Information is stimulus
Suppose that the Federal government were to offer sizable loan guarantees for any and all “green energy” companies. Any firm, including new entrants, would be eligible. The government would do some cursory due diligence, only to establish that the company in question would actually spend the capital it raised on real projects colorably linked to green energy (as opposed to, say, buying New Zealand dollars in a carry trade).
Wouldn’t such a program constitute a stimulus to the economy? If sufficient leverage is allowed, it would lead in short order to a bunch of entrepreneurs founding companies on just a shoestring of equity and a whole lot of cheap, guaranteed debt. Firms with even a small likelihood of success would constitute real options worth more than the sliver of private capital at risk, so arbitrageurs would rush to create them.
Such a program would be a pretty direct form of fiscal stimulus. Although politicians and financiers enjoy pretending otherwise, contingent liabilities are still liabilities, and offering loan guarantees to all comers for risky projects is, ex ante, just a way of financing a government expenditure equivalent to the expected losses of the program. We shouldn’t be surprised that an oddly financed stimulus would function as a stimulus.
But note that if, by good fortune, the artificially spurred new firms do surprisingly well and very few guarantees are actually paid, that wouldn’t eliminate the ex ante stimulus effect of the program. It is not the actual transfer of Federal money that serves as the stimulus. The stimulus comes only and precisely form the certainty the program provides to investors that capital spent will be repaid, with interest.
So, suppose that the government does nothing, but “the market” becomes certain (correctly or not) that green energy companies are a sure thing. As long as the cost of capital to such firms falls sufficiently, precisely the same dynamic would take hold. We’ve just watched it happen, twice. When capital became very cheap to internet firms, entrepreneurs understood (and discussed quite openly) that there was an attractive lottery on offer, so why not get in? During the structured credit bubble, the market became convinced that some classes of debt yielding more than the “risk-free” interest rate were certain to be repaid. Entrepreneurs (both speculative borrowers and financial engineers) saw the arbitrage, and found ways of offering those classes of debt. In both cases, if the market had been right, everyone would have been happy. But when the market was wrong, it was someone else’s cost. Many entrepreneurs walked away rich and happy. Others lost, but only a small amount relative to what they’d have made if things worked out differently. It was a good gamble for them ex ante.
Responding to Arnold Kling’s “recalculation theory“, Paul Krugman asks (as he has asked many times)
why [doesn’t], say, a housing boom — which requires shifting resources into housing — …produce the same kind of unemployment as a housing bust that shifts resources out of housing.
A housing boom, any kind of boom, is attended by an increase in certainty. Information is stimulus, confusion is contraction. A bust occurs when the market is unsure of everything, when market participants perceive better risk-adjusted return in holding government securities (or supply-inelastic commodities) than in financing real investment. Sectoral shifts per se have no clear implication with respect to variables like employment and output. But “hangovers” do happen, because powerful booms are periods when market participants make consequential decisions with great swagger and confidence, and busts are when we learn that despite their certainty, they were wrong. They are left not only impoverished and burdened by debt, but bereft of confidence in their ability to evaluate new opportunities. The best way to avoid the hangover is not to err so terribly in the first place. Easier said than done, perhaps, but that’s no reason to cop out. We can build a better financial system, one in which degrees of certainty are attached and removed from economic propositions dexterously, rather than clinging like giddy leeches until a collapse.
Information is stimulus. As markets become more informed, money will be created and lent into the economy as surely as if the government printed and spent it. And stimulus is information, since governments do not spend randomly but do so in accordance with their own revealed certainties, which may or may not turn out to be wise. Poorly chosen stimulus and asset price bubbles are covert twins — only the identities of the people making bad decisions are different. Conversely good economic choices by governments can lead to outcomes as salutary as a healthy market. (See this very nice post by Bryan Caplan, and the articles cited.)
Information is a behavioral attribute, not an attribute of the external phenomena to which it may ostensibly refer. To say that an agent is informed means she behaves differently than an uninformed agent. Her behavior is less random, more predictable. To be informed does not imply ones information is accurate. (In general, accuracy is unknowable, both ex ante and ex post.) Information increases the volatility of outcomes, because it provokes larger and more concentrated bets than uncertain agents would take, creating large gains and losses depending on how adaptive the informed behavior turns out to be. It is often better, as a behavioral matter, to be uninformed than to be poorly informed.
But we do not always have the option of remaining uninformed. We cannot afford to hedge all of our bets. Whether via a great mis-recalculator in the sky or a political establishment largely captured by certain interests, new information will be manufactured. (I think it probable that government stimulus will substitute for market-generated information in the near term, as chastened capital market participants are more conscious of the hazards of certainty than policymakers are.) We will be spurred to take some actions and eschew others, and the structure of the economy will shift accordingly. Let’s hope those choices are good, and do our best to help make them that way.
Update: While I was writing… Arnold Kling offers related and excellent “Thoughts on Probability and Uncertainty.”
- 12-October-2009, 5:05 p.m. EDT: Added bold update re related Arnold Kling post.
- Changed “of things worked out differently” to “if things worked out differently”.
SRW,
Is it really information per se that’s the stimulus? Isn’t there lots of information around when housing prices or stock prices are going down?
Loan guarantees are equivalent to capital, which is a stimulus. The actual transfer of money is equivalent to a loan loss, which is a depressant.
Regarding the Kling recalculation theory, consider that gross US job destruction and creation is in the area of 7 or 8 million per month – in booms and recessions. Lots of job liquidity there – gross flows of creative destruction in all environments. By comparison, the net change in terms of employment or unemployment, depending on the point in the cycle, is a fraction of the ongoing gross flows.
I don’t like the Kling probability model too much. Probabilities for fair coins and tall guys are well defined by the relative simplicity of the event space. Inflation event space by comparison is complex; not simple. The number of different possible events within each domain of interest (higher/lower) is unknowable; therefore the probability is unknowable. Therefore we reduce an impossible calculation to the idea of subjectivity. Objectivity is isomorphic to simplicity. Subjectivity is isomorphic to complexity.
I’d say welcome back, but that would involve a highly subjective if not wildly speculative projection of the future state on my part.
October 12th, 2009 at 7:39 pm PDT
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I think “confidence” would be a better word than “information” for what you’re talking about. Confidence can be inspired by real information (about a burgeoning technology, demographics, capital costs, etc), or it can be spurious (real estate values only go up). We’re suckers for a good narrative, and more than anything, that’s what the Wall St. pundits are good at pitching: plausible stories about money. The bust, and uncertainty, comes when we realize it was bunkum. If we were always realistic about how much knowledge we have about the future, markets might behave very differently than they do.
October 12th, 2009 at 8:40 pm PDT
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information projected in the future is expectation.
people and businesses borrow money with an expectation that they can repay the money in the future, and that this expectation depends on their expectations of the future.
so i think that expectation is the stimulus — expectation that the economy will expand and that debts can be repaid — not information per se.
October 12th, 2009 at 10:09 pm PDT
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also, in your post you come close to seeing the point of the PPIP. it was intended to stimulate the market for these assets by creating certainty ie a floor on the losses. in fact just the threat to create this floor was enough — a credible threat to prop up a market can sometimes do the same as a real threat.
October 12th, 2009 at 10:11 pm PDT
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JKH & Zane — First, thanks for making it through this one. I think it is unusually odd and dense, even for me.
I often complain when I read papers that take words in common use and operationalize them in some odd and technical manner, potentially tricking readers into attaching the authors’ conclusions to a much broader domain than the results justify. For example, in the growth literature, “institutions” are sometimes defined as “property rights / enforcement of contract / limited executive”, while schooling is “human capital”. I read a (famous) paper recently that said there’s little evidence that “institutions” matter, but human capital matters a lot. That annoyed the hell out of me, because if you tell an ordinary educated person would include educational practices in the category of institutional quality, but could easily misinterpret the paper to mean that experts have looked and found little evidence that institutional quality is important. Similarly, “financial development” is often operationalized as something like “private credit / GDP”. Don’t get me started.
So, reading your comments, I think I can be accused of the same sin, although I will offer up a defense. By “information”, I mean something quite specific — not data or communication, but some factor that reduces the unpredictability of the informed party’s behavior. That is close to the premier “scientific” definition of information — in information theory, information is what reduces the entropy of an event space, a factor that takes a high entropy prior distribution to a lower entropy posterior distribution. One measures information in terms of how much entropy it undoes.
In finance, there is the concept of “informed” vs “noise traders”. But how can the two be distinguished by an external party? We never know what conjectures about the world, true or untrue, traders may have. But we can observe the degree to which a population trades randomly — back and forth in roughly equal proportion — or the degree to which there is a bias, which implies less uncertainty, or more information. Empirically (looking at stuff like spreads and price action), market-makers behave as though “biased” trade is informed, whatever true or false ideas might underlie the order flow. (Given the short-time horizons with which market-makers trade, they are sensible to do so — even if “informed” traders are trading on bullshit, they won’t be in the market to prove the point. It’s Keynes’ market-can-remain-irrational dictum lived in millisecond increments.)
Reduction in the entropy of a recipient’s behavior is not, however, what ordinary people mean by information. My defense is that ordinary people don’t have a clear definition of information, and this is a pretty good one to try to put out there. Ordinary people do know that information and “data” or “chatter” are two different things, and if pressed, I think people might draw the distinction by saying data can be noise, but information is presented or distilled in such a manner that one could draw useful conclusions. If we let “actionable” substitute for useful, then we are pretty close to my definition of information. You can tell if someone is informed by how they act. (So, I think what I’m doing is not the same as defining out of “institutions” phenomena that ordinary people would affirmatively expect to be defined into the term.)
Anyway, whether I’m abusing the term or not, by my definition I don’t think it’s true that, in general, “there lots of information around when housing prices or stock prices are going down”. I certainly don’t want to equate rising stock prices with information or with stimulus. The world is too complicated (and the empirical correlation with fiscal stimulus would almost certainly go the other way, just like gun control laws correlate with high gun crime). But in the post-bubble period, it is pretty hard to predict what “investors” are likely to do. During a boom, it’s not so hard, there are specific sectors that are disproportionately attracting capital, the distribution of capital is not random. During a bust, there is plenty of data and charts and what not but there aren’t stable, discernible capital attractors. Patterns of capital allocation are more random.
