OER, CARE, Stewardship, and the Commons

 

Lisa Petrides, Douglas Levin, and C. Edward Watson recently released the CARE Framework, but apparently some people, David Wiley in particular, don’t care for the framework.  Stephen Downes has already I think responded in two brief posts here and here. Stephen’s posts are brief and I think pretty spot-on. Nonetheless, I’ll soldier on and try to use a couple thousand words to say the same thing.

I find the Framework both exciting and timely. As I’ve mentioned before, I’ve been making up for lost time studying the economics of the commons. In particular, I’ve been deep into Elinor and Vince Ostrom’s work, as well as David Bollier’s work.  The Framework doesn’t explicitly state that it is about a “commons” but that’s what they are describing. A commons. A true commons as Elinor and Vince Ostrom would describe it.

OER Stewardship consists of Contributing, Attributing, Releasing, and Empowering

The CARE Framework for OER Stewardship

People serving as OER stewards pursue a wide variety of strategies and tactics relevant to their specific context to improve access to education and opportunity over time. Yet, what all good OER stewards should have in common is a commitment to practices that serve to demonstrate their duty of care to the broader OER movement.

The Framework is a great start towards a community definition of our own Open Education Commons. I hope to make more contributions along these lines this year. It’s part of what I will talk about at OER18 and OE Global18, and it’s what I’m drafting papers and posts about.

The CARE Framework emphasizes “membership” and “stewardship”.  It uses words like contribute, attribute, release, and empower.  These are verbs.  The commons is a verb.  A commons is all about governance, behavior, social norms, production, and usage. It is a social-economic system. It is not a pool of objects or nouns that a bunch of people share.

Wiley dismisses this. He makes a nod towards Elinor Ostrom and tries to cite her work on the commons as supporting his.  He misses. It may be a compliment to Ostrom.

The CARE Framework attempt to define membership boundaries in what I’ll call the open education commons (I have good reason to say OE commons, not OER commons – bear with me).  Wiley admits that defining group boundaries is Ostrom’s first principle of managing a commons. But he dismisses the Framework and any effort to define group membership, and thereby any behavioral norms, by denying that we should even consider OER as a commons. It’s here where he abandons Ostrom and returns to the old “tragedy of the commons” analogy. He invokes the idea that commons thinking and commons ideas only apply if we’re discussing physical, natural common pool resources. He asserts that rivalrous goods are necessary for such common pool resources and then asserts OER are not rivalrous goods.

Indeed, he sets up a straw man using the old Garrett Hardin story of the tragedy of the commons wherein a “commons” is defined to be  = open, unlimited access to a scarce, limited natural resource.  The analysis is static and he gets lost in the terminology.

The first problem is that common pool resource(s) are not the same as a commons. That’s Ostrom 101. It’s difficult to read Ostrom or listen to her (fortunately there are many extant videos online of her lectures) and not discover the fatal flaw in Hardin’s “tragedy of the commons” story of over-grazing (or over-fishing or over-hunting). Hardin’s “tragedy” describes a common pool resource where there was no commons structure or social norms governing behavior.  It did not describe real-life commons scenarios.  Ostrom studied real-life cases. In the Hardin “tragedy” it’s unlimited access by strictly self-interested, socially-detached, profit-maximizing individuals that did not practice stewardship. Interestingly, Wiley denies there’s any possibility of “tragedy” of OER commons while he advocates for OER precisely the hypothetical regime of Hardin’s “tragedy”: unlimited use of CC licensed educational materials without consideration for community norms or commons governance or stewardship or recognition of being in a “community”.

The second problem is Wiley’s assertion that OER materials are “non-rivalrous”. Wiley supposes lack of rivalry in OER goods inoculates OER from any of the risks of unsustainabilty or failure of what I’ll call the OE commons. Here we’ve got three sub-issues: Are non-rivalrous goods exempt from concerns of sustainability?  Are OER non-rivalrous and cost-free to reproduce? And finally, just what is the scarce resource jeapardizing sustainability?

Wiley is dead wrong in his assertion that non-rivalrous goods are the only subjects of common pool resource concerns or commons concerns. He implies that Ostrom and her work on the commons only applies to rivalrous goods like natural resources (even here, not all natural resources are rivalrous. Rivalry in goods is contextual and depends on demand, supply, and property regimes). It is true that knowledge and ideas are non-rivalrous. But even non-rivalrous goods can be managed quite successfully as a commons and can also face challenges of sustainability and governance. Ostrom co-authored and co-edited Understanding Knowledge as a Commons. Her work inspired the Workshop on Governing Knowledge Commons. It’s a gross misrepresentation to suggest that Ostrom’s work on commons governance and membership applies only to natural resource pools that are rivalrous. Even non-rivalrous goods face challenges of sustainability that need to be addressed by commons stewardship.

