RoR: Forum

Krugman is putting the blame where it doesn’t belong — on inadequate spending — when the real problem is inadequate savings. Right now, interest rates are very low, which encourages businesses to invest more in long-term capital projects. That sounds like a good thing. The only problem is that the low interest rates are due not to increased savings but to new and additional money which the Fed has created out of thin air. Had the low interest rates been due to increased savings, savers would no longer be spending that money on consumption goods, the demand for consumption goods would fall, and resources normally devoted to their production would be freed up to be used on the long-term investments which businesses have undertaken in response to the low interest rates. But since the low interest rates are due not to an increase in savings, but to an increase in bank credit created out of thin air, consumers continue to spend their money on consumption goods, which means that the resources devoted to their production are not then available to sustain the longer-term capital investments.

Moreover, the low interest rates discourage new savings, so there is even more consumption spending than there would otherwise be, and therefore even less material resources available to complete the longer-term investments that businesses have undertaken. At some point, the shortage of available resources for those investments will become apparent, and the projects will have to be aborted, with the result that the loans financing those investments will not be repaid, and workers will be laid off. The result is, of course, another recession.

Money is simply a medium of exchange. What is exchanged are real resources, and those resources are limited. Resources devoted to the production of consumption goods cannot simultaneously be devoted to the production of capital goods. Normally, this does not pose a problem if the low interest rates which encourage capital investment are due to increased savings, because the money that is saved is not spent on consumption, which means that enough resources are then available to complete these investments. But when the low interest rates are due to artificially created bank credit, they send a false signal to investors, telling them in effect that there are more resources available for these capital goods than there actually are. This is the fundamental fallacy in credit expansion — not the fact that the expansion can be excessive, but the fact that it exists at all — for even the mildest form of credit expansion can cause a boom and a subsequent bust. The only system that is capable of avoiding this problem is one in which interest rates are governed exclusively by the rate of savings.

But that is a system that only Austrian economists favor. Neither Keynesians, like Krugman, nor monetarists like Bernanke and Greenspan, recognize its virtues.

Post 1

Monday, June 28, 2010 - 11:29pm

Bill,

I agree with your conclusions... where you said, "The only system that is capable of avoiding this problem is one in which interest rates are governed exclusively by the rate of savings. But that is a system that only Austrian economists favor. Neither Keynesians, like Krugman, nor monetarists like Bernanke and Greenspan, recognize its virtues."

But I see some of the other points differently (and I often see all of the different schools failing to fully understand the force of psychology as a component of demand.)
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You wrote, "Krugman is putting the blame where it doesn’t belong — on inadequate spending — when the real problem is inadequate savings"

Krugman doesn't do economics, Nobel prize to the contrary not withstanding. He's just an apologist for central planning. But I don't think the problem is inadequate savings.
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You wrote, "Right now, interest rates are very low, which encourages businesses to invest more in long-term capital projects. That sounds like a good thing. The only problem is that the low interest rates are due not to increased savings but to new and additional money which the Fed has created out of thin air."

Low interest rates do encourage more borrowing for long-term capital projects, all things remaining equal. Low interest rates would also encourage consumer spending in two ways: big ticket consumer items become more affordable and saving is discouraged by interest rates that are lower than inflation which means more consumer spending of all kinds.

But we are not seeing spending on either long-term capital projects or consumer spending - not because the savings are low (because they were low before the credit crunch). It is all about demand for money being high. No body is willing to let go of much money now because things are too damn scary. The Fed keeps pumping money into the central bank reserve accounts at unprecedented rates, but it isn't coming out. No one wants to borrow, and no one wants to loan and the reason is the economic uncertainty.
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You wrote, "Had the low interest rates been due to increased savings, savers would no longer be spending that money on consumption goods, the demand for consumption goods would fall, and resources normally devoted to their production would be freed up to be used on the long-term investments which businesses have undertaken in response to the low interest rates."

The problem with that analysis is that decreased demand for consumption goods would mean a decrease in the demand for most business expansions - long-term or short-term. When consumer demand is on a decline, business puts expansion on hold. What would happen in this scenario, where you have lower interest rates due to increased savings, would be less savings since they aren't making as much interest, and that means more consumer spending and then you get to the business expansions.

Low interest rates lead to consumer spending. Consumer spending increases lead to business expansion. But only when consumers and business aren't being cautious. Same with investors - when the economy is shaky everyone holds money close.

Money being held dear should force interest rates to rise - but that isn't happening, and that is because the interest rates aren't being set by the market.

And that is the problem. The government is in charge of the supply on money, the supply of credit, and the price of credit and money (interest).
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Side note... Money isn't just a a medium of exchange. It is also a store of value (a poor one, if it has no intrinsic value). It has a time-value. Therefore, interest should be the sum of the following: compensation for an estimate of the risk of capital loss, plus recouping transaction costs, plus some value equaling loss of present use of the money by the loaner, plus estimated inflation loss. But in fact, these can be totally overrun, even in a free market, by simple psychology - by uncertainty.

I maintain that uncertainty AND government interference in interest rates, credit supply and money supply can totally wipe out all of the other factors that would normally be the sole determinates of the interest rate.

Post 2

Tuesday, June 29, 2010 - 12:29pm

I wrote, "Right now, interest rates are very low, which encourages businesses to invest more in long-term capital projects. That sounds like a good thing. The only problem is that the low interest rates are due not to increased savings but to new and additional money which the Fed has created out of thin air."

Steve replied,

Low interest rates do encourage more borrowing for long-term capital projects, all [other] things remaining equal. Low interest rates would also encourage consumer spending in two ways: big ticket consumer items become more affordable and saving is discouraged by interest rates that are lower than inflation which means more consumer spending of all kinds.

You are certainly correct that low interest rates encourage consumer spending (investment) in "big-ticket" durable consumer goods as well as investment in capital goods. I made precisely that point later in my post when I wrote, "the low interest rates discourage new savings, so there is even more consumption spending than there would otherwise be, and therefore even less material resources available to complete the longer-term investments that businesses have undertaken." However, saving isn't just discouraged by interest rates that are lower than inflation; it's discouraged by interest rates that are lower than they would otherwise be in the absence of credit expansion. They might be higher than inflation and still not high enough to reflect people's actual willingness to save (i.e., their time preference).

But we are not seeing spending on either long-term capital projects or consumer spending - not because the savings are low (because they were low before the credit crunch). It is all about demand for money being high.

First of all, spending on long-term capital projects doesn't depend on a high rate of savings, as you seem to be suggesting; it can and does occur with a very low-rate of savings if the latter is accompanied by a low interest that is created by the Fed's injection of new and additional money. That was the very point I was making, along with the further point that investments on long-term capital projects or even on durable consumer goods like housing cannot be sustained in the absence of sufficient savings. It is this kind of unsustainable malinvestment that is responsible for our current recession. Yes, the demand to hold money is high, as it should be, but it may not be high enough. If interest rates are lower than they otherwise would be in the absence of the Fed's credit expansion, then even now Bernanke is sowing the seeds of another boom and subsequent bust.

No body is willing to let go of much money now because things are too damn scary. The Fed keeps pumping money into the central bank reserve accounts at unprecedented rates, but it isn't coming out. No one wants to borrow, and no one wants to loan and the reason is the economic uncertainty.

But at some point, all of those bank reserves will get loaned out, and you'll see the consequences of another bust that is even worse than the one we have now.

I wrote, "Had the low interest rates been due to increased savings, savers would no longer be spending that money on consumption goods, the demand for consumption goods would fall, and resources normally devoted to their production would be freed up to be used on the long-term investments which businesses have undertaken in response to the low interest rates."

The problem with that analysis is that decreased demand for consumption goods would mean a decrease in the demand for most business expansions - long-term or short-term. When consumer demand is on a decline, business puts expansion on hold.

