15 July 2021

My New Book: Economics Redefined

This may seem like the daydream of a fond old man. But I am confident that my new ebook Economics Redefined deals a death blow to neoclassical economics. I expect few economists to read it and fewer still to understand it. Even so, I expect that eventually it will become the conventional wisdom. Those who have been intimidated by the mathematics of mainstream economics -- the Lagrangians and the bordered Hessians -- will read this book and rejoice because it shows that the math is hogwash.


In September 2014, Jonathan Barzilai, a mathematician at Dalhousie University in Canada, wrote an open letter to William Nordhaus, who was the president of the American Economic Association at the time. Among other things Barzilai pointed out: "In economic preference theory, the claim that ordinal functions can be differentiated is based on elementary errors: Theorems of differential calculus are applied where the assumptions of these theorems are not satisfied and mathematical operations are applied where they are not applicable. The notion that ordinal functions are differentiable is an error. It has no parallel in mathematics and science."

Since a large part of economics rests on the idea of utility maximisation (which is untenable if Barzilai is right) his letter was expectedly not met with enthusiasm. To describe the response as a "deafening silence" might be cliched but quite appropriate and hardly surprising. His claim was after all akin to someone telling physicists that the law of conservation of momentum is incorrect. Nordhaus did not respond. If other economists took note of Barzilai's letter they probably regarded him as crazy.

Unfortunately for mainstream economics Barzilai is right. And it does not take much thought to arrive at that conclusion. If utility is ordinal, then three values of utility a, b and c are of the kind that we can say a > b > c and nothing more. The three numbers 3, 2 and 1 satisfy that ordering but so do 25, 3 and 1. Obviously the operations of differential calculus cannot be applied to them. That is all there is to it. It took me quite some time to realise this because, like most economists, I was thinking of baskets of goods as in indifference curves. Not being a mathematician but an engineer by training, I needed to think in pictures, and it was a couple of years before I convinced myself that Barzilai's argument applies to baskets of goods as well.

In June 2017, Real-World Economics Review, a heterodox economics journal, published a paper of mine where I showed that the demand curve must necessarily take the shape of a rectangular hyperbola, and that when this is the case, macroeconomics can be built from the microeconomics of heterogeneous agents, and that involuntary unemployment must follow as a matter of course. It was a month or so after this, while looking through old issues of Real-World Economics Review, that I first chanced upon two papers by Barzilai as well as a putative refutation of one of his papers, which was actually nothing of the kind.

Four years later, in a moment of transcendental joy, the realisation struck me that Barzilai's idea and mine, though seemingly oceans apart, actually amounted to the same thing. It is because utility is not differentiable that demand curves must be rectangular hyperbolas.

I hope the reader of this book too will be able to savour the joy of that realisation.

A summary of the book is as below:

Chapter 1 shows that the mathematics of profit maximisation is incorrect.

Chapter 2 shows that the mathematics of utility maximisation is incorrect.

Chapter 3 uses the ideas of the previous two chapters to arrive at a non-equilibrium macroeconomics derived from the microeconomics of heterogeneous agents and having involuntary unemployment as a key feature.

Chapter 4 explains how our conception of money is different from that of Keynes and Friedman.

Chapter 5 shows that the idea of the money multiplier is incorrect.

Chapter 6 sets out a way of measuring money.

Chapter 7 shows that the velocity of money has nothing to do with the speed at which money travels from hand to hand and, indeed, has nothing to do with time at all.

Chapter 8 shows why recessions occur.

Category: Economics

09 August 2019

Money supply growth turns negative for the first time since September 2006

It's been quite some time since I have commented on this blog.

Now something important has happened.

For the first time since 2006 the growth in Corrected Money Supply (my measure of money) has dipped below 0%.

It first went below 0% in June 2018 (using the latest figures from the St Louis Federal Bank web site. The data keep getting revised for several months which is why my previous post did not capture the fall below zero.) though it was above 0% in June 2019, the latest I am able to calculate.

In September 2006 CMS growth fell below 0% and continued to stay below until August 2007. The Great Recession began in December 2007.

It is to be seen if this time is any different.

Category: Economics

09 October 2018

How long will the good times last?

Lest the headline surprise some readers I must clarify that I am referring to the US, not India.

Last week, in a column in the Washington Post Matt O'Brien wrote:

"This is the kind of economy that central bankers dream about.

"No, really, they had to dream about it. That's because, other than the late 1990s, we've never seen the confluence of so much positive economic news like we are now. Unemployment, after all, has just fallen to an almost-50-year low of 3.7 percent, and wages are still rising at a more respectable rate of 2.8 percent -- but despite all that, prices have only gone up a restrained 2.3 percent the past year."

In response to the good news, the Fed raised its benchmark interest rate in September 2018 and hinted at one more this year and three in 2019.

How long will these good times last?

The figure below shows the growth rate of Corrected Money Supply (CMS, my measure) since 1961. A month ago the US Bureau of Economic Analysis radically reworked data for a host of measures such as personal consumption expenditure and the personal saving rate. The chart for CMS growth uses the new data. As can be seen, whenever CMS growth falls to zero, it is usually the cue for a crash in one or more asset markets and a coming recession or mini-recession.

In 2015, when CMS growth came close to zero and stayed there for some time there was a mini recession. After that, the CMS growth rate again rose much above 10%.

Since the beginning of 2017, however, CMS growth has been falling steadily and it is now hovering around 2.5% (the figure is for August 1, 2018). The rate hike in September has probably pushed the growth rate of money supply further down.

At the moment, one can safely say that the Fed's plan for three more rate hikes in 2019 will not materialise. The US economy will go into a tailspin much before that.

Category: Economics

10 April 2018

Money supply growth is falling once again

This blog, which focuses mainly on money supply (using my own measure) has been silent for more than a year.

The reason was that there was little to write about. Money supply growth which had fallen steadily from a high of 22.4% YoY in February 2014 to 0.9% in October 2015 went into reverse gear and rose rapidly.

Since July 2017, however, money supply growth has been again falling. At the end of January this year it stood at 11% and seems poised to fall further when the Fed Funds Rate is raised again. As the graph below shows, when money supply growth draws close to the 0% mark, nasty things begin to happen. We are a long way above that right now.

Since my previous blog post three of my economics papers have been published in Real World Economics Review. Their titles and links are as below:

1. The mathematical equivalence of Marshallian analysis and "general equilibrium" theory
A diagrammatic derivation of involuntary unemployment from Keynesian micro-foundations
3. Does the maximization principle break down during recessions?

Category: Economics

20 December 2016

Update on money supply growth

The graph below shows growth in Corrected Money Supply (my version of money supply) from January 2005 to October 2016.

From January 2014 it fell continuously and showed every sign of falling below the zero mark. But the plunge stabilised in January 2016 and has been mostly growing steadily since April. In October, the latest for which data can be calculated, the growth rate stood at 7.8%.

The reversal looks similar to that which took place in 2013 but that was owing to the Fed's QE. This time there is no QE and in fact the Fed is slowly winding down its balance sheet.

The proper comparison may be with the reversal in growth that took place from the start of 2007 and went on until the recession began. In that episode the growth in money supply may have been because of money exiting the housing market and waiting to be invested in other asset markets. This time too the growth of money supply may be caused by money exiting some asset market (possibly bonds) and being invested elsewhere. Will a crash follow soon?

Category: Economics

Philip George
Understanding Keynes to go beyond him

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Published on July 6, 2021
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