But let’s look at Wiley’s assertion that OER materials are non-rivalrous. His evidence for this is based on the tired canard that making digital copies is virtually free and we can make unlimited copies.  But even in an all digital document file world (and not all OER are digital document files) the cost of copying is not zero. Disks, networks, computers, software all have costs of both acquisition and maintenance. They also bring questions of privilege and access. The marginal cost of copying may be very, very small. But marginal cost isn’t the end all of the analysis as any good economist knows. OER reproduction is not cost-free. To have a very, very low marginal cost still requires substantial investment in infrastructure, fixed costs, and sunk costs. Further, just how does one costlessly copy a digital OER resource and avail themselves of all the 5 R’s when the source code files for the website aren’t provided or come in such a format that discourages it. Ask the many faculty who have tried to download, edit, and remix some OpenStax texts. Time is a cost too. Wiley himself sees this when elsewhere he argues that very few have the resources or luxury to contribute to the “hard, frequently painful, and seldom recognized work associated with stewardship.” Clearly OER materials are not cost-less to reproduce and that alone means we must be concerned with sustainability and behavioral norms of stewardship.

A great deal of confusion in thinking about OER sustainability – or what I prefer to think of as sustainability of the OE commons – comes from confusion in terms. In particular we’re confused about “resources”.  We use the word resource in OER and then we encounter research about the commons and CPR’s, common pool resources, and confusion ensues. Economically, a resource is something that is necessary for the production of other more economically valued goods or experiences. Resources do not have to be physical objects. The traditional taxonomy is land, labor, and capital, although I think most economists today would not object to adding knowledge in some form to that mix. In economic terms, what we call OER’s are resources used as part of the teaching process that produces some learning.

Note: Please bear with me, my critical pedagogy folk. I’m applying economics to teaching here at a very abstract, general level. I am not embracing learning outcomes, learning analytics, or engineered corporate “learning” experiences. Teachers who  engage pedagogies and activities that result in student agency or transformation can still be viewed as a production process in the abstract even if it’s artisanal, unpredictable, and unmeasurable.

Yes, teaching materials such as textbooks, quizzes, images, and software are resources in the teaching or educational process. They are one of the resources. If those materials are free to access, to use, to revise, to adapt, etc, then we call them OER.  The use of the word “resource” is legit in this context. However, are these resources fit for purpose? And by fit for purpose, I mean are do they synergistically amplify the most critical resource of the process, the labor and knowledge of the teacher?  To make them truly fit for purpose requires engaging the 5 R’s. We must remix, revise, redistribute, and edit. It is not enough to have or use an OER with permissions for 5 R’s if we do not or cannot actually do them. I may have the right or permission to vote, but if I do not actually vote that right is meaningless.  To actually revise, remix, redistribute, or edit OER’s requires additional resources.

The critical resources necessary for OER are people’s time and expertise. This is true for both the creation of those mass distribution OER’s such as general ed course textbooks and the materials as used in each class. I think of the textbooks as wholesale or bulk OER’s that need further processing and supplementation to be most effective in any particular course. And who provides these critical resources of time and expertise for creation, editing, remixing, revising, and redistribution? The most critical source is faculty.  Is faculty time non-rivalrous? Hardly.

Accepting the economics definition of scarcity as “unlimited wants and limited resources”, we must conclude faculty time is scarce. It is valuable. Faculty make choices of how to use their time. They can choose to spend time creating, editing, revising, remixing, and sharing OER materials, or they can spend their time in a myriad of other ways.

While OER materials are indeed resources in the context of teaching, in the context of our discussions of sustainability, they are not. OER materials are not resources and not the commons or the CPR itself. OER are the fruits of the an open education commons that utilizes a common pool resource of faculty time and expertise to produce them.  If we think of it this way, we see why stewardship, the CARE Framework, and Ostrom’s principles are so important.

OER materials are not some static, ever growing pool of materials that can endlessly and costlessly be copied, reproduced, and used. That OER textbook written two years ago? It might be out of date now. Who is going to edit and update it? Who cares if I can copy that text from a decade ago? Maybe OER’s cannot be over-used as David Wiley states, but they can certainly be under-produced. Under-production will lead to tragedy of the open education commons as surely as over-grazing might lead to failure of a pasture commons.

Why would faculty devote their scarce time to OER? Why should they take time to attribute (and trust me attribution takes time)? Is it only because of threats of legal action should they not comply with copyright licenses?  Hardly. That’s never stopped faculty before. It’s because they are convinced that they are part of a community, a commons, wherein this is the norm. Attribution is what good people do. As Downes put it, they want to respect, protect, and further the collective enterprise in which they are a part.

