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“Skate where the puck’s going, not where it’s been”. – Wayne Gretzky

There’s a famous saying that’s repeated on rare occasion when the fiscalist view of the world dominates policy – “we’re all Keynesians now.” It’s generally a misleading way of labelling an entire population and such declarations are usually the views of biased policy thinkers. Now, I am not in the business of labelling other people, but I am in the business of understanding the macro environment so that I can help other people make smarter financial decisions. And I see a trend developing in the fields of finance and economics that will dramatically alter the landscape – anyone who wants to better understand the financial world for what it is (as opposed to the ideological view of what they want the world to look like) will veer towards Monetary Realism and a Post-Keynesian view of the world.

I can’t stress how important it is that we do not confuse many of the principles of Post-Keynesian economics with some sort of ideology, however. It’s unfortunate that the term “Post-Keynesian” has the word “Keynes” in it because that word tends to induce a vomiting reaction for half of the population. And that really misses the point of the PKE school. Post-Keynesian does not mean that you automatically favor government spending or socialism. Yes, it is based, in part on understanding effective demand (which any business owner should accept) and the idea that the economy doesn’t naturally veer towards full employment (again, a concept we should all acknowledge given the extraordinarily high unemployment rates in recent history). But PKE is much more than that. PKE really means that you understand and accept the foundation from which the PK school works from. And this means you focus on stylized fact, operational reality and the institutional design of the monetary system. Therefore, you understand things like the following:

  • Double entry bookkeeping.
  • Understanding sectoral balances and the flow of funds in the system.
  • Accounting identities based on an operational understanding.
  • We have a fiat money system and not a commodity money system, therefore, understanding fiat money matters!
  • Banks matter in an economic model because they issue most money.
  • Understanding reserve accounting.
  • The money multiplier is a myth because banks aren’t reserve constrained.
  • The central bank and the government are highly involved in the economy (this is our reality, not necessarily the world we envision).
  • The private sector dominates economic activity.

When you tie all of these understandings together you work from a better foundation for understanding the monetary system. And the proof is in the pudding. After all, look at this all-star list of predictions that PKers got right in the last 5 years:

  • We knew that the expansion of QE wouldn’t cause hyperinflation or even high inflation.
  • We knew that the USA wasn’t going to suffer from a Greek crisis.
  • We knew that Europe was screwed.
  • We knew the stimulus wasn’t nearly as “stimulative” as most presumed.
  • We knew monetary policy would likely come up well short.
  • We knew interest rates weren’t going to rise.
  • We knew corporate profits were going to boom due to the government’s deficit.

These are the kinds of things that should make every single economist stand up and say “wow, what kind of performance enhancing drugs are those guys on?” But it doesn’t require performance enhancing drugs to understand the PK foundation. It just requires a bit of open-minded thinking. All joking aside, these were big time predictions. And they weren’t based on guesses or ideology or preference for policy. They were based on the above understandings like double entry bookkeeping, flow of funds, sectoral balances, institutional design, etc.

The PKE school is not necessarily based on ideology and policy preference. And no, you don’t have to be a socialist to understand Post-Keynesian economics. You just have to be willing to wade into the waters of double-entry bookkeeping, accounting, sectoral balances, flow of funds, etc. In other words, you have to be willing to understand things that are operational truth based on the way our financial world actually works. Unfortunately, it also means you will have to set aside your preferred ideologies for PKE is primarily about understanding the world that is and not the world we necessarily want. And that’s the biggest hurdle here. But I see a trend developing – the PKE school and Monetary Realism will increasingly grow in influence as more and more people choose knowledge over ideology. After all, if you want to make better financial decisions you need a better understanding of the world that IS and not the fictitious world you want.

Source: Monetary Realism Means Choosing Knowledge Over Ideology