When consumers save, it isn't that their demand for consumer goods declines; it's just that they're willing to defer present consumption for future consumption. Simultaneously, the increased saving lowers interest rates, which encourage businesses to invest in future consumption -- i.e., in longer term projects, whose completion is of greater duration and therefore more future oriented. The lower interest rate due to the increased savings thereby coordinates the preferences of both consumers and investors.

What would happen in this scenario, where you have lower interest rates due to increased savings, would be less savings since they aren't making as much interest, and that means more consumer spending and then you get to the business expansions.

You're confusing "supply" with "quantity supplied," which is a common error frequently made by people unfamiliar with microeconomic theory. Economics makes a distinction between these two concepts. The supply of loanable funds is determined by the time preference of savers -- by their willingness to postpone consumption. When there is an increase in the supply of savings due to an increase in the willingness of savers to postpone consumption, that increase is represented by a shift in the supply curve out and to the right, which increases the quantity demanded by moving the supply curve along the demand curve, which then lowers the price of loanable funds (the interest rate). But the lower interest rate does not then mean that the quantity supplied decreases, which could only happen if there were a decrease by investors in the demand for those funds, which would be represented by a leftward shift in the demand curve along the supply curve.

Low interest rates lead to consumer spending. Consumer spending increases lead to business expansion. But only when consumers and business aren't being cautious. Same with investors - when the economy is shaky everyone holds money close.

That depends on the cause of the low interest rates. If the cause is the Fed's expansion of the money supply rather than increased savings, then yes, there will be increased consumer spending (i.e., less savings) as a result. But if the low interest rates are due to increased savings prompted by low consumer time preference (an increased willingness of consumers to postpone consumption), the low interest rate would not lead to more consumer spending, which confuses cause with effect. The low interest rates are the result of the willingness to save, which in turn is the result of a willingness to postpone consumption.

Money being held dear should force interest rates to rise - but that isn't happening, and that is because the interest rates aren't being set by the market.

Well, yes, but if the money that is being held dear is saved in a lending institution, then it will increase the supply of credit and contribute to lower interests rates.

Money isn't just a a medium of exchange. It is also a store of value (a poor one, if it has no intrinsic value). It has a time-value. Therefore, interest should be the sum of the following: compensation for an estimate of the risk of capital loss, plus recouping transaction costs, plus some value equaling loss of present use of the money by the loaner, plus estimated inflation loss. But in fact, these can be totally overrun, even in a free market, by simple psychology - by uncertainty.

I wouldn't say they're overrun; they're still influential factors.

- Bill

(Edited by William Dwyer on 6/29, 6:04pm)

Post 3

Tuesday, June 29, 2010 - 1:32pm

Bill,

You wrote, "The supply of loanable funds is determined by the time preference of savers." I think it is much more complicated than that. Money available to loan is also a product of the Fed's reserve requirements, the Fed's interbank and discount rates, and the demand for money. That last covers more than just time preference - it also speaks to savers and lenders perceived risks and emotional state.

Loanable funds are loanable because savers AND banks are willing to loan them out for a given period. Many of the crunches we've experienced contain a 'borrowed short and loaned long' component that tripped lenders when demand for money soared. It also depends upon the lending institutions' fears of defaults - their willingness to loan out what they have. Right now we have large reserves in the banks. And it isn't because our saver's have suddenly changed their time preferences. Loans don't go out the door unless the following components are all in place: money available to loan (savers and Fed money), lending institutions willingness to assume the loan risk, and the demand on the part of a borrower who meets the lender's risk requirements.
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There were really only two points I was trying to make.

First, is that the Fed sets the interest rates - not the market place - and that is a major problem. So when you say that the interest rate is caused by increased savings that would only be true if the Fed weren't making any changes.

Second, is that economists of all stripes often forget that people have emotions and look at the future and drive demand up or down - and do so in a way that upsets any previous relations between price and supply. At times, demand has an emotional component (booms and busts and times of political uncertainty or fundamental change). And we are in a period of high demand for money due to the recession and because the government is behaving in ways to generate uncertainty.

Post 4

Tuesday, June 29, 2010 - 6:41pm

Steve, I don't think you're being very clear when you talk about the effect of "psychology". You suggested that every schools of thought fails to fully understand it, but I haven't seen anything you've written about it that's different from mainstream thought. You've focused on the effects of uncertainty on demand, making people want to hold onto money. And you've talked about "emotional state". Both of those are very widely promoted. In fact, they're one of the key justifications used for government solutions. If people are too scared, they'll end up making the situation worse. Government has to spend, or "stimulate", the economy until these passing emotional states are corrected and the uncertainty diminishes.

Personally, I think that psychology has far too significant a place in modern economic theory. References to emotional state are a simple (and simplistic) explanation for widespread behaviors. And there is an unmentioned belief that these emotions are irrational, which is why government is seen as a way of correcting the problems. The same theory is used to describe why the boom happened in the first place. First the irrational peasants jumped on the bandwagon and made a real-estate (or dot com) boom, and then they had a panic attack and the bust happened. No need to understand supply and demand here!

Perhaps we need a form of razor, like Occam's Razor. The one I'd like to see would say something like "Never explain an economic phenomena as a product of emotion when it is just as well explained as a product of reason".

In this case, we don't need to refer to people's "emotional state", as if it was unconnected to any rational evaluation. There are solid reasons for the actions being described.

Take the case of people holding onto money. Instead of blasting this as some kind of irrational emotional state, shouldn't we be able to see it as a logical course of action. Imagine a young man who lives near his wealthy family, and who knows they'd help him out if anything bad happened. Compare that to a young man, off on his own, without any safety net. He has no parents or anyone else to turn to. Now which of the two is more likely to save a substantial nest egg, and who is more likely to save very little? In terms of incentives, the one with the safety net knows he can spend more casually without worry. The one without a safety net knows he has to rely on himself.

The same incentives occur when a person has many job opportunities or if he doesn't. With opportunities, he is able to save less, take larger risks, etc. Why? Because while he may not have the cash in front of him, he can treat these opportunities (or parent's willing to help him out) as a kind of reserve. He doesn't need to save as much because he rationally believes that he has a larger pool of resources than just resides in his bank account. The man with less opportunities doesn't have that implicit reserve. He has to make his real reserves larger than the man with opportunities does to cover the same possible events. If he loses his job, he needs to have enough money to hold him over until he can get another, which might be awhile.

Notice that there is no need to refer to the man with few opportunities as being driven by his emotional state. He doesn't save because he's panicking or because he's paranoid or because he's feeling uncertain about his prospect. He saves because he rationally has determined that he can't protect against future needs without the savings.

When an economic bust occurs, the opportunities diminish significantly. Risk of losing your job may also increase. Because of this, your implicit reserves drops significantly and you have to start saving if you want the same kind of security. Also note that the bust comes after a boom. During the boom, the implicit reserves increases beyond what they normally might be. In the tech-boom, candidates seeking a position at the company I worked for were outright rude because they expected they could get dozens or hundreds of offers. In the real-estate boom, home owners thought their homes were worth a fortune, and that the prices would keep going up. They not only didn't need to save, but they could take out additional debt because the increasing prices meant that they were making a fortune on their "investments".

Given this, we should reasonably expect people to suddenly notice that their "savings" was an illusion, that any debt was real, that opportunities have diminished, and that if they want to be secure in the future, they better start saving themselves! Far from being some irrational emotional state, this is perfectly logical expectations and behaviors.

So why do we need to talk about psychology here? Why do we need to refer to emotional states? How is economic theory enhanced by assuming that everyone is acting on emotions and not thinking things through? In practice, it is the government that seems to benefit at least in the short term. By blaming everything on the citizens, it gives them an excuse to take action and "do something" to save people from themselves.