So, Zane, I really do mean a bit more than confidence. I think confidence is prerequisite to information, in the sense I am using it. Obviously, if investors don’t believe / “have confidence in” the transmitted conjectures, they won’t act on them, and thereby become informed, in the sense that I am using the word. But for “the market” to be informed, investors in aggregate have to be confident in some particular conjecture that drives their behaviors (whether the conjecture is reasonable or, as you put it, bunkum). The kind of Wall Street pundit that pitches plausible stories to front run or drum up business is trying to “inform”, in my usage, because she is trying to drive investor behavior. The information transmitted may be poor quality, in the sense that investors are likely to be harmed rather than helped if they do act upon it. But that’s hard to know ex ante or even ex post (were oddsmakers “wrong” about the Nobel today?), and many storytellers perceive themselves as quite sincere in the payola yarns they spin. It reduces cognitive dissonance to let yourself believe what you are going to have to say. For uncertain forward-looking questions, I don’t think that “accuracy” is a practical yardstick by which to distinguish information from misinformation. (The information is generally takes the form of a biased probability distribution, e.g. “A is more likely than B”. If B is observed, that doesn’t mean the information was wrong. Repeated information from the same source can be evaluated empirically, but there’s no reason to believe that the source’s accuracy is well-represented by a simple, stable probability distribution. Maybe our source is very accurate in forecasts regarding A and B, but not so accurate with respect to C and D, so simple scorekeepers would trick us into believing the source is less informative than she is.)
So, JKH, that puts us into the kind of probabilistic confusion that Kling is trying to get at and you are trying to tease him about. We are left with very little idea of what is true or false with respect complicated, uncertain event spaces, ex post or ex ante. So, I claim, we cannot use “truth” as a metric for information, and I claim it is, um, uninformative to megabytes of raw data or somesuch. So I stand by my behavioral definition.
I agree, but I’m not sure I fully grok your point, with respect to net vs gross job flows. I neither meant to diss nor to buttress Kling’s “recalculation theory” — I don’t think that investors or “the market” constitute unique or uniquely good calculators, but I did mean to push back at Krugman a bit for suggesting there’s any great mystery in the asymmetry between booms and busts. Kling’s story and mine would be perfectly consistent, if we privileged the market as the only rightful informer.
I agree that loan guarantees are capital. Whether transfers are losses depends on the circumstances, though if they are transfers triggered by guarantees they are ex post markers of loss. But transfers can obviously be capital too, e.g. if the state purchased equity rather than guaranteeing loans.
Welcome back to you too. By the way, your comments at “billy blog” ave been phenomenally good (e.g. here, but there was also a really nice discussion of bank balance sheets I can’t seem to find).
October 12th, 2009 at 10:23 pm PDT
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babar q — re expectation vs information and other definitional issues, i think i’ll let my reply to JKH and Zane stand… ultimately it’s a definitional issue.
re PPIP: certainly I agree that creating a floor can be stimulus. that doesn’t mean it’s good stimulus. in my mind (and in my piece), stimulus is quite equivalent to a boom — whether it’s ultimately a good idea depends on whether it will move the economy in a desirable and sustainable direction. i don’t view PPIP as good stimulus, because i thought it’s intention and likely effect was to strengthen institutions that should be weakened and to have adverse distributional effects. another dimension on which PPIP can be evaluated is whether or not it would be costly stimulus ex post, that is, whether after altering the direction of the market, government guarantors would take losses on their positions. i certainly thought that PPIP would be costly, but current market valuations suggest that had it ramped up as originally scheduled, it might not have been. (actual transactions are too new to judge.) my guess is that current valuations won’t be sustained without policy so loose it creates FX/interest rate difficulties for the Fed. but I could be wrong, happens a lot. even if it would have been cheap stimulus, though, it still would not have been desirable, from my perspective.
October 12th, 2009 at 10:35 pm PDT
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SRW,
My comment on the recalculation theory was also neutral. I was quite astounded when I learned how many jobs are lost and created each month apart, from the net headline figure. It seems to me there’s a whole lot of forced “mini-recalculating” going continuously in terms of labour force adjustment. Perhaps that reflects some inherent flexibility of the US labour market and its capacity for adaptation, but maybe I’m abstracting too much from the volumes alone for that to be a valid conclusion.
I meant transfer in the sense of paying off on the guarantee – i.e. covering the loss in the form of contingent capital (and becoming a CDS settlement as I write it).
Yes, I’ve been enjoying the Post Keynesian learning journey recently, at billy blog and elsewhere; it reinforces some analytical instincts I’ve held for a long time about the macro implications of fiat money and banking system operations. The following include some comments that seemed to have generated a bit of attention. They were written within a time span of 2 months; a transition from scepticism about one PK model (Chartalism), to defending it while embracing scepticism about another (Circuitism):
http://bilbo.economicoutlook.net/blog/?p=3891
http://bilbo.economicoutlook.net/blog/?p=3921
http://bilbo.economicoutlook.net/blog/?p=5199
October 13th, 2009 at 1:09 am PDT
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Economists, including those at the Fed, seem to have trouble with the concept you introduce. Alan Greenspan, for instance, likes to point out that easy U.S. monetary policy did not cause the housing bubble because housing bubbles occurred all over the world. Of course he underestimates the power of the “Greenspan Put” to provide “information” to borrowers and lenders globally. Beyond the housing bubble, the information effect of the “Greenspan Put” had a dramatic effect on investment/universal bank leverage, which in turn increased monetary velocity, which produced even easier money than Greenspan/Bernanke probably intended or understood. We all know how that turned out…
The response of Bernanke to all this is to promise yet more certainty (“extended period”). The information effect for dollar borrowers (aka “carry traders”) is by now well understood by market participants. Sure this is a crowded, one-way trade, but that is the nature of trades that have more information provided than others. Recently the Fed has rolled out some hawkish Regional Presidents to “subtract” information from carry traders. The early results seem not very promising…
October 13th, 2009 at 9:45 am PDT
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“Information is stimulus. As markets become more informed, money will be created and lent into the economy as surely as if the government printed and spent it. And stimulus is information, since governments do not spend randomly but do so in accordance with their own revealed certainties, which may or may not turn out to be wise.”
Following the view of the Chicago Plan of 1933, the point of QE &Govt Borrowing is to change expectations. That’s why in the view of the Chicago Plan, they are complementary. I also feel that this point is being made here:
http://web.mit.edu/krugman/www/trioshrt.html
“Expectations: Finally, we return to the issue of inflation targeting. The basic point, once again, is that a credible commitment to expand the future money supply, perhaps via an inflation target, will be expansionary even in a liquidity trap. There are two problems, however, with this view. One is that it is not enough to get central bankers to change their spots; one must also convince the market that the spots have changed, that is, actually change expectations. The truth is that economic theory does not offer a clear answer to how to make this happen.”
In the comments, I agree with JKH:
“It seems to me there’s a whole lot of forced “mini-recalculating” going continuously in terms of labour force adjustment.”
I’ve tried to argue this on EconLog, calling it constant recalculation. The search for a steady state where recalculation has occurred doesn’t work for me.
Hoping I’ve followed what’s been said, let me say that I found the post and comments very useful.
October 13th, 2009 at 3:31 pm PDT
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“And stimulus is information, since governments do not spend randomly but do so in accordance with their own revealed certainties, which may or may not turn out to be wise.”
This sounds like Roger Koppl’s “Big Player” theory, in which agents base their expectations off the actions and personality of a big player like the Fed rather than their own assessment of the state of things. The result of this dose of “information” is herd behavior, akin to the booms you describe.
October 13th, 2009 at 5:23 pm PDT
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SRW,
I think I’m getting it more now. Perhaps we should be thinking in term of concentration versus diffusion; risk taking versus risk aversion. Information concentrates the mind and assists with risk analysis and decision making. Lack of information diffuses important logical connections and makes risk analysis and decision making more difficult.
I guess it’s easier to process data (i.e. to inform oneself) in bull markets than in bear markets. Maybe information is a momentum play. It’s easier to tell a story and create a myth before the fact when information builds on itself. So is information a sequential process with a bull market structure?
Still, I’m not sure if asymmetry is the right idea. Information, certainty, stimulus – all in the same direction?
Even if I knew nothing about entropy (which is close to the truth), my characterization of “lots of information around” is sloppy. My own naive understanding of information has something to do with the processing of data into an intelligent usable form, formulated in the mind of a human being. This includes the notion that there is a difference between data and information. Data is raw material. Information is data processed into usable or actionable form.
The information theory entropy entry in Wiki looks interesting. I should understand more about the physics meaning first, though.
P.S. I don’t like to create the impression of that of an overzealous shill, but Bill Mitchell’s latest is absolutely superb – a conceptually seamless global analysis of fiat money dynamics. His best yet, IMO. I think it deserves as much blogosphere attention as Steve Keen’s excellent “Roving Cavaliers” post from last January:
http://bilbo.economicoutlook.net/blog/?p=5402
http://www.debtdeflation.com/blogs/2009/01/31/
therovingcavaliersofcredit/
October 13th, 2009 at 5:26 pm PDT
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I like this notion of “capital attractors”. In physics, there are lots of examples of metastable systems that are robust against perturbations of some finite amplitude, but which when disturbed enough, run away to some other lower energy (or higher entropy) state. The half bottle of beer on my desk would rather (energetically) be lying on its side, and if I push it a little too much, it’ll tip over. Or in a density stratified fluid with significant viscosity, you can have a denser upper layer on top of a less dense lower layer. The higher their viscosities, the larger a perturbation can occur at their interface before the system inverts, and the heavy stuff sinks to the bottom, and the light stuff floats to the top.
In the market context, that finite perturbation might be a combination of excess capital looking for a home, and a compelling narrative about, say, the Power of the Interwebs. There may or may not be something to the story (in an objective sense), but once enough capital has bought into it, the system becomes unstable, and money is attracted to the pile, just because there’s a pile to be attracted to. Everybody’s doing it. And in all likelihood more capital flows to the pile than the initial story could have ever justified (no matter what it was), just because it’s a runaway process. Greater fools investing. Such investors are “informed” insofar as they have an obvious course of action to take. Once the boom begins, their behavior is fairly predictable.
Then at some point their behavior again becomes unpredictable, when it starts to become obvious that the original narrative that got things going was either untrue to begin with, or has been blown all out of proportion. But nobody wants to be the first to go, because everyone knows the party is absurd, and there might just be more money to be made from new entrants. When fear starts to trump greed, the run begins. You don’t have to go home, but you can’t stay here. The so-called investors are again predictable, or informed, and money flows out of the bubble, but it doesn’t really know where to go next.
That’s where we are today: a lot of money has been taken out of real estate, and temporarily it went into Treasuries, and other ultra-safe instruments because people were scared. Now everyone is both sick of earning 0% interest, and starting to wonder exactly how safe these safe havens really are, so the money is diffusing out, looking for a new aggregator, but because there isn’t anything obvious, pretty much all asset classes are going up (except for housing of course).
As plenty of people have pointed out, these two bubbles were pretty different. However retarded pets.com was, we got a lot of good stuff out of the internet boom. Technology. Fiber. Connectivity. Gifts that keep on giving. Whereas the housing boom was pretty much pure bunkum (and we should have known it) and also debt fueled instead of equity fueled (bad). If we’re going to continue being prey to mob investing, it seems like we’d do well to try and limit ourselves to the former kind. We want railroads, not tulips.
So what do we have today? What are the narratives being pitched? What kind of bubble do we want next? I think we could do a lot worse than the energy technology (ET) that Tom Friedman has been pitching relentlessly.
