-entry accounting and financial reports are things that will teach you a lot of the basic terminology about assets, liabilities, equity, credit and so on.
I suggest maintaining your personal (or your family's) books with double-entry. A great pplace to start is Plain Text Accounting.
Modern academic (and central bank) macroeconomics is literally all about taking macroeconomic models to data. Period. Attend any macro seminar in the field at any university and that’s what you’ll see. In particular: it is directly about “verifying the mechanisms.”
Your complaint is perhaps somewhat ignorant of the way macroeconomics is actually practiced.
Source: an academic economist.
If you're saying "it's hard," then I agree. And every academic macroeconomist would say the same thing.
> Never mind the hundreds of other things that feed it each of those systems some of which are impossible to model.
This also sounds like "it's hard," OR "you can't model everything." You can then say "and so I give up." Macroeconomists do not and for good reason: policymakers are going to use some kind of model to predict the impact of policies, or to select which policies to implement. We can either do our best to try to inform them on the basis of data, or we can throw up our hands, in which case they might well make worse choices.
> Every once and awhile someone's model will 'get it right' at that point they go on book tours and predict the next disaster which may or may not happen.
I do not see this happening personally. Nor do I think a lot of academic economists are in the business of going on book tours making confident predictions.
It is the policy makers are not aware of the 3rd or even 2nd level effects on those decisions. The models do not show it to them because many cant, or they do not want to see it. There are also enough different theories that they can pick whatever sounds nice and fits what they want to say and then can lean back and say 'see the model said'. My point is they are not going to follow the 'science' they are going to have smorgasbord of whatever pet theory they want to promote. Then back the 'science' into it.
>This also sounds like "it's hard," OR "you can't model everything." You can then say "and so I give up."
What I am saying is the models are borderline not working. They 'sorta' work right up until you get an irrational actor (see recent stonks issue as an interesting case study). People are irrational but rational in a different dimension. But we have no real good way to model that. It is why almost all of these theories 'work' until you get something irrational that the model does not account for.
I am also not saying 'give up'. I am saying you need a lot more dimensions in your calculus. I am also saying many of those dimensions you will have a very hard time measuring. That is due to other external dimensions affecting those hyper dimensional curves, and even the model bending back on itself affecting things. It will also not be something you can keep in your head. Also at this point you will have to explain it in a way people can understand (any way else is the way of kafka). There are many years of theories that sound nice but do not work.
>I do not see this happening personally. Because in the majority of the cases it does not happen. Because the models usually get it wrong. But every once and awhile someone hits the lottery and leans into it. Usually around market crashes.
I also want to be clear about what I'm saying:
- I'm not saying macroeconomists don't have a hard job. Specifically due to the slow feedback and complex systems, it must be one of the hardest jobs in the world. It's like you set a dial on a big black box and suddenly, but years later, a bunch of people get sick. You'll never know whether it was that dial setting that did it. Or whether it was one of your other 35 dial settings. Actually, you'll likely never even know it happened.
- I'm not saying macroeconomists are worse at this than any others. There are many highly theoretical fields with low level of concrete feedback where this is a problem.
- I'm not saying macroeconomists aren't trying. It's just a fundamentally insanely intractable problem, so I'm still looking for evidence that they aren't failing.
- I'm also not saying macroeconomists are doing it out of ignorance or spite. The few I've spoken to have all been pretty honest about flying blind.
> We have our recommended ten-stage process for reading such big books:
1. Figure out beforehand what the author is trying to accomplish in the book.
2. Orient yourself by becoming the kind of reader the book is directed at—the kind of person with whom the arguments would resonate.
3. Read through the book actively, taking notes.
4. “Steelman” the argument, reworking it so that you find it as convincing and clear as you can possibly make it.
5. Find someone else—usually a roommate—and bore them to death by making them listen to you set out your “steelmanned” version of the argument.
6. Go back over the book again, giving it a sympathetic but not credulous reading.
7. Then you will be in a good position to figure out what the weak points of this strongest-possible argument version might be.
8. Test the major assertions and interpretations against reality: do they actually make sense of and in the context of the world as it truly is?
9. Decide what you think of the whole.
10. Then comes the task of cementing your interpretation, your reading, into your mind so that it becomes part of your intellectual panoply for the future.
> Follow this process, and your reading becomes active. Then you have the greatest possible chance of learning the books—of thereafter being able to summon up sub-Turing instantiations of the thinkers Adam Smith, Karl Marx, and John Maynard Keynes and then running them on your wetware. If you can do that, you can be closer to being as smart as they were. And at the same time you will be aware enough of their weak points and blindnesses that you can be wiser than they were.
[1] https://www.bradford-delong.com/2019/12/a-note-on-reading-bi...
Arguably even the bad theories are better understood in the context of modern economics (Marx's "Iron Law of Wages" which proposes that wages inevitably fall to subsistence levels makes much more sense as a special case of there being more supply than demand for that type of labour; one prevalent in the middle of an Industrial Revolution which made many craftsmen obsolete but less evidently a universal truth after a century of most people in the West earning well above the minimum necessary to keep them alive)_
I'd be aware that there are certain heterodox schools of economic thought that are much more popular among non-economists than economists, so it's probably worth trying to find something that presents opposing arguments and isn't too biased.
Also, I don't know about his other stuff but Ray Dalio has some great material if you want a very quick, high level introduction to some macroeconomic concepts that doesn't have much jargon. In particular I remember the introductory video at:
https://economicprinciples.org/
being pretty good. I also liked his free book on debt crises since it breaks down the macroeconomic situation in various country/time periods (inflation, government/private debt, etc) which I thought was more interesting than reading about some of those things in abstract (I also don't remember it being very jargon-heavy).
If you’re looking for a textbook, this is the best (it’s also free):
https://www.core-econ.org/the-economy/book/text/0-3-contents...
Reminds me of a guy I once met, who told me that "this is the best bakery in the city" (>1.5e6 inhabitants). Interestingly, the city's best bakery was just around the corner of his appartment. Once he moved to a different appartment in 10min walking distance, he never went back to the best bakery. He found out that the bakeries closer to his new appartment were at least equally good...
The accidental theorist - Paul Krugman
Or if you want a textbook, Mankiw is pretty good.
Buy and read,23 Things They Don't Tell You About Capitalism, by Ha-Joon Chang. All his books are recommended for a reasonable criticism of mainstream economics.
And the main reason is that reducing wages creates unhappy, unmotivated people. If you own a business you want unhappy unmotivated out. By laying off people you keep people who (supposedly) are happy that they have not been and kept their salary.
If you are business owner, it is better to keep 90% of your crew but motivated vs keeping 100% but unmotivated.
> That may sound pretty simple. But it is one of the most important discoveries in history.
I wonder why is that. If you are a business owner this is common sense.
> The second thing to know is that well-functioning central banks can offset such demand shocks to a considerable degree.
It is unfortunate that they are called "banks". We need to have better differentiation in naming, as central banks and regular banks don't share same goals.
Except they do, and that is next point.
> The third thing to know is that if central banks go crazy increasing the money supply, the result will be high price inflation.
Because the reality is that increasing money supply is theft/taxation (is there really a difference?) By printing money central bank taxes each unit of currency decreasing its value.
While central banks print money directly, the "regular" banks "print" money indirectly. By having ability to lend more than the cash they actual have the "regular" banks are also creating supply of money out of thin air. This can't be called taxation anymore so the only way to call it is theft.