Towards a Formally Defined New Economics

The discussions on reforming the economics curriculum after the crash has produced highly defensive responses from the likes of Karl Whelan and Tony Yates.  Their response being – meah – why stray from the neoclassical when you have Diamond and Dybvig and the Bernanke Financial Accelerator in your kit bag. Well that kitbag is obviously deficient if it cannot ex-plain the causes of a balance sheet recession, only reactions when you get into one.  The worst example of this was a paper by Negro, Giannoni and Schorfheide  of the NY Fed last year that claimed that DGSE was capable of explaining the Great Recession.  What they did was take the most well known New Keynsian model Smets-Wouters (2007) New Keynesian model and add on the  the “financial accelerator” model of Bernanke, Gertler, and Gilchrist (1999).  In the model credit shocks transmit through the real economy through amongst other reasons undermining the value of collateral. However all they did was take a pre-existing credit shock from Q3 2008 and predict it forward, they could not explain how that shock occurred.

But if the existing kit-bag is insufficient does that mean we should simply broaden courses to be more institutional and more cogniscent of great debates.  Certainly I have argued here that courses should focus on the contested core ideas. But that is not enough.

I said then

To my mind an economics curriculum needs to be founded around these contested core ideas, ideas such as what is interest? what are profits?  what is saving and what is the impact of saving?  What creates value?  What is capital?  There is no real agreement on any of these ideas.

Replacement of the flawed neo-classical paradigm (in the lakosian sense) requires a better replacement – but there is no consensus- at least in the post-keynsian community, what that replacement should be, we only have a broad outline.

What I am suggesting here is that we formally in mathematically and accounting consistent terms the core concepts and not let past ANY model that is not formalised.   This way we will ensure that all our models are computable, testable and formally consistent.

This approach is much more fundamental that the neo-classical core based on intertemporal optimisation of marginal values.  Marginal values of what?  Are these values observable and do they provide information for economic decisions? What is the impact of one optimization on flows affecting all other optimisations?  DGSE and similar models have a level of abstraction one step removed from the fundamental constraints of capitalism. Endowments are not accumulations of factor returns, they are a gift from heaven.  That is not to say inter temporal optimisation is not a useful second order tool, but is not a primary first order tool, those are the fundamental accounting constraints and relationships of capitalism.

I suggest four rules for a formally defined economics of this nature:

1) All economic models are constructed from formal definitions of the key relations of the economic system (capitalism in our case) which are set in accounting and stock-flow dimensionally consistent quadruple entry terms.

2) These economic relations provide information to agents only if they are observable.

3) A complete model must account for all economic gains and losses to all departments and categories agents of the economy, including banks and finance, all other models are partial.  A universal model includes all information for all agents, no model can be universal without artificially reducing the information set.

4) Only a complete model can be used to compute the path of all prices at the level of aggregation of the model.    No model can include all information so no model can be fully predictive of all prices.

 Let us explore how modelling can proceed on such axiomatic foundations.

The starting point is the fundamental equation of accounting.

Assets=Owners Equity + Liabilities

This assumes that for each modelling step we have a liability for a corresponding asset, so always more than one agent and a double entry for each, Copeland’s quadruple accounting principle.

Capital is another term for Owners Equity, so lets rearrange in terms of Capital for our Fundamental Equation of Capitalism.


We can refine this further by casting this in intertemporal terms.

NPV Capital=NPV Assets-NPV Liabilities

Cast in this way we can see the measure of capital is fundamentally bound up with the interest rate – now why did this issue entangle economic theory for 80 years when it can be found in one step from foundational principles?

It is more useful however for agents to base decisions on the rate of return on capital over a defined period – A to B

ROR=NPV AssetsB-NPV LiabilitiesB/NPV AssetsA-NPV LiabilitiesA

Which can be termed

ROR=Profit:Loss/Capital Advanced.

As Cameron Murray rightly advances it is ROR not marginal revenues which is the key metric for the firm.

Which gives us a definition of profit:loss

We can further breakdown the Profit:Loss account as follows:

Profit:Loss= revenues+book value assets-depreciation-expenses

Where expenses are the per moment of time cost of liabilities to the balance sheet.

