How does the economy work? A new Fed paper suggests nobody really knows
nytimes.com
nytimes.com
But is there a single individual on earth who knows all the ins and outs of all the minutiae of every single aspect of Google search - from search result algorithm to ingestion to crawling to artificial intelligence? Not a chance.
You don't even have to get as complicated as Google search - any reasonably complex software system with hundreds of engineers working on it will be beyond the comprehension of any human being - fully understanding that is (which also entails knowing exactly all the edge cases, all the bugs, all the unexpected results possible, etc.)
How does the economy work? Nobody knows - but that doesn't mean nothing intelligent can be said about it, or that the Fed can't make reasonable decisions on imperfect information - just like any other incredibly complex system that humans struggle to understand.
IMHO the problem with economics is that their simple models are not over a closed system. A supply and demand curve is fine for a specific product, but it fails if you try to use it at the macro level where other factors come into play.
I'd love to work on better models for the fed, with the data and experts they have.
So sometimes increasing the price is the way to go to increase sales.
So the price operates in weird ways; what about other things. If the product is placed next to more expensive items it could do a number of things.
For instance, it could be a decoy product and increase the sales of the adjacent item. Or perhaps the adjacent item could be a decoy product.
And what about numbers? Pricing things ending in 9s perform better. Selling things at $39 tend to do better then lower numbers like $34 or $37 because of the 9.
And then there's the packaging and placement itself. Tall or wide packaging of the same volume emote different signals and respond differently to prices - look at the great variety of how bottled water is packaged next time you're at the store.
Then there's the quantity on a shelf at any given time. Sometimes intentionally overstocking the shelves will increase sales as consumers will take more than they need, sometimes understocking will creating anxiety that the product won't be available when needed. Depends on the product, the buyer, the conditions of the market, lots of things.
Then there's the brand itself. Depending on the market you're in, a name brand can either help or hurt you. In some markets, the name brand is associated with premium pricing and poor value so it doesn't carry your product; in other markets it's just the opposite.
And then there's discounts and sales. In some stores you want to never have a sale, ever. In other stores you want to barrage your shoppers with a complicated array of perpetually churning sales.
And what about sales, there's an artificial price that gets advertised before the actual one; nobody is paying the higher price, so it can more or less be chosen arbitrarily. You can mark your bubblegum as 99.99% off from being $10,000, but then the illusion is broken.
Instead, what sales do is they give the perception of a higher price signal through the presentation of the sale without actually charging the price.
That's why when you go into clothing stores they'll say the product was $95 or whatever and what luck, through many discounts it's now only $30. Well they all sold at about $30, we know that, but the product decoy pricing itself tries to capture both worlds.
This is just honestly just a tiny bit of how demand actually works. It's a vast study.
The point is that people aren't mechanical rational automotons without any strategy or agency who respond to prices through unconscious reflexes. Nor do they have perfect information or maximize their utility value through arbitrarily complex deductions and always choose the most optimum outcome.
Things are totally messy and the classical models are about as accurate as saying "winter brings cold weather and summer brings hot". Sure, in general. But on any specific day it's non predictive.
A $10,000 pack of gum will likely perform poorly. But if you hyped the heck out of it and made it really unique, you might even sell out your inventory of that alarmingly quickly because humans are weird like that.
Proof? Let me introduce you to Palessi https://m.youtube.com/watch?v=-2gaNq-rOkI
> That's why when you go into clothing stores they'll say the product was $95 or whatever and what luck, through many discounts it's now only $30. Well they all sold at about $30, we know that, but the product decoy pricing itself tries to capture both worlds.
(apologies if i'm misunderstanding)
In what way do supply and demand curves fail at the macro level?
Is this ever claimed? Supply and demand curves intersect at the price, and so different prices will have different supply and demand curves.
> elasticity is impossible to predict and changes with time, many goods are not substitutable in the way these models present them.
The models may be inaccurate, but the inability to model at the macro level with current technology or knowledge does not indicate a failure of supply and demand curve movements being the causal factor of price changes.
> We are victims of the post-Enlightenment view that the world functions like a sophisticated machine, to be understood like a textbook engineering problem and run by wonks. In other words, like a home appliance, not like the human body. If this were so, our institutions would have no self-healing properties and would need someone to run and micromanage them, to protect their safety, because they cannot survive on their own.