It’s pretty disturbing that all this behavior is at some level pretty rational. Personally, I think I’d rather live in a world where we were trying lots of different things on smaller scales all the time (new rulesets, new technologies), and admitting to ourselves that we don’t really know what’s going to work out, and what isn’t, instead of everyone piling on to the most plausible thing going. As with biological populations, diversity in business is robust and adaptable, monoculture is brittle. We’ve placed too much emphasis on efficiency, and not enough on resilience. We need both.
October 14th, 2009 at 6:41 am PDT
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JKH — sorry for the slow, and what will be a partial, reply. i’ve gone through the several posts you suggested. there’s some good debate there, and your posts are excellent. i hope to say more about the chartalist/circuitist/post-keynesian stuff in future posts. but here are a few comments…
i think you are right, despite their protestations, to call this crew on underplaying the nonmechanical constraints on government action. yes, they acknowledge an “inflation barrier” and distributional issues. when the subject comes up, they clam to be first to acknowledge them. and they are right that most mainstream conversations make use of analogies to commodities or externally issued currencies in ways that serve to unnecessarily constrain currency-issuing governments. i am very sympathetic to that view.
BUT, overall, they write as if we are usually very far from the point where nonmechanical constraints ought to be binding, and i think that is an error on their part. first, they act as if a sovereign can always choose to issue a currency and to only borrow in that currency. but what a fiat currency issuer can do by fiat is limited, at least without resorting to unpleasant degrees of intrusive coercion. as a practical matter, in a decent society, citizens choose their stores of value and media of contracting and exchange. states have remarkable “soft power” as standard setters, and since the choice of a money is largely an arbitrary “schelling point”, the combination of pushing a standard and some gentle coercion via forcing tax payments is sufficient to permit governments to establish fiat currencies. but that privilege can be lost. “inflation” is not a unitary phenomenon — even if there is not much consumer goods inflation, asset inflation is sufficient to dethrone a currency as store-of-value. asset inflation, when labor is contracted in noninflating currency, has terrible distributional consequences even if in the near-term consumer goods capacity is such that prices and wages don’t much change. further, if there is consistent asset inflation, people with bargaining power will begin to contract in the appreciating commodity. (do you really believe the equitization of executive compensation in the 90s was all about “aligning incentives”?) the problem of maintaining a fiat currency is challenging. that California is very pleasant most of the time doesn’t mean it’s not important to build structures that resist earthquakes in a crisis. a model of inflation that looks simply to an employment/output gap as a quantitative limit, and presumes any amount of spending up to that is fine, without regard to what is being purchased and to whom funds are being distributed, is doomed to fail. as Arnold Kling likes to say, the economy is not a GDP factory. (also the macro consequences of wealth have everything to do with the microstructure of who gets it.)
to sum up, i think (and i think you might think as well), that “the money illusion” takes some work to maintain, and we oughtn’t let the very flexible mechanics make us too complacent. there’s an irony, i think, in that Mitchell & Mosler & Fullwiler are more right than wrong, but they would become wrong if they succeeded in making their perspective the mainstream. Their theory may not be able survive in equilibrium with its being widely understood, unless governments get very good at using extraordinary discretion artfully despite pressure by everyone able to lobby that it’d be good for the economy if the state were to fund just a bit more of my savings.
note their viewpoint is becoming mainstream. krugman is basically a chartalist these days, right down to the wordplay of accusing those he disagrees with of harboring a gold-standard mentality. delong too. i think it will end in tears, and i think that’s a shame, because i think the chartalists are in fact more right than wrong, that we would be better off if the government did a lot more of giving people money in a non-regressive way and taxing real resource destruction. but instead we are running terrible deficits and using our mechanical freedom to ratify past savings that were ill-invested and on stimulus programs that often amount to political rent transfers. i think that is leading to fissures that will eventually and perhaps soon break the monetary system. we’d be better off just cutting checks to everyone. (it’d be more legitimate, and it would spur observable present activity rather than creating overhangs of financial wealth susceptible to sudden runs into commodities or real goods and services.)
a few more things. i like very much that you explicitly point out (re household balance sheets / flow of funds) that savings can take the form as real savings, even if its value shows up measured in dollars on financial statements. the greatest intellectual sin that the chartalists commit is to dissemble and fudge the claim that private sector savings requires a public sector deficit. private sector savings of public sector obligations (including govt bonds and fiat currency) does require a public sector deficit. but people can save by building factories or hoarding gold or claims on future private sector services without there being any government deficit. it may be the case that people really want to save government obligations, so it may be reasonable to pay especial attention to stocks and flows of govt obligations available to the private sector. but they need to make that case (it’s a strong case, and would involve liquidity — holding the medium of exchange — and insurance — holding assets with a purchasing power guarantee). when they do make that case, i think they’ll find they place the line in the wrong place: since insured bank deposits are perfect substitutes in the private sector for govt obligations, i think they ought to divide the world into the public and guaranteed banking sector and everyone else, rather than placing the government and its central bank in a special basket. of course, these are arbitrary modeling choices — we can divide the world into the JKH and non-JKH sectors, but if the justification is that currency and default-free claims on currency are especially important to savers, then commercial banks belong inside the issuer circle, rather than in the user circle. the banking system expanding its balance sheet serves most of the functions they desire from deficits, but of course the distribution is different.
(maybe more government-monopolized currency system would yield a better distribution, or maybe quite the opposite. they assume that governments could/would/should become an employer of last resort if only the world understood “modern” theory. i’m unpersuaded about the should, and very skeptical of the would.)
anyway, that’s a long digression, and i’m still responding to your first post above. more soon, i hope.
October 14th, 2009 at 6:47 am PDT
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But coming from a natural science background, I still want some other word besides information. Maybe what I’m thinking of is knowledge. Is ill-informed still informed? I guess if you know what lie someone’s been told, or what gossip they’ve heard, you can better predict their behavior. I just wish we could focus our industriousness more on things that are objectively true, and less on the animal spirits.
October 14th, 2009 at 6:48 am PDT
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David — Great points.
Thank you very much for noticing that the hawkish Fed officials are being “rolled out” intentionally, that their words have meaning more in instrumental than semantic terms. The people at the Fed understand very well what the chartalists pooh-pooh, that regardless of theories of capacity and output gaps, faith in a currency is a poorly understood and potentially fragile phenomenon. I find it astonishing that so many really smart people who don’t have any instrumental reason to say other than what they mean are taking the sudden bout of hawkishness as signaling a “dangerous” intention to actually act, rather than this being the Fed’s equivalent to every Treasury Secretary’s meaningless commitment to a “strong dollar”.
The “Greenspan Put” did create certainty, and was most assuredly stimulus for a very long time. A big part of where we are now has to do with the “wealth effect” from asset losses. But many homeowners/share-owners are not actually any poorer, in the sense that they face a hard constraint that prevents them from spending what they would have spent had assets continued to rise. The negative wealth effect is a function of diminished expectations, in terms of the central tendency of ones net worth, but also increased uncertainty. If you know for sure what your future income and portfolio returns will be, you can income-smooth with perfect efficiency, even from a smaller base. But much of the increase in the savings rate is not adjusting income-smoothing plans under perfect foresight. Much of it is precautionary savings given agents consciousness of their lack of foresight. Even those who still have enough saved wealth to retire comfortably are suddenly aware that bad things can happen and they may not be so lucky next time. That’s a real change from the “great moderation” era. (The effect on bank behavior, both of the certainty and of the crisis, is unsurprisingly even more extreme, given the huge profits leverage confers when the bottom of the distribution is clipped, and the huge hazards when the leverage can bite both ways.)
At some level, the question is whether the Fed will be able to reengineer certainty. They can certainly guarantee everything, but there are political constraints, and doing so might call into question the price-stability commitment that is their bedrock. Ironically, I think the hawkish Fed-speakers are their to create, not destroy certainty. Yes, they are adding confusion with respect to when the Fed might shift rates or employ an “exit strategy”. But the bigger uncertainty now is the FX and commodity value of the dollar, and hawkish Fed-speak enhances certainty there.
October 14th, 2009 at 7:08 am PDT
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Don — I agree with both of you that the economy is continuously recalculating, and it should be continuously recalculating. I think that Kling’s point (and the Austrians generally, see this nice exposition) is that sometimes there’s such an abrupt shift in expectations that the continuous calculation can’t keep up, so rather than facing steadily shifting near-certainties, the economy faces a sudden burst of confusion. I do think that’s right (although I’m less sanguine that, left to its own devices, our recalculator would be very good).
Re expectations and spots, it’s pretty clear that there’s a policy goal to try to create certain expectations of modest inflation, using QE and borrowing etc, but as Krugman points out, those techniques (along with assurances and exhortations) may or may not be sufficient to do the job, which one might frame as creating a combination of certainty and modest inflation expectations, so that the insurance aspect of govt obligations is devalued but the purchasing power commitment by the central bank remains unquestioned. if they succeed, the private sector will do much of the reflating that might otherwise show up as continual govt deficits and an expanding Fed balance sheet. time will tell…
October 14th, 2009 at 7:22 am PDT
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JP — That’s a very good point.
There are two ways direct stimulus creates information. One is that the government, very directly, is an informed investor (in the sense I am using the term). It invests nonrandomly, and directly spurs activity and adds money (if the Fed is a net buyer of securities at the same time).
But, the government’s actions also inform the private sector. Not necessarily in the traditional sense increasing the public sector’s appreciation of the real economic value of alternative projects — that depends on whether the government has chosen to do wise things with its stimulus or not. But as you say, private investors observer, frontrun, and herd. By copying or extrapolating from government action, the pattern of private sector investment is shaped and becomes less random. That adds to the short-term stimulus. But again, the long-term value depends on whether the government’s choices and the private-sector coat-tailing it inspired were actually good ideas.
October 14th, 2009 at 7:29 am PDT
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JKH II & Zane… more tomorrow, i need a break. sorry!
October 14th, 2009 at 7:30 am PDT
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Steve,
I think you put your finger on an unintended consequence of Fed actions: “unintentionally targeted certainty”.
You argue that it will be difficult for the Fed to reconstruct certainty for consumers in their savings decisions. I agree, and I would add that this uncertainty hits higher net worth consumers harder, as they were projecting future wealth gains with high certainty during the Great Moderation.
So maybe the Fed won’t achieve “income certainty”, but the firehose, being turned to “full on”, must achieve something. That something is “carry trade certainty”. It works against consumer “income certainty” by indirectly by raising the volatility of inflation, and directly by raising tradeables prices and therefore reducing real incomes.
The Fed provides more certainty to some sectors than it does to others. Sometimes, this can result in self-reinforcing dynamics in the real economy (i.e. the housing bubble). Other times, the dynamic will be an adverse feedback loop. A higher-inflation-volatility feedback dynamic would create such a loop for consumers.
October 14th, 2009 at 10:26 am PDT
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I think I agree with this notion of how uncertainty leads to contraction.
Here’s some handwavy evidence.