So from very simple beginnings we have derived definitions of capital, profits, revenues and costs.  Breakdown the revenues accruing to factors and you have the foundations for a stock-flow consistent economic model.   We also have the tools through some simple algebra and not so simple double entry tables to model interest and banking, but that is beyond the scope of this post.  If any accountant wishes to comment on these propositions or wishes to show how they can be defined more expressively please feel free to do so.

Looking back on the writing of key classical thinkers such as Malthus and Torrens it is striking how careful they were to define these fundamentals, and how sloppy more recent practitioners are (with a few notable exceptions such as Fisher, Keynes, Kaldor and Godley)

From setting up a complete model at a relevant level of abstraction we can derive equations for market clearing prices where the flow of revenues equals the flow of costs. In capitalism most markets are not market clearing most of the time, if they were that would provide no information on where and how to invest.  This avoids the sterility of the unfortunate physical analogy of equilibrium-disequilibrium. A paradigm without agents acting on information.  The equilibrium analogy creates logical paradoxes, either equilibrium is defined in a way where it is never achieved or defined intertemporily with prescient rational agents with the same information as God which makes being out of equilibrium impossible, and eliminates all information on differential rates of profit which is the defining feature of capitalism.   A much better language to talk in non-linear dynamics terms – regions of relative stability – where limit cycles reign, and regions of instability and chaos.

There are certainly risks of Bourabaki style sterility of  axiomatic foundations.  But the issue is to get the first axoms right.  Neither Austrian human action axioms or the fashionable in the last decade graduate texts composed entirely of axoims derived from maximising agents were based on the accounting of the firm – were based on a monetary capitalist economy.

Horsham Inspectors Report is the Worst Timed Ever

Issued 19th

As for the needs of London, I note that the Further Alterations to the London Plan (FALP) include a housing target of 42,000 pa compared with an estimated need of 49,000 pa. However, the Mayor’s evidence to the recent examination of the FALP indicates with confidence that the shortfall of 7,000 dpa can be met within London’s boundaries. There has been no indication from the Mayor that he is expecting the HDPF to meet any of London’s current needs and in these circumstances no further provision is necessary.

As we know the inspector to the Further Alterations to the London Plan saw through the Mayors ruse of trying to meet the shortfall from the aeher and said the need would have to be met outside London. His report was published on the 15th Dec.

As a result the inspector consluded there was no current need for the Mayfield Country Town.

Sigh this report, from the inspector not checking release dates and not liaising with fellow  inspectors, as they can and often do, takes the debate not an inch furher as it is out of date the moment it is issued.  Similar the new policy on SHMAS and Green Belt reviews will further push out OAN from the Metropolitan Green Belt authorities.   This is a record.  An inspectors report out of date 4 days before it was issued.  Certainly the inspector raises good points about the problems of this proposal, its distance from rail for example, but it wont close down the debate and does not soundly conclude that Horsham is not a good location for a Garden City.


Not Again – Brandon Lewis with even More #NPPF tweaks by Letter

Yet again tweaks to guidance via letter being used as a proxy for the now almost weekly policy changes to the NPPF.  This time in a letter to the planning inspectorate.

Brandon Lewis is clearly learning on the job and its not a pretty sight.

The letter

Dear Simon,
Strategic Housing Market Assessments
I am writing to ensure our existing policy position on emerging evidence in the form of Strategic Housing Market Assessments is clear.
We have set out in our recent guidance that a Strategic Housing Market Assessment is just the first stage in developing a Local Plan and councils can take account of constraints which indicate that development should be restricted
The extent of constraints will be justified on a case by case basis for each Local Plan, depending on particular local circumstances, within a housing market area. Many councils have now completed Strategic Housing Market Assessments either for their own area or jointly with their neighbours. The publication of a locally agreed assessment provides important new evidence and where appropriate will prompt councils to consider revising their housing requirements in their Local Plans. We would expect councils to actively consider this new evidence over time and, where over a reasonable period they do not, Inspectors could justifiably question the approach to housing land supply. However, the outcome of a Strategic Housing Market Assessment is untested and should not automatically be seen as a proxy for a final housing requirement in Local Plans. It does not immediately or in itself invalidate housing numbers in existing Local Plans.
Councils will need to consider Strategic Housing Market Assessment evidence carefully and take adequate time to consider whether there are environmental and policy constraints, such as Green Belt, which will impact on their overall final housing requirement. They also need to consider whether there are opportunities to cooperate with neighbouring planning authorities to meet needs across housing market
areas. Only after these considerations are complete will the council’s approach be tested at examination by an Inspector. Clearly each council will need to work through this process to take account of particular local circumstances in responding to Strategic Housing Market Assessments.
As you are aware, the Secretary of State can recover appeals, for example where he considers that they raise issues of national importance. This is important to support the application of relevant policies at national level.