Why would faculty devote scarce time to sharing and contributing their content or materials? All teachers have materials they’ve created for classes. Not all OER’s must be 300 page textbooks. There’s a wealth of unshared teaching materials sitting in faculty drawers in the form of handouts. Only a small portion get shared or contributed to others, partly because sharing and making available to others is not always easy. Time. Resources. Scarcity. Again, they share when it’s part of the social norm.

What might discourage faculty from attributing or contributing? Faculty will not share, will not contribute, and will not attribute when they see that their efforts and time get abused by others who don’t adhere to the social norms.

It’s not just over-use that can doom a commons. Enclosure and extraction can destroy a commons just as well.

Another Ostrom principle of commons management is fairness. Faculty and all members of the open education commons need to perceive that fairness reigns. There’s been a steady drumbeat that says CC-BY license is the “most free” (how is it more free than CC0, I wonder?). But when I’ve worked with faculty to help them create, share, publish, revise, or remix their OER materials, their gut preference is typically for CC-NC, CC-SA, or CC-NC-SA.  Why? Because they perceive those licenses as more fair. The NC and SA licenses make statements about “I’m contributing to the OER community. I expect fair reciprocity. I expect you to be a good steward too.”  Faculty react quite negatively to organizations who charge for access to CC-BY materials. Faculty perceive those organizations as using legal technicalities to abuse the good faith efforts of the community.

I haven’t yet presented the CARE Framework to faculty. My expectation is it will be warmly accepted and greeted with a kind of “well, of course”.  I thank Petrides, Levin, and Watson for their work on it. While in many ways the framework simply captures what I think most faculty think and feel already, making the framework and its emphasis on stewardship explicit is a major step forward for the open education commons.

 

 

 

 

 

A Personal Note on Ostrom, Open Learning, and Me

As usual, I have way too many balls in the air and way too many ideas happening at once.  It’s exciting but every silver lining has a touch of grey. (hat tip , Robert Hunter).

I continue wearing my multiple hats as part of the school’s Open Learn Lab. I still have no title, although ITS calls me the Project Champion (thank you).  I actually prefer “Chief Instigator”.  Anyway, it continues to be me as server sys admin, dev  ops, open pedagogy evangelist, WP developer, inventor, faculty professional developer, and chief pixel washer.   We are digital, so there’s no bottles to wash anymore. Just pixels.  This year I do have two fantastic  enthusiastic student interns that are convinced we’re going to revolutionize higher ed. On top of all that, there’s still the half-load of teaching and course development.  And in a community college, once you’ve done the governance & faculty leadership gig, it kind of sticks to you – especially if you’re trying to get the Lab “institutionalized” (translation: into the org chart & budget permanently).

So I’ve been spending most of the past year trying to figure out for folks where or how “open learning” fits into the college – ours or any community college.  I think I’ve been making progress on that front with the Commons of Our Own idea.  But then David Bollier at OpenEd17 steps into my world with his talk of the commons.  BAM.  The grey cells start firing at accelerated pace.  The economist part of me starts kicking in and I’m off to the races.

Bollier gets me to start researching and reading and listening to Elinor Ostrom.  Now I’m embarrassed to say that while I had a most passing familiarity with her work, I hadn’t until now taken a deep dive.  My loss. That’s both the silver lining and the touch of grey.  Her and Vince Ostrom’s ideas on governance of commons, polycentric complex economic systems, and the differentiation between commons as behaviors vs common pool resources has the little grey cells firing like a fourth of July fireworks finale. Silver. Lots of silver.  It’s all coming together.  My multi-disciplinary career and background, the Open Learning Lab, the tech, higher ed governance and policy, pedagogy, and what we need to do for people.  BAM. Silver linings.

Unfortunately, I’m not a young man. Touch of grey around the temples.  Ok, ok, ok, lots of grey throughout.  I get a feeling that I missed my calling and a chance to really do some interesting stuff in this commons area.  I could have done so, so much but my education didn’t really expose me to the Ostroms or the Commons (except for the myth of the “tragedy” thereof).

So I’m kind of overwhelmed now.  Today, while out on my walk, I listened to Elinor’s lecture at Indiana U just after her wining the Nobel Memorial Prize.  I found myself alternating between shouts of “yes!” as I connected her ideas to our present situation in open learning and higher ed, and  then followed by waves of sadness and perhaps tears (“no, you have something in your eye!”) as I realize what could have been personally.  As I said, I’m not a young guy.  I’m gonna have to make the most of these years left.  There’s a lot to do and lots of connections to make.  Collaborations about innovation aren’t the easiest thing to put together at a community college.

I promise I’ll blog and tie all this stuff together.  I have to.  I promised to talk about it at OER18 and OEGlobal 18 in April.

