QuestionEconomics.com

Why I started this site–with a little personal history.

September 27, 2023, Ralph Hiesey, Boulder Creek, CA

I started working on this web site sixty years ago when in 1959 I wrote a history term paper in my senior year in high school.  I wanted to know what caused the 1930’s depression.  How did the (mostly) booming economy of the 1920’s turn into an economic disaster for millions of people in the 1930’s?  I was amazed that thirty years later there was no agreement among experts about why it happened. That started me on a long quest for “why?”  There is more detail on my background at the bottom of this page.

Even now, ninety years after the 1930’s depression economists still don’t agree on why it happened. The economic crash in 2007 has only made more obvious how much we don’t know about these events and how to fix them. The main response by the Fed to the 2007 collapse seems to have been: print as much money as necessary to whomever it seemed need it to stop their panic of lost assets. I still don’t clearly understand  the economic logic–nor have I heard a defense for what is happening, but pushing cash at high rate to increase the money supply has the feel of desperate  “papering over the problem,” or “sweeping the dirt under the rug” or “kicking the can down the road”– not sure which is most appropriate–all with little insight as to what exactly caused the problem, and how the problem will eventually be resolved by this action.

The Monetary constraint: A big advance in my understanding was my discovery of an important basic property of money which I call the “Fundamental monetary constraint.” It is completely missing from current macroeconomics. The analysis on this site shows why this constraint has important effect on controlling GDP of an economy, explaining why economic distribution of the economic output within contemporary economies often fails to work well–resulting in income and wealth inequality.

Money as a veil: Economists tend to view “money” as a substance that permeates an economy, like the air we breathe or the water that the fish in the ocean barely notice because of its ubiquity.  The assumption seems to be that we don’t really need to think much about it–perhaps just hope the Fed adds to it appropriately, but that the most important constraints in an economy have nothing to do with how money itself works. It is assumed that economic problems have to do only with how much goods/services are being produced, and how much others are willing to purchase.  I’m certainly not denying the importance of those.   My discovery was that an unrecognized extremely basic “constraint” imposed by money exerts influence as important as supply and demand on our economy–and that we must understand what that constraint is to properly understand the factors that determine GDP in an economy. This fundamental understanding about money needs to be explained and understood in textbooks even before the introduction of national accounts is introduced. (For those familiar with Milton Friedman’s ideas, It is important to note that my view is quite different from his.)  Although this analysis was originally intended to explain the 1930’s depression, I discovered that it also explained other important economic behavior: Such as why income and wealth inequality so easily develop in an economy. It also explains why public and private debt is necessary and why, expressed as dollar amounts, (rather than with respect to GDP) public debt in the US has gone up every year since 1955–with tiny exception of only one year in 2000 under President Clinton. It explains why this is what makes it possible for people to save money and simultaneously permit GDP to grow reasonably. It also shows the importance of government taxation and spending being at a proper level–neither too high or especially not too low for optimizing GDP. The most important goal of this site is to educate others on how this constraint influences an economy, including what has been called “Secular Stagnation.” The following link explains the Fundamental Monetary Constraint, and how it has influenced our economy. (About 15 pages) “Fundamental monetary constraint”

Monetary velocity in greater view: Analysis of this constraint also emphasizes the importance of “monetary velocity” which is often thought to be of relatively little importance–often thought as one “residual” number that only describes an entire economy.  The monetary analysis here shows the importance of knowing that monetary velocity also is a number that separately describes different economic subgroups, (in an economy with heterogeneous agents.)  All these separate values combine together to determine the value for an entire economy.  Understanding how monetary velocity differs among different wealth or income groups is a better way to account for the different spending and savings propensity of different groups rather than the now common usage of “MPC” (marginal propensity to consume.)  Those of high wealth have strong tendency to hold money at low velocity, especially when interest rates are very low–and those of low wealth usually hold money at high velocity. This new analysis shows how useful it would be for the Fed to measure velocity for different wealth or income groups to understand their effect on national GDP. The following link explains exactly what determines monetary velocity, and describes its economic impact, especially when there are large differences in monetary velocities among different wealth groups.   Monetary velocity explained-2 pages

We cannot solve the problem if we don’t properly understand what causes the problem:  This site is intended to understand what has historically caused and is causing the problem of high wealth inequality, and how it causes poor distribution of economic output of goods/services.  Suggesting what precisely should be changed to improve economic distribution is the next step not yet taken here. By taking a somewhat different from orthodox approach that takes a critical examination of how money works, it is possible to make much clearer some phenomena of contemporary economics.  It simply explains more–rather than different. I hope that will be true for others who follow this explanation.

My basic criticism of present macro is that it does not recognize this monetary constraint. A great advantage of this understanding is that it implies policy that could work to improve the economy, and also makes obvious why some policy would make it worse.  I believe Keynes was one of the closest to make sense of economics but, as he discovered, it seems that old wrong views are very tough to extinguish.  Analysis on this web site does imply some criticism of traditional Samuelson macroeconomics–but not because I’m claiming his description is “wrong”, but rather that this additional insight gained from understanding the “fundamental monetary constraint” makes it more complete, and adds considerable insight about how money is held can constrain an economy. It explains how extreme wealth inequality can constrain an economy in ways that are not understood within present macroeconomics–and shows how this could have been an important factor that prolonged the 1930’s depression.

How math has been abused in economics has also influenced me: I have great skepticism for the way mathematics has been used in macroeconomics. That was generated by my courses in mathematics for which I received a BS degree in 1964.  Economic reality, like any reality we experience in the real world must be fundamentally based on empirical data rather than just perceived theoretical beauty–or a rather a far fetched idea of mathematical precision.  I do consider some of the math “practice” in economics to be malpractice. One example is the commonly claimed equality between “savings” and “investment” often said to be “mathematically proven.”  Anyone that understands how mathematics works knows that the only way an empirical fact can be “mathematically proven” is if that assumption has already been baked into the initial math assumptions. It is pretty easy to see that this assumption has already been made when when the mathematical assumption about “spending” has been equated with the assumption about “earning.”  The essays I have written have only a small amount of elementary math which I hope will clarify understanding rather than imply that this in itself “proves” anything, or pretends that the presence of this math necessarily makes economics “rigorous.”   The only way math can “prove” anything about the real world is to base the math on equally convincing empirical first assumptions.

This site is not really intended to be a blog that is constantly being changed, though it is occasionally revised to make it more accurate and clear as my understanding evolves.  It’s a gradually developing set of semi permanent somewhat heterodox economic essays based on careful non mathematical logic, from what we actually observe in the economy.  The math needs to come only after that, and if skillfully done can clarify the picture.  I’ve been thinking about these issues over fifty years. I believe that my description of the “fundamental monetary constraint” as part of macro economics has given important additional power to explain some important respects in which economies have failed to work well, particularly with respect to understanding why distribution of goods/services among agents within an economy often does not function well.

I very much hope to get serious criticism and feedback from this writing, either positive or negative–based on clear logic and real world evidence–not emotional ranting.  I become uneasy when I hear terms and phrases expressed frequently whose precise meaning is often vague, such as: “exogenous,” “endogenous,” “rigidities,” “frictions,” “market imperfection,” “perfect market models,” “shock,” “rational,” or “dynamic equilibrium.” These are not forbidden, but I just want to make sure these add clarity, not vague phrases trying to cover the BS. Please criticize me if you believe you don’t understand what I’m saying, or you are think my writing is unclear. I’m looking for that kind of criticism.

Clarity is my most important objective. Better clear and wrong, rather than simply muddled about not quite sure. Clear and wrong are easier to criticize and correct.

Ralph Hiesey, Boulder Creek, California