This is just one example of where talk about emotions only distracts. If you look at business opportunities, there's plenty of rational justifications there as well. It is logical to notice that many businesses are running at a loss, hoping that economy will somehow recover (meaning go back to the height of the boom and continue that trend). It is reasonable to note that interest rates are low now, but won't always be, so taking a loan is risky. It's reasonable to notice that the government is fighting tooth and nail to prevent any actual corrections to the economy, and so we still don't know the preferences of the market participants. It's reasonable to fear significant government interference, especially in propping up failed companies. And therefore it's reasonable to not even attempt to outcompete another company because they will be rewarded and you'll have incurred any costs in your attempt to gain market share.

Once again, there's no need to blame this on some kind of widespread emotional state or psychology. So I think we should stick with the razor that I mentioned above.

"Never explain an economic phenomena as a product of emotion when it is just as well explained as a product of reason".

Post 5

Tuesday, June 29, 2010 - 7:32pm

Steve,

I wrote, "The supply of loanable funds is determined by the time preference of savers." You replied,

I think it is much more complicated than that. Money available to loan is also a product of the Fed's reserve requirements, the Fed's interbank and discount rates, and the demand for money. That last covers more than just time preference - it also speaks to savers and lenders perceived risks and emotional state.

I agree. I was addressing only the supply of saved loanable funds. My point was that the extent to which people choose to save their money is determined by their time preference -- by their willingness to postpone consumption.

Loanable funds are loanable because savers AND banks are willing to loan them out for a given period. Many of the crunches we've experienced contain a 'borrowed short and loaned long' component that tripped lenders when demand for money soared. It also depends upon the lending institutions' fears of defaults - their willingness to loan out what they have. Right now we have large reserves in the banks. And it isn't because our saver's have suddenly changed their time preferences. Loans don't go out the door unless the following components are all in place: money available to loan (savers and Fed money), lending institutions willingness to assume the loan risk, and the demand on the part of a borrower who meets the lender's risk requirements.

I agree. I was assuming the ceteris paribus qualification -- all other things being equal.

There were really only two points I was trying to make.

First, is that the Fed sets the interest rates - not the market place - and that is a major problem.

In a sense, you are correct, but the marketplace -- the supply and demand for loanable funds -- still determines the federal funds rate. It's just that the Fed determines the quantity of funds available for interbank lending through the buying and selling of Treasury bonds on the open market. It does, I believe, set the discount rate directly, because that is the rate at which banks borrow directly from the Fed itself.

So when you say that the interest rate is caused by increased savings that would only be true if the Fed weren't making any changes.

I already acknowledged that the interest rate is determined by the Fed's injection of newly created money. When I said that the interest rate is determined (at least in part) by the supply of savings, I was referring to a context in which the supply of loanable funds was due entirely to people's savings. Of course, there is also a sense, even under our current system, in which the interest rate is partly determined by the supply of savings. It's just that the Fed adds or withdraws newly created money through the purchase and sale of Treasury bonds in order to bring the interest rate to the level it desires. So even under our current system, the supply of loanable funds is due both to savings and to newly created money by the central bank, even though the central bank has the power to bring the interest rate to whatever level it desires.

Second, is that economists of all stripes often forget that people have emotions and look at the future and drive demand up or down - and do so in a way that upsets any previous relations between price and supply.

On the contrary, economists are well aware of the effect that people's emotions have on their demand curves, since they identify people's tastes and preference as among the many factors affecting their demand for goods and services. Moreover, it makes little sense to characterize people's preferences, however emotional, as "driving demand up or down in ways that upset previous relations between price and supply." since demand is itself determined by people's preferences. It is also determined by a change in their income, in the price or availability of a substitute good, in the price of a complementary good, in expected future prices and in sales taxes. All of these factors affect people's demand for goods and services in perfectly rational and predictable ways. There is nothing arbitrary or capricious about the demand for goods and services or for holding money in preference to spending it.

At times, demand has an emotional component (booms and busts and times of political uncertainty or fundamental change).

Demand always has an emotional component. :-) But let me add in light of Joe's comments, that the boom and bust are not the result of "animal spirits" -- Keynes explanation -- since JM didn't think that interest rates affected the demand for loanable funds, when they obviously do. Banks are not going to lend out money in times of economic uncertainty, but that's hardly an example of "animal spirits" or irrational behavior. On the contrary, it is eminently rational, just as it is eminently rational for people to cut back on their spending instead of buying goods and services when they can least afford it.

And we are in a period of high demand for money due to the recession and because the government is behaving in ways to generate uncertainty.

I couldn't agree more!

(Edited by William Dwyer on 6/29, 9:22pm)

Post 6

Wednesday, June 30, 2010 - 12:08pm

Joe,

I'll try to be more clear on this. I'm not that well read in economics, but I have the impression that economists acknowledge emotions, and emotional reactions, but then they often slide back into attempts to make predictions or to quantify in ways that don't account for emotions when they should. I'll try to hunt down some examples on that.

Advocates of government intervention will use any excuse to justify their interventions. But, 1) Having emotions doesn't mean that we cease to have volition, 2) There is still no moral or constitutional justification for government intervention, 3) Even at our emotional worst, government intervention would generate far worse results, 5) Emotions aren't all bad - fear can cause people to over-react, but it can also energize needed actions and help to focus one on real dangers.

Strong emotions can change economic indicators without representing irrationality or diminished reason.
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You wrote, "I think that psychology has far too significant a place in modern economic theory. References to emotional state are a simple (and simplistic) explanation for widespread behaviors. And there is an unmentioned belief that these emotions are irrational, which is why government is seen as a way of correcting the problems. The same theory is used to describe why the boom happened in the first place. First the irrational peasants jumped on the bandwagon and made a real-estate (or dot com) boom, and then they had a panic attack and the bust happened. No need to understand supply and demand here!"

I'm not familiar enough with modern economic theory to speak to that. I'd say that emotions are neither rational nor irrational. They are inner states that we experience and we act on them or we don't. I agree with a small part of the explanation of emotions and the boom and emotions and the bust. But my explanation would be that similar mechanisms are at work with a con man attempting to carry out a swindle, and the government attempting to pursue putting poor minorities into houses. Both rely on normal, positive emotional urge to get ahead and to acquire a desireable end. Then both go further and encourage the mark to not look closely at what reason would show to be a flaw in the scheme. As to the panic causing the bust... No, it is the other way around. Like any pyramid scheme, or check-kiting scheme it has to come to an end, THEN the realization of loss creates the panic.

I agree with your Occam's Razor. "Never explain an economic phenomena as a product of emotion when it is just as well explained as a product of reason". But, I'd say that there is a place for emotion to explain shifts in demand that are out of ordinary - that the intensity of the emotion causes changes in demand that exceed any changes in supply or price. Here are some of the factors: How many people are experiencing an emotional shift at once? In most economic situations for each person that is happy about the days transactions, another is unhappy - there is an averaging going on in human activities because of different circustances and different beliefs. There is also an averaging of the intensity of emotions. Some people are in a panic because of individual circumstances, like a loss of their job. Places where emotion would be a factor would involve large portions of the population effected at once, the intensity of the emotion being high, and under it all is that reason is telling them of a sudden change. What they know (or think they know) is suddenly changed and this leads to a sudden change in emotion.
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You wrote, "Take the case of people holding onto money. Instead of blasting this as some kind of irrational emotional state, shouldn't we be able to see it as a logical course of action"

I am seeing emotions as a product of reasoning regardless of whether the reasoning was done correctly or not, and regardless of whether the information the reasoning was based upon was correct or not. So I don't see this as an irrational state - just a more highly motivated state. It will have a higher percentage of people acting in opposition to reason and it will have a higher percentage of people completing a sequence of actions... that's the nature of highly motivated action when looking at a large number of people.

I am not blasting the holding of money as an irrational emotional state. I'm holding my money more dearly now and I will freely acknowledge that I feel a lot of fear for the economic future and I will claim that this heightened emotional state is perfectly logical.