Here’s the lecture:

And, hat tip to Robert Hunter and Jerry Garcia.   

Religion, The Stock Market, and the Search for Meaning

People want to understand phenomena.  We want explanations for what happens. Journalists, especially TV and radio journalists, want explanations that can be summarized in 1-2 sentences in a sound bite.  Randomness is pretty scary.  And anything that’s too complex to understand easily looks a lot like randomness.

So what triggered this little nugget of metaphysical social observation in an economics blog?  Reporting on the stock market!  Everyday we (those of us who read, listen or watch the news) are treated to not only reports of what the major stock market averages have done that day, but we’re always given a simple and easy explanation.  Just look at today in the NYTimes.  I’m not trying to pick on The Times, it was just the first thing showing on Google Finance as I wrote this – any source, any time and you’ll get similar simplistic explanations.

The move announced by central bankers on Wednesday to contain the European debt crisis led to euphoria in global stock markets…

Krugman posted this evening that he didn’t understand it.  But he approached it from the standpoint of “does this action by ECB make economic sense that should improve stock prices?’.  I think he’s right that it doesn’t make sense, but I think he misses a bigger point.  It’s foolish to try to attribute the movements of stock market averages on any given day to the any particular sentiment of investors or any particular logic of rational investors.

The markets are huge.  We’re talking hundreds of billions and trillions of dollars in trades. Daily volume is in the billions of trades everyday. It’s complex, folks. The reasons these trades happen and why they happened at the prices they did are really, really complex.   It’s kind of like ancient peoples trying to understand the stars and without even a telescope or any calculus! Unfortunately, like them, we want simple explanations.  So we invent them.  And like ancient peoples we make sure our explanations support and reinforce whatever religious or superstitious beliefs we have.  [readers are advised not to try to decide what my spiritual beliefs are based on that sentence – it’s complicated].

There is a belief that supports much of this daily “this is what the market did and why” reporting. It’s actually based on the theory that markets are rational and “efficient”.  There’s an economic theory that holds that prices in financial markets accurately reflect the current state of all known information and news regarding the future flow of earnings and profits from firms.  It’s demonstrably false, but it has quite a following among neoclassical economists.  It cannot be proven and evidence exists to contradict the hypothesis (see Quiggin’s Zombie Economics), yet it’s taken as article of faith among many, many economists.  So much so that some non-believing economists have begun to refer to neoclassical economics as theo-classical.

The whole idea that there’s a single sentiment or key piece of news that drives the stock market each day is made even more absurd when we realize that most trading isn’t even being done by humans!  The significant majority of all trades are done by computers based on algorithms such as “buy this if the price has moved x in the last y seconds”.  Even more of the trading is done by casino-oriented short-term trading by large banks and hedge funds who are only trying to figure out what they think the other traders are going to do a few seconds before they do it. (also known as Keynes’ beauty contest).

Markets are the collective, sum judgement of lots of complex decisions.  Even if all the individual decisions were rational, there’s still no reason to believe the aggregate outcome can be represented as the decision of some hypothetical rational being.  So next time you hear or read some talking head pontificate that “the markets are saying…..”, just remember there’s little difference between that modern commentator and some ancient priest in long gown claiming that “the gods are saying….”

The Quantity Theory of Money and Fears of Inflation Are Nonsense

We rarely get to conduct scientific experiments in economics, but for the last 3+ years The Federal Reserve has unintentionally conducted a test of an economic theory called the “Quantity Theory of Money” (QTM). QTM makes some very specific predictions – predictions that Ron Paul, conservatives on Wall Street, and others have been repeating a lot.  Unfortunately for them, QTM has failed the test.

First, some background on the theory. The QTM is and has been one of the foundations of both monetarist thought and Austrian economic thought.  In it’s base form, it’s based on an accounting identity that must, by definition, be true.  The notation sometimes varies, but the quantity theory of money is based on a definition called the equation of exchange.  This equation goes like this:

M times V = P times Q
where:
M: Money supply
V:  velocity of money, or the number of times the average dollar changes hands and is spent during the same time period as Q is measured.
P:    price level
Q:   real GDP (sometimes real National Income, Y, is used – same thing essentially)

So what does the equation say?  If you look at the left hand, M x V, you get a representation of the total spending in the economy.  It’s how much money was in circulation times the number of times that money was spent.  The right side, P x Q, gives us the value of nominal GDP.  It’s the value of all the real stuff we bought (Q, real GDP) times the Price level P which translates it into today’s prices.  Put the two sides together and you’ve got total nominal spending in money terms must be the same as the total value of the things we bought.  Duh.  Of course it is.  It’s an identity.   It’s the macro equivalent of saying that if I spend $5 each time (M) on 7 trips to the grocery (V) to buy 70 apples (Q) at $0.50 each (P), then I will spend $35 on $35 worth of stuff.

