Project: A Heterodox Macro Textbook

After having examined a lot of relevant, useful and insightful material on the failure of orthodoxy, some of which that came up in the responses to my post, I have come to a conclusion that there is a viable project we could undertake together, which has the chance of creating a revolution. There are several points that need to be taken in consideration to shape the project.

Insight Number 1:

The first point comes from Edward Fullbrook’s remark that:

If Samuelson had any claim to genius it was that he understood better than anyone else that nothing in economics is nearly as important as Economics 101. Marshall, Samuelson’s target, understood it also.

Samuelson’s was the textbook which defined economics in the twentieth century. I propose that we work together on writing the textbook which will define economics in the twenty first century.

Insight Number 2:

Why did Keynesian economics become dominant? Because Keynes, and no one else, was able to explain one feature of the Great Depression – long and persistent unemployment — and offer a remedy. Samuelson also succeeded because he claimed the mantle and legacy of Keynes and created the IS-LM model which can also explain unemployment. As many have remarked, the IS-LM has little relation to the original Keynes. This is not of importance to the issue currently under discussion. The point here is: Economic theories SUCCEED if they explain major economic events/catastrophes. It is also true the theories FAIL if they do NOT explain major economic events. A case in point is the old institutional economics. It was among the most respected schools, and had a solid theoretical framework based on historical and qualitative analysis. However, this framework was adapted to the long run and was not suitable for explaining short run critical phenomena like the Great Depression. The school went into decline and perished as a result, since the institutionalists could not come up with a solution to the major problem of the times. The New Institutional School does not really qualify as a revival or a continuation of the Old School since they adapted a lot of mathematical frameworks in order to fit themselves into hegemonic paradigms of neoclassical economics. SIMILARLY, Hayek and Friedman and other free marketeers lost respect and went into hiding, since free market paradigms were manifestly shown to be defective by the Great Depression. This provides a clear target for what our textbook should accomplish:

GOAL OF NEW TEXTBOOK: EXPLAIN satisfactorily the major economic events of the past century.

Insight Number 3:

Bernanke has called explaining the Great Depression to be the Holy Grail of Macroeconomics. The failure of quantitative easing has demonstrated to the world that Friedman’s explanation is false. It is not a question of restrictive money supply. Thus the search for the Holy Grail is on, and we have the chance to capture it.  We need to explain satisfactorily the Great Depression and the Global Financial Crisis. I believe that the explanation is nearly the same for both, which would lend strength and credibility to the explanation. If our textbook can succeed in providing a believable explanation, it would have a good chance to be the defining textbook of the twenty first century. Of course, we would also need to provide a credible explanation of things like austerity in Greece, failure of the Argentinian Currency Boards, the effects of NAFTA and many other major economic phenomena. The explanations should be integrated and coherent, based on a common and understandable framework. Newtons theory had spectacular success because they used a single principle to explain a vast range of phenomenon. Similarly we need to use a limited set of ideas to explain a large number of economic events of the past century.

I believe that the Holy Grail is within our reach. Keynes was about 40% of the way there. He got some of the elements of the explanation but also missed a number of key issues. In particular, the aggregate consumption function is a mistake. One of the keys to the Great Depression and the Great Recession is role of “vacuum-cleaner” effect (opposite of trickle down). As income is re-distributed to the top, the aggregate demand falls, since the wealthy only want to increase their wealth, and do not consume. This is one of the key insights of Angus Deaton, that we need to break down consumption by income level because consumption patterns are different and cannot be stably aggregated across income levels. This is especially true when income distribution is changing.

Atif Mian and Amir Sufi in House of Debt have gone a lot further. They are about 80% of the way there. In my review of their book, I have summarized some but not all of their insights. The crucial role of leveraged debt is central to their analysis, which is missing in Keynes. Their analysis provides a common framework which can be used to analyze both the Great Depression, the Global Financial Crisis and the ensuing Great Recession.

Elements missing from the analysis of Mian and Sufi are the role of money creation by banks, the role of government de-regulation, especially the political aspects, and also the role of insurance – in particular the failure of the largest insurance company in the world, the AIG. The role of money and banks are well covered by Ellen Brown. The political aspects are also well covered by Michael Hudson. The pieces of the puzzle are all there and we only need to put them together. By combining available analysis, I believe we can get all the way there. Remember that Keynes succeeded with only a 40% correct analysis. Even if we cant get 100% of the way there, I am sure we can do a LOT better than any competitor; especially conventional macro-economists will be simply unable to compete because they have their hands tied behind their backs. They cannot invoke historical explanations and politics because this is ruled out of bounds by their methodology.