Mostly, I'm saying that there is a multiplier effect when large numbers of people feel the same way at the same time. And that isn't irrational. It is a good reason to get government out of the economy since they encourage changes that effect the entire economy at once, where as a smoothing, an averaging, is the usual effect with private actions.
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I think that some economists act as if all human action was rational - not that it was a product of a person capable of reasoning, but that all outcomes are logical and reasonable for all people at all times. But people do make irrational choices, they do act on emotion, and there are times when emotions run high within an economy for most of its participants. That is where the old formulas will over or understate the results. That is where "intensity of emotion" needs to be tacked on an additional factor to the existing forumlas.
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Assume that we didn't have any government intervention via the Fed. And that the only boom and bust phenomena were smaller, more localized and due to popular miscalculations. More like the tulip mania of the 1600's. If we attempt to model interest rates, average savings, expected demand, etc. before the boom, as well as during and then again, long after the mania we would find that the same formula that did a reasonable job of predicting before the boom started, or after the bust had past, would not give accurate results during the boom or the bust. The difference is the emotional content - the increased motivation.
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If you talk about single individuals, you really aren't talking economics. You are talking about values, reason, psychology. The person acts to gain or keep what they value, and their reasoning in forming their values and shaping their actions is reasonable or not in a given instance, and their psychology will likely tell one about where they stray from a reasonable approach in things.

When you talk about economics, psychology drops out - it is assumed to be averaged out. Calculations reveal the proportions of demand for a given value so that individual reasoning isn't an issue. But there are occassions when the averaging that is an assumption isn't there. Because the normal averaging effect doesn't take place, emotions are a factor. Booms and busts and other mania type of phenomena need that extra factor to be understood.

Another area where there is a similar need to put in emotional intensity: Polling, to be accurate, needs to have a factor that represents emotional intensity related to a belief. Reagan always polled low - the pollsters never added a factor that represented the intensity of his support. Now adays that's less likely to happen since the big polling outfits often ask a followup question related to "...strongly agree or disagree."

Post 7

Wednesday, June 30, 2010 - 12:56pm

Bill,

We seem to be in agreement on all things but the following:

The degree to which the interest rate is governed by the Fed setting it directly versus the combination of savings and printed money. But, I'm really not that well versed in this area so I'll just say that maybe you are right but that I'm going to reserve judgment till I look into it further.

And on the issue of emotions...

You wrote, "...economists are well aware of the effect that people's emotions have on their demand curves, since they identify people's tastes and preference as among the many factors affecting their demand for goods and services. Moreover, it makes little sense to characterize people's preferences, however emotional, as "driving demand up or down in ways that upset previous relations between price and supply." since demand is itself determined by people's preferences."

True, but you will find the same economists that agree with what you have written, talking about supply and/or price changes causing a change in demand. And they are correct, all things remaining the same. Over a large market place the ratios will hold true. But when the only precipitating change is an economy-wide change in perception that makes for a large shift in emotions, then you have changes in demand that are unrelated to changes in supply or price. A formula that would give x one day, will on the very next day, not give x if a large portion of the population shares a change of emotion.

You wrote, "[Demand] is also determined by a change in their income, in the price or availability of a substitute good, in the price of a complementary good, in expected future prices and in sales taxes. All of these factors affect people's demand for goods and services in perfectly rational and predictable ways. There is nothing arbitrary or capricious about the demand for goods and services or for holding money in preference to spending it."

The only error that I'm accusing any economists of making is that of not recognizing that emotions are normally averaged out therefore demand is presumed to contain emotion, tastes, preferences, knowledge, etc. And that because these things are all averaged out over an economy they don't need to be accounted for separately. But there are economy-wide shifts in perception that bring about very heightened emotions - and a multiplier effects takes place. And these override the prior effects of supply and price. If yesterday it took an x change in supply to bring about a y change in demand, that may not be the case tomorrow should emotion becomes a singular, economy-wide effect instead of something that is averaged out.

Here is the heart of my argument applied to interest rates: Yes, interest rates effect the demand for loanable funds, and it is measurable to a degree that it is reasonably predictable - in normal times. But the degree of the change in demand for a given change in interest rates can be radically changed by the intensity of the emotions. Intense, economy -wide emotions, which only rarely need to be accounted for - as in booms, busts, manias, and sudden release of information that can threaten on a large scale, change that ratio between the delta for interest and a resulting delta for demand. Proof of this is in how little new money is pulled out of the banks relative to the drops we've seen in the interest rates during this period of uncertainty. My point is that I've seen economists argue in some places that emotion is a component in demand, but then in other places argue as if changes in demand are solely accounted for by changes in supply and/or price.

And, contrary to what JM, or anyone else has written, strong emotions don't need to mean irrational behavior. They will motivate strongly so that demand increases without requiring any decrease in supply or price. All economic change requires completion of acts - transactions - and the portion of a populations intended acts or acts that they might lean towards that actually reach completion will depend upon the intensity of the emotions. This is of no consequence during normal times since strong and weak emotional responses average out - but not during boom, busts, manias, etc.

Post 8

Wednesday, June 30, 2010 - 3:11pm

Steve, thanks for trying to clarify. Unfortunately, I still fundamentally disagree with your approach. I think it is an attempt to substitute psychologizing (not even psychology!) for economics, and provides no real value and quite a bit of harm! Let me highlight some of the problems.

First, a focus on emotions would have to accomplish one of two things for it to be relevant at all. It could explain an event that couldn't be explained due to changes in incentives or economic context. Or it could be used to measure the intensity of such an event. Let's look at both.

Any attempt to introduce emotion as the driving force for an economic behavior is a rejection of economics. Economics provides us a method of analyzing how certain "causes" incentivize changes. These "causes" are things like prices, opportunities for profit, or expectations of the future context. The causes are just aspects of the economic context that create incentives. We can then analyze the incentives and explain how changes in them incentivize changes to the economic behavior of individuals. We can see how an artificial increase in cost, say by a minimum wage law, incentivizes some companies to reduce their work force in order to maximize their profit or avoid suffering losses.

When emotions are introduced in explaining economic behavior, they are introduced as an alternative to economic incentives. They attempt to explain the changes to economic behavior by appeals to some outside, mysterious force unconnected to economic incentives. And that means rejecting economic explanations. It's the equivalent of explaining natural phenomena by saying God did it. It looks like an explanation, but actually acts as a substitute. And whenever you use this kind of "explanation", you are implicitly claiming that that particular economic behavior cannot be explained through economics, just as the natural phenomena explained by a god is thought to be unexplainable through science.

In practice, emotions are used to describe the boom and bust cycle. The boom is explained by claiming that people get caught up in the emotions and propel the boom further and further. That assumes that there are no economic incentives in play, which there are plenty. The bust is explained as an inexplicable panic or change of emotion, also unconnected to economic incentives. Both are viewed as mysterious external forces that disrupt normal economic forces, and both implicitly assume that there can be no economic explanation. The introduction of emotions is used to substitute a sort of mass psychologizing for grounded economic theory.

And of course, any introduction of emotions as the "cause" of economic behavior smuggles in the presumption of irrationality. If the economic behavior cannot be explained by reference to economic incentives, it means that people are not acting appropriately based on the incentives. They are acting irrationally. And that's a strong argument for government controls and regulations, to save people from themselves.

So introducing emotions not only rejects economic reasoning, but it hinders it by implicitly assuming there is no economic justification, and you don't need to look any further. It also is universally used as an attack on free markets (they are inherently irrational and self-destructive) and offers support to government interference (we have to be saved from ourselves). No added value, and a lot of harm along the way.

I should probably note that economics does not attempt to explain changes in individual preferences (i.e., demand), by economic incentives or anything else. Demand is an input. You could try introducing emotions as a cause for changes of individual preferences, but it adds no value in economic reasoning. But this is not what is being argued when it comes to things like the boom and bust cycle. The arguments isn't that individuals across the board suddenly change their preferences.