As an identity definition it’s not really very interesting.  It’s when economists begin to use it as a model of future outcomes that problems arise.

The typical way QTM is used, and the simple way folks like Ron Paul and a lot of folks who are upset at Federal Reserve efforts to stimulate the economy, is by thinking of what happens when M, the money supply, is suddenly increased.  The thinking is that an increase in M must result in an increase in P in order to keep the equation balanced.  This is the foundation of modern inflationary fears in the last  few years.  Typically folks using the QTM this way don’t say things like “an increase in M must lead to an increase in P”.  They say things like “The Fed is printing money like mad and that’s going to lead to inflation”  since an increase in the price level, P, is how we measure inflation.

But there’s actually four terms in this equation.  Any of them can change.  That’s where assumptions come in.  The advocates of QTM, whom I’ll call “inflation-phobes” for the moment since they’re always fearful of inflation, make some strong assumptions.  They assume three big things.  First, they assume that the velocity, V, is constant.  In other words, according to them, you and I always spend our money at exactly the same rate. Suppose I spend my whole paycheck every two weeks now.  They assume that I’ll always spend my whole paycheck every two weeks no matter how big or small that check is or whether I’m suddenly fearful of losing my job next month.  The evidence for the constant velocity assumption is weak.  You be the judge using the St.Louis Fed data:

To me, that doesn’t look constant.  If V is constant, then any increase in M also increases spending, MxV.  But if V isn’t constant, then an increase in M can be offset by simultaneous slowdown in velocity.

The next assumption is that real GDP is always at capacity.  In other words, there is no unused capacity in the economy such as unemployed workers or empty office buildings or factories running only 1 shift when they can run 2.  This is assumption is essential to the inflation-phobes because it means that Q can’t be increased.  This is necessary to their desired outcome because it would imply that the only way for PxQ to rise to meet an increase in MxV is by having P increase.  I won’t go to the trouble of showing data and graph to prove that Q isn’t at capacity.  If you have doubts, see last week’s update on employment and GDP.

There’s one more unstated assumption by the inflation-phobes.  They assume that any increase in base money, which is primarily the bank reserves The Fed makes available to commercial banks, will necessarily translate into M1, money in circulation among the public.  This too is a bad assumption.  There times, like the last 3 years, when commercial banks don’t want to or can’t lend.  In times like this bank reserves just sit there on the books safely tucked away from any kind of productive economic activity or spending.  The Fed can push reserves onto the banks’ books, but it can’t turn those reserves into loans or spending by customers. Another weakness in this assumption is the idea that even if the money ends up in private hands it will be used for spending on goods and services. Instead, what we’ve seen is that much of what little lending the big banks have been doing has been to finance financial market trading and speculation – things like oil futures.  Speculating in oil futures isn’t the same thing as actually refining and selling oil.  The speculation doesn’t create jobs and isn’t part of the circular flow. Production is.

So we’re back to the question of testing the QTM theory.  The QTM theory of money as inflation-phobes express it, says that increases in base money (M) necessarily must result in inflation (increases in P) at some time in the near future.

In 2008 and 2009 The Federal Reserve expanded bank reserves greatly.  It expanded the monetary base dramatically.  The Fed invented a variety of new names and methods for doing it, although almost all of them involved The Fed buying some kind of bond, security or financial asset.  If the QTM theory and the hard-money inflation-phobes are right, there should have been a dramatic increase in inflation.  They predicted it.  Again and again.  It simply hasn’t happened.  Paul Krugman put together an nice little graph showing the failure of the QTM theory:

The thing is, of course, that the past three years — the post-Lehman era during which the Fed presided over a tripling of the monetary base — have been an excellent test of that model, which has failed with flying colors. Here are the data — I’ve included commodity prices (IMF index) as well as consumer prices for the people who believe that the BLS is hiding true inflation (which it isn’t):

A couple of notes: for the commodity prices it matters which month you start, because they dropped sharply between August and September 2008. I use the IMF index for convenience– easy to download. (Thomson Reuters I use when I just want to snatch a picture from Bloomberg). But none of this should matter: when you triple the monetary base, the resulting inflation shouldn’t be something that depends on the fine details — unless the model is completely wrong.

So, we’ve had a test, a pretty substantial test of the Quantity Theory of Money and the assumption that any increase in monetary base must lead inevitably to an increase in prices and inflation.  The theory has failed.  It should be put to rest.  Milton Friedman, a man as responsible as any other for pusing QTM, once famously claimed that “inflation is anywhere and everywhere always a monetary phenomenon”.  He was clearly wrong, there’s more involved than just base money growth.