I have highlighted what is new.  Clearly the implication was the last ad hoc and not consulted on revision was not clear.

The old guidance made it celar that the SHMA was just the first step, what is new is the assumption that LPAs should be given time to assess evidence.  Previously I have recommended ton this blog that 1 year was reasonable after new HH projections to complete a revised SHMA.

The reference to Green Belt being a ‘policy constraint’ and the DTC making up shortages from constrained housing is a slight reigning back from the last set of guidance and really should have been their from the outset.  It makes it clear that the constant is not an absolute one, that policy needs to be supported by evidence and if you keep a GB constraint you make up the need elsewhere.

But there is still a black hole.  Following the Hunstan and Solihull cases it is clear that the NPPF is a radical break which made  local plans not meeting OAN in full out of date overnight.  Though the new letter makes it clear that LPAs  need reasonable time to consider new evidence many plans were out of date even with old evidence.  The Planning inspectorate could usefully seek clarification on what to do in those circumstances, and secondly how to calculate on S78 appeals the 5 year supply (especially with RS withdrawn) given that ministers are no saying that you cant automatically rely on SHMA numbers on a district by district basis.   If you cant claculate the 5 year supply, how can you apply para 14 of the NPPF.

Brandon Lewis is making it up as he goes along, one fix creating ever more problems requiring ever more fixes.

He gives the impression of not liking the central plank of the NPPF, using 5 year targets as a punitive stick to get LPAS to adopt local plans meeting OAN in full.  He would much rather they were ‘slow coaches’ and didnt rock the bopat with new housing supply and green belt release until after the election.

If he doesnt like this then he should just scrap or amend para. 14 and not mess everyone around.

Should Objectively Assessed Need Include a ‘Policy on’ or ‘Policy Off’ Employment Growth Assumption

Not a straight forward question to answer especially if you happen to live in Oxfordshire where the difference between the two doubles the housing numbers.  Lets take the arguments step by step then assess the current debate.

There is no doubt from NPPG that there should be an assumption of balance between job growth and housing growth.

Paragraph: 018 Reference ID: 2a-018-20140306

How should employment trends be taken into account?

Plan makers should make an assessment of the likely change in job numbers based on past trends and/or economic forecasts as appropriate and also having regard to the growth of the working age population in the housing market area. Any cross-boundary migration assumptions, particularly where one area decides to assume a lower internal migration figure than the housing market area figures suggest, will need to be agreed with the other relevant local planning authority under the duty to cooperate. Failure to do so will mean that there would be an increase in unmet housing need.

Where the supply of working age population that is economically active (labour force supply) is less than the projected job growth, this could result in unsustainable commuting patterns (depending on public transport accessibility or other sustainable options such as walking or cycling) and could reduce the resilience of local businesses. In such circumstances, plan makers will need to consider how the location of new housing or infrastructure development could help address these problems.

I dont think this is necessarily that clearly or simply worded.  What ‘assessment’, what ‘assumptions’?  It gives examples of how things can go wrong without a clear statement of what the baseline employment assumption is and whether that forms part of OAN is is a ‘policy on’ assumption on top of that.

The PAS guidance goes a little further with a useful case study.

From Inspector’s advice, for example in Bath and North East Somerset (BANES), it is clear that future labour market requirements cannot be used to cap demographic projections. In other words, if demographic projections do not provide enough resident workers to fill the expected workplace jobs they should be adjusted upwards until they do. But if the demographic projections provide more workers than are required to fill the expected jobs, they should not be adjusted downwards. If both a job-led projection and a trend-led demographic projection have been prepared, the higher of the two resulting housing numbers is the objectively assessed need. The rationale for this, as explained by the BANES Inspector among others, is that much of the demand for housing is not driven by job opportunities, and people who do not work also need somewhere to live.