October 14th, 2009 at 5:17 pm PDT
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SRW,
Yikes! I wasn’t expecting you to respond so quickly on the Chartalist digression. I feel guilty for distracting you from your main post theme. Anyway, thanks. Your comments are very much on the money and much appreciated. You mentioned you might reference this area down the road, so I’m going to take the liberty of adding another comment here – partly for that reason, but also, as must be obvious to you by now, I can’t restrain myself. I’m in large agreement with your points; no need for you to respond to the following summary.
Preliminary – I have a high regard for the Chartalist analytical framework, and have made that clear on their various related blogs. One person who has been encouraging and helpful in providing feedback comments to me on various sites has been Scott Fullwiler, who posts on occasion at the Kansas City blog. Some points here may partly repeat ones made earlier to which he has responded. This reflects an interest in developing additional understanding of the subject matter – not my lack of appreciation for his help.
The areas you reference gave me cause for earlier questioning as well. I agree there are questions around the Chartalist partitioning methodology for deconstructing the financial economy. The Chartalist model splits the world between government and non government sectors and then identifies the natural net saving position of the non government sector opposite a natural deficit position for the government sector. They attribute this configuration to a non government desire to “net save”. Here as you imply one could question the fundamental causality at work within the model itself. The accumulation of government liabilities by the non government sector automatically must result in a “net save” position according to the Chartalist definition. But as you point out, government liabilities are attractive for reasons relating to zero/near zero credit risk and liquidity risk. So one must ask, is it the desire to “net save” that drives the accumulation of government assets, or is it the desire to hold these low risk assets among total saving that forces the “net save” position as a required macro accounting result? The Chartalist model barely mentions the issue of risk that I can recall. Is the desire to net save an extension of liquidity preference and the liquidity trap and the demand for money? Is it a coincidence that the supplier responding to this net saving demand just happens to be the issuer with the best credit and liquidity characteristics in the economy?
Furthermore, as you also point out, low risk assets are also found in the banking system through deposit insurance and other implicit or explicit guarantees. This makes it all the murkier to distinguish motivation as between the desire to net save and the desired to save in the form of low risk assets offered directly or indirectly by the government. The banking system links net savers and net borrowers at the margin. Is the banking system in extending credit and creating deposit liabilities satisfying in part the desire of its newly moneyed depositors to net save? Does the government as primary supplier leverage its volumes by de-risking the banking system as required?
These are questions that tweak the Chartalist view, I think. That said, the non government net save position results from a net spend initiative from government, which is an important Keynesian mechanism unique to the government/non government interface.
There are additional questions around the Chartalist partitioning of the financial economy. The sector financial balances model is derived from standard national accounts identities, which of course include an allowance for real economic saving, regardless of the financial asset liability structure around that saving. The Chartalist model subtracts that real economic saving component, deriving a net financial saving concept for the non government sector as a result. The upstream national accounts model includes government saving as part of the equation that sums to total real economy saving. Yet the Chartalist view insists there’s no such thing as government saving. Their reasoning has to do with the technical impact of tax payments and surpluses on the government financial position (more on this below). But the point is that it doesn’t make a whole lot of sense in my view for Chartalists to refute the model on which their derivation depends. In fact, it seems more like a contradiction. Also, real economy (i.e. “gross”) saving is generally evidenced in financial claims of the household sector on other areas of the non government sector. One might interpret these household financial assets as a desire by households to “net save” as well, even though these claims net to zero on full consolidation with corresponding corporate and institutional liabilities to the household sector.
My interest in Post Keynesianism generally and Chartalism in particular is that they have understood the monetary system correctly from an architectural, mechanical, and analytical perspective. This is big achievement in my view. It is big because it is good in its own right, and because it also correctly identifies most of the non-PK economics profession as not having it right. (Most, I say). There is an analytical war mostly between the PK’s and the “neoclassicals”. However, the neoclassicals seem mostly unaware that such a war is being waged. Interestingly, and to your point, Paul Krugman, whose initials happen to be PK, but who is not really a PK, has invoked a more visible war against the “fresh water” school that is quite consistent with the PK Chartalist advance. And on at least one occasion, he has borrowed (if inadvertently) from the PK model to do so:
http://neweconomicperspectives.blogspot.com/
2009/07/sector-financial-balances-model-of_17.html
You’ve raised an interesting perspective on the nature of Chartalist policy prescription – not only with respect to real economy constraints, but with the challenge facing government in the event it seized the opportunity to implement Chartalist policy advice in full. Your take on the potential government decisions dilemma reminds me of an anecdote from Bear Stearns (or Lehman) financial crisis meetings with the government. A government official involved in the discussions at the time said something like: “This would be very interesting, if it wasn’t happening to us.”
The full Chartalist framework comprises the analytical foundations plus the policy or ideology that flows from it. As you have recognized, my primary push back on the ideology/policy side was the suggestion that they deal more directly with ultimate limits to spending and deficits. It is one thing to lift the veil of false financial constraints. It is another to mute actual constraints that exist otherwise. Even if they are contingencies, it is only sound risk management to recognize them as such. To be fair, they recognize what I think can best be described as “real economy constraints” in their writings. I may be thinking wishfully here, but I detect just a bit more qualification showing through in their writing lately. But they’re not there yet in my view. There is still a feeling of lack of boundaries. The full treatment should balance the “mechanical freedom” (as you aptly put it) of the financial architecture with real economy constraints as an overview.
One of my favourite examples of the Chartalist tendency to dial down constraint readings is in the area of fiat taxation dynamics (this also goes to my point earlier above):
(Warning: wonkish. Ha!)
The typical government balance sheet, consolidating the central bank with the treasury position, is a net liability profile. The liability components are bank reserves, currency, and debt. Taxes can be paid using either bank reserves (usually, as agent) or currency (rare, I think, as principal.) In either case, the taxpayer discharges his/her own tax
liability by using the medium of exchange that is at the same time the form assumed by the government’s liability. The government’s net liability position is reduced by the coincident payment/redemption of the liability. This is followed typically by rearrangement of liability mix due to bank reserve depletion, etc. Chartalists like to refer to this particular dynamic as a sort of disappearing act. Your tax dollars “go nowhere”, etc. This tax depiction is the elementary component in a Chartalist analysis of government surpluses more generally. The point is made that surpluses aren’t actually “stored” as saving. But this alleged disappearing act results from the fact that governments tend to run consolidated net liability positions. The disappearing equates to extinguishing a liability; it is the natural asset liability management action of an economic unit with a net liability profile. In fact, it doesn’t have anything to do directly with the fact that the unit happens to be a currency issuer. By comparison, reasonable household financial management suggests that one use some saving from income to pay down the mortgage or other borrowing somewhat before ramping up too much further in asset bulk (unless perhaps you’re in the US, in which case mortgage interest is tax deductible – another sad story). In any event, it is not acceptable to declare that no saving from income has taken place merely because an economic unit uses saving proceeds to pay down a liability rather than acquire a new asset. In this specific case of government saving, one can easily construct the corresponding sequence of T-accounts to demonstrate that a government budget surplus at the macro level represents a partial source of “financing” for real investment. That’s because the non government sector has basically failed to save enough to match up with investment in the normal way, because of the outsized tax payment (budget surplus) it has made to the government. Perhaps this particular loss of perspective reflects some weakness in a model that excludes the core component of real economic saving in deriving a theory of net saving.
My final point returns again to the larger issue of real economy constraints. The Chartalists do acknowledge such constraints, albeit not in bold billboard advertising. But in an ironic sense, by downplaying the present evaluation of such future constraints, they run the risk of not being “stock/flow consistent”, which is one of the hallmarks of PK thinking. For if there are real economy constraints, even as contingencies, such constraints become a necessary part of a required risk management vision. If such constraints become binding with some degree of probability at some time in the future, they must translate to a more specific deficit discipline at that point. If that is the case, then it would seem the cumulative deficit (debt) position matters at that point, again as a matter of risk management sensitivities and boundaries. And that means the sequence of cumulative deficits leading up to that point also matters. If deficit discipline becomes binding at some future point, it should somehow be binding all the way through in a time and risk proportionate sense. I think the Chartalists tend to leave the “binding” part to the tail end. This is a somewhat different issue than recognizing which constraints are false today and which constraints are true tomorrow. In other words, the Chartalists use the lifting of false constraints as the rationalization for ongoing, current period “pedal to the metal” deficits, saving the constraint response until just prior to hitting that brick wall. Here it is unfortunate for purposes of analytical exposition that that the Chartalist ideology seems to have been developed over the past 30 years, which is mostly an extended period of disinflation. It’s not clear how much of the policy prescription is secular and how much reflects the circumstance of this long disinflation cycle.
October 14th, 2009 at 8:49 pm PDT
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More simply: rational agents making plans can’t just look at expected value, but also some set of likely outcomes; under heavier variance there are more alternative outcomes to hedge against, and when they can’t be hedged against stuff doesn’t happen.
It’s the difference between “housing can only go up” — in which case damn the torpedos, buy as much house and as many houses as you can as soon as you can — and “housing will probably go up, but I could wind up in the hole if I’m not careful; in the latter case people unable to tolerate being the hole on an investment won’t jump in, b/c they can’t survive one of the outcomes.
The information you’re getting at is just aimed at convincing people the set of outcomes is narrower and therefore easier to hedge against.
This is why (trustable, not recision-heavy) insurance is such a win: it allows holders of insurance to plan around the expected cost of possible problems (the expected cost-to-you of a home burning down is pretty low, b/c most homes don’t burn down) instead of planning around the cost of a realized problem (…but if your home does burn down it’s financially ruining).
I think you’ve caught this understanding before just connecting it for you.
October 17th, 2009 at 8:29 am PDT
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All — sorry for the long absence. that’s my talent.
JKH — entropy is a scary sounding word, but the basic idea is simple: Knowing nothing means that anything is possible. Information is that which limits the range of the possible. In probability terms, “anything is possible” translates to equal probability of everything, and is the least informed state. As soon as we refine that to a probability distribution where somethings are more likely than others, we have “information”. Entropy is defined mathematically in a way that naturally captures this. If we take the entropy yardstick out, it gives a bigger number for the less informed state, and the number zero when only one thing could possibly happen. Also, it lets us measure how many 0/1 bits of information it would take to communicate to someone uncertain over some broad range of possibilities more specific weightings on the outcomes. That’s really all there is to it. There are interesting connections and analogies between entropy in an informational sense and entropy in a physical sense, but you really don’t need to know any physics (or the mathematical details of informational entropy) to intelligently understand and discuss the idea.
BTW, this was all Claude Shannon’s insight, as Michael Martin points out in the comments at EconoLog.
Zane — If the above makes sense, it’s why I want to use the term “information”. Inspired by Shannon, I assume that someone “uninformed” would believe that almost everything is equally likely, and invest accordingly. Assuming (conventionally) that agents are risk averse, that suggests both less investment in “risk assets” and more even patterns of investment. If risk-averse agents are informed, they should both invest more, and in patterns that look less random and even.