Rhetoric Is A Powerful Tool To Advance Moneyed Interests

Money is essential to a successful economy.  But it’s money in circulation that’s useful.  Money that’s locked up in storage in vaults and savings doesn’t help.  The early economists understood this well and often used the analogy of money-is-to-economy as blood-is-to-human-body.  Circulating money, money that is used to buy things is as important to the economy as the blood in your arteries and veins.  The analogy works.  It leads us to realize that money, and more of it, can and usually is a good thing.

The analogy, however, doesn’t work for those economists and policy-makers who want are more interested in enabling the top 1% or so to profit at no risk by earning income on holding money.  Theoretically, the rich, the top 1%, could earn income from their large stores of wealth by investing it in production.  But the profit-by-investment-in-production method requires risk. It’s hard. It requires work to find and exploit good investment opportunities. From the perspective of the really wealthy, it can be more desirable to make money by simply owning money.  To do that, it’s necessary to that there be no inflation. They actually prefer deflation because then their cash wealth gets more valuable without being risked or used productively at all. The other approach to making money without risk by simply owning money is to lend it. Instead of starting, owning, and building a business, investing in equity, you make loans. Ideally you use your wealth and influence to get politicians to guarantee your loans – heads you win and tails somebody else loses. These approaches to making money by simply owning money require that money be scarce and hard to get.  It’s directly counter to the money in circulation paradigm.  A circulatory system deprived of money is good thing those who make money from money instead of labor.

But to persuade the mass of people, the 99%, the ones earning money from labor, it’s necessary to change the metaphor.  That’s been rather effectively in the second half of the 20th century.  It’s been done by extending a different metaphor.  Economists have long used the word liquidity for the idea of how easy it is to convert an asset into cash and therefore spent. For example, real estate (particularly in this market) is very illiquid.  I could own a $1 million house but be unable to buy a Coke from the 7-11 store because I lack any cash.  That’s an extreme example of illiquidity.  In contrast, a liquid asset is one that is either actually cash or easily turned into cash so it can be spent.  There’s a whole range of assets in between with varying degrees of liquidity.

This idea of liquidity and it’s association with cash has been used to push a metaphor that suggests the problem is too much money in the economy.  We’re peppered with phrases like “drowning in debt” or a house mortgage that is “underwater”.  It makes us feel that the liquid stuff is undesirable.  So we get  a central bank that’s reluctant to create and inject money into the economy because critics claim that will create too much liquidity and they falsely claim that it’s inflationary.  When the central bank does increase inject liquidity into the economy, it does it by getting the money to precisely the people who keep it from circulating.  We get a government that refuses to use it’s ability to directly inject money into the economy and get it into circulation.

Government ultimately is the source of all money.  Only government can define and create money.  It has two ways to do it. It can simply create (“print” or “mint” if you will, but it’s not that way anymore) money and spend it.  That puts money immediately into circulation in the circular flow of goods and services.  Or, the government could create money reserves for the banks, a riskier strategy.  The banks then can lend using a fractional reserve logic.  If the banks lend out the reserves, then money is created.  If the borrowers from the banks spend the borrowed money, then it’s in circulation.  If the borrowers use the money to simply buy other financial assets, then it’s not in circulation and is sterile.

In our modern system, the government (in the U.S. and many other nations) has delegated the responsibility for creating money and putting it into circulation to quasi-private central banks such as The Federal Reserve Bank.  In today’s workings of the financial system, these central banks have further delegated the responsibility and decision-making on money-creation to private commercial banks by providing reserves for whatever level of loans they choose.  When those banks choose not to create money or choose not to create and provide money in a way that puts it into circulation, the system suffers. We suffer from too little liquidity.

Daniel Becker at Angry Bear made this point very well in a long post there in June 2011.  He points out that we should really talk about “dehydrating in debt”, not “drowing in debt”.  The dehydration metaphor leads us directly to the solution – more money in circulation.  I from the conclusion to his post:

Got that? Let’s summarize: The share of income to the 99% of people declined from 1976 onward. At the same time the means of making money changed from labor production to money manipulation (producer economy to finanicialized economy) adding to the reduction in share of income. We also changed the ideology to one from relying on the vast population (as represented by the individual and We the People) to relying on a small portion of the population to distribute what money was created. We did this for 33 years. By 1996, people were borrowing as a means to sustain their standard of living (not increase it). If the people are not spending to increase their standard of living, then is the economy really growing? By 2006 people were no longer able to make the payments and consumption was declining.  Then gas hit $4/gal and winter heating was looking like another $4000 to $6000 would be needed.

