What are the best introductory books to get more grounded in economics
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).
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
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...
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.
The accidental theorist - Paul Krugman
Or if you want a textbook, Mankiw is pretty good.
> 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)_
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.