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ming away the cost of capital which is often very systemic and beyond anyone s control consider the practice of bonded labour now outlawed in india where failure to repay a money lender led to indentured servitude for the borrower for life what is this transaction financially it is secured lending collateralized by human capital it seems like a terrible thing but economically it is about as free a system you re likely to see the fact that modern systems with egalitarian sensibilities do not allow people to offer their human capital as collateral leads to restricted choices where the incumbent owners of financial capital which can be offered as collateral stand to borrow cheap and gain disproportionately so why was this old system of securing borrowing through collateralized labour not successful why did it not lead to a reduction of credit rates across the board why was this near risk free borrowing extended at rates as high as 60 per month the answer perhaps is that the borrowers were caught in a bad political equilibrium where the exercising of economic choice did not indeed could not liberate them their micro economic decisions were overwhelmingly constrained by their macro institutional exclusion the market could not wrench them out of it though political inclusion could similarly consider the perpetuation of influence through networks politely called social capital this is again problematic for the brand of analysis that treats individuals in an ahistorical arms length fashion our lived experience daily reminds us that we are not so much as individuals as somebody s son somebody s daughter somebody s friend part of some elite not so elite cohort etc again our experience might be somewhat different as we operate in highly sanitised almost game like environs where a basic level of social capital has been accumulated and hence assumed away the rest depends on the individual and so we tend to observe and place greater weight on individual centric explanations of opportunity success achievement but this is simply not true for very vast sections of very large societies where there is tons of path dependent baggage to be utilised or shed away before one can even begin to make use of any little bit of economic freedom nevertheless it is interesting that though my own country operates on a belief much similar to mine political empowerment first before economic freedom the results have not been too good this is probably because political empowerment through its very nature is handed out in a group fashion and the result in india has been that while many groups do indeed reach better political equilibria they often do so only at the expense of pushing another worse off group down below them the scarcity of economic opportunity no doubt plays a part in creating this scarcity of political opportunity as well so xxxx may have a strong point despite my arguments to the contrary but not for the reason he thinks nb note that none of this has to do with the service delivery aspects of governance which is where the conversation turned the other day for the record i do believe that cash transfers done right go a longer way than direct provision for most goods or services development economics research consensus to the extent that there is one seems to be that the only interventions where in kind benefits consistently outperform cash transfers seem to be health interventions ors mosquito bed nets but for everything else cash works better education in india is a primary example with a plethora of cheap private schools cropping up in cities schools that we would be horrified by from a quality perspective but which still deliver better learning results than government schools posted by ritwik at 2 19 am 2 comments monday april 29 2013 a typology of monetary theories ii carrying on from where i stopped last time on the monetary typology 5 henry thornton i sometimes like to think that macroeconomics or at least modern monetary economics began with henry thornton during the bullionist controversy he wrote his magnum opus at the start of the 19th century the text revived in the economic literature through the efforts of jacob viner in the 1930s reads more modern than a majority of contemporary monetary discussions thornton s work is possibly the first successful marriage of the currency and the banking principles see pg 296 onwards here for more reference on the difference between the two schumpeter considered it the best theoretical monetary performance of the 1790 1870 era in his hea pp 657 658 thornton anticipated wicksell s cumulative process of the expansion or contraction of the economy in what was a bid to explain the observed regularity between issue of central bank liabilities and the nominal economy which is simply assumed by the quantity theory of money qtm as schumpeter notes hea pp 676 677 702 703 only ricardo and a few of his closest associates ever believed in the strict we would today call it naive form of quantity theory thornton though he was on ricardo s side in the bullionist controversy sought to explain it using processes and phenomena that he saw in the real world rather than posit it as a matter of logic as ricardo did in all thornton represents the centre in the theory of monetary policy comfortable with currency and credit with quantities and rates with a belief in the power of central banks though acting through private financial agents 6 schumpeter i label this cell with josef schumpeter s name borrowing from ashwin who describes endogenous money creation through banks extension of credit as an idea that is first best explained in ch 3 of his book theory of economic development i haven t read it so i will defer to ashwin s judgement with the caveat that schumpeter was an unbelievably wide scholar of the history of economic thought and it is my prior that someone so widely read is unlikely to hold polar positions so schumpeter himself might have been a schumpeter ian centrist somewhere between the thornton schumpeter cells in my typology however we are more concerned with what the cell signifies rather than the views of schumpeter himself so what makes for a schumpeterian theory of monetary actors and mechanisms in short this is a view that infuses the financial banking system with a lot of autonomy through both prices interest rates and quantities and thus renders the central bank a relatively smaller player in the purely monetary scheme of things the endogeneity of money supply is a common heterodox position and a large number of theorists with widely divergent policy prescriptions austrians real bills theorists post keynesians etc hold views on it which seem remarkably similar i submit that what would be specifically schumpeterian is the view that the financial system leads should lead credit and money creation rather than responding passively to consumer or investor real economy investors i e businesses demand the argument is definitely a claim about how the world works but is perhaps also normative enshrined in schumpeter s twin views as ashwin describes it of money creation through elastic credit as the differentia specifica of capitalism and of the banker as the capitalist par excellence this is in some contrast to the real bills view banks central banks should extend money only against safe short term collateral as well as the canonical post keynesian horizontalist view that even privately created endogenous money is merely