Pedagogical Approaches to Theories of Endogenousversus Exogenous Money: Pluralism in Action?

Pluralism in economics: rethinking the teaching of economics, October18, 2008, City University, London.

Stephen Kinsella

Dept. Economics,University of Limerick.stephen.kinsella@ul.ie

www.stephenkinsella.net

October 18, 2008

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 1 / 17

Today

1 Problem

2 Example: Two Approaches to Money

3 For discussion: Is there a middle way?

4 Conclusion

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 2 / 17

You’re Out There...

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 3 / 17

Why should I learn this?

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 4 / 17

Cons of Teaching PKE

Time

Confusion

Learner Uncertainty/Lack of Background Knowledge

Compare & Contrast Leaves some students behind

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 5 / 17

Cons of Teaching PKE

Time

Confusion

Learner Uncertainty/Lack of Background Knowledge

Compare & Contrast Leaves some students behind

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 5 / 17

Cons of Teaching PKE

Time

Confusion

Learner Uncertainty/Lack of Background Knowledge

Compare & Contrast Leaves some students behind

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 5 / 17

Cons of Teaching PKE

Time

Confusion

Learner Uncertainty/Lack of Background Knowledge

Compare & Contrast Leaves some students behind

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 5 / 17

Q: When is the cost of Pluralism too high?

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 6 / 17

A: When Overlaps don’t exist, don’t opt for pluralism, costtoo high

Semantic Proximity, e.g. Unemployment

Definitional Proximity: U = L/(E + L)

Empirical Proximity

EG: Existence of Unemployment

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 7 / 17

A: When Overlaps don’t exist, don’t opt for pluralism, costtoo high

Semantic Proximity, e.g. Unemployment

Definitional Proximity: U = L/(E + L)

Empirical Proximity

EG: Existence of Unemployment

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 7 / 17

A: When Overlaps don’t exist, don’t opt for pluralism, costtoo high

Semantic Proximity, e.g. Unemployment

Definitional Proximity: U = L/(E + L)

Empirical Proximity

EG: Existence of Unemployment

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 7 / 17

A: When Overlaps don’t exist, don’t opt for pluralism, costtoo high

Semantic Proximity, e.g. Unemployment

Definitional Proximity: U = L/(E + L)

Empirical Proximity

EG: Existence of Unemployment

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 7 / 17

Non Trivial Matter

Samuelson (1997, pg. 7)

. . . words may be treacherous because we do not react in aneutral manner to them. Thus a man who approves of agovernment program to ration housing will call it a program of“social planning,” while an unsympathetic opponent will describethe same activity as “totalitarian bureaucratic regimentation.”Who can object to the former, and who could condone the latter?

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 8 / 17

Two ApproachesStock Flow Consistent Macro Models: Godley and Lavoie (2006)

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 9 / 17

SFC Treatment of Money

There is a gap in (historical) time between production and sales whichgenerates a systemic need for finance;

bank money is endogenously determined by the flow of credit and;

total real income must be considered to be divided into three parts –that received by entrepreneurs, that received by labour, and thatreceived by banks.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 10 / 17

SFC Treatment of Money

There is a gap in (historical) time between production and sales whichgenerates a systemic need for finance;

bank money is endogenously determined by the flow of credit and;

total real income must be considered to be divided into three parts –that received by entrepreneurs, that received by labour, and thatreceived by banks.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 10 / 17

SFC Treatment of Money

There is a gap in (historical) time between production and sales whichgenerates a systemic need for finance;

bank money is endogenously determined by the flow of credit and;

total real income must be considered to be divided into three parts –that received by entrepreneurs, that received by labour, and thatreceived by banks.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 10 / 17

SFC Treatment of MoneyPedagogy

Modeled using di!erential equations

Simulated in Eviews

Perturbation analysis gives policy recommendations/comparisons

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 11 / 17

SFC Treatment of MoneyPedagogy

Modeled using di!erential equations

Simulated in Eviews

Perturbation analysis gives policy recommendations/comparisons

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 11 / 17

SFC Treatment of MoneyPedagogy

Modeled using di!erential equations

Simulated in Eviews

Perturbation analysis gives policy recommendations/comparisons

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 11 / 17

Two ApproachesDSGE Approach: Barro (2007)

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 12 / 17

DSGE Treatment of Money

Y = A! F (!K , L), (1)