Bath and North East Somerset Core Strategy Examination, Inspector’s preliminary conclusions on strategic matters and way forward – June 2012 , 

But a quite different conclusion was reached recently in Leicestershire.  (S62a/2014/0001) in relation to a case in Leicestershire, Inspector Jonathan King stated that a FOAN (SHMA) must be ‘policy-off’

So do we use the BANES method or the Leicstershire Method?  Sigh this could take over from Liverpool v Sedgefield in planorak tedium.

Ok lets take things from first principles.  It is quite legitimate in my view to set an OAN ‘policy off’ baseline and then add various policy assumptions.  But it is important if you do so that the OAN baseline is accurate and reflects a plan which might be found sound.  The fundamental national policy is that OAN is met in full. So a baseline must reflect economic growth that meets national policy and is not policy constrained.  Such as constraints from lack of housing.  However if an LPA wants to adopt an aggressive job creating go for growth policy on top of ‘normal’ growth that is a ‘policy on’ assumption after OAN.

There is a flaw in the BANES approach mentioned by PAS.  If one LPA is a growth node that adopts a jobs led approach to employment growth – but is constrained so it can develop all the housing this implies, and the another is a net commuting authority that accepts the housing overspill under the DTC but adopts a more housing led approach capping jobs because it is an unsustainable location for major employment growth then surely this is fine as the two balance out net.  However if you adopted the higher of the two on the BANES principle you would systematically oversupply.

That is the problem with the BANES principle.  The OAN just wont add up over a HMA or nationally to hit global OAN.

In the short run all housing targets need to be housing led as it is not easy to move, in the longer run however they need to be jobs led as people who can move to work will.  It is acceptable therefore to mesh housing led and jobs led approaches as long as you are consistent across an HMA and with net migration assumptions and don’t constrain housing and jobs growth in the ‘policy off’ baseline.

Certainly some of the Oxford SHMA assumptions based on a Cambridge Economics model look like double counting as some of that growth would have been part of the baseline. Also some of the assumptions seem odd and some of the criticisms of CPRE unjustified.  It includes a backlog figure against SEP targets.  Whenever you have new census and national household projections this resets the household formation figures and to include a backlog against a dated plan can result in double counting.   There is a long thread on the PAS forums on this including a comment by a ONS statistician in support of the double counting point.   However as well as meeting new household formation you also have to meet a backlog of housing for people in existing household who would form a household if they could afford to do so – concealed/suppressed households.  The guidance on this latter point is quite clear.


The Best Hedge Against a Currency is Another Currency – Not Gold

Gold bugs are keen on posing the likely inflationary collapse of a currency as the main reason to invest in Gold.  Only a few months ago many were still predicting the likely collapse in the Dollar, now investors in half of the emerging economies and Russia and dumping everything to buy safe dollar assets.

Of you fear a currency is overvalued you buy another currency.  Its only rational to invest in Gold (or crypto currencies) if you think all currencies are overvalued.  Only likely to be the case if most of the world currencies pursue a debt monetarisation strategy, which most central banks are banned from doing anyway.

Its a theoretical but very unlikely possibility.  It is possible that another global collapse of asset prices and unpayable debts will force creation of helicopter money to bail out banks, but this would not be new money that circulates, rather it simply readjusts the overall price level to that it was before the collapse in asset prices, spending would continue as it was before, it would not be inflationary.  The Bank bailouts after 2007 were hardly inflationary were they.

If anyone can think of a realistic scenario where all currencies would hyperinflate at once then please add it in the comments, if not then there is not a rational case for a gold or crypto currency hedge.  Buy land, buy frozen concentrated orange juice buy anything, but don’t buy gold whose real asset value will always simply track the real demand fro it in manufacturing and so will be a bad cyclical hedge against global contagion.

You cant have a Robin Hood Ban on Windfarms

From the Yorkshire Post

EXPERTS ARE investigating whether centuries-old woodland linked to the legend of Robin Hood should be afforded protection from a controversial development.

Campaigners in the South Yorkshire villages of Norton, Campsall and Sutton have launched an official bid for Barnsdale Wood and neighbouring White Ley plantation, north-west of Doncaster, to be recognised as ‘ancient’.

It comes following an application to erect two wind turbines adjacent site, documented in literature as a stomping ground of the world’s most famous outlaw. Residents nearby claim the plans for ‘community’ turbines would create a blot on the landscape and building work which requires access through part of the woods would disrupt and damage natural habitats.