To date, nothing has been done to address this. Nothing at all. And, by “this” I mean, the income inequality that has resulted in an an economy where a very small group of people (top 1%) are taking money out of the system (that is money that would fuel the engine) faster than the engine can make it which results in an ever faster declining share to the rest of the people. Instead, we have refined new fuel and dumped it right into the top 1%’s hands and wonder why the engine is still sputtering?

One other issue I have with framing and the words used today: Under water.

People are not under water. They are not drowning in debt. On the contrary, people are dehydrating. They are starving for water. Do you know what the symptoms are of dehydration? You get thirsty and then urinate less to conserve water. (debt spending) Then you stop making tears and stop sweating. (can’t borrow) Eventually your muscles cramp, the heart palpitates and you get dizzy. (close to bankruptcy, voting against your interest) Let it go long enough and you get confused, weak and your coping mechanisms fail. (Tea Party, etc) In the end, your systems fail and you die. (recession)

People are dehydrating and Washington is doing nothing about it because they believe it is drowning.  They are throwing out life boats to people in a desert.  That is the chart Ken linked to.

Sometimes Methodology Isn’t Everything

Brad Delong points us to a study published in the British Medical Association jounal BMJ and quotes from it:

Smith and Pell: Parachute use to prevent death and major trauma related to gravitational challenge: systematic review of randomised controlled trials 327 (7429): 1459 — bmj.com:

No randomised controlled trials of parachute use have been undertaken

The basis for parachute use is purely observational, and its apparent efficacy could potentially be explained by a “healthy cohort” effect”

The full journal article is well worth following at the link he quotes.  Besides the laugh (warning: the positive health effects of laughing haven’t been proved by randomized controlled trials either), the authors suggest by parody an excellent point.  Sometimes rigid adherence to one single methodology in science is sometimes not only uncalled for and useless, it can also be immoral.  Some Austrian and New Classical economists might want to take note.

Brief History of Macroeconomics and The Origins of Freshwater vs. Saltwater Economics

I and others, particularly Paul Krugman, occasionally make reference to “freshwater” vs. “saltwater” economics.  Here’s a little background to explain the terms and, I hope, shed a little light on current disputes in macroeconomic theory.

First, let’s go back in time.  The stuff that economists study, namely the economy, economic behavior, and markets, really emerged as it’s own discipline in the 1700’s with Adam Smith.  It had always been a topic for philosophers to discuss. Even Aristotle writes about the topics.  But it didn’t really emerge from “moral philosophy” into it’s own field of study until Smith.  Originally Smith and the subsequent economists such as Ricardo focused on markets and what we now  call microeconomics with a nod towards questions of political economy (public policy and the whole economic system).  The industrial revolution was in full swing.  The economic system wasn’t really “capitalist” because nobody knew what that was yet.  It wasn’t until the mid-1800’s that the word capitalism becomes commonly used.   Note:  Adam Smith was not a capitalist.  According to the Oxford English Dictionary, the earliest recorded usage of “capitalist” comes in 1792 in France, well after Smith wrote the Wealth of Nations.  

Then in the years just after the Napoleonic wars, England suffered some very severe financial crises and depressions involving the collapse of canal-building businesses.  At the time, Smith’s famous treatise was now 40-55 years old.  The authors now called economists argued about it’s causes and the policies needed to right the economy and restore full-employment.  The center of the debate revolved around questions of “whether there could ever be such a thing as a general glut of commodities”.  In other words, was it possible that the now industrialized economy with it’s newly enlarged banking sector and wide circulation of paper money could be too efficient?  Would such an economy always produce willing buyers for all the goods that sellers wanted to supply?

Two views emerged. One of them, later called “Classical” becomes the dominant thinking in economic circles.  The Classical view denies that long-term high unemployment is even possible as long as the government balances it’s budget and follows a laissez-faire policy of not interfering in markets.  A very mechanistic view of the economy as being constructed of self-adjusting markets that always return to equilibrium evolves.  The Classical view supports a very liberal (old sense) and anti-regulation view of government policy.

Critics existed but they failed to dominate the debate.  Karl Marx in the mid-1800’s writes some scathing critiques of Classical economics focusing on how the mechanism of market equilibrium cannot and does not work as described in labor markets.  Yet despite the critique, the Classical economists continue to dominate policy making and academic circles.  The debate, however, becomes more polarized with the Classicals of the late 1800’s and early 1900’s pushing even more extreme anti-government, pro-market policy positions and models than their Classical predecessors advocated. Many of the critics of capitalism and Classical economics move to the opposite end of the spectrum and embrace socialist, communist, or fascist/syndical economics, in effect taking a position that market capitalism is so fatally flawed that it must be completely replaced by a system of planning by the government.

