I've Still Got Money Problems

By Alex Rosenberg

I’d be grateful for more attention from Professors Ross and Coyle. Their dissent from my observations about mainstream economic theory invites a response, at least to get them to focus on my actual subject, the role of money (or the lack of any role) in the theory economists employ. 

There are at least a couple of important sciences whose central explanatory concept have no definition. ‘Mass’ is famously a primitive, undefined term in Newtonian mechanics as is ‘fitness’ in Darwinian theory. 

Both are measured accurately via their effects—force and reproduction respectively. By contrast in economics’ most fundamental theory—microeconomics, the concept of money is defined away, it doesn’t even appear. Ross and Coyle know this perfectly well. If they are going to gainsay my claims, they should explain why I am mistaken to say it plays no role or why its invisibility is harmless. Equally, they need to tell us why it’s perfectly all right for macro-theory to adhere to the “classical dichotomy,” as it’s called—the denial that money prices matter in the long run for the macroeconomy as well. Both Ross and Coyle tell us that things are complicated—the whole economy is a complex system and the financial sector is all about expectations—yes, yes, we know all about derivatives and leverage, futures and swaps. Economists know about them because they are real. The trouble is economic theory doesn’t seem to know about them. 

Ross is disingenuous when he says that economists find money puzzling because the economy is so complex. They don’t treat the economy as simple, but in the theories they apply to the complexity money isn’t puzzling, it’s as I said invisible. Sterling and yen, dollars and euros just drop out, like the difference between meters and yards. He’s right to notice that the economy is the resultant of many forces, like the movement of the Earth’s crust. And seismologists do know a great deal more about earthquakes than other people, even if they can’t predict their occurrence. But at least their theory has room for the existence of the fault lines that give rise to the earthquakes. And the problem for economics is not that it can’t predict the earthquakes. It’s predicted four out of the last zero earthquakes. 

I really like Professor Coyle’s syllabus. The outline of how the central bank works to manage inflation and exchange rates is neat. But to begin with, things haven’t worked out the way her chapter on monetary policy describes. And if you were to put the chapter into maths, you’d end up with the “classical dichotomy” all over again—money prices just won’t make a difference in the long run (for the cognoscenti, the Philip’s curve her syllabus starts with is short run). 

My own impression of the role of money in contemporary economics comes from the intermediate and advanced textbooks of Mankiw and Romer. By the time they wrote, monetary theory had been dealing with electronic systems of credit and debit for more than 50 years. So, I was surprised to read Professor Coyne’s explanation of why the DSGE mathematical models still taught in the grad schools turn out to be irrelevant. 

One approach among contemporary economists I was silent upon was Modern Monetary Theory. There were two reasons. First, this heterodox approach is widely rejected by the mainstream. But second, it begins with a treatment of money as a real variable in the economy, and so is not guilty as I have charged the mainstream. Interestingly, Keynes adopted the view of the nature of money that MMT subscribes to, a view that goes back past Keynes to the “chartalism” of an early 20th century German economist named Knapp. He held that what makes something, anything, money is the enforceable requirement of the government that taxes be paid in its form only. Keynes grabbed the theory with both hands, and went on to give money a real role in his theory, largely because he took radical uncertainty, and not just casino probabilities, seriously as economic reality. 

The government’s insistence that only what it deems money will pay taxes, immediately explains the ready acceptance by everyone else of payment in the same form, even when everyone knows money is just intrinsically valueless pieces of paper. MMT packages this theory of money together with the thesis that inflation is a product of the economy producing at close to its maximum possible level of output, something that rarely happens, hasn’t happened in the last half century and isn’t happening now. Whence no inflation. At least MMT gets the facts to be explained right. More than can be said for mainstream macro. 

Whether or not I take sides about MMT, it wasn’t particularly relevant to my screed, which was directed at the tools employed by economists to advise central bankers, i.e. the theories in which the chief concern of the central bankers, the money supply, has no long term causal role. 

I’d still like to know what I got wrong about mainstream economic theory’s silence about money.

About the Author

Alex Rosenberg is R. Taylor Cole Distinguished Professor of Philosophy at Duke University.

Articles by Alex Rosenberg at 3:16

1969 and the Emotional meaning of 2000 here

Can the Experience Machine Save the Planet? here

How to make Sense of the Pandemic here

Alex Rosenberg's Money Problems here

The Responses

EJ Spode's response is here

Don Ross's response is here

Diane Coyle's response is here