Money instantaneously created & destroyed

=" A “social contrivance” or medium of exchange

Households maxmise consumption C subject to constraints oninvestment, "K , production, summarised in the production functionrelation, and depreciation, "K :

C + "K = A! F (K , L)# "K

Smooth pedagogical transition between micro & macro explanationsof income and substitution e!ects, etc.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 13 / 17

DSGE Treatment of Money

Y = A! F (!K , L), (1)

Money instantaneously created & destroyed

=" A “social contrivance” or medium of exchange

Households maxmise consumption C subject to constraints oninvestment, "K , production, summarised in the production functionrelation, and depreciation, "K :

C + "K = A! F (K , L)# "K

Smooth pedagogical transition between micro & macro explanationsof income and substitution e!ects, etc.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 13 / 17

DSGE Treatment of Money

Y = A! F (!K , L), (1)

Money instantaneously created & destroyed

=" A “social contrivance” or medium of exchange

Households maxmise consumption C subject to constraints oninvestment, "K , production, summarised in the production functionrelation, and depreciation, "K :

C + "K = A! F (K , L)# "K

Smooth pedagogical transition between micro & macro explanationsof income and substitution e!ects, etc.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 13 / 17

DSGE Treatment of Money

Y = A! F (!K , L), (1)

Money instantaneously created & destroyed

=" A “social contrivance” or medium of exchange

Households maxmise consumption C subject to constraints oninvestment, "K , production, summarised in the production functionrelation, and depreciation, "K :

C + "K = A! F (K , L)# "K

Smooth pedagogical transition between micro & macro explanationsof income and substitution e!ects, etc.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 13 / 17

DSGE Treatment of Money

Y = A! F (!K , L), (1)

Money instantaneously created & destroyed

=" A “social contrivance” or medium of exchange

Households maxmise consumption C subject to constraints oninvestment, "K , production, summarised in the production functionrelation, and depreciation, "K :

C + "K = A! F (K , L)# "K

Smooth pedagogical transition between micro & macro explanationsof income and substitution e!ects, etc.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 13 / 17

DSGE Treatment of Money

Y = A! F (!K , L), (1)

Money instantaneously created & destroyed

=" A “social contrivance” or medium of exchange

Households maxmise consumption C subject to constraints oninvestment, "K , production, summarised in the production functionrelation, and depreciation, "K :

C + "K = A! F (K , L)# "K

Smooth pedagogical transition between micro & macro explanationsof income and substitution e!ects, etc.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 13 / 17

DSGE Treatment of MoneyPedagogy

Usual Textbook graphical analysis

Light calculus

Data fitting

Policy prescriptions from model fitting

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 14 / 17

DSGE Treatment of MoneyPedagogy

Usual Textbook graphical analysis

Light calculus

Data fitting

Policy prescriptions from model fitting

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 14 / 17

DSGE Treatment of MoneyPedagogy

Usual Textbook graphical analysis

Light calculus

Data fitting

Policy prescriptions from model fitting

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 14 / 17

Is there a middle way?

Yes.

Explore common problem statements di!ering solution concepts incomparative setting

EG The Multiplier, Unemployment, Growth, Consumption, etc.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 15 / 17

Is there a middle way?

Yes.

Explore common problem statements di!ering solution concepts incomparative setting

EG The Multiplier, Unemployment, Growth, Consumption, etc.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 15 / 17

Is there a middle way?

Yes.

Explore common problem statements di!ering solution concepts incomparative setting

EG The Multiplier, Unemployment, Growth, Consumption, etc.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 15 / 17

Conclusion: Only opt for pluralism when su!cient overlapsexist. Otherwise, world of pain.

Figure: caption

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 16 / 17

References

Robert J. Barro. Macroeconomics: A Modern Approach. South-WesternCollege Pub., 1st edition, 2007. URL http://www.amazon.com/Macroeconomics-Approach-Robert-J-Barro/dp/0324178107/ref=pd bbs sr 1?ie=UTF8&s=books&qid=1198791536&sr=1-1.

Wynne Godley and Marc Lavoie. Monetary Economics An IntegratedApproach to Credit, Money, Income, Production and Wealth.Palgrave-Macmillan, 2006. URL http://www.palgrave.com/products/Catalogue.aspx?is=0230500552.

Paul Samuelson. Economics: The Original 1948 Edition. McGrawHill/Irwin, 1997.

Stephen Kinsella (UL) Pedagogical Approaches October 18, 2008 17 / 17