> By contrast, natural or organic systems are antifragile: They need some dose of disorder in order to develop. Deprive your bones of stress and they become brittle. This denial of the antifragility of living or complex systems is the costliest mistake that we have made in modern times. Stifling natural fluctuations masks real problems, causing the explosions to be both delayed and more intense when they do take place. As with the flammable material accumulating on the forest floor in the absence of forest fires, problems hide in the absence of stressors, and the resulting cumulative harm can take on tragic proportions.
E.g. economic policy after the Great Depression has kept such an event from happening again at that scale. Was there too much volatility in the early half of the 20th century, or is the economic policy that moderated the cycles just setting us up for an extreme crash to come?
Any reduction of volatility could be argued to be a step away from antifragility, toward systems that can't survive on their own. But not all are; and even when they are, there may be other benefits that compensate for the loss.
It's actually not that complicated. All of the complexity of the economy ultimately boils down a very simple thing: it's a mechanism that allows people to exchange current wealth (i.e. stuff) for claims on future wealth (i.e. money). As long as everyone believes that their claims on future wealth will be redeemable at some rate they consider a fair trade, everything hums along. As soon as people stop believing this, everything falls apart.
What happened in 1929 was mainly a liquidity crisis, not an actual economic crisis, at least not at first. The underlying productivity of the American economy was unchanged before the crash and immediately after. But the inability of people to pay for things because of the Fed's unwillingness to loosen credit caused people to lose faith in the value of their claims on future wealth, and that caused an actual reduction in productivity over time. The same thing happened in reverse in the Weimar republic where the problem was effectively the exact opposite: inflation caused by government paying debts by (literally) printing money. (That was a little different because Weimar Germany wasn't very productive, having never really recovered from WWI, but that doesn't really change the basic conceptual simplicity of what happened in both cases.)
Seriously though, I am actually in the process of writing a book/blog about this sort of thing (and a whole lot more). In the meantime, you can check out my old blog. See my profile for a link. When the new blog launches I'll post an announcement on the old one, so subscribe there if you want to be notified.
And thanks for the kind words!
The second big thing is to understand that ideas for individuals (firms or people), for example "costs are bad because I lose something", have a completely different meaning for the economy. Because cost is income. Cutting costs may make sense for a company, but if you cut costs in the economy people lose jobs. You will actually have to trouble yourself and look away from the money to see what the flow of money actually achieves in the real world to make a judgement. Just looking at the money is meaningless.
The third big thing is about "pensions". While putting back money into some account makes sense individually, again it has no meaning for the economy. Because "saving money" has no useful meaning on the economy scale. Everything is produced and consumed NOW. Nobody puts back stuff into warehouses to be used decades later for the retired, especially not services. So relax when there is talk about "pension crisis" on an economic scale. Sure, who gets what is important and for any one individual the financial stuff really matters because they are bound into the system, but for the economy all that matters is what people in the future will produce. Money "saved" for pensions does not send any products or services into the future, nor is it needed for "investment" (our finance system does not need that, money can be and is created on demand for debt). It sends information into the future, which future generations may or may not use to determine how much of what they produce then they will give to you (in retirement). However, what is available overall and what the then-society will be willing to use for pensions will be up to them. It does not matter one bit (overall!) what irrelevant virtual numbers are written in some "accounts".
Another thing is debt: For an individual it's bad unless it's debt used to produce cash flow. For an economy - it does not matter (of course the details matter, if done bad it can reduce confidence and have a big bad ripple impact). "Debt is money" is not just some phrase. Debt creates money (yes yes money is very complex - much like a quantum particle, it depends on what you look at and context). The best simple example I saw was a story where a kid wrote a promise to mow a lawn (any lawn), and that promise was handed around in the neighborhood to "pay" for neighborhood favor things. If the debt - having to mow the lawn - was actually repaid by the kid this piece of "currency" would just be gone.
I'll leave it up to the reader to think about what "saving" on the economic scale really achieves, it's a fun little exercise. Again it works best if you ignore "money", or treat is as secondary - looking at its effects instead of at it.
TL;DR I recommend not going too technical. The deeper you look the less you see of the big picture. Just start thinking about stuff - ignoring money completely or see it as the completely virtual made-up control-carrot that it is - while doing walks in the park or forest.
> Another thing is debt: For an individual it's bad unless it's debt used to produce cash flow.
Debt is a very specific word. Yes you can get capital by going into debt. But just "capital" can also mean it was yours to begin with. Debt means you created an obligation to somebody else, which is additional information. You have X amount of money - capital - but there is a difference if you get it by borrowing or if it was already yours.
what i meant was, that if people dont use debt as a form of capital (investment in something to get a larger return) then it is basically bad as you say because you will be under water when paying the interest..
basically, people who go into debt need to think like a capitalist, and invest it in something (thier skills, a car to get a better job somewhere, etc)
thats what i mean.... sorry if it was confusing
My understanding is that it was paying debts by buying the thing the debt was denominated in (gold?) by printing money. Which meant that as the early money printed caused some level of inflation, they then needed to print that much more to make the next payment.