There are many other elements that we need to take into account in writing a successful textbook. However, I believe that we need to take things one step at a time, so that we can move forward together. I think the first step is to create consensus on the causes of the GFC and subsequent GR. I have put down my views, which are more or less a summary of Main and Sufi – I have added a few minor elements to their analysis.

STEP 1: Create an explanation of the Global Financial Crisis 2007-8 and the Great Recession. I think my explanation (which summarizes Mian and Sufi) in Review of “House of Debt”  is a good place to start. There are a few quibbles one could make. One is that I have said that Keynes used wage rigidity as an explanation for prolonged unemployment – Paul Davidson will take me to task for this. I was deliberately oversimplifying here – In fact Keynes DOES say that wage negotiations are conducted in terms of nominal wages not real wages, and workers will strike if nominal wages are cut, but will not respond in the same way to a general increase in the price level. Anyway, we can fix the problem by providing a more detailed explanation of Keynes’ views.


This explanation is not meant directly for the textbook – this is for discussion amongst ourselves. At a later stage, we will break the explanation down into its elements, and provide each element with a pedagogical exposition suitable for students. Here we can split up the pieces into separate chapters. A crucial element is the notion of asset price bubbles. Here someone could do a chapter with historical details from Kindleberger, and so on.

As I said earlier, there are MANY MORE elements required to make this work, and I hope to discuss these other aspects in detail later on, after we get started on this project.  We need to use a different format to start – for example, we can use GOOGLE DOCS for a shared editable document.

Shared Google DOC: Review of House of Debt – Currently I have shared and allowed EDIT rights to anyone. This allows anyone with the link to open and edit document and/or add comments.

ONE OBJECTION I would like to dispose of early is the following. In doing a historical and qualitative analysis of the type that I propose, where we will pull in specific historical details of regulations, East Asian Crisis, etc. people will object that we have provided a history but there is no theory. Theory must rise above particulars. Where are the equations? Where is the model?

I propose that we use Judo – use the force of the attack against the attacker. I propose to view theories themselves as products of historical experience. Keynesian theory was developed in response to the Great Depression and CANNOT be understood outside this context. Thus ALL theories have historical specificity. In the course of the textbook, we should analyze the emergence of theories as part of the historical process. This reverses the idea that we should use theories to analyze history and economic experience. In fact, puzzling historical experiences generate theories which a required to explain, analyze and shape responses to the history. THUS theories cannot be understood outside their historical context, as all current conventional economics attempts to do.

A second important fact is that we will be using politics and social phenomenon in explaining the major economic events of the past century. This will make it clear to all that one cannot study economics in isolation. This is one of the strengths of Polanyi’s methodology. Polanyi provides a very brief historical explanation of the Second World War in terms of economic factors. If we can similarly explain social and political phenomena, this would substantially strengthen the textbook.

  1. For economic analysis the Great Depression and the recent Financial Crisis are two distinct events.

    During the Great Depression is the underlying weakness in the Industrial Sector and the Agricultural Sector that persists because of economic behavior and policy that restricts economic activity and results in a prolonged deflationary spiral. Also, for historical analysis, with the New Deal you finally have a government at the national level that will view the economy of a great continential nation as an integral whole, something that was missing prior to 1932. We have never gone back to the old ways since.

    The Financial Crisis is a case where the influence, both economically and politically, of concentrated wealth failed to serve the greater society. You had good financial instruments that were misused — money going into a sector that should have been earmarked for investment, but a sector that was not big enough nor had the turnover of economic activity to handle that much money for investment and instead it went for speculative activity that eventually collapsed. Trillions of dollars were needed to bolster this sector to halt the collapse. You cannot take trillions of dollars from the general economy to bolster a small sector of the economy that is populated by the financial elites and not expect it to negatively affect the broader economy and society in general — the persistent anemic growth since 2008.

    The decline in growth since the 1960s is another problem which I will not go into here. I do not buy the argument forwarded by Robert Gordon.

  2. Do you really want the answers that are needed to achieve 100%? At least 90% proven without the other 10% being to date ‘not yet proven’.
    “There never was an idea stated
    that woke men out of their stupid indifference
    but its originator was spoken of as a crank.”
    — Oliver Wendell Holmes, Sr.
    (1809-1894) American Poet
    .*** BUT, why not read and challenge a Noble Laureate for Physics and challenge ? ******Excerpt from
    “In four books written from 1921 to 1934, Soddy carried on a “quixotic campaign for a radical restructuring of global monetary relationships”[this quote needs a citation], offering a perspective on economics rooted in physics—the laws of thermodynamics, in particular—and was “roundly dismissed as a crank”[this quote needs a citation]. While most of his proposals – “to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort” – are now conventional practice, his critique of fractional-reserve banking still “remains outside the bounds of conventional wisdom”[this quote needs a citation]. Soddy wrote that financial debts grew exponentially at compound interest…”

    Why do you not want to show “Where we went wrong, and how to fix it”?

    • Well — Isnt it true that Soddy has already done this? So what remains to be done? What exactly are you asking for? Can we reprint Soddy and make it the Macro Text which will replace Samuelson? Would that work?
      To be more positive — I am looking for a SINGLE MINDED FOCUS on ONE THING: HOW TO EXPLAIN the Global Financial Crisis and the Great Recession. I do believe that a bad system of money creation plays an important role in this. BUT THIS HAS TO BE STATED AND PROVEN. We have to SHOW how SODDY helps to explain the GFC. That requires work, not just reprinting Soddy.

  3. xavi mir said:

    What is the single best explanation of the GFC?
    Here is how complex science answer this question:

    As it is said in this article:

    “for example there have been 35 falls greater than 6% in the daily Dow Jones Industrial Average since its inception in 1896, about 110 years ago. If the changes in the (logarithm) of the index are normally distributed one would expect that 35 falls of this magnitude would take place about once every 600 million years.”

    So, power laws and fractality explain perfectly why markets are not efficient and have so many crisis.
    In a nutshell: self-organized systems tend to have the emergence of high magnitude effects in a very similar way like we see them with natural phenomena as earthquakes. So we could have a Richter kind measure to monitor our markets.

    We have statiscally proven that Fama was wrong and that markets need to be regulated inorder to minimize the impact of great magnitude falls.

  4. David Chester said:

    I think that my explanation about how our social system works, “Consequential Macroeconomics”, is as heterodox as one gets, because it covers all of the system in the most general and seamless way. By looking at the Big Picture as a system and logically connecting the various parts of the system with the minimum necessary kind of exchanges of money for goods, services, access rights, valuable documents, etc., the model that is built up (Wikipedia, commons, macroeconomics: DiagFuncMacroSyst.pdf ) cannot be bettered in terms of comprehension ability and simplicity. Can you do better?

  5. rjw said:

    I am facinated that all of you miss something very basic …. how to measure and conceptualize the economy. Nobody even mentioned ” national accounts” … … yet in my experience, economists rarely taught national accounts in a structured way, and as a result carry huge misconceptions about what basic concepts do ( and do not ) mean with them throughout their academic or professional careers. I have asked very bright graduate students at top universities to explain what the current account is, or how it relates to the overall balance of payments, and received totally incoherent answers. Unless you start by telling people that some relationships are matters of accounting, others are behavioural and causal, and such elementary things, you will get nowhere in revolutionizing the way economics is taught and understood. You all seem to want to explain the big picture, and miss the fact that understanding of complex systems has to start at a rather less ambitious level.

  6. David Chester said:

    rjw (and Azad too)–please note that the balance of national accounts, along with 5 other kinds of balances, are included and are a “big” feature in the analysis provided by my model (see above) and are in my book “Consequential Macroeconomics–Rationalizing About How our Social System Works”. I can send you a copy as a reviewer’s e-book, if and when you ask me! ( Please take a look at it, or possibly (as a summary) examine my paper SSRN 2600103 “A Mechanical Model for Teaching Macroeconomics” in the open literature. I would love to see your comments, friendly or un–.

    I firmly believe that Heterodox Macro camp badly needs a standard text book (or more than one), on which to base its ideas and teachings, and I suggest that on the theoretical side mine is the most suitable to date. Its line is completely new, but it is irrefutable in the assumptions and logic. There has always been great difficulty in economists agreeing about this subject, so the discussion about it should be made a feature of this website for which I am sure we will be overloaded with various opinions! So please stick to the basics only.

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