David K. Levine — unlucky when trying to think

17 Jul, 2016 at 11:54 | Posted in Economics | 3 Comments

50cf9626f2deeIn the wake of the latest financial crisis many people have come to wonder why economists never have been able to predict these manias, panics and crashes that haunt our economies.

In responding to these warranted wonderings, some economists – like professor David K. Levine in the article Why Economists Are Right: Rational Expectations and the Uncertainty Principle in Economics in the Huffington Post – have maintained that

it is a fundamental principle that there can be no reliable way of predicting a crisis.

To me this is a totally inadequate answer. And even trying to make an honour out of the inability of one’s own science to give answers to just questions, is indeed proof of a rather arrogant and insulting attitude.

Fortunately yours truly is not the only one racting to this guy’s arrogance …

Steve Blough trolls me this morning over on the Twitter Machine about the truly remarkable ignorance of economics professor David K. Levine:

I confess I am embarrassed for my great-grandfather Roland Greene Usher, who sweated blood all his life trying to help build Washington University in St. Louis into a great university, that WUSTL now employs people like David K. Levine:

Levine, you see, appears to believe that we live not in a monetary but in a barter economy. And so Levine claims that the Friedmanite-monetarist expansionary policies to fight recessions that recommended by Milton Friedman cannot, in fact, work:

David K. Levine: The Keynesian Illusion:
I want to think here of a complete economy peopled by real people … a phone guy who makes phones, a burger flipper, a hairdresser and a tattoo artist…. The burger flipper only wants a phone, the hairdresser only wants a burger, the tattoo artist only wants a haircut and the phone guy only wants a tattoo…. Each can produce one phone, burger, haircut or tattoo…. The phone guy produces a phone, trades it to the tattoo artist in exchange for a tattoo, who trades the phone to the hairdresser in exchange for a haircut, who trades it to burger flipper in exchange for a burger. All are employed… everyone is happy.

Now suppose that the phone guy suddenly decides he doesn’t like tattoos enough to be bothered building a phone…. Catastrophe. Everyone is unemployed…. The stupid phone guy… is lazy and doesn’t want to work…. The burger flipper would like to work making burgers if he can get a phone, the hairdresser would like cut hair if he could get a burger and the tattoo artist would like to work if he could get a haircut and yet all are unemployed …

Maybe the government should follow Keynes’s [note: Levine means “Milton Friedman’s” here] advice and print some money…. Then the phone guy can buy a tattoo, and the tattoo guy can buy a haircut and the haircutter can buy a burger, and the burger flipper — ooops… he can’t buy a phone because there are no phones…. [Perhaps] the burger flipper realizes he shouldn’t sell the burger because he can’t buy anything he wants… and we are right back… with everyone unemployed…. Maybe he doesn’t realize that and gets left holding the bag… a Ponzi scheme…. It seems like a poor excuse for economic policy that our plan is that we hope the burger flipper will be a fool and be willing to be left holding the bag.

DKL’s argument that Friedmanite-monetarist expansionary policies cannot cure a downturn is, I believe, correct — if the downturn is caused by a sudden outbreak of worker laziness, an adverse supply shock that reduces potential output.

Expansionary monetary policy in such a situation will indeed produce inflation. People’s expectations of the prices at which they will be able to buy are disappointed on the upside as too much money chases too few goods. It is not clear to me why DKL calls this a “Ponzi scheme” rather than “unanticipated inflation”.

But does anybody — save DKL — believe that an extraordinary and contagious outbreak of worker laziness is what caused the downturn that began in 2008?


Everybody else believes that the downturn that began in 2008 occurred not because of a supply shock in which workers suddenly became lazy but because of a demand shock in which the financial crisis caused nearly everybody in the economy to try to rebuild their stocks of safe, liquid, secure financial assets. Everybody else believes that the right way to model the economy is not the barter economy of DKL — trading phones for tattoos, etc. — but as a monetary economy, in which people hold stocks of financial assets and trade them for currently-produced goods and services.

This matters.

This matters a lot.

Brad DeLong


  1. Everybody else believes that the right way to model the economy is not the barter economy of DKL — trading phones for tattoos, etc. — but as a monetary economy, in which people hold stocks of financial assets and trade them for currently-produced goods and services. Brad DeLong

    Except 90%+ of the money supply is created by a usury cartel consisting of government-privileged depository institutions, aka “banks.” Money, more precisely “fiat”, is scarcely used by the economy since non-banks may not use it except in the form of unsafe, inconvenient physical fiat, aka “cash”.

    And there’s the reason for the boom-bust cycle. Bank deposits are lent into existence (boom) and go out of existence when repaid (bust).

    If we were a monetary economy then the money supply need never shrink and hence a boom-bust cycle would not be inevitable.

    • Except 90%+ of the money supply is created by a usury cartel consisting of government-privileged depository institutions, aka “banks.” aa

      Actually no and I apologize since though “bank loans create deposits” not all deposits are loans by banks.

      However, the deposits that are not created by bank lending* are instead the result of what are essentially forced loans of fiat to the usury cartel since only they may have accounts at the central bank. Thus, for example, US Social Security recipients are forced to lend the fiat they would ordinarily receive to the usury cartel.

      So the government-privileged banking cartel has created or legally embezzled about 89% of the total money supply, it’s more accurate to say. The other 11% or so is beyond their control in the form of physical fiat, aka “cash”, i.e. bills and coins.

      So we are about 11% a monetary economy and about 89% a bank deposit economy.

      *Excluding deposits created by central bank activity such as buying office supplies, etc. (legitimate) and perhaps by other means (indirectly) such as currency swaps (illegitimate, imo)

  2. It isn’t that the money is unstable by itself, but only when its being loaned in connection with speculation in land values. As land values rise in a developing city, the banks and landlords welcome this trend and invest in it. Eventually when it becomes too costly to build homes or production facilities, the entrepreneurs give up trying and the previously invested money (borrowed from the banks and getting interest returned) can no longer be backed by the rising price of what was previously bought. Then land prices fall and mortgages cease to be repaid. It is important for us to understand that money can always be borrowed if the rate of interest on it is sufficiently high, and this is a gradual “diminishing-returns” situation for the investor, not a sudden failure. The failure (bubble burst) happens suddenly, when the investors begin to see that previous investments are in danger. They decide to withdraw their money (if it is possible, even at a small loss). Many others to observe this action and want to follow the same route. We can blame the instability on the stock-market, but basically it is because of speculation in land values (which are not true capital investment, like in durable capital goods, buildings, machinery and products of labor). Such speculation encourages this “commodity ” to become unstable over the business cycle which is the basic cause of the trouble. This theory was first suggested by Henry George in 1879 “Progress and Poverty” but the speculators, monopolists and capitalists managed to deny that land and capital behave in different ways and should not be seen as the same thing as far as investment goes. We have yet to recover from this deliberate mistake in the theory.

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