It wasn't the claims on future wealth (i.e. money) that they lost faith in, it was their job security.
You see the stock market crash so you tighten your belt in anticipation of potentially losing your job. So does everyone else. So people don't buy things which means companies don't need workers to make them and people lose their jobs. Then people who lose their jobs don't spend money, and people see people losing their jobs and tighten their belts even more for fear they're next, and you get a deflationary spiral.
You can lay this on the Fed for not providing enough liquidity, but the real reason this happens is that the Fed is the only one allowed to do it.
Suppose you're a candlemaker in the US during a deflationary spiral. Nobody will give you dollars for your candles. However, someone might give you euros or pesos or something like that. But now you have to pay your rent. If you can pay it in pesos, you're all set. If you can't, you have to buy dollars with pesos, which bids up the price of dollars and accelerates the deflationary spiral.
The problem comes when the government privileges its own currency. If you can't easily get a bank account denominated in another currency without converting it to dollars, if you can't pay your taxes in pesos even when that was what you received from the buyer, then people still have to convert the other currency into dollars and continue the deflationary spiral.
Whereas without that government restriction, a shortage of dollars would be resolved by using something more available as the medium of exchange.
It's also possible to have a gold standard without holding your reserves in gold. The bank could hold them in anything -- other metals, bonds, real estate -- and then exchange that thing for gold in the market in the event that the customer comes for it, which they only do if they lack confidence that the bank will be able to make good, which doesn't happen when the bank is holding valuable assets. And then you can create as much "money" as you need by, for example, making mortgage loans backed by real estate.
You can still get into trouble there if the value of the assets declines (see 2008 housing crash), but that's a different kind of problem than the original one with separate methods to avoid it.
Fractional Reserve is easier to understand as debt than as an asset. A bank is given $1000 from a central bank. The bank can now loan that $1000 with interest for a total of $1100. The bank is allowed to loan that debt promise at a fraction reserve rate of 7-1 or 5-1 as loans to other customers. The $1100 promise can be loaned as $800 plus interest for the total loan value of $880. That can then be loaned out as $660 including interest. Then $440 can be loaned out. Then $220.
So the original $1000 from the central bank was used to create $3300 worth of debt.
Money is created using debt promises.
> What happened in 1929 was mainly a liquidity crisis, not an actual economic crisis, at least not at first. The underlying productivity of the American economy was unchanged before the crash and immediately a
> Promoting antifragility doesn’t mean that government institutions should avoid intervention altogether. In fact, a key problem with overzealous intervention is that, by depleting resources, it often results in a failure to intervene in more urgent situations, like natural disasters. So in complex systems, we should limit government (and other) interventions to important matters: The state should be there for emergency-room surgery, not nanny-style maintenance and overmedication of the patient—and it should get better at the former.
Limiting private fund or corporate doing funny stuffs is hard. Some of them is as large as a State.
Is there an economy shop where you can go get a new economy if this one gets run over by a car?
99.9% of species that have ever lived have gone extinct. Choosing one species that happens to be doing well at the moment (especially one that is doing well specifically because of human intervention) to use as an example doesn't indicate that species in general are robust.
An economy is way more psychology than natural science.
Everyone who participates in the economy has some mental model of the economy. That means anyone who accepts money as payment, or takes out a loan, or opens a bank account. In their model, cash will hold its value reasonably well, interest rates won't change too dramatically, etc. There is no agnosticism when it comes to the economy, and you make decisions based on your mental model of the economy on a daily basis.
Suppose you come up with a way to predict the stock market. You publish it. Well, it immediately stops working, because now a bunch of Wall St. guys are using your model to try to predict what will happen, and that changes the outcome. It breaks the model.
Published economic models don't work because they affect the thing they model and you can't solve the halting problem.
Would you go as far as to wager that the top 15 engineers/architects on the project (over the years) know about 85% of the ins and outs of the system? Generally speaking at least, edge cases excluded.
He'd probably be capable of figuring any of them out, but in terms of "knowledge at rest", I doubt anyone knows even a third of everything there is to know, even if we constrain ourselves only to knowledge of things within the engineering discipline.
An opaque system cannot be changed or improved upon. But yet, we see that Google Search changes every now and then with different methods of indