QuestionEconomics.com

Why I started this site–with a little personal history.

September 17, 2025, Ralph Hiesey, Boulder Creek, CA

To be updated/revised soon.

I started working on this web site sixty years ago when in 1959 I wrote a history term paper in my senior year in high school.  I wanted to know what caused the 1930’s depression.  How did the (mostly) booming economy of the 1920’s turn into an economic disaster for millions of people in the 1930’s?  I was amazed that thirty years later, in 1959, there was no agreement among experts about why it happened. That started me on a long quest for “why?”  

Economist J.M. Keynes described the situation as caused by “lack of consumer confidence.” That was a pretty good try, in retrospect not incorrect, but I’ve gone farther to give a satisfying explanation for the precise cause of “lack of confidence.”  My hypothesis is that high amounts of money held by few very wealthy people can reduce the amount of money held by many more others, which reduced aggregate economic demand.  Keynes suggested something essentially the same, by describing a “liquidity trap” held by those holding a lot of cash that was not being spent. That’s close to my description that defines “economic trade imbalance”, and describes how  that easily  drives an economy such as the one in the 1930’s into high wealth inequality that defines liquidity trap. 

After that, economist Milton Friedman claimed that he had solved the problem:  he said it was the Fed’s fault for not expanding the money supply.  But that only described how to fix the problem, not what caused it.  Therefore that “explanation” was not sufficient for me.

About ten years ago I discovered a much better explanation based on logic that has existed for hundreds of years as a cause for imbalanced international trade.  Imbalanced international trade among nations has been long known  to cause wealth differences among nations.   It is exactly the same situation that can easily exist within agents in a single, non trading country.  Within a single country it causes income inequality between importing and exporting single agents:  meaning “exporters” who produce more than they consume, and rest who are  “importers”  who consume more than they produce.  This causes the same money imbalance problem—it’s not just an analogy, it has exactly the same cause.

We cannot solve the problem,  if we don’t properly understand what causes the problem:  The main essay on this site (“Fundamental monetary constraint How imbalanced domestic trade disrupts an economy)   explains how domestic “trade imbalance” historically caused and is causing the problem of high wealth inequality, and how it results in poor distribution of economic output of goods/services. This essay predicts much empirically observed economics that is not easily otherwise explained. This is essentially equivalent to lack good distribution of goods and services.  Also explains unending need for US government deficit spending since 1950’s.  It predicts why capitalistic economies must constantly “grow”—otherwise the cannot remain at a satisfactory  employment level.  Why relentless quantitative easing since 2010  did not fix a reluctant economy—but instead pushed much more wealth inequality in the US. Supplies an obvious explanation for why taxing the is rich benefits everyone, rich and poor, in an economy. Provides an actual numerical value of “trade imbalance” that can maintain a more beneficial economy that isn’t required to grow.

A big Economic math problem: My undergraduate BS degree at Stanford was mathematics.  However, when I began to try to read some textbooks on macroeconomics, in particular Macroeconomics by Blanchard, I didn’t expect to have a big problem with the math, which didn’t even go as far as calculus.  But  I wondered from what planet did this stuff come from??  I will mention just a two examples.

There is discussion of a “consumption function.” It was supposed to show how total consumption in an economy was dependent on economic output, y.   C=$a + $b*y , where a and b are positive constants.    Think about it. Does that make sense??  If total economic output, even if total output is zero, there is there really a value $a, asserted to be a positive constant, consumption from the economy?? This odd result was “explained” (excused??)  by saying—it CAN’T  be zero, because people still need to eat! Even if output is zero!   Well, yes, of course, but in the math education I had would demonstrate that your function definition is wrong, and must be made to correspond with reality, since people do in fact actually eat.

Another example: it is asserted that “savings” = “investment.”  I know perfectly well that I can “save” my paycheck  by secretly locking it in a safe, whose combination only I know, which my action clearly could not cause any investment to happen.    Macroeconomists will explain (correctly) that I’m not using the terms “savings” and “investment” that are what economists mean.  It took me a long time to realize that. The problem here is sloppy definitions—without very careful definitions math can lead to all kinds of mistakes and confusion.  A macroeconomist will explain that my “saving” caused “investment” to happen months before I put the money in the safe—I’m told this occurred when some company created some extra unsold inventory,  before I even decided to save the money.  This kind of logic is very strange!  I would call that “magical” thinking.

Monetary velocity in greater view: Analysis of this constraint also emphasizes the importance of “monetary velocity” which is often thought to be of relatively little importance–often thought as one “residual” number that only describes an entire economy.  The monetary analysis here shows the importance of knowing that monetary velocity also is a number that separately describes different economic subgroups, (in an economy with heterogeneous agents.)  All these separate values combine together to determine the value for an entire economy.  Understanding how monetary velocity differs among different wealth or income groups is a better way to account for the different spending and savings propensity of different groups rather than the now common usage of “MPC” (marginal propensity to consume.)  Those of high wealth have strong tendency to hold money at low velocity, especially when interest rates are very low–and those of low wealth usually hold money at high velocity. This new analysis shows how useful it would be for the Fed to measure velocity for different wealth or income groups to understand their effect on national GDP. The following link explains exactly what determines monetary velocity, and describes its economic impact, especially when there are large differences in monetary velocities among different wealth groups.   Monetary velocity explained-2 pages

How math has been abused in economics has also influenced me: I have great skepticism for the way mathematics has been used in macroeconomics. That was generated by my courses in mathematics for which I received a BS degree in 1964.  Economic reality, like any reality we experience in the real world must be fundamentally based on empirical data rather than just perceived theoretical beauty–or a rather a far fetched idea of mathematical precision.  I do consider some of the math “practice” in economics to be malpractice. One example is the commonly claimed equality between “savings” and “investment” often said to be “mathematically proven.”  Anyone that understands how mathematics works knows that the only way an empirical fact can be “mathematically proven” is if that assumption has already been baked into the initial math assumptions. It is pretty easy to see that this assumption has already been made when when the mathematical assumption about “spending” has been equated with the assumption about “earning.”  The essays I have written have only a small amount of elementary math which I hope will clarify understanding rather than imply that this in itself “proves” anything, or pretends that the presence of this math necessarily makes economics “rigorous.”   The only way math can “prove” anything about the real world is to base the math on equally convincing empirical first assumptions.

This site is not really intended to be a blog that is constantly being changed, though it is occasionally revised to make it more accurate and clear as my understanding evolves.  It’s a gradually developing set of semi permanent somewhat heterodox economic essays based on careful non mathematical logic, from what we actually observe in the economy.  The math needs to come only after that, and if skillfully done can clarify the picture.  I’ve been thinking about these issues over fifty years. I believe that my description of the “fundamental monetary constraint” as part of macro economics has given important additional power to explain some important respects in which economies have failed to work well, particularly with respect to understanding why distribution of goods/services among agents within an economy often does not function well.

I very much hope to get serious criticism and feedback from this writing, either positive or negative–based on clear logic and real world evidence–not emotional ranting.  I become uneasy when I hear terms and phrases expressed frequently whose precise meaning is often vague, such as: “exogenous,” “endogenous,” “rigidities,” “frictions,” “market imperfection,” “perfect market models,” “shock,” “rational,” or “dynamic equilibrium.” These are not forbidden, but I just want to make sure these add clarity, not vague phrases trying to cover the BS. Please criticize me if you believe you don’t understand what I’m saying, or you are think my writing is unclear. I’m looking for that kind of criticism.

Clarity is my most important objective. Better clear and wrong, rather than simply muddled about not quite sure. Clear and wrong are easier to criticize and correct.

Ralph Hiesey, Boulder Creek, California