Despite the dominance of the Classicals, there were always some economists laboring, researching, and writing about the cycles of business and the workings of money and banks.  They just didn’t get much attention or have a comprehensive framework to distinquish themselves from either the Classicals or the planned economy types.

Then came Keynes and the Great Depression.  Classical economics denied The Great Depression could happen – much like University of Chicago economists in 2010 who claimed that today’s high unemployment is the result of workers suddenly choosing to voluntarily have leisure instead of a job.  Keynes writes a powerful book called The General Theory of Employment, Interest, and Money.  Macroeconomics is born.

Keynesian macro focuses on a total systems approach to the economy instead of just assuming that whatever works in a micro perspective in each market will make the total system work.  Keynes attempts to avoid the fallacy of composition. Keynes’s analysis shows that an industrialized, capitalist market economy with a financial/banking sector is inherently unstable.  It tends to have cycles – business cycles.  It’s beyond the intent of this post to explain the reasons, but the bottom-line was that Keynes identified a role for active government and central bank policy to maintain full employment  and stable prices.  Keynes rapidly gained converts in economics and soon the field was split into microeconomics and macroeconomics.

The success of Keynesian economists and Keynesian policies in the 1940’s, 1950’s and 1960’s led to dominance of Keynesian viewpoints.  But there were two subversive trends underway that would eventually reverse the Keynesian dominance and return the Classical viewpoint to dominance.  One was an attempt to build a comprehensive mathematics framework for all economics built on the math of Newton’s physics.  This effort, called the neo-classical synthesis, originally focused on microeconomics.  But eventually it turned it’s attention to putting Keynes’s ideas into the same optimizing-behavior mathematics.  Unfortunately, Keynes himself was long dead by now and unable to clarify what he “meant”.  Some ideas are forced onto him that weren’t necessarily there in the original (such as insisting on static equilibrium).  The second trend was a small group of economists who never agreed.  They were in effect Classicals in exile.  Led by Milton Friedman at University of Chicago and Friedrich Hayek, they launched a two-prong attack.  Hayek’s attack led to what we call Austrian economics today and is often embraced by extreme libertarians.  I won’t get into that here, there’s not enough time.

Friedman’s initial attack focused on re-writing our understand of The Great Depression.  Friedman works to show that monetary policy by the central bank was at fault for the Depression, implying that a laissez-faire government fiscal policy would be best.  Friedman’s disciples at Chicago and elsewhere expanded the attack by insisting on “micro-foundations” in all macro-economic theories and models.  By micro-foundations, they mean that the only acceptable basis for a macroeconomic model is one that is based only on the micro ideas of perfectly rational individuals acting on perfect information with perfectly rational expectations about the future and the nature of the economy.  By the mid-1970’s the Friedman posse was clearly winning the academic wars, in part because their position lent itself easily to using neo-classical synthesis  mathematics and because it was consistent with “micro-foundations”.

Friedman originally took a modified Classical position.  Classicals denied that either fiscal or monetary policy could affect or correct the performance of the whole economy.  Friedman pushed the idea that fiscal policy wouldn’t work but that monetary policy would.  Eventually the next generation of Friedman students and disciples went further and returned to the Classical position that neither fiscal nor monetary policy would work.

As it turns out, these newly re-ascendant Classicals, now being called New Classicals, inspired by Friedman, often taught at universities located inland near some kind of “freshwater”.  The remaining supporters of Keynesian viewpoints, now under severe attack, taught at schools nearer the ocean.  Then in 1976 R.E. Hall pens a paper called Notes on the Current State of Empirical Macroeconomics and identifies this split and associates freshwater and saltwater with the split.

As I see it, the major distinguishing feature of macroeconomics is its concern with fluctuations in real output and unemployment. The two burning questions of macroeconomics are: Why does the economy undergo recessions and booms? What effect does conscious government policy have in offsetting these fluctuations? These questions define the issues considered here. I will further restrict my attention to structural approaches, and will avoid discussion of the reduced-form approach, including its recent sophisticated manifestation (7).

As a gross oversimplification, current thought can be divided into two schools. The fresh water view holds that fluctuations are largely attributable to supply shifts and that the government is essentially incapable of affecting the level of economic activity. The salt water view holds shifts in demand responsible for fluctuations and thinks government policies (at least monetary policy) is capable of affecting demand. Needless to say, individual contributors vary across a spectrum of salinity). The old division between monetarists and Keynesians is no longer relevant, as an important element of fresh-water doctrine is the proposition that monetary policy has no real effect. What used to be the standard monetarist view is now middle-of-the-road, and is widely represented, for example, in Cambridge, Massachusetts.

1To take a few examples, Sargent corresponds to distilled water, Lucas to Lake Michigan, Feldstein to the Charles River above the dam, Modigliani to the Charles below the dam, and Okun to the Salton Sea.