accommodative i e responding passively to exogenous money demand however the monetary views of some notable 20th century empirical theorists particularly john gurley and edmund shaw are of a schumpeterian nature and the approach also resonates with post keynesians of a more structuralist persuasion witness thomas palley or bob pallin 7 woodford new view in 2003 mike woodford wrote what continues to be the benchmark monetary theory text in graduate macroeconomics woodford visualized a cashless or more precisely a currency less economy where monetary policy is focused on price stability and is conducted using just the short rate with the rest of the yield curve taking care of itself through financial equilibrium while this has been seen as a modern take on a wicksellian pure credit economy woodford s attempt should also be seen as the proper development of the new view of monetary economics that began with jim tobin s explorations of monetary economics in a world of modern financial internediaries and assets in the early 1960s as perry mehrling notes woodford s work should be seen not simply as a new keynesian reponse to the rational expectations revolution but also as an initial attempt by modern macroeconomics to rise to the challenge of modern finance i identify the critical element of this view as the attempt to infuse the monetary sovereign with full policy control through a monetary instrument even in a world of entirely interest bearing money money is the numeraire and the main monetary channel is expectations of future monetary action in developed economies with elaborate forward looking financial markets in a world of treasury etfs money market mutual funds zero cost sweeps between demand deposits and time deposits etc the woodford ian schema seems entirely reasonable as the default prior to begin working with rest to follow in parts iii and iv posted by ritwik at 12 10 am 5 comments friday april 19 2013 a typology of monetary theories i as a much delayed follow up from my post proposing a top level framework for thinking about business cycle macro here s a framework for thinking about monetary theories note that this is primarily about a theory of monetary mechanisms and propagation and thus corresponds better as a theory of monetary policy rather than pure monetary theory which would be more concerned with questions like why does money have non zero value in equilibrium yet because of the centrality of the financial system in macroeconomic ups and downs and because of the growth of central banking with the urge to exert control over the financial system arguably developments in the history of macroeconomic thought basically parallel developments in the history of central banking so here it is a typology of monetary theorists and theories here i ve attempted to categorize monetary theories along two axes the first axis deals with who is the primary monetary actor central bank vs pvt banks financiers the second axis deals with what is the primary monetary mechanism interest rates real or nominal vs the quantity of some monetary aggregates short notes on some of the cells follow 1 ricardo as schumpeter notes in his monumental history of economic analysis book iii chapter 7 pp 657 719 the contemporary history of monetary theory goes back to the bullionist controversy in the early 19th century and david ricardo was the leading flag bearer for the currency school broadly speaking a ricardian monetary intuition involves a commitment to the quantity theory of money in some form or the other a belief that outside or central bank money is special and that what is truly special about cb money is currency as of today scott sumner best represents ricardianism in monetary thought 2 old monetarists old monetarists would broadly be people who focus on monetary aggregates albeit both on base money currency reserves and broad money bank deposits etc aggregates a classic tendency would be to focus purely on the liabilities of the banking system as exemplified by milton friedman s contention that banks also have assets and that that s not quite important and to infuse the central bank with a lot of control over the banking system nick rowe would probably be a good example of a current theorist who is an old style monetarist 3 real bills doctrine this was the opposite side to ricardo thornton in the bullionist controversy and this position has been revived a few times since the basic contention is that money liquid media of exchange is basically to be issued by pvt banks against high quality short term collateral in old school jargon this went by the name of discounting against self liquidating real bills though this seems more like practical advice than monetary theory the implied theory is easy to spot central banks are only supposed to respond to accommodate endogenous demand against specific limited collateral so that the primary monetary actors are private banks and financiers also the restrictions on the quality and maturity of collateral to be admitted restricts interest rates to a rather narrow band it is clear that quantities of collateral and exchange media issued are the main mechanisms here as perry mehrling notes in his book on fischer black milton friedman blamed this view for demanding that the central bank act in a pro cyclical fashion and thus exacerbating business cycles 4 fisher irving fisher created the first neoclassical macro model and brought monetarist thought to the united states he revived the quantity theory but also brought to notice the monetarist paradox in interest rates the observation that inflationary policies were associated with higher interest rates rather than lower he conducted deep research into the construction of price indices and proposed that a monetary regime attempt to maintain price stability it is clear that fisher thought it was firmly within the remit and capability of central banks to maintain macroeconomic stability through quantity mechanisms or rates mechanisms descriptions of the other cells and some quadrant level aggregations will follow in the next post posted by ritwik at 4 38 am 5 comments on reinhart and rogoff if you follow macroeconomics or global economic policy by now you d be familiar with the recent blow up over the so called reinhart rogoff r r results carmen reinhart and kenneth rogoff r r have compiled and conducted some extensive research into the experience of countries following financial crises which led to their book this time is different the central thesis of book was that financial crises have certain common hence perhaps predictable patterns and among the biggest challenges in mitigating their occurrence or ensuing damage has been the tendency to believe that this time is different the book received plaudits when it was released many have gone on to say that it s been their bible in the current global financial crisis a subset of the themes that r r covered in their book was the dynamics between growing public debt and growth this evolved into an independent line of published research from which the headline take away was that countries with public debt gdp ratios of over 90 experience strikingly slow growth and thus the 90 level might be an intuitive tipping point beyond which may lie treacherous territory for sovereign borrowing this argument though made with suitable academic precaution has been used or at least invoked by several influential policy makers in developed economies with debt gdp ratios exceeding t...