October 17th, 2009 at 5:59 pm PDT
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David — I think the point you are making is exactly right: the Fed is creating certainties, and that’s most of the “stimulus” we’ve gotten thus far. The Fed has clipped the bottom of the distribution in terms of price ‘flation (there is no widespread expectation now of falling prices), and clipped the distribution of banking sector outcomes (“no more lehmans”). People will now behave in a manner consistent with these new distributions, and that involves more spending and non-govt-security financial investing than otherwise would have occurred.
Whether informing investors in this way is a “good” thing depends on outcomes. “Information”, like “confidence” is not an unalloyed good. Ultimately, it matters whether the information that guides behavior is or can be made consistent with outcomes in the real world. If the government, for reasons of politics, scale, changes in external behavior, etc is ultimately unable to ratify the “informed” expectations it has created, today’s activity will look like a bubble, and tomorrow we’ll face more uncertainty, more resources that look ex post to have been wasted, and more debt and poverty. If the government can maintain the world in a state not too far from the story it is trying to endow with confidence fairly indefinitely, then the information will prove to have been “good”. That’s why the Fed/govt/banking system etc need to be careful in the certainties they create: no matter the content, there is a short-term boost. but investor certainty creates implicit commitments that, if not met, can provoke a reversion to extreme hedging, a fine informational definition of economic catastrophe.
October 17th, 2009 at 6:16 pm PDT
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Michael —
Your connection of the piece to Shannon entropy (over at EconLog) was right on (as pointed out in the comment above).
Your piece suggesting phase changes in the distribution surrounding asset prices is quite interesting. Uncertainty between distributions (or “Knightian uncertainty” that can’t be characterized by distributions is much too neglected in economics, because it is so much harder to manage than the uncertainty of a known (or assumed) distribution.
October 17th, 2009 at 6:20 pm PDT
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JKH III — more on chartalism soon (i hope!) it deserves a post of its own. I think you capture a lot here: “If deficit discipline becomes binding at some future point, it should somehow be binding all the way through in a time and risk proportionate sense. I think the Chartalists tend to leave the ‘binding’ part to the tail end. This is a somewhat different issue than recognizing which constraints are false today and which constraints are true tomorrow. In other words, the Chartalists use the lifting of false constraints as the rationalization for ongoing, current period “pedal to the metal” deficits, saving the constraint response until just prior to hitting that brick wall.”
October 17th, 2009 at 6:24 pm PDT
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wh — agree with pretty much everything you say. the rationale for insurance, and for futures market, is precisely the stimulative effect: people do more and more value producing things if they can clip the distribution of adverse outcomes that might result from their actions. most of economics ought to be understood as the art of persuading people to “do”, rather than to huddle, hide, and hedge. i think in a pretty deep sense, “economic development” is about creating a world in which agents consider a wide range of potentially useful behaviors to not be outrageously risky.
but when we talk about insurance, we always have to talk about price. trustworthy insurance is a win, as long as the insuerer to whom risk is transferred is not bearing costs that should out way the benefits of enabling the less-stunted behavior. that depends on the specifics of the risks that are clipped, the behavior that is enabled. insurance companies make judgments about what risks they will bear, and how much they will charge to do so — sometimes well, sometimes poorly. The government / Fed / implicitly-or-explicitly-insured financial system also needs to make such judgments carefully, or else the win-win can turn to lose-catastrophe.
October 17th, 2009 at 6:30 pm PDT
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SRW,
That’s the aspect that’s been the most puzzling to me. Although their examination of it is unsatisfying, I’m not sure they’re wrong. Do you assume and react to inflation risk just because debt/GDP is 50 per cent, or do you wait until inflation risk apart from that is observable in some way (e.g. TIPs implied inflation premium), even if debt/GDP grows to 100 per cent in the interim? If you simply react to conventional debt mileposts, you’re in the position of “expecting to expect” inflation, based on the conventional interpretation of what are false finance constraints. I think that’s their argument. If you should decide to post on this subject, it is an important point for you to consider. I’d be interested to see how you deal with it logically/analytically.
October 18th, 2009 at 7:56 am PDT
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SRW,
Another way of stating the problem is that the Chartalists view the integral of deficits as irrelevant to the issue of risk. It is only the differential deficit that becomes a risk, and only then when “real economy constraints” become a risk. At that point, deficit adjustment becomes Chartalist monetary policy (i.e. tightening). And in theory, Chartalists see no problem with the possibility that the integral of deficits might even require some marginal surplus reversal, although they would consider such an extreme quite unlikely. Again, I’m not sure this logic is wrong. Or, at least, I need more proof that it is wrong.
October 18th, 2009 at 8:10 am PDT
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The post that follows this one is the Mona Lisa of the financial crisis. It should be put under glass and hung in the Louvre. I put this comment here rather than there, for fear of disturbing the atmospheric balance.
October 18th, 2009 at 8:19 am PDT
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Dealing with Krugman’s question simply boils down to realizing what happens during the boom. We are consuming resources now we expect to invest later or vice versa. Either way you are messing with expectations, goals and the planing of everyone throughout the economy. The boom doesnt cause unemployment, but in fact decreases it, because future resources are being overly committed in the now to such activities at the expense of future consumption or investment. We are stealing committed savings. We are raiding our social security funds, etc. As the future unfolds and firms and individuals attempt to realize their expected consumption and investment demands we realize resources are short, and we need to liquidate those malinvestments so we can stop wasting and free whatever resources are possible to transfer to sustainable and preferred uses.
October 19th, 2009 at 10:58 am PDT
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Mises,
I’m sure the Austrian position is better than your exposition of it.
I also think the difference between the Austrian explaination and the Keynesian explaination is LESS than you think. Your “errors in calculation” and Keynesian “animal spirits”, are in essence the same thing – malinvestment is also part of the Keynesian story, but Keynesians emphasize the secondary effects more. And surely that is an EMPIRICAL question, so denying the importance of empiricism is bad policy from your side.
October 21st, 2009 at 6:50 am PDT
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P.S. I personally, are like JKH attracted to the chartalist position. I don’t find either the Austrian view or the neo-Keynesian very convincing, mainly because a. I don’t think there is a stable equilibrium;
b. I don’t think there is any reason to believe if there was one, the economy would necessary head towards it after a shock.
I think “malinvestment” is perfectly normal, our economy tends towards excess capacity in most things (given that most markets are monopolistic competition and show increasing returns to scale – and this is a good thing – it ensures we have choice. But those ideas I suppose are far to radical for Austrian’s who think they automatically can choose correct axioms. They always seem to justify there belief in Austrianism in that it is “more intellectually satisfying”. As though that is the primary way we judge the truth of ideas. (How the hell did we get stuck with Quantum theory then?)
October 21st, 2009 at 6:58 am PDT
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Steve Waldmann,
excellent and thought provoking post as usual.
October 21st, 2009 at 7:00 am PDT
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P.S.
With regards to the “housing bubble”. I’m fairly confident that the amount of excess investment in housing was fairly small, and the recession we have already had, is enough to neutralise it. The problem was that the price of land is too high, and people took on too much debt, based on those land prices. (And yes lots of blood suckers – bankers and real estate salesmen lived off those nominal price gains).
October 21st, 2009 at 7:07 am PDT
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Steve Waldmann,
I just read your first reply to JHK and find it worthy as a post on its own. I find I agree 100% with it. “we’d be off just cutting checks to everyone” – yes that is exactly what I’ve been pushing – except that it makes sense to do some necessary infrastructure investment when the opportunity cost is low.
But one small issue, it is not clear to me that it is well understood why inflation sometimes can be seen in consumer goods and sometimes is manifested in “asset price inflation”. Do you have any ideas on this mechanism? I know some people deny there is such a thing as “asset price inflation”. Do you have a theoretical basis for your ideas in this area?
October 21st, 2009 at 8:36 am PDT
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Mises,
I think it will clarify our differences, if I ask a few questions:
” As the future unfolds and firms and individuals attempt to realize their expected consumption and investment demands”
Why do you think these are known and fixed? Do you know what you buy next year? You don’t even know what products will be available – let alone the prices and your income.
“we realize resources are short”
Not at the moment they aren’t. Or what do have specifically in mind here?
“and we need to liquidate those malinvestments so we can stop wasting and free whatever resources are possible”
Does liquidated malinvestments always free resources? Could it be the value of those resources even in inferior uses is more than the value of the same resources in alternative uses?
“to transfer to sustainable and preferred uses.”
Do you know what those sustainable and preferred uses are now? If not how will you find them? Why do you assume you will know what is sustainable, given that changes in technology, taste and relative prices might make what seem good choices now, untenable in the future?
October 21st, 2009 at 8:43 am PDT
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Short summary,
I think we are shooting at a moving target, and flexibility and resiliance are more important than efficiency.
October 21st, 2009 at 8:44 am PDT
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P.S. When you talk about preferred uses – it rather skips a crucial question “whose preferred uses”. Any change in the distribution of income (through changes in employment or in relative prices) will change the sum of preferences. Also those preferences might be critically dependent on wealth and expectations of the future – and those can also be volatile.
October 21st, 2009 at 9:01 am PDT
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Let me ask a hypothetical question about “liquidated malinvestment”. Could it be that sometimes the problem with an investment is not that what it produces is useless, or that we could use the (sunk-cost) investment goods better somewhere else, but that the price paid for the investment was too high, and the debt can longer be financed from the flow of income it produces. “Liquidating” the malinvestment, involves just a change of ownership, and the resources continue in their old use. Is it possible this happens sometimes?
October 21st, 2009 at 9:13 am PDT
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“Mises,
I’m sure the Austrian position is better than your exposition of it.”
not sure this is worth a response.
“I also think the difference between the Austrian explaination and the Keynesian explaination is LESS than you think. Your “errors in calculation” and Keynesian “animal spirits”, are in essence the same thing – malinvestment is also part of the Keynesian story, but Keynesians emphasize the secondary effects more.”
the theories are clearly different, and we can see that because the diagnosis and more obviously the prescriptions are very different.
the errors in calculation are the direct result of policy makers tampering with our means to calculate. The market would naturally coordinate our production possibilities so that we tend to move along the curve, because our investment and consumption decisions into the future would be based on our actual capital base. When claims to capital are released unevenly while there is no new addition of capital to be claimed, and these receipts look identical to actual claims to capital, the market tends to overshoot their consumption and investments preferences until the notes are eventually devalued to reflect the actual capital that can be tapped.
Animal spirits, according to keynes, are like fish who swim one way and for no good reason at all switch the way they swim. What the austrians are taking about is not a random switch, but a move that we can expect them to tend to because the policy makers are confusing the means to calculate.
” And surely that is an EMPIRICAL question, so denying the importance of empiricism is bad policy from your side.”
when did i deny the importance of empiricism? i, nor austrians, do any such thing. the theory of capital misalloaction however can still be formulated without reference to empirical cases. i think you misunderstand theory and empiricism.
“Why do you think these are known and fixed? Do you know what you buy next year? You don’t even know what products will be available – let alone the prices and your income.