So let's go on to the second place emotions are brought in. The intensity of the reactions. The big problem here is that economics does not and cannot provide a formula for what the optimal reaction is to a change in economic incentives. There's nothing that tells us that a minimum wage increase must result in X number of people being fired. In fact, it could be that not a single person loses their job even with all else being equal. Economics is not quantitative. It is qualitative. It doesn't tell us what the results will be, but identifies the incentives or changes in incentives. So how does introducing emotions add value here? It doesn't. Saying that people are "overreacting" is not meaningful in this context. It is not scientific. It is simply introducing the presumption of irrationality again with the presumption that economic behavior is somehow disconnected from economic incentives.

You said:

Strong emotions can change economic indicators without representing irrationality or diminished reason.

I don't know why you think this is true. If rationality and economic incentives suggest you act in a particular way, and you act in a different way due to "strong emotions", aren't you acting irrationally or with diminished reason? If your strong emotions are in sync with your reasoned opinion of the best course of action, hasn't the introduction of "strong emotions" simply obfuscated the issue?

The one thing that you said that makes the most sense is the idea that people rationalize their urges and sometimes ignore consequences that should be expected. Whether it is the con man, or the government, or just the individuals themselves who generate these rationalizations, it's obviously true. People are clearly willing to believe that housing prices will never drop, or we're in the middle of a "new economy" that will never have a downside, or that Pets.com is a good long term incentive. And it would be foolish to believe that in economic matters, emotions don't have any impact on people's choice. It's certainly true that people will often ignore or downplay risks when they are emotionally committed to something. But most of the time when individuals decide to rationalize risks away, they are making an individual value preference.

If we pretend we're in "normal" economic times, and I want to buy a house, I may decide it's important even if I could barely afford it and there's a risk that I might lost my job. I'm choosing to value the house more and value the security and lack of risk less. That's not a topic of economics, though. During the housing boom, though, it's different. As the incentives are stacked up for buying a house, I would be more likely to buy one. While there are risks as well (including a housing bust), I have ample evidence that the risks are minor. Prices keep going up! The amount of land on earth is limited while population keeps increasing! The government has already proven they are willing to do anything to keep the prices high! And if I don't do it now, I'll lose big time! These are all strong incentives. Where does the introduction of emotions help explain the situation?

Here are some of the factors: How many people are experiencing an emotional shift at once?

I don't see this as important. Take housing. A strong incentive during the boom is that everyone else is buying houses, so the prices are going up and you expect it to continue. When the bust happens, it isn't due to a sudden inexplicable emotions change in state. It happens for a variety of reasons, including prices not going up as much as they were (a problem with any boom, as inflation can't increase at the same rate for long without hyperinflation), and the drop in expectations of how valuable the real estate would be. Those trigger less buying, which lowers price even more, causing further reactions. When people start realizing the trend, they start recognizing the risks they had assumed were minimal before are becoming much more likely, and they add to the trend. Add in widespread unemployment and the destruction of major financial institutions, stimulus spending, and a government bent on socialism, and you have a recipe for substantial changes in expectations.

It's not the sudden emotional shift of lots of people. It's the change in rational evaluation by those people. It's not the fact that everyone is excited about the housing market that makes people hop into the market, it's the fact that the incentives become so strong.

In most economic situations for each person that is happy about the days transactions, another is unhappy - there is an averaging going on in human activities because of different circustances and different beliefs.

This is a bizarre statement. Economic transactions are when two parties think they can trade for mutual benefit. If I buy a gallon of milk at the store, both parties win. Both sides are happy. There is no "averaging out" to zero. Even the stock market, which has the appearance of zero sum, requires that every transaction is mutual. If the price changes, later, it may seem that one side won and the other lost, but it was entirely mutual at the time. Those who buy wanted to own the stock, and those who sold wanted to get rid of it. Both would have preferred a better deal (who wouldn't!), but they both got what they wanted. If I sell some of my stock today because I want cash, and someone else buys it because they preffered stock over cash, we both win. We're both happy.

There is also an averaging of the intensity of emotions. Some people are in a panic because of individual circumstances, like a loss of their job.

No, there isn't. In normal situation if I lose my job and panic, that does not mean someone else out there won big and is ecstatic. There's no reason why any of this would "average out" whether in normal or abnormal economic situations. The economy is not zero sum, so there is no winner for every loser.

Places where emotion would be a factor would involve large portions of the population effected at once, the intensity of the emotion being high, and under it all is that reason is telling them of a sudden change. What they know (or think they know) is suddenly changed and this leads to a sudden change in emotion.

Agreed, but once again the emotion provides no value to the theory except to imply that it is irrational. Imagine if every time you did something, I said "Oh...that's just Steve acting out on his emotions!". Of course there's an element of truth there! Your actions probably are aligned with your emotions. But it only serves to question your rationality. If instead I said "Oh, Steve just rationally concluded that was the best course of action and acted on it", wouldn't that be better?

I am seeing emotions as a product of reasoning regardless of whether the reasoning was done correctly or not, and regardless of whether the information the reasoning was based upon was correct or not. So I don't see this as an irrational state - just a more highly motivated state. It will have a higher percentage of people acting in opposition to reason and it will have a higher percentage of people completing a sequence of actions... that's the nature of highly motivated action when looking at a large number of people.

I don't understand why you don't view this as irrational if it makes people act "in opposition to reason". Why do you think there's a distinction here? My claim is that by introducing emotions into the argument, you're creating a presumption of irrationality. You keep arguing that you're not, but then go on to point out that the resultant actions are in opposition to reason! If you're trying to make a subtle point, you're not doing a good job.

Mostly, I'm saying that there is a multiplier effect when large numbers of people feel the same way at the same time.

You haven't shown any actual multiplier or hinted at one that I can tell. So far it sounded like you were saying that if lots of people are emotional, then it will have a large effect. But that's true if lots of people rationally conclude they should behave in a particular way. Anything multiplied by a lot of people is big because a lot of people are acting that way. But you seem to be suggesting that there is a further multiplier somehow. Whereas I would say that when people recognize the new economic reality (that people are not continuing to buy houses at ever increasing prices), they rationally adjust their behavior accordingly. There is no need to have a theory of run-away emotions that distort the market.

When you talk about economics, psychology drops out - it is assumed to be averaged out.

I don't think that's right at all. I think you have some strange understanding of economics where it attempts to predict quantitatively how people will act. It's like the Isaac Asimov Foundation trilogy, where individual preferences "averaged out" allowing predictions. But that's all nonsense and not how real economics works.

Booms and busts and other mania type of phenomena need that extra factor to be understood.

I think you need to study Austrian Economics more, because booms and busts are not "mania" types of phenomena. They are the result of economic incentives created ultimately by an artificial interest rate.

Ultimately, the reference to emotions is a distraction and impediment to economic reasoning. It's easy, as highly complex economic activity can be "explained" by reference to "animal spirits", manias, and emotional states. But it presumes irrationality on the part of the market participants, it suggests the free market is inherently flawed, and it obscures the role of the government interventions that caused all of it. It also adds nothing useful to the explanation.

Post 9

Wednesday, June 30, 2010 - 6:47pm

Steve,

I wrote, "...economists are well aware of the effect that people's emotions have on their demand curves, since they identify people's tastes and preference as among the many factors affecting their demand for goods and services. Moreover, it makes little sense to characterize people's preferences, however emotional, as "driving demand up or down in ways that upset previous relations between price and supply." since demand is itself determined by people's preferences." You replied,

True, but you will find the same economists that agree with what you have written, talking about supply and/or price changes causing a change in demand.

