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Pedagogical Approaches to Theories of Endogenous versusExogenous Money: Pluralism in Action?
Stephen Kinsella
∗
August 27, 2008
Abstract
Pedagogical pluralism is di
ffi
cult to implement in practice, but when overlaps between com-peting approaches are considered, the benefits for the students exceed the costs. An example isgiven contrasting two approaches to the modeling of money in macroeconomics: the stock-flowconsistent macroeconomic modeling associated with Godley and Lavoie[9]and Barro’s[2]more
mainstream neoclassical dynamic general equilibrium modeling. I argue students can only con-trast and compare approaches e
ff
ectively when thematic overlaps are significantly large to makethese comparisons obvious. Only then should a pluralist approach be considered desirable.
Keywords:
Pluralism; Pedagogy; Stock Flow Consistent Modeling; Dynamic General Equilib-rium Modeling.
JEL Codes:
A1, A2, B5.
1 Introduction
Teaching post-Keynesian monetary economics is not easy. One has to overcome the natural appre-hension a masters student must feel when faced with completely new material which purports torewrite much of what they already think they know about macroeconomics. Students will ask if the work they put into their orthodox courses was in vain. The lecturer must have an answer forthem.A large amount of the lecturer’s time and e
ff
ort must be expended in comparing and contrastingthe orthodox macroeconomics learnt from textbooks on macroeconomics like Barro [2], and Barro& Sala-i-Martin[3]to justify one’s approach and contextualise unfamiliar course material for the
students. One spends significant amounts of class time simply setting the basics up before the realbenefits of post-Keynesian macroeconomic modeling—dealing with uncertainty, business cycles, andbehavioural actors through their generation of stocks and flows of funds—become apparent. Unlessgreat care is taken, all but the most committed students are left behind to muddle through as bestthey can. The course creates confusion, annoyance, and frustration, and exposes the lecturer to thedreaded “so what?” from their students. What then is the benefit of teaching monetary economicsusing a pluralist approach?
∗
Department of Economics, Kemmy Business School, University of Limerick, Ireland. Email:stephen.kinsella@ul.ie,www.stephenkinsella.net.Paper prepared for the workshop ‘Pluralism in economics: rethink-
ing the teaching of economics’, October 18, 2008, City University, London.
1
This paper compares and contrasts two approaches to monetary economics from a pedagogical,practical, and pluralistic viewpoint. I ask: what pedagogical benefits if any, does the DynamicGeneral Equilibrium approach favoured by prominent neolassical economist Robert Barro haveover the Stock-Flow Consistent macroeconomic modeling proposed by prominent post-Keynesianslike Godley and Lavoie[9]? Is there an inherent contradiction in teaching both, and does oneapproach have an obvious advantage over the other? Can an economist interested in pedagogicalpluralism thread a middle line?I outline the stock-flow consistent approach in section2and give and example of the type of macroeconomic modeling students might be exposed to using this approach in section2.1. ThenI explore the dynamic general equilibrium model used by Barro in his most recent textbook, andpoint out similarities and di
ff
erences between the two approaches in section3. I conclude with apractical set of steps for implementing a pluralist pedagogical approach.
2 Stock Flow Consistent Macroeconomics
Godley and Lavoie[9]have written a masters-level textbook that reduces many of the costs men-
tioned in the preceeding section. As the book progresses, Godley and Lavoie build models of increasing complexity from a basic methodological premise: the decisions and actions of economicactors (banks, households, governments, etc.,) create financial stocks and flows which must be ac-counted for in the aggregate[15]. This aggregate
is
the macroeconomy. Macroeconomics in theirconception is a series of causal explanations (or: stories) of how these accounting entities influenceone another through time, in the presence of endogenous money, fundamental uncertainty, anddi
ff
ering expectations amongst agents. Each macroeconomic model, then, is the set of behaviouralequations imposed by the modeler on the national accounts which hold the information created bythe economic actors as they go about their businesses.In Godley and Lavoie’s
Monetary Economics
, each model is developed from a simplified balancesheet and transactions matrix, which records the stocks accruing to each actor, and the flows be-tween them. A set of dynamic behavioural equations is posited, e
ff
ectively determining the directionof the financial flows between the actors. Steady state conditions are derived, and the simulatedequilibrium system is shocked under various scenarios to test the responses of di
ff
ering actors andthe national response to changing policies or economic conditions. Each of these simulations isavailable online
to allow students to verify the authors’ claims for themselves.To take an illustrative example of their approach to modeling money, Godley and Lavoie
(au-thor?)
ff
ects of a simply Keynesian multiplier.
2.1 Example
We begin with a simple balance sheet and transactions matrix, detailed in Godley and Lavoie[9,
pgs. 59 & 62]. With all variables in nominal units, setting a tax rate,
θ
, of 20%, and assuming theparameters of a standard Keynesian consumption function are the propensity to consume out of present income,
α
1
= 0
.
6
,
and past income,
α
2
= 0
.
4, the baseline case begins with zero economicactivity. The causal story goes that the government is ‘born’ in some sense, and they start orderingproducts from the firms by increasing government expenditure
G
from 0 to 20. The firms employ
1
2
the households to produce the products being ordered by the government, and o
ff
the economy goes.Output
Y
is the sumber of government spending,
G
, and consumption of the goods in the period,
C
. Taxes
T
are levied on income
Y
, giving a disposable income measure,
YD
. The consumptionfunction
C
=
α
1
×
YD
+
α
2
×
H
1
, which is the only behavioural equation in this simple model, givesthe convex combination of consumption from present and past income. Obviously past householdwealth,
H
−
1
= 0 in the first period.The government initially orders (or
injects
) $20 worth of products accounted for through thegovernmental budget,
G
, which circulates around the system such that the households get the $20in wages for producing the products ( so the wage bill,
WB
=
Y
), then they must pay taxes
T
of 20% on this. The equation system below is solved recursively, with household wealth in savings
H
s
and houshold holdings of cash
H
h
fluctuating each period via
H
=
∆
H
+
H
−
1
until the economyreaches its steady state.Taking the example further, the households go o
ff
and buy products from each other to thevalue of $16 in this period. The model continues this process ad infinitum, with the resultant beingthat the initial injection of $20 causes ripples throughout the economy and we get a multiple e
ff
ectof government spending on the economy, hence the term “multiplier”. Pedagogically, this is verysimple to implement, and is an interesting computational exercise for students to attempt. Thefact that this example is very close in spirit to other Keynesian models students will have beenexposed to previously makes it a good introduction to stock-flow consistent modeling.Our system of equations looks like this:
G
(1)
Y
=
G
+
C
(2)
T
=
θ
×
Y
(3)
YD
=
Y
−
T
(4)
C
=
α
1
×
YD
+
α
2
×
H
1
(5)
∆
H
s
=
G
−
T
(6)
∆
H
h
=
YD
−
C
(7)
H
=
∆
H
+
H
−
1
(8)
2.2 Solution
If we start by solving the model for
Y
, then
Y
=
G
+
C
, and
T
=
θ
Y
, and by substituting in for
T
and factoring, we get
YD
=
Y
−
T
(9)=
Y
×
(1
−
θ
)
.
(10)By similar logic, our consumption function, the only ‘behavioural’ equation in this system, isgiven by
C
=
α
1
×
YD
+
α
2
×
H
−
1
.Since, in period 2, household income
H
−
1
= 0, so we can say that
C
=
α
1
×
Y
(1
−
θ
)
.
Substitute3
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