“
i’m not saying theyre fixed. people can adjust and accept forced savings, but this doesnt change the fact that the decision making was removed from them. Interest rates in part reflect people’s savings prefrences. That is their preference for the future versus the now. If someone injects an overt amount of fraudulent savings to distort the rate, and oversupplies loanable fund demands, as those demands draw down on real resources, they are requiring some unplanned consumption sacrifice to compensate. This higher, unpreferred level of investment must funded somehow.
My point was also more about why booms last so long. People may not realize the need to sacrifice right away, because they are not aware they’ve created an unsustainable path, because the market forces no longer reflect the resources available. Mises made the case of a master house builder who had 100 bricks, 10 bricks are needed per house, but he sets off to to build 100 houses which require a thousand bricks. I’ll somewhat change the case. He can start building all the houses without anyone realizing he wont finish, and to the extent he wants to complete his project, he must rely on no one else consuming the saved bricks and in fact requires their future savings of bricks to go towards this project. If people start savings for their own consumption or other investment purposes, the master brick builder can still tax their savings to aid his project via inflation. People will eventually be shocked, or maybe they dont even realize theyre robbed but the reality is they still are, when they go try spend their presumed savings and the resources it buys is less than it would have had the master builder not diverted their resources away from preferred uses.
the other key is the information does not pass through. the market has a coordinating function that is sacrificed here so people are left blinded. They aren’t able to track how much they should consume based on how much is invested without market mechanisms like the interest rate functioning properly.
”
Not at the moment they aren’t. Or what do have specifically in mind here?
”
if you don think resources are short why do you bother with economics? why is there a need to economize?
specifically i have in mind what i was saying before. In general people can can’t consume and invest at the rates they are because they are draining their resources too fast to achieve both. In effect they are oustide their PPF curve.
”
Does liquidated malinvestments always free resources? Could it be the value of those resources even in inferior uses is more than the value of the same resources in alternative uses?
”
liquidating by definition frees resources. Some resources may not be able to be liquidated and that is part of the waste that you cant get anything back of.
and yes you’re right, those resources may be better off in inferior uses compared to better uses including the transfer. But if this is the case, their liquidation will not be required naturallly by market forces.
”
Do you know what those sustainable and preferred uses are now? If not how will you find them? Why do you assume you will know what is sustainable, given that changes in technology, taste and relative prices might make what seem good choices now, untenable in the future?”
because the market is largely self-coordinating, or at least we do as best we can because we put ourselves in the best situation to calculate into the future because we are honest about what we have to use. The market will not allow more resources to be invested without an equivalent sacrifice in consumption. That is what i mean about sustainable. Not that their wont be any more entrepreneurial failure. My point is we should trend across the PPF curve, as best we can realize now. I fully submit the future is uncertain and anything can change. Our resources could be destroyed unexpectedly but the key word there is unexpectedly. We’re talking about playing the best hand we’re dealt. What more can you expect of people.
October 21st, 2009 at 9:43 am PDT
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Mises,
I think I did my job and pointed out how many heroic assumptions you are making.
Lets just also point out that monetary policy is increasingly open with an open aim (stabilizing consumer prices) and so can be an input into the calculation that entrepeneurs makes. But there are so many unknowns, that pointed to one source of error is indeed a VERY heroic assumption. And that is the point of “animal spirits”, confidence if you like, optimism or pessimism can affect how expecations of the future are evaluated.
And one single interest rate doesn’t carry enough information to ensure that exactly the resources that are required, will be in the future (futures markets might). But anyway, I think it is besides the point, shortages are not clearly what caused the recent crash, financial imbalances ARE.
Now for the surprise, I agree with most Austrian’s that our current financial system stinks, even if I think their description of what happens is at most a relatively minor side issue.
October 21st, 2009 at 11:21 am PDT
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Mises,
the reason for the end of the boom wasn’t forced savings because of shortages. Yes there were shortages of some commodities (notably oil, metals and grains), but even that was possibly due to speculation. But that wasn’t the main issue. The main issue was CLEARLY that people had counted on rising asset prices to support their personal balance sheets despite increasing indebtedness. When asset prices stopped rising (and given how overvalued they had become they had to stop rising at some point), they were in big trouble. Your story doesn’t add up to what actually happened, in the world we have today with the massive increase in the world labour force due to globalisation, it is hard to see how it could. If people made errors in calculation, “incorrect” interest rates – and a number of commentators have pointed out that according to some well known rules it is not obvious that they were incorrect – are a minor issue compared to incorrect expectations. The market made major pricing errors – not least in currency prices. This WAS due to government sector interferance – but was OUTSIDE the control of the US government. Have Austrian’s heard of the theory of second best, or do they want to rule the world?
October 21st, 2009 at 11:38 am PDT
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Mises,
unfortunately, I can’t cut and paste here for some reason, otherwise I would answer your specific answers. Suffice it to say, I think to say in the current circumstance that resources are not relatively short. Not only that, but the financial situation of consumers is bad and deteriorating so that finding growing markets to employ unemployed resources in is difficult.
And I agree entirely that there are lots of unknowns and we can only expect investors to do their best. And they will often be wrong. But the system copes with their errors constantly, people move between sectors constantly. Central banks trying to maintain low inflation and avoid unemployment are in comparison a help, so long as they are open and consistant for the reasons our host here so clearly layed out.
October 21st, 2009 at 11:49 am PDT
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“Mises,
I think I did my job and pointed out how many heroic assumptions you are making.
Lets just also point out that monetary policy is increasingly open with an open aim (stabilizing consumer prices) and so can be an input into the calculation that entrepeneurs makes. ”
entrepreneurs care about profit margins. the difference between their inputs and outputs. the average direction of a basket of consumer prices makes no difference.
and whether you realize or not, monetary policy has utterly failed at stabilizing consumer prices, even on an average basis which has messed up adjustments thrown in.
”
But there are so many unknowns, that pointed to one source of error is indeed a VERY heroic assumption.”
you must not understand the problem at hand.
distorting the captial base can lead to extreme economic disequilibria. that is a theortical fact. whether that is the only reason to blame in this case is up for question but there is a lot of good reason to think it was at least the driving force for the majority of structural problems. And that is true for pretty much the whole boom bust phenomenon of human history.
” And that is the point of “animal spirits”, confidence if you like, optimism or pessimism can affect how expecations of the future are evaluated.”
so? i think you think the theory hinges on something it doesnt.
“And one single interest rate doesn’t carry enough information to ensure that exactly the resources that are required, will be in the future (futures markets might). ”
with all due respect, im not sure how much macro econ you understand, but you must learn about what the interest rate is and what it does.
the interest rate is the point where the supply and demand for loanable funds meet. For the production structure of the economy to be in harmony with available resources, the interest rate must be the reflection of the actual supply of loanable funds, in effect the actual capital saved for non-current consumption purposes. the problem is the Fed doesnt work of this, they use their unlimited grab bag, rather than limiting themselves to the strict amount of captial available for investment.
new investments must be financed somehow, and they can only be financed with excess resources; savings. all im saying is in the market place, investment demands cant be met without adequate financing in terms forgone consumption, an investment demand is met with an adequate amount of loanable funds for that demand. the more resources saved, the more is avaiable for investing, the less resources saved the less is avaialbe for investing. saving itself is showing a preference for the future over the now. if a few resources are saved but you try make a ton of investments, you’re gonna run into a problem, because there are no adequate savings. The entrepreneur who takes the loaned funds may overinvest or underinvest, or incorrectly invest all together but that is beyond the point. Malinvestment is something entirely different.
”
But anyway, I think it is besides the point, shortages are not clearly what caused the recent crash, financial imbalances ARE.”
i agree. though in a deeper sense, shortages are resposnible for all our inabilities to a satisfy our needs, but more specifically ive consistently blamed capital misallocation. we made poor use of our resources.
October 21st, 2009 at 12:03 pm PDT
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reason,
for a visual see:
http://www.auburn.edu/~garriro/figure910.gif
October 21st, 2009 at 12:12 pm PDT
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“entrepreneurs care about profit margins. the difference between their inputs and outputs. the average direction of a basket of consumer prices makes no difference.”
But if the inputs and outputs are at different times, inflation makes a difference. It is the cash flows that matter to entrepeneurs.
“distorting the captial base can lead to extreme economic disequilibria. that is a theortical fact.”
I have no idea what you mean to say here.
“For the production structure of the economy to be in harmony with available resources, the interest rate must be the reflection of the actual supply of loanable funds, in effect the actual capital saved for non-current consumption purposes.”
THE interest rate? Risk and time make a whole structure of interest rates – which one do you mean. As as I pointed out, interest rates carry insufficient information to do the job you want it to. And as Keynes pointed out, there are other demands for money – the liquidity (transaction) demand for money and the speculative demand for money. Your model is too simple. Besides which the economy is never in balance. You act as though we start from a “correct” position and then distort it. In fact the economy is constantly adjusting to new changes, it is never at rest. What matters is the cumulative effect of a whole time series of rates. It could well be that short term fluctuations, don’t change the capital structure in the long term, just change the timing of investments (in fact anybody who has worked in a firm KNOWS that that is case).
“new investments must be financed somehow, and they can only be financed with excess resources;”
This is a crass oversimplification. It is absolutely true that a given piece of production is classified either as investment or consumption (although even that becomes murky at the edges). But good investment creates its own surplus. Don’t get the real economy and the financial economy mixed up. You ask how much macro-economics I understand (well I used to work in the economics department of a central bank). I think your revealed view of macro-economics is too simple. Perhaps you know more than you are expressing.
October 22nd, 2009 at 5:54 am PDT
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Loan guarantees carry regulatory and supervisory burdens including assessment of risk, pricing of risk, compensation of employees, contracting procedures, conflicts of interest, etc.
Hence banking, a public private partnership, funded with fdic insured deposits, requires extensive regulation and supervision.
Also, (for better or for worse) the reason for private capital in banking is to let the private sector price risk rather than the public sector. That would also apply to govt guarantees for funding for this purpose as well
October 22nd, 2009 at 8:59 am PDT
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“But if the inputs and outputs are at different times, inflation makes a difference. It is the cash flows that matter to entrepeneurs. ”
they may not be at different times. some businesses are able to sell forward their product. but this is besides the point. a basket of consumer goods makes no difference to entrepreneurs. i dont know a single entrepreneur and i doubt you do who references bls numbers before investing. to use an accusation of yours, its an extremely simplistic and largely irrelevant way of viewing an entrepreneur’s incentives. If consumer goods are falling 10% a year but factor prices are falling 50% a year, do entrepreneurs still have a problem?
also why should inflation only inflate output prices rather than input prices?
further, if retail prices prices are falling faster than factor prices, entrepreneurs will hold off bidding up factor prices, causing them to fall relative to retail prices until a profit margin is restored.
“I have no idea what you mean to say here. ”
i mean simply we dont know how to make best use of our resources if we arent honest about how many resources we have to make use of. booms are simply us trying to extend our available resources beyond the potential capacity.