Not true; you've obviously misunderstood what they're saying. Economists of all stripes recognize the distinction between supply and quantity supplied and between demand and quantity demanded. I covered this point in an earlier post (#2). Supply and/or price changes can cause a change in the quantity demanded, but not in the demand itself. A change in supply (versus a change in the quantity supplied) moves the supply curve along the demand curve, causing a change in the quantity demanded, not a change in demand. A change in demand would cause a shift in the demand curve, and can only come from a change in people's tastes or preferences, in their income, in the price or availability of a substitute good, in the price of a complementary good, in expected future prices or in sales taxes. Demand, which is the willingness to buy more or less of a particular good without any change in price, cannot be caused by a supply or price change. Only the quantity demanded can.

I wrote, "[Demand] is also determined by a change in their income, in the price or availability of a substitute good, in the price of a complementary good, in expected future prices and in sales taxes. All of these factors affect people's demand for goods and services in perfectly rational and predictable ways. There is nothing arbitrary or capricious about the demand for goods and services or for holding money in preference to spending it."

The only error that I'm accusing any economists of making is that of not recognizing that emotions are normally averaged out therefore demand is presumed to contain emotion, tastes, preferences, knowledge, etc. And that because these things are all averaged out over an economy they don't need to be accounted for separately.

I don't follow you. They certainly do need to be accounted for separately, because each of these factors has a separate influence on demand.

But there are economy-wide shifts in perception that bring about very heightened emotions - and a multiplier effects takes place. And these override the prior effects of supply and price.

Are you talking about speculative or momentum buying in which people buy on the assumption that the price is going up? If so, that's certainly true, and that's the kind of thing that can feed a bubble, but this kind of bubble psychology would not take you very far without an increase in the money supply -- without credit expansion. And in any case, it is no longer very powerful in today's economy. Besides, it is a mistake to say that this kind of buying can override the effects of supply and price. Supply is always a limiting factor, and the increase in demand is one of the very factors that determine the increase in price.

If yesterday it took an x change in supply to bring about a y change in demand, that may not be the case tomorrow should emotion becomes a singular, economy-wide effect instead of something that is averaged out

Again, strictly speaking, a change in supply does not cause a change in demand; it causes a change in the quantity demanded. You're still not grasping that distinction. The speculative momentum buying to which you seem to be referring is itself caused by a change in demand -- by a change in people's expectations of higher prices.

Here is the heart of my argument applied to interest rates: Yes, interest rates effect the demand for loanable funds . . .

You mean the quantity demanded.

. . . and it is measurable to a degree that it is reasonably predictable - in normal times. But the degree of the change in [quantity] demand[ed] for a given change in interest rates can be radically changed by the intensity of the emotions. Intense, economy -wide emotions, which only rarely need to be accounted for - as in booms, busts, manias, and sudden release of information that can threaten on a large scale, change that ratio between the delta for interest and a resulting delta for [the quantity] demand[ed].

The emotion that you're referring to would constitute a change in demand, which would move the demand curve along the supply curve; if the change were to constitute an increase in demand, it would cause the interest rate to rise, which in turn would increase the quantity of loanable funds being supplied. If the change were to constitute a decrease in demand, it would cause the interest rate to fall, which in turn would reduce the quantity of loanable funds being supplied. Is this what you are saying? If so, it is certainly true, but there is nothing irrational about it, and it does not contravene the laws of supply and demand; on the contrary, it is simply an expression of those laws.

Proof of this is in how little new money is pulled out of the banks relative to the drops we've seen in the interest rates during this period of uncertainty.

The problem we have today with the banks is not a lack of demand; it is a supply side issue. Small firms are desperate for loans, but the big banks won't lend, because despite all the money the Fed is pumping in, these banks are still loaded down with toxic assets and are trying to rebuild their capital. This is a problem that was created by the government's refusal to allow them to fail and to have them taken over by sounder lending institutions. It's a failure of government intervention, not the result of emotional excess, as you seem to be implying.

My point is that I've seen economists argue in some places that emotion is a component in demand, but then in other places argue as if changes in demand are solely accounted for by changes in supply and/or price.

For Pete's sake, Steve, emotion (how strongly you desire something) is a component of demand; changes in the quantity demanded are accounted for by changes in supply and/or price. There is no disagreement among economists on that!

And, contrary to what JM, or anyone else has written, strong emotions don't need to mean irrational behavior. They will motivate strongly so that demand increases without requiring any decrease in supply or price.

Demand can certainly increase without requiring any decrease in supply, which is to say that the demand curve can shift right without requiring the supply curve to shift left. Is this news to any economist? Certainly not, for it is elementary microeconomics. But if demand increases relative to supply, then far from requiring a decrease in price, it would necessarily require an increase. I don't know any economist who would say it required a decrease, since that would be contrary to the laws of supply and demand.

All economic change requires completion of acts - transactions - and the portion of a populations intended acts or acts that they might lean towards that actually reach completion will depend upon the intensity of the emotions. This is of no consequence during normal times since strong and weak emotional responses average out - but not during boom, busts, manias, etc.

I don't know what you mean by strong and weak emotional responses "averaging out" in normal times. Strong and weak emotional responses always average out within any given population's demand curve. Furthermore, how do you determine what is a strong and what is a weak emotional response? Strong or weak relative to what? Nor do I know what you mean by "no consequence" during normal times. Actions always have consequences. Are you saying that under "abnormal" economic conditions, people's responses are irrational and that they produce irrational consequences? And if not, then just what are you saying?

(Edited by William Dwyer on 6/30, 7:23pm)

Post 10

Friday, July 2, 2010 - 3:10pm

Joe, Bill,

Thanks for your posts. I'll try to make a reply you will find worth reading, but it will take me a few days (the cumulative length of the tiger-striped posts you have left is a little intimidating :-)

Post 11

Saturday, July 3, 2010 - 2:54pm

Ignoring the paranormal 'sciences' for a moment, is there any pseudo-scientific field less calibrated than 'economics?'

State of the economic art can't even reach a consensus and authoritatively inform any of us on what already happened much less, what is going to happen, or what would happen, etc.

If economics is 'science', then so is Political science 'science.'

I don't buy it for a minute, I've never experienced anything remotely resembling 'science' in any economics course I ever took, any economics paper I've ever read. It's standard models are laughable bits of banality, and it's attempts at complex modeling are so poorly uncalabrated and hand waved as to be completely meaningless, the pinnacle being the 'hell, just ignore the terms we can't model' in the MIT pinhead/LTCM fiasco.

It's all -political- science, nothing more.

It is the classic example of what Feynman called 'Cargo Cult Science' in his 1974 speech at Stanford.

It is politics, masked in a veil of 'science.'

Who is kidding anybody about that? Only technical illiterates could possibly buy it. Politicians use it like modern day witch doctors, and the tribe loves the show.

It's not a crime to be a technical illiterate. But, it's not a honorary degree, either, or license to 'run the economy.' And yet, here we are, sprinting back towards the dark ages, with our mystical beliefs in can't see them magic spirits in the skies, like 'S'ociety and 'the economy.' Ancient magic spirits, dressed up like modern day lipstick on a scientific looking pig. We're collectively f'n nuts.

The economic emperor has no clothes. Sorry. The jury is in. It's crap, carny hucksterism parading as science.

Prove otherwise, any acolytes out there. My deep condolences, if you are degreed in one of these witch doctor scams. I'm sure the rituals were quite difficult to master, the hoops painful to jump through, but the beekeepers were laughing at all that going nowhere sweat.

You've been had. It happens. We've all been, don't feel alone.

The basic tenets of 'science' have successfully been attacked, and in these modern egalitarian times, anything that calls itself a 'science' -- even when it self-consciously refers to itself as 'the dismal science' -- is yet regarded as if ti was actually a science.

Social science, economic science, end even 'environmental science'... modernity has successfully had the scientific legs kicked out from underneath it after a hundred year plus onslaught by a virulent theocratic religious movement -- Social Scientology no less -- attempting to take over the world and save it, for its own good.

