Friday, March 25, 2011

Dear Martin Wolf

Disagreement on economic issues is common and can be heated when the differences debated are significantly divergent.  More often then not many exchanges of differing opinion actually involves economists who hold similar views but take exception to the use of a word or phrase.  Both types of exchanges should be mutually educational in that open minded people find such exchanges stimulating of critical thinking.  No one is right 100% of the time.  This does not make it less difficult or challenging.

One such exchange over the use of words and phrases and the concepts they convey or imply broke out last week between Martin Wolf and Bill Mitchell.  Bill Mitchell is an Australian economist and proponent of Modern Monetary Theory and sectoral balances ( a macroeconomic balance sheet in which the economy at any given time must sum up to zero for all three sectors).  Martin Wolf is current day icon as a well established economic commentator and columnist who has expressed an appreciation of sectoral balances in his writings.

When on March 15th, 2011, Martin Wolf wrote a relatively innocuous article, "Japan can meet the Earthquake Test" on Japan's ability to finance recovery from its recent devastating earthquake and tsunami.  The following day Bill Mitchell posted on his blog, "So near but so far ... from comprehension", a very strong series of objections to the use of "solvency" and "afford additional spending" and questions his understanding and/or use of sectoral balances, despite correct conclusions.  Such an exchange is likely to become personal, despite the importance of the concept of sectoral balances and the difficulty of many people, without regard to how many monetary theories they learned, to keep the three sectors in perspective and balanced while engaging the important economic concepts of aggregate demand and output.  The necessary use of the words/phrases deficit, government spending, private savings and private consumption/investment bring the curtains down in many minds and are cause for differing opinions on use and meaning among economists. 

As I read both articles several times, it appeared to me that Martin Wolf was having problems with the use of sectoral balances and aggregate demand and output, which many of us coming from different monetary theory backgrounds have, and which causes to have to pause and think all three sectors through together, from time to time as we try to wrap our minds around sectoral balances without becoming confused from what we were taught.  In such a situation, an exchange as above is many times not productive, because it becomes personal rather than intellectual.

Interestingly, (is anything coincidental?), on the 17th of March, Bill Mitchell wrote a very elegant piece on the 19th century Confederate States of America, "Printing money does not cause inflation", which was a very academic and yet readable piece that, low and behold, directly addressed the issues of aggregate demand and output in relation to sectoral balances in very emotionally neutral, intellectually clear exposition.  Martin Wolf was never mentioned.  I have no idea if this was meant as a communication to Martin Wolf or if was just how the issues coalesced in Bill Mitchell's mind and produced this independent piece.

All I can conclude is I hope Martin Wolf read it, because he would have appreciated it.

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