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Ep138: The basics of economics "math" with Sam Levey [SPECIAL VIDEO EPISODE]

Jan 15, 2023

This video episode was produced by KRTD Media and can be viewed in full on their YouTube channel, here.

Welcome to episode 138 of Activist #MMT. Today's a special video episode with UMKC PhD student Sam Levey on the basics of "math" in economics. This is basically Sam handholding me through the opening chapters of Wynne Godley and Marc Lavoie's 2016 book, Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth.

(Here's a link to part two in this special video series on the "math" in economics, with Jonathan Wilson and Sam. A detailed list of the audio chapters in this episode – plus notes and observations – can be found at the bottom of this post. Here's a bonus resource created by listener Youval Marks: an Excel spreadsheet implementation of the model discussed in this video.)

This episode was produced by KRTD Media. You can follow KRTD Media on YouTube, Twitter, and Facebook. A special thanks to KRTD's Amber Griego – who I interviewed in episode 51.

The specific paper we focus on today is the 2006 paper by Godley and Lavoie called, A simple model of three economies with two currencies: the Eurozone and the USA. The longer-term goal is to understand the concepts in this paper via its math. For this conversation, however, the much more important goal is to use this paper as an excuse to learn the basics. In other words, I'm not reading to learn, I'm learning to read.

This is actually the first in a two-part video series with Sam on math in economics. The second is guest-hosted by Johnathan Wilson. Jonathon and Sam go much farther and deeper, and it's centered around Sam's most recent paper. They also bridge the gap between the math used by MMT and post-Keynesianism, and that used by mainstream economists.

A final note: my conversation with Sam was originally intended to be only a half-hour long and in private. Thanks to Sam's generosity and blessing, it's turned into something much more. A big thanks to Sam for all his time and patience.

And now, onto our conversation. Enjoy.

Audio Chapters

  • 2:41 - Hellos and graduate school course load
  • 4:35 - My attempt, formulas 1-15
  • 5:52 - I walk through the first few formulas as I understand them
  • 8:27 - Back to the beginning: Balance sheet and transactions flow matrix
  • 19:44 - Godley and Lavoie's Monetary Economics book
  • 20:17 - Transactions flow matrix
  • 21:01 - Bills, notes, and bonds
  • 22:46 - Delta rows in transactions table: The bridge between the balance sheet (stock) and transactions table (flows)
  • 36:05 - Equations 4-6: Disable income for Americans equals US GDP [interest * bonds for each country] plus [exchange rate * foreign bonds]
  • 37:18 - Supply of bills versus demand for bills: The same bill but from another country's point of view (priced in ITS currency)
  • 42:36 - Equations 7-12: Theta is the tax rate. Disposable income equals taxes minus income
  • 44:52 - Equations 16-18. First Greek letter: consumption function, common parameters, exogenous variables. I'm
  • 52:16 - Equations 16-18 continued
  • 52:50 - Equations 16a-18a: Propensity to consume IMPLIES a target level of wealth
  • 1:05:47 - Equations 19-25, Greek letter mu: propensity to import for a county: [They always import SOMETHING, regardless conditions] plus [the amount they want to import based of the country's total spending (as defined in formula 25)] plus [the amount they want to import based on the strength of the domestic currency versus the foreign country's currency]
  • 1:13:37 - Mapping the formulas back to the transactions matrix, and translating the formulas to real world conditions. Each of these formulas, and pieces therein, represents a real world conditions.
  • 1:16:01 - A comment on what's odd in the final ("xr") elements in formulas 19-21 and 23: It is the exchange rate but **from the other point of view**.
  • 1:19:43 - Many different perspectives to sort through, and then natural logs, which is the inverse of an exponential. The short version is that natural logs are kind of the same as percentages.
  • 1:23:41 - Equations 28-33: 28 specifically: Exports TO the US and imports INTO the US. Different perspectives of the same thing! One measured in dollars (from the US point of view), the other in euros (from the euro point of view). Speaking about the same transaction from the OTHER COUNTRY'S point of view. (The exchange rate in 31 and 33 is 1.0.)
  • 1:29:11 - Equations 34-39. 37: I'm in the US. Total imports into the US are equal to imports from euro country one plus euro country two. The difference between two country symbols versus one country symbol (a sign convention used by this paper only.)
  • 1:34:19 - Equations 49a (which is not a typo) and 40-42, 50a and 43-45, and 51a and 46-48. This expresses the demand for money. "Out of all of your savings/wealth, how much of it do you want to hold in money (cash)?" And of that, how much do you want to hold in each type of currency? (More generically, bills, bonds, notes, cash. Or even more generically, ASSETS of each country.) In this section, is determining how the interest rate in each country affects the demand for that country's money.
  • 1:35:05 - The two-digit subscript is not a two digit number, it's just two separate digits to express a coordinate in a 4x4 grid (00 is top left, 33 is bottom right). (Note each country's equations in this section is called an array.)
  • 1:39:18 - Relating these formulas to the consumption function, and the target level of wealth. There are real world conditions for wanting a certain amount of cash.
  • 1:48:06 - Defining coefficient. In [lambda<01#$>*r], the lambda portion is the coefficient. It's the less important part (determined outside the model) in a product/multiplication problem.
  • 1:50:08 - Jumping ahead a bit: The real world conditions behind these coefficients/parameters. Example: & is Greece, # is France. Greece is less powerful, so my Greece coefficient is lower because I'll always want relatively more French bonds. So Greece interest rate changes will not affects my desire as much as French interest rate changes.
  • 1:52:09 - Assuming only the first term (the constant) is non-zero. Looking at formula 43, if I desire 1/10 off my wealth to be in #bonds, then the first term [lambda <10#>] will equal 0.1. Also, looking only at the left side of 50a and 43-45, what does H# + B## + B#$ + B#& equal? It equals V#. The whole fraction is 1, such as 50/50. [I live in #. H# is my country's CASH. B## is my country's BONDS (bills). B#$ is the US's bills, B#& is &'s bills.]
  • 1:56:19 - Still assuming the final three terms are all zero (not there). Now let's discuss the first term (the one with no interest rate, only a coefficient). (In real-world terms, this means I just don't care at all about interest rates.) Note let's bring back the other three terms one at a time. Example question this brings up in equation 44: If the # interest rate goes up, how does that affect my desire FOR US BONDS? Note the different signs (+ or -) before each term.
  • 2:02:56 - Final topic: The COLUMNS in these same twelve equations, but considering only the coefficients. (02 through 32 is one column.)
  • 2:10:30 - Reviewing these twelve formulas, and closing everything out. "This is the bulk of the model." Final comments.