Yesterday I was unwell and made good progress on [amazon_link id=”0099551861″ target=”_blank” ]Revolutionaries: Inventing An American Nation[/amazon_link] by Jack Rakove. Naturally, I’ll be trying to finish it on Tuesday

[amazon_image id=”0099551861″ link=”true” target=”_blank” size=”medium” ]Revolutionaries: Inventing an American Nation[/amazon_image]

Meanwhile, the list of other books I want to read is growing. Here are some new additions.

There’s [amazon_link id=”1743311435″ target=”_blank” ]Double Entry: How the Merchants of Venice Created Modern Finance[/amazon_link] by Jane Gleeson-White, which featured recently on NPR’s Planet Money episode, The Accountant Who Changed The World.

[amazon_image id=”1743311435″ link=”true” target=”_blank” size=”medium” ]Double Entry[/amazon_image]

Dieter Helm’s [amazon_link id=”0300186592″ target=”_blank” ]The Carbon Crunch: How We’re Getting Climate Change Wrong and How To Fix It[/amazon_link].

[amazon_image id=”0300186592″ link=”true” target=”_blank” size=”medium” ]The Carbon Crunch: How We’re Getting Climate Change Wrong – and How to Fix it[/amazon_image]

[amazon_link id=”184954400X” target=”_blank” ]Greekonomics: The Euro Crisis and Why Politicians Don’t Get It[/amazon_link] by Vicky Pryce – one of the speakers at the Festival of Economics in Bristol on 23-24 November – a few tickets left!

[amazon_image id=”184954400X” link=”true” target=”_blank” size=”medium” ]Greekonomics: The Euro crisis and why politicians don’t get it[/amazon_image]

A footnote, though, for publishers. Please can you stop these awful patronising book subtitles? I’ve done them myself, mea culpa, but I’m fed up with them now.

A 1695 book has been strongly recommended to me, [amazon_link id=”1402168403″ target=”_blank” ]A report containing an essay for the amendment of the silver coins[/amazon_link], by William Lowndes. There are free e-versions of the text available at Open Library. Lowndes proposed a solution to the critical shortage of coins at the time, but the Government instead followed advice from John Locke (on the basis that he had saved the life of the King’s uncle by operating successfully on an intestinal infection – an interesting reason for taking economic advice). This is the crisis covered by Thomas Levenson’s excellent book [amazon_link id=”057122993X” target=”_blank” ]Newton and the Counterfeiter[/amazon_link]. Isaac Newton took charge of the Royal Mint from 1699 to his death in 1727, and finally sorted out the coinage crisis.

[amazon_image id=”1402168403″ link=”true” target=”_blank” size=”medium” ]A Report Containing an Essay for the Amendment of the Silver Coins[/amazon_image]

It looks delightful: “In the most ancient times, when money was first coined within this island, it was made of Pure Gold and Silver, like the Moneys now currant in some other Nations, particuarly in Hungary and Barbary where they have Pieces of Gold called Ducats and Sultanelles; and in the Kingdom of Industan, where they have pieces of Silver called Rupees, which I have seen.”

Yesterday I had lunch with an old friend who is a top monetary economist. We were discussing a conference on the state of macroeconomics that I attended recently. The conference seemed to me to reveal quite a deep division between those macroeconomists who thought their pre-crisis New Keynesian DSGE models were basically fine, although obviously in need of having a financial sector added to them, and other economists taking a wide range of approaches but pretty sure the pre-crisis mainstream approach is defunct. I’m in the latter category, with the caveat that it’s nearly 25 years since I’ve done any proper macroeconomics.

Alas, my dear friend is in the amended status quo camp. He said the tools a monetary economist needs can be found in the Michael Woodford tome [amazon_link id=”0691010498″ target=”_blank” ]Interest and Prices: Foundations of a Theory of Monetary Policy[/amazon_link]. His argument went like this. Any macro model makes simplifying assumptions. We macroeconomists could have assumed that prices and wages are perfectly flexible, which would make the models easier, but we didn’t. That was a correct call. We did make the simplifying assumption that the financial sector was a veil and we could ignore the incentives on bankers’ behaviour, and that was a misjudgment. But economists understand incentives, it’s straightforward to fix, and we’re putting the financial sector into the models now.

[amazon_image id=”0691010498″ link=”true” target=”_blank” size=”medium” ]Interest and Prices: Foundations of a Theory of Monetary Policy[/amazon_image]

This argument is on the face of it perfectly reasonable, but it reminds me of a conversation I had with another tleading economist in the mid-1990s, when I was working as a journalist reporting on technology and becoming enthused about the likely implications of the internet and World Wide Web for the economy. This economist argued that all the internet did was reduce transactions costs, and economists understand how to model transactions costs, so the new technologies would turn out not to be very interesting analytically. This was also true in a small way, and false in a much bigger way.

The moral is that the judgments reflected in simplifying assumptions are not a small technical matter. Transactions costs are not a side-show in economic analysis, they are the main attraction, driving the fundamental structures and institutions of the economy. So it is with the assumptions behind conventional macro models, which encapsulate a world-view about the nature of economic and political institutions  – the failure of pre-crisis DSGE models is not a question of small and easily corrected misjudgements but rather missing the main point.