Are we that f'n nuts, to let complete f'n nuts run the world? Or, do we just crave the endless entertainment of them trying?

Barney Frank? Are you shitting me?

Post 12

Saturday, July 3, 2010 - 3:12pm

1] Economics can't tell us what will be.

2] Economics can't tell us what is.

3] Economics can't even tell us what was!

What kind of 'science' is that?

The world's most highly trained/instructed/lauded economists, including many winners of Nobel prizes, yet refer to something called 'the' Economy, as if there really was just one of them in any manner that was significant.

If you lined up all the economists in the world end to end, they still wouldn't be doing anything useful for anybody, but at least they'd be out of the f'n way, and we wouldn't be hanging on their every wild assed guess while politicians abused them for their little witch doctor show.

Post 13

Saturday, July 3, 2010 - 11:53pm

So Fred, are you saying the predominant way Economics is taught is of little value and needs to be changed, or are you saying there is no value at all in attempting to understand economic behavior whatsoever? Or do you just object to using the term 'science' for economic thought? If you think there's no value in trying to understand economic behavior, why do you come to that conclusion? And why do you think no one can correctly explain what happened to the economy? What is your justification for this thought? Do you think the recession or any other economic behavior is unexplainable? Or is it that you hear so many conflicting statements from economists that it leads you to believe that none of them know what they're talking about, so therefore you give no legitimacy to a study that has no consensus? Is an academic consensus required for you to accept a particular study as legitimate?

You're not giving any particularly convincing arguments here.

Post 14

Monday, July 5, 2010 - 6:26am

John:

Your assumption is that I'm trying to convince anyone of anything, other than myself.

I, like all of us, am imperfectly and only partially sampling all of reality, and by pinging that reality with the declaration 'the economic emperor has no clothes' -- not for the first time, but possibly the hundredth time in my life -- and finding yet again a resounding thud, no cogent defense of the counter-position -- continue to convince myself utterly that there is no 'there' there, or at least, illuminate for myself what the nature of that 'there' is.

Because, you see, there is immense value in "attempting to understand economic behavior." Immense political value.

A hint: "The Department of Political Economy" ... at my Alma Mater and others.

If I were a devout herdist/tribalist/collectivist -- or, someone severely damaged by decades of inculcation by same -- then I would be imbued with the same paternalistic megalomaniac fervor -- a belief that mankind required constructivist marshaling by well meaning elites, for its own damn good. Some were born to the lick the boots, some were born to wear them. Might as well be well meaning elites. If the masses can't be told what to think and how to think, then just as good is the suggestion not to think at all, as long as the latter is done peacefully and harmlessly and pointlessly. Any or all of the above will do on the way to mankind as bees, and civilization as a managed-by-some bee colony.

So, in a land where some few might yet still laugh at anyone selling us the notion of 'the' national weather, politicians and their wizards daily sell us the notion of 'the' national economy, as if 'it' existed in any meaningful singular and most importantly manageable by power grubbers sense.

For decades. For nearly a century. The totalitarian religious fervor that is sweeping mankind didn't crop up yesterday, or even a decade ago.

This is not a requirement of economics as science; in fact, it used to be, at one time, quite common for economists to refer to 'the economies,' a more nuanced and accurate model of economic behaviors, plural, not the tell-tale-we've-long-unquestioningly-swallowed-the-totalitarian's-narrative "economic behavior", singular.

Forget predictive(what will be)or descriptive(what is)economic state of the art. Let's cut right to what should be a slam dunk for anything calling itself a 'science:' What was? What already happened? What is already demonstrated? Can state of the art economic 'science' reach a consensus and demonstrably and reproducibly inform us on what the causes -- sorry, I'm using unfamiliar complex pluralistic terms here, generations past their efficacy -- 'the cause' -- of the original Great Depression were-- sorry-- was?

Why, no. If we look in the 'scientific' literature, say, at some "Dept. of Political Economy"... what find is no end of contradictory and battling political narratives -- spin -- selling one political worldview or the other. Rampant free market capitalism? Constructivist government fat fingering of the economies -- sorry, 'the' Economy? "Schmegfield" believes, while "Bloomfield asserts..." while " Scumboni opines..." Aka, the same 'science' you can find in any sociology hymnal.

The 'science' may not be able to predict or describe a damn thing with any certainty other than some purely qualitative severely under-modeled banalities, but state of the economic art can't even agree on the efficacy or impact of those qualitative under modeled banalities. Please. What is 'the' economic impact of a 10% rise in marginal tax rates? Can you point me to anyone I should take seriously who will assert the answer to that question is expressed as 'science' and not pure political spin?

But moot, because a far greater political benefit is achieved simply by getting all political sides to agree to to wage the battle in terms of 'the' economy. The totalitarian/herdist/collectivists must be laughing their asses off, every time a mouth-breather for freedom counters their plans to 'run the economy' with their better plans to 'run the economy.'

It is just like the wheelbarrow joke. Guard at factory stops worker leaving with wheelbarrow full of hay at gate every day, searches wheelbarrow, can't find anything, lets him go. Worker retires, guard sees him at bar, says "I know you were stealing something. What was it?" and worker says 'Wheelbarrows.'

The political debate between totalitarians/collectivists/herdists and what few defenders of freedom still lurch about is long over, when those defenders agree to use only totalitarian terms and goals in the debate, like 'the' economy.

I've heard the hand waving arguments -- 'all economies are tied together, inexorably, into a single, organic whole.' In what meaningful way is that banality scientifically useful? It is useful only in a political sense, as a precursor to confuse someone nit paying much attention who is about to witness some charlatan pull a political rabbit out of his hat. Hey wizards -- demonstrate that you can predict or describe or model or simply identify even one of them with any degree of reproducible accuracy, before you claim you have the first clue about all of them in aggregate.

Is it a science based on any meaningful metrics? Like what? "the" unemployment rate? Jesus, shouldn't that be a simple enough 'it' to measure? And yet look at the modern political wrestling with this number. Are you telling me, with a straight face, that in spite of the millions spent in state and federal governments to monitor 'it', that state of the art tribal economic science is presenting any of us with an accurate metric of 'the' unemployment rate, or that any of us have the slightest quantitative appreciation for what a 9.75% unemployment means, vs. a 10.25% unemployment rate? I'm not asking you to 'convince' that to me, I am already convinced that the attempt is laughable based on the observed gyrations and lurchings and absurd "government job creation performance" pronouncements--none of which is doing a damn thing to address the issue of 'high unemployment in the economies.'

John, totalitarian fervor -- of which, an acceptance of "political economy" and totalitarian terms of art like 'the economy' as opposed to 'the economies' is part and parcel -- would just be laughable puddingheaded nonsense, if it wasn't also demonstrably dangerous.

Don't ask me, ask yourself. Is our understanding of economic behaviors increased or decreased by referring to the economies as 'the economy?' Are economic behaviors made any less complex by believing, as a concrete absolute, in the myth that there really is just one of them?

I don't believe that serves the interest of anyone, except for totalitarian leaning politicos. The absolute assertion that 'they' are an 'it' leads us inexorably on a path where we attempt to manage an 'it.' ie., the national tribal insanity going back decades.

Economists used to, in the past, quite often and quite readily and quite deliberately refer to 'the economies.'

Apparently there was a 'the' meeting, and the field decided that some interests were best met by referring only to 'the' economy. I can understand, through the prism of totalitarian/collectivist thinking, why the widespread assertion that there is just 'one' of them would be useful. I can't fathom any scientific reason for doing so.

Did I miss something important? In 1989, when the Berln Wall fell, were we all supposed to jump to the conclusion, "Hey! Centrally planned, command-control 'the' economy running is a fine and wonderful paradigm, so let's all fall down under the light breeze of James Carville showing up with his bumper sticker, "It's the economy, stupid!" as his answer to that wall collapsing.

