Posted by: Dirk | December 8, 2014

The new textbook by Carlin and Soskice is behind the curve

I am currently looking for a textbook in macroeconomics to use. I would strongly prefer a textbook which is not wrong on how money and credit work, and since Carlin and Soskice were supposed to create a new, progressive textbook I am scanning through their textbook online at a big online bookstore. Section 5.3.4 is titled The Role of Banks in a Fractional Reserve Banking System. Once again, this is wrong. Basically, all serious economists by now know that the fractional reserve banking system is a myth and I find it morally wrong to teach that stuff to students. Claiming that it is a pedagogical device (“as if”) does not make it better, because you could teach how it really works in the same amount of time. Even if you couldn’t, what allows you to teach something which is wrong (and the balance sheets really don’t make any sense, it is not “disputed”). If you want a short introduction, turn to the Bank of England or the MMT Primer or Marc Lavoie, if you have the time and the money.

And the monetary stuff is not the only problem with the textbook by Carlin and Soskice, by the way. Another big stumbling block is the IS curve, which posits a negative relation between real interest rates and demand. Low real interest rates cause high investment, and high real interest rates cause low investment. Theoretically, it is sound, but empirically it is wrong. Monetary policy does not work in Japan, it does not work in the euro zone and not in the US. If it would, we would not have quantitative easing. So, when the next crisis hits it will be obvious to everybody that the IS curve is a fiction. Most economists already know that, though. Investment depends on many things right now, but the interest rate does not seem to be one of them. This situation has been lasting many years now.

Macroeconomics has something to do with demand and supply. Demand depends on spending money, and if you cannot correctly explain how money works than I won’t use your textbook. Suggestions for alternatives are welcome.


Responses

  1. I agree with you on both those points. I’m using this textbook because I couldn’t find anything else that had adapted anything after the 2007 financial crisis. Especially the idea that lowering interest rates stimulates investment in physical plant seems quite obviously wrong. Lowering interest rates may stimulate consumption by households, but it seems to stimulate speculation in stock market by business, or mergers and acquisitions by means of debt.
    Too bad nobody replied to your useful query.

    • Hi Marie, I have started writing my own macroeconomics textbook and hope that it will come to the market in fall 2017. If you can’t join them, outcompete them!😉


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