Natural England has begun delving into archive materials and analysing old maps to establish whether the area has been continuously wooded since 1600, with a decision expected early in the new year.

The only part of Barnsdle Forest with trees likely to be descendants of a medieval forest is Hampole Wood.

The only arguments about whether Robin Hoods was from Yorkshire or Notts or Derbyshire is misplaced.  Royal Forests did not respect county boundaries.

In the reign of Henry II (1154-1189), Richard I (1189-1199) and John (1199-1216), all of Nottinghamshire north and west of the Trent was subject to forest law.

In fact this area extended into Derbyshire as far as the River Derwent.

In fact Shoerwood Forest is likley to have extended all the way north to Barnsdale which marked its northern edge.  The earliest 15th century chronicles of Robin Hood mention Barnsdale.  And most importantly

Manwood’s “Forest Laws” records an occasion when King Richard the Lionhearted who was hunting in Sherwood chased a hart out of Sherwood and into Barnsdale. Because the king failed to kill the hart (stag) he made a proclamation at Tickhill, in Yorkshire and at divers other places that no person should kill, hurt, or chase the said hart, but that he might safely return into the forest again. The hart was afterwards called, “a hart royally proclaimed.”

So it is likley that Barnsdale Forest and Sherwood Forest were near contiguous at that time with Tickhill roughly the border.

the whole area could be traversed in a day which is what King John did on the 9th September 1213 when he travelled from Rothwell which is seven miles north of Wakefield and ten miles north-west of Barnsdale to Nottingham probably on the King’s Great Way that connects London with York following the route of an older Celtic/Roman Road.

So the whole historic area of Sherwood and Barnsdale Forest probably extended all the way from  Nottingham to Rothwell.  So lets ban everything in this area.  There is no doubting that this might meet the definition of a landscape’heritage asset’ – but lets be reasonable this is a huge area only some part of which retain ancient woods or historic and legendary connotations – like the Robins Hood Wells for example, or else we might as well ban all development in West London because it features in the Paddington Books


Gladmans Have Lost the Winslow Battle But they Will Win the Winslow War

Why do developers keep fighting no hope actions trying to block neighbourhood plans when the legislation is very cler they can come forward in advance of local plans?  A good example is this weeks action by Gladmans in Winslow.  After all if a local plan is out of date through lack of a 5 year supply an appeal should succeed under NPPF Para 14 even if the Neighbourhood Plan was made the day before?

The reason I think is a rather bizarre recovered appeal decision also in Winslow where this was just the issue, a neighbourhood plan had just been made and the local plan withdrawn from examination from lack of a 5 year supply/  Pickles found this rather uncomfortable and made policy up as he went along.

 The Secretary of State r… considers that neighbourhood plans, once made part of the development plan, should be upheld as an effective meansto shape and direct development in the neighbourhood planning area in question. Paragraph 198 is clear that, where a planning application conflicts with a
neighbourhood plan that has been brought into force, planning permission should not normally be granted….

the Secretary of State places very substantial negative weight on the conflict between the appeal proposal and the Winslow Neighbourhood Plan even though its policies relevant to housing land supply are out of date in terms of Framework paragraph 49. He concludes that this and the other adverse impacts, together, would significantly and demonstrably outweigh the benefits when assessed against the policies in the Framework taken as a whole. He therefore concludes that there are no material circumstances that indicate the proposal should be determined other than in accordance with the development plan.

In how many other cases has Pickles given little weight to out of date local plans?  The weight given to material considerations is a matter for the decision maker but the word ‘together’ indicates that the development plan conflict was determinate, seemingly ignoring para 14 of the NPPF, and the fact tha para 198 needs to be read with Para 196 and 197.  What the Sos seems to be arguing is that the NPPF should be read as a whole, but where there is a neighbourhood plan forget all of that and just read para. 198.

This is a bad decision because it provides a perverse decision to slow down on local plans and use neighbourhood plans which don’t allocate enough land as a blocking mechanism rather than the ‘positive and proactive’ mechanism to increase land allocations they were meant to be.

As in other areas, such as Green Belt reviews and Windfarms, Pickles and Lewis seem to be undermining the NPPF and giving nods and winks to friendly local authorities on how to do so.

I am not arguing this site should be developed or allocated, but Pickles is playing silly games and deserves to lose this JR.