And, don't tell me we didn't fall down under the mighty weight of that bumper sticker, or that the GOP had a cogent answer: as recently as 2008, I had some jackass GOP lightweight at my front door, I swear to God, explaining to me that "It's the economy, stupid" is just too powerful an argument, and the GOP just has to roll with it for now."

Riddle me this: "It's the economy, stupid!" is so powerful and concise an economic argument, easily swallowed by millions, that it swings a nation towards American Totalitarianism.

But adding a single 's' to that bumper sticker renders it so complex that we all furrow our brows and can't seem to focus on what that means.

No Carville: "It's the economies, stupid!" 20 years too late.

regards,
Fred

Post 15

Monday, July 5, 2010 - 7:21am

John:

Economic debate is simply a projection of political debate; it is not scientific debate.

It is political debate between two irreconcilable points of view. That isn't demonstrable science, it is simply wrestling.

There can be differences of scientific theories which can both be workable, but that isn't the case with incompatible economic debate.

It's not as if the competing economic theories were complementary theories, alternative expressions of some deeper truths. Freedom and totalitarianism are incompatible paradigms. On issues determined by too much or too little of either, we can't equally pursue 'both' as a workable path, but rather, a balance between the two.

It is a concession to totalitariansim to even wish that there was some evidence of 'science' in arriving at that balance, but there is evidence only of political wrestling, a tug of war, using every means other than science. Economics, as best as I determine, is an abuse of science, an example of what Feynman called Cargo Cult Science. The goal of economics is to provide the veneer of science to purely political arguments, period. A self-admitted 'dismal science.' A social science. A soft science. ie, not science at all, except as veneer. Which is why you see so little attempts at actual calibration. Political agenda driven opinion is not subject to calibration.

An airplane flies, or it doesn't. And, there can be -- and in fact are -- multiple seemingly different scientific theories as to why an airplane flies, and airplanes designed using each theory will actually fly. For example, there is the predominantly US, and predominantly European taught theories(which are actually just emphasis of the same integrated whole theory.) One school of thought primarily explains the action of forces on a wing by an integration of the surface pressure field on the wing. The other school of thought explains the action of a wing by the change of momentum of the airflow around the wing. One is a far field "the reaction to the effect of the wing on its environment" view, and the other is a near field "the effect of the environment on the wing" view. It's really two views of the same integrated set of equations, and both are useful views of reality in explaining why and how a wing generates lift, but both seemingly different views are useful because they are both accurate representations of reality.

Such is not the case with the political struggle between freedom and totalitarianism. They are incongruous alternative destinations, they can't both be arrived at, only pulled towards, neither are they similar facets of any unified theory. Only totalitarians are selling the unifying nonsense of "you can't be truly free without coercion; you can't be absolutely free without absolute coercion." (Paraphrased from Fountainhead.) A traffic light and/or double yellow line painted fairly down the middle of the road does not tell us what to drive, or where to drive, and the passive efficacy of its blind ordering is no argument to take the blinds off and create excuses for telling people what to drive and where to drive and for what reasons to drive.

Such instances of 'coercive' government are no more 'coercive' than the fact that the earth doesn't collapse under our weight, but resists, and in so doing, 'coerces' the plane of our existence and 'restricts' our freedom. We yet stand, we yet walk, where we can, as governed by nature and our reasonable, non-restrictive laws.

Economics is a political attempt to politically manufacture governing natural laws based purely on politics, not science. When you look at the justifications of the scientific -looking- economic models, even the modelers can't keep a straight face and claim that this is how human behaviour actually functions and can be governed, as if by natural law, but always with the caveat "acts as if...", far more often than not backed up by no calibration(application of model to reality and comparison with ground truth)at all.

And then, ignoring that caveat, justify political assertions "as if" the models accurately modeled reality, and "as if" even if they did so, mankind responded to the "as if" modeled imputs and parameters under the now mathematical laws imposed by the "as if" model.

Show me the demonstrably reproducible calibrations; that would be 'science.' If not, then it is politics -- witch doctor dances in front of the tribe, imploring, cajoling, begging, bamboozling. Anything but demonstrably reproducible science.

Is 'the' airplane of 'the economy' sputtering on now because of or in spite of
our Cargo Cult Scientists in their grass hut control towers attempts to fly 'it?'

If modern state of economic art could even answer that question, I'd be convinced. What is clear is, the witch doctors selling us the dance, the Barney Franks (Barny Frank? Are you shitting me? Barney Frank?)have no self-interest in answering that question except in the affirmative.

regards,
Fred
(Edited by Fred Bartlett on 7/05, 7:32am)

Post 16

Monday, July 5, 2010 - 7:59am

John:

Is an academic consensus required for you to accept a particular study as legitimate?

Reproducible, verifiable, calibrated.

Not "I rolled my eyes into the back of my head yesterday, to control the economy, and today, the sun came up, unemployment only went up to 10%, and would have been much worse had I not done that, therefore, rolling my eyes into the back of my head is a reasonable way to control the economy."

"The airplane flies because I do thus." Not, "The airplane flies in spite of me doing thus."

The Soviet airplane sputtered for decades, feet off the ground. And then, it demonstrably crashed.

What characteristic of our own presently sputtering airplane are shared with their demonstrably crashed airplane, and why aren't we jettisoning those features as fast as possible, instead of courting them?

If economics could master at least that much 'science', I'd be convinced it was a useful tool of anything. As it has not, my conclusion is that we managed to catch some of the disease during that Soviet airplanes long, sputtering fight to stay aloft, and the field of economics is where a lot of the debris from that slow motion wreck landed.

Meanwhile, our own engine #4 is on fire, we need to feather it.

Not supercharge/pump more gasoline to it.

regards,
Fred

Post 17

Monday, July 5, 2010 - 12:29pm

Jesus Fred, I didn't expect a three post marathon essay here! My time is limited so I only got through your first post. But still, you seem to be saying the same thing as before. If at all possible I'd prefer we keep our conversation focused and concise. These are the arguments you appear to be making;

1) Because there's no consensus in the academic community on economic issues, it is not a legitimate study.

2) Because economics cannot predict for example what a tax rate will do to the economy, it is not a legitimate study.

3) Economics is a study for 'liberal elites'. So therefore it is an illegitimate study.

To wrap your arguments up, Economics is not a science because; it can't explain economic behavior; it doesn't have an academic consensus; it can't predict economic behavior; it's the domain of liberal elites.

Here my problems with your arguments.

1) A lack of consensus is not a disqualifier for the legitimacy of a study. A consensus is epistemologically meaningless for any study, scientific or otherwise. Just because some people have a different argument from others, doesn't mean none of them are right.

2) Economics can most certainly predict what economic behavior would occur given a certain variable is introduced such as a tax increase. If we assume individuals are rational in their economic decisions, and they seek to maximize values, we know what the rational economic decision would be if the price of goods go up.

3) Just because these university Marxist professor have tried to hijack the study of economics to fit their own political ideology, does not mean there is no legitimacy to the study per se. If that were the case, we'd have to discard history as a legitimate study since these same professor seeks to corrupt the study with their own marxist idealogy. The same pretty much goes for every study.

As far using the term "science" for economics, I believe coming up with a label for it is a red herring, I'm not interested in getting into a debate on the legitimate use of the term science, but I certainly don't object to using the term science for economics. The ancient Greeks and Romans made no distinction between philosophy or science. They were the same thing. It basically was all considered a "study" of some sort - a 'logia' (Greek for the study of something) or as we use the suffix version of the term 'logy'.

I appreciate your wit Fred and I definitely enjoy reading your posts, but I just can't follow you here on these arguments you're putting forth.

Post 18

Monday, July 5, 2010 - 1:09pm

John:

It's OK.

regards,
Fred

Post 19

Monday, July 5, 2010 - 1:23pm