“THE interest rate? Risk and time make a whole structure of interest rates – which one do you mean. As as I pointed out, interest rates carry insufficient information to do the job you want it to. ”
there is no value lost in aggregating the money markets to a loanable funds market. especially because money injections will be discounted eventually and by proxy effect all fund markets and each rate has some effect on other rates (notice how the fed tries to say they’ll keep short rates low for a while to effect long rates). Anyways you have some given supply of funds available for loans and thats all the matters. The equilibrium interest rate is simply the “price” where the supply = demands. IF demand are oversupplied you have more resources being invested than fund available in the loan market can support. This mean those demands must either be abandoned or financed at the expense of resources that were not meant to be available to the loans market.
”
And as Keynes pointed out, there are other demands for money – the liquidity (transaction) demand for money and the speculative demand for money. Your model is too simple.”
i’m well aware of why money is demanded. Keynes over emphasized the “speculative demand” for money, but we need not go there. all i will say is there is NO basis for calling demands for money speculative, unjustified and worthy of combating. As rothbard points out it simply boils to an argument of you’re holding more money than id like you to hold. Every individual has the right to exercise preference over their money/liquidity balances.
Anyways, I’m talking about the difficulties in our investment and consumption decisions based on an oversupplied loans market. The further we drive down interest rates, the more we discount the expense of longer term projects. This encourages investments further out than otherwise. A low interest in itself reflects a high savings and, therefore, a preference for the future over the now. think about it, if the world were ending tomorrow interest rates would certainly not be low. If a low interest rate is present without a high savings, because of false signals from money inejctions, then people make bad decisions. They work off bad assumptions. This causes people to engage in long term projects, like housing, even though the resources are not there to allow such a venture WHILE no more new saved resources are dedicated to make up for the deficit (the difference between available resources and available resources plus money injections fraudulently representing real resources).
Continuing, the fed is constantly changing the loanable funds by controlling the supply lever based not on resources, but technocratic decision making, and what they add or withdraw overstate or understate the actual capital supply which is already discounted in real terms. You have to remember the fed only supplies loanable funds in a nominal sense but are able to have real effects simply because of the fraud involved in the notes they release. No one can distinguish claims to real capital from money injections so eventually all money is devalued but there is an uneven dissemination process that allows for real effects.
”
Besides which the economy is never in balance. You act as though we start from a “correct” position and then distort it. In fact the economy is constantly adjusting to new changes, it is never at rest.”
i agree. think about the fact the fed funds target usually only changes every few months. isnt that crazy considering how much rates should adjust based on the dynamic inputs of the market? shouldnt the effects be similar to price fixing?
in terms of starting from the correct position, like i said, the fed only has the ability to supply in a nominal sense. Real resources do work their own magic, and if someone wants to make one available for loans, their is little problem to doing so. Real resources certainly can’t overshoot. But if we presume the market is undersupplied, it still doesnt help for a central authority to inject cash, because the allocation is artificial and extremely difficult for the rest of the economy to coordinate with. That is the big problem, coordination. We need and rely on prices for coordination and the rational allocation of resources but cannot do so when prices are being artificially fixed from a central authority. A problem with prices being manipulated though as one attempts to “correct” a price, and this is especially true in the loans market, is prices are somewhat indirect signals, so even if something is “underpriced” just changing the price upwards doesnt necessarily fix and coordinate all the factors involved in the price. the price often needs to be derived in the correct manner, not just adjusted with artrificial tools.
”
What matters is the cumulative effect of a whole time series of rates. It could well be that short term fluctuations, don’t change the capital structure in the long term, just change the timing of investments (in fact anybody who has worked in a firm KNOWS that that is case). ”
already answered this mostly. you’re taking too much of a cue off greenspan’s excuses for his lack of involvement in the current crisis.
”
This is a crass oversimplification. It is absolutely true that a given piece of production is classified either as investment or consumption (although even that becomes murky at the edges). But good investment creates its own surplus.”
this is beyond the point. resources needed to get to the surplus must still come at the expense of something. its a forced investment. force = against economic preferences.
”
Don’t get the real economy and the financial economy mixed up. You ask how much macro-economics I understand (well I used to work in the economics department of a central bank).”
that explains a lot ;)
October 22nd, 2009 at 10:27 am PDT
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Is that really Warren Moseley – wow (if so)!
Mises
“that is a theortical fact.”
What a wonderfully funny statement. Theories explain facts, they don’t create them.
“But anyway, I think it is besides the point, shortages are not clearly what caused the recent crash, financial imbalances ARE.”
i agree.”
So why are pushing the Austrian view and not singing the praises of Minsky?
October 22nd, 2009 at 10:29 am PDT
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“What a wonderfully funny statement. Theories explain facts, they don’t create them.”
to avoid jumbling words, i mean it like 1+1=2 is a theoretical fact. you see now?
”
So why are pushing the Austrian view and not singing the praises of Minsky?”
i’m not a strict austrian and think there are areas they fall short, but they certainly got a lot of the important stuff mostly right. anyways, i’m not that familiar with minsky’s work. But the austrian view is certainly not about shortages or excesses. They talk about that explicitly and make clear imbalances are the problem. i dont think minsky’s ideas are at odds with the austrian ideas anyways, though im not that familiar so maybe you can make that clear.
October 22nd, 2009 at 11:07 am PDT
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Mises
I missed your second to last post, but it is such a jumble of misconceptions about monetary policy, I think it best not to reply in detail.
Basically, with the fiat money system we have now, for better or worse, there needs to be some point of control in order to avoid either excessive and inadequate money supply (because of inflation) and the central bank adjustment of very short interbank rates has proven historically to be the best method of control. That it happens only every now and then is a question of the flow of information, but this is not so tragic – most interest rates are none the less set by the market, the manipulated interest rates only serve to encourage or restrict the creation of credit, like the brakes or accelerator of a car. In fact I regard them mostly as signals of intent on the part of the bank to avoid excessive inflationary and deflationary forces.
Historically, they have been successful at what they do, compared with what went before.
Perhaps a Minsky might say – this very success carries with it the seed of failure.
I see you failed to pick up the point on the complexity introduced by the time structure and risk structure of interest rates. In particularly, Minsky would say that changes in risk premia are the key variable.
And I’m sorry but quoting Rothbard, is not a convincing argument with me. (I think he is a clever idiot, if you understand what I mean. Like someone once said about APL, a mistake carried through to perfection.)
October 23rd, 2009 at 3:51 am PDT
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Mises
Have you read “Babysitting the economy” by Krugman. You really should. It explains why changes in liquidity preferences can be crucial to aggregate demand in the economy. I’ve seen Austrian critiques, but they are just hair splitting and don’t address the central issue. (Basically, the critiques remind me of the misinterpretations of the Sermon on the Mount in Life of Brian.)
October 23rd, 2009 at 4:01 am PDT
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Mises
“1+1=2 is a theoretical fact”
Stop it you are making it worse (and so is all your discussion about (expected) inflation and entrepeneurs. You are mixing up average inflation and relative price inflation, and forgetting that borrowed funds or sunk costs are fixed in nominal terms, but future prices are not. The point is quite simple. And as for your point about entrepeneurs stopping from buying commodities if the prices go up – ???? I’m sure if you thought about it you would rephrase that. This only makes sense if
1. They think the changes are temporary
2. They have inventories
3. The elasticity of demand for their product, or competitive conditions in the market are such that they cannot just increase the price.
And as for crowding out of consumption – well that is an inflationary pressure that the central bank is on the look out to avoid. So essentially, what you are saying is that the central is not doing its job properly. So what is wrong then, with the solution being that the central bank does its job better? And if you are going to claim that, then you should be able to point to evidence of accelerating inflation.
October 23rd, 2009 at 4:28 am PDT
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“Basically, with the fiat money system we have now, for better or worse, there needs to be some point of control in order to avoid either excessive and inadequate money supply (because of inflation) and the central bank adjustment of very short interbank rates has proven historically to be the best method of control.”
this is the biggest fallacy is in macro economics. the quantity of money is irrelevant. any quantity of money is sufficient to satisfy all roles of money. you must think deeply about what money is to realize this. money only changes things in nominal terms, and to the extent there are real effects, they are redistributive of wealth. the money supply is always elastic, even if fixed, because it can grow internally, but being subdivided infinitely.
further saying it is historically proven, is non sense. proven by what?
“That it happens only every now and then is a question of the flow of information, but this is not so tragic – most interest rates are none the less set by the market, the manipulated interest rates only serve to encourage or restrict the creation of credit, like the brakes or accelerator of a car.”
it doesnt matter if most interest rates are set by the market. and for the important factors this isnt even true. interest rates are supposed to reflect the scarcity of capital alone, but the fed acts as though capital isnt scarce, which is why they always act to combat rates. Its not only direct money injections that effect rates too, but the low reserve requirements and the guarantees allow for major changes in rates also.
”
Historically, they have been successful at what they do, compared with what went before.
”
what went before? the 19th century showed america’s best historical performance on record and it was during falling consumer prices and it was riddled with two failed central banks, and a variety of manipulations (bimetalistm etc.). have you heard of the industrial revolution? The only reason booms and busts were more frequent is because there were checks and balances to avoid letting them getting way out of hand. read hayek on this topic.
”
I see you failed to pick up the point on the complexity introduced by the time structure and risk structure of interest rates. In particularly, Minsky would say that changes in risk premia are the key variable. ”
i dont think you understood my answer. in fact i think your lack of direct response to my points is a sign you just wanted to say a few more unsupported extreme claims in your favor.
”
And I’m sorry but quoting Rothbard, is not a convincing argument with me. (I think he is a clever idiot, if you understand what I mean. Like someone once said about APL, a mistake carried through to perfection.)”
what? quoting rothbard id not convincing? what about WHAT ROTHBARD SAID? are you that intellectually messed up that who says what matters more than what has been said?
“Mises
Have you read “Babysitting the economy” by Krugman. You really should. It explains why changes in liquidity preferences can be crucial to aggregate demand in the economy. I’ve seen Austrian critiques, but they are just hair splitting and don’t address the central issue. (Basically, the critiques remind me of the misinterpretations of the Sermon on the Mount in Life of Brian.)”
ive read too much krugman, and my life is too short to give him more time. If you want to display his best arguments here i would raed and comment but that would be the most effort i could really grant him because ive already tasted much of what he has to offer. his ideas ride off what he says in depression economics “free lunches are possible”.
“Stop it you are making it worse (and so is all your discussion about (expected) inflation and entrepeneurs. You are mixing up average inflation and relative price inflation, and forgetting that borrowed funds or sunk costs are fixed in nominal terms, but future prices are not.”
how am i mixing it up? i was never trying to talk about relative price inflation. and im not fogetting that borrowed funds etc. are sunked costs; you just dont realize how that factors in. entrepreneurial profit is created by predicting future supply/demand. Prices should reflect this, and if entrepreneur misses out, he shouldnt profit. If i sink costs and the goods i hope to sell are going down in price relative to my input costs, i mispredicted the future situation such that this item isnt in as high demand or low supply as i thought. Further, what do you say about investment in the techonlogy industry where prices are falling all the time, and investment is consistently robust? what about the 150 year peiod of america were prices were falling and growth was sustainably above 10% for much of the period? does your head explode when you absorb such facts? my way of thinking can account for this, i wonder if yours can.
