Why don’t economists understand money? (video)
Prof Victoria Chick, Emeritus Professor of Economics, University College London, addressed the question: “Why Don’t Academics Understand Money?” at the Positive Money conference in January 2013. She said there has been a regression in the way economics has been taught. This 18 minute video gives some very interesting insights:
“We’ve regressed to pre-Keynesian economics.”
Prof Victoria Chick
The question has to be treated in two parts, due to a split in the way money is talked about in academic economics. She suggested that “money and banking” was treated differently from “macroeconomics”. Money and banking was seen as on the fringe somewhat, “a frivolous option”. Keynes said, when he was writing the General Theory, that he thought that what he was writing would revolutionise the way the world thought. He had a theory where “money permeated the entire economy”. In modern economics, though, the role of money is separated from the whole analysis.
She said that economics thinks of itself as uncovering universal truths rather than being based in the context of its time. For example, the quantity theory of money is based in a historical period where gold was a major factor.
When she was a student in the late 1950s, she said, it was widely understood that loans create deposits. Now students are told that deposits create loans, which is wrong.
Much of neo-classical economics “regard banks as glorified safes.” However, “banks do not lend money” she stated. They don’t have a pot of money that they are passing on.
It is the ability of banks to create money that led Keynes to say that investment came before savings.
During the Q & A session after her presentation at the conference, Prof Chick expanded upon her main points. To a question about whether some academics were being “bought off”, she replied that there is something that “seeps into the veins of academia” rather than people being deliberately “bought off”. Although some had been “bought off” she said, if you’ve seen the film, Inside Job.
There is also social pressure to conform, she said. “You are just not part of the gang” if you don’t go along with the dominant ideology.
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