“So essentially, what you are saying is that the central is not doing its job properly. So what is wrong then, with the solution being that the central bank does its job better? And if you are going to claim that, then you should be able to point to evidence of accelerating inflation.”
for the central bank to do its job better, short of ending itself, it would have to end moral hazard, and stop expanding the money supply unevenly all together. it should just allow for notes to grow internally by exchanging one denomination for smaller denominations if demanded.
in terms of pointing towards accelerating inflation, its very simple. The fed’s effective liabilities have grown significantly. the fed only expands its liabilities by creating inflationary demand for assets. that is inflation. inflatoin will spread further as well, because money is only held for spending, so it is bound to be transacted. if you say they can withdraw it, well they shouldnt have put it there in the first place then. i doubt that will convince you because you may say the financial system need a bridge loan or watever, but then you must realize the difficulties they have in an actual exit strategy and that they will never take the route necessary. see this: http://goldnews.com/?p=138
October 23rd, 2009 at 9:26 am PDT
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Mises,
this has no point anymore. Let me just ask you a rhetorical question – what would convince you that you (or Hayek or Rothbard) were wrong?
October 26th, 2009 at 4:35 am PDT
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“Mises,
this has no point anymore. Let me just ask you a rhetorical question – what would convince you that you (or Hayek or Rothbard) were wrong?”
i wouldn’t say there is no point. but anyways, if you’re implying im the one who is too stubborn or something, realize at least im responding to you in the context of your arguments. Anyways, i think hayek and rothbard are wrong on a lot of things. i dont see them as prophets or deities. In terms of being wrong on the topic at hand, id need to see a mistep in logic and/or a misapplication of logic to history.
What would convince you Krugman, Keynes, etc. were wrong? i hope it doesnt take more than digging one hole to bury money in, or considering 9/11 terrorists economic stimulus, or thinking a housing bubble is needed to lift us out a previous downturn, etc..
October 26th, 2009 at 9:08 am PDT
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Mises,
You don’t need to make a misstep in logic, you just need to make incorrect assumptions. Krugman and Keynes are/were sometimes wrong. Empirical evidence is the key criterion.
October 27th, 2009 at 7:04 am PDT
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I’m a constructivist, generally, so dont bury my assumptions in formalities. Everything is derived, with careful attention, and for the most part assumptions arent actually made. i am simply addressing the facts of what things are, their platonic forms if you will. an introspection into what money, interest rates, etc. are reveals their essence which cannot be taken away from them. So far as one thinks it wrong, they are simply saying they dont want to have a discussion about interest rates or money, etc. Otherwise you must point to a misstep in logic or the application of theory to historical events.
If you want to move this to a debate about epistemology i can help highlight why empiricism is not the key criterion. Many economic facts dont depend on empiricism at all, like supply and demand, for example. It is true no matter what historical setting you’re under, so is independent of empirical review. This is true of manyy underlying theoritical facts. Think about testing itself. Many facts are revealed within the act of testing that cannot be tested. Testing presumes you can relate causes to effects, you exist, there is time, there is space, etc. You can’t test whether causes relate to effects, whether you exist, whether there is space and time, becausing testing already implies they are all true. Empiricism is steps down the line in knowledge, not the base of knowledge. And empiricism itself rests on a theoretical foundation.
October 27th, 2009 at 9:09 am PDT
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The Shannon definition of entropy is linear (or “extensive”) in the sense that the sum of the entry of two bits of information is always equal to the entropy of the two bits together. This linear assumption fails when the two bits are correlated. Tsallis has generalized to a nonextensive definition of entropy, which permits for deviations from gaussian to levy statistics in the presence of such correlations. If one had a reliable and simple way to determine whether the entropy of a market were nonextensive or extensive, then one would have at the same time a good indication of whether decisionmaking was correlated or uncorrelated.
October 27th, 2009 at 8:49 pm PDT
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Mises
I’m with David Brin on this – he is a passionate pragmatist – and a passionate anti-platonist. Read some of his stuff.
And as for why I thought our conversation had no point any more, therein perhaps is the hint. There are some fundamental differences there! I was increasingly finding nothing at all I could agree with you about. I didn’t know where to start replying really.
October 29th, 2009 at 7:46 am PDT
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Reason,
can you link me some of his material?
“And as for why I thought our conversation had no point any more, therein perhaps is the hint. There are some fundamental differences there! I was increasingly finding nothing at all I could agree with you about. I didn’t know where to start replying really.”
i dont agree with you on anything either but that didnt stop me. The point of the debate is to see whose arguments can stand up better, not to agree from the onset or look for approval in the arguments of your counterpart. To the extent you disgaree, you should have more to say rather than less. How about responding with things like WHY you disagree.
October 29th, 2009 at 10:05 am PDT
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“”Plato: Our senses are defective; therefore, we cannot discover truth through experience. That chair, for instance. Despite all your gritty “experiments,” you will never determine what it is. Not perfectly. Therefore give up! Empiricism is useless. Seek the essence of truth through pure reason.
Galileo: You’re right. my eyesight is poor. My touch is flawed. I will never know with utter perfection what this chair is. Nevertheless, I can carve away untruths and wrong theories. I can demolish fancy “essences” and epicycles and disprove self-hypnotizing incantations. With good experiments – and the helpful criticism of my peers – I can find out what the chair is not.”
David Brin The Transparent Society, Page 146
October 29th, 2009 at 10:13 am PDT
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http://www.davidbrin.com/libertarian1.htm
October 29th, 2009 at 10:32 am PDT
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What are “good” experiments? Why is “experimenting” useful?
I’m not denying our senses, btw, just disagree with the extent of power traditional empiricists grant our external senses, and the lack of respect for power they have of our internal senses. Introspecting is still utilizing a sense, so far as im concerned.
Further, think about it like this, you ever use one of those spam checkers, that makes you type in the letters which they display all skewed? Why is it our fanciest computers have trouble solving this? Simply because they dont see an A for and A. They have large databases of images, and can complete millions of steps quickly but cant get simple answers our brains do in a few steps. They cant see a bold skewed A as still being an A because they dont recognize the essence of Aness. There are invariant qualities that make an A what it is, and realizing that is key to still recognizing the A regarldess of varying contexts.
Even more true than that, we can learn a lot about the world without ever sensing outside our minds. If i never had all my senses besides my ability to think, i could learn a lot by experimenting in my mind alone. I can learn that i think, which has large implications. I must think in a spacial setting over time. So i’ve already established time and space. Thinking involves repetitions which amounts to understanding arithmetic. Further i realize each event is causally connected such that i can theorize, and relate effects to causes. I know I exist, i know i act, i know i show preference, etc. There is much more to know, but its not true to say all knowledge comes from our outside experiences, and in fact most fundamental knowledge does not.
Further experimenting in the outside world always leaves with a measure of doubt. Things we discover that are true always dont carry this weight. Science itself is not something that is true with some margin of error. math does not have a margin of error. existence does not have a margin of error. neither does supply and demand. these are theoretical truths that cannot be undone, are not just true some of the time, and will never be experimented away. Could an experiment show experimenting to be untrue? Makes your brain jiggle to even think about it. Clearly the foundation of knowledge and experimenting rest on deeper foundations, which is what you’re missing.
You should take a cue from Godel, who showed why formalism never leads you to a complete theory. It is necessary to take a cue from Plato, which Godel certainly did, to make complete theories at all.
October 29th, 2009 at 10:44 am PDT
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Mises
I’m sorry, I think your talking a load of crap. But it would take too long and be too off topic to explain why. Lets agree to leave it.
October 30th, 2009 at 3:56 am PDT
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Mises
just to make sure you don’t think you can claim victory and go home – I disagree with almost every sentence you wrote above. I will just say the following – the approach you recommend is the approach of almost every religion. So if it was a good way to discover the truth, we would have one common religion. Right?
October 30th, 2009 at 4:27 am PDT
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“Mises
just to make sure you don’t think you can claim victory and go home – I disagree with almost every sentence you wrote above. I will just say the following – the approach you recommend is the approach of almost every religion. So if it was a good way to discover the truth, we would have one common religion. Right?
”
ofcourse i won. you didnt even throw a punch, how could i lose.
and with all due respect, i dont care if you disagree with what i said. i care if you can substantiate an argument that contradicts what im saying.
i have zero idea what you’re talking about when you say my approach is the approach of all religion, and even if it were true, that doesnt mean im wrong by necessity. Its a highly fallacious argument that amounts to no more than name-calling.
You’re wrong in that there is a point to debating. However, you’re right that there is no point debating with you. And in all of it, you try discount my intellectual honesty by calling my thinking religious in nature, yet you’re the one ideologically clinged to your ideas with zero evidential basis. Best of luck learning, understanding and progressing with your approach.
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October 30th, 2009 at 9:54 am PDT
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Um Your the one who is arguing against empiricism and now I am the one who has no evidence. (How do you know by the way)? No, it is just that it takes to long to reply when I don’t just disagree with part of what you say, but almost everything. I can’t be bothered.
October 30th, 2009 at 11:19 am PDT
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“Um Your the one who is arguing against empiricism and now I am the one who has no evidence. (How do you know by the way)? No, it is just that it takes to long to reply when I don’t just disagree with part of what you say, but almost everything. I can’t be bothered.”
i’m not arguing against empiricism. i dont think you understand me at all. im just saying its not the foundation of knowledge. in fact i think more of empricism than you do, because you think it hinges on empricial review. i’m certain of empricisms importance. do you think empricisim is true only with a positive margin of error? what percent certain are you in empricism? could we find empricial evidence agaisnt empiricism in the future?
my view of knowledge is similar to godel, kant, and much of wittgenstein, among many others. i guess you think they are religious idiots as well. even steven hawkings, the extreme positivists, de facto agrees with most of what ive been saying since he thinks mathematical functions are immune to review by non logical means.
Wittgenstein:
“In a certain sense, we cannot make mistakes in logic. … [L]anguage itself
prevents every logical mistake. – What makes logic a priori is the
impossibility of illogical thought. (TLP 5.473-5.4731.)
Thought can never be of anything illogical, since, if it were, we should
have to think illogically. … It used to be said that God could create
anything except what would be contrary to the laws of logic. – The truth is
that we could not say what an ‘illogical’ world would look like. … It is as
impossible to represent in language anything that ‘contradicts logic’ as it
is in geometry to represent by its coordinates a figure that contradicts the
laws of space or to give the coordinates of a point that does not exist.
(TLP 3.03-3.032.)”
October 30th, 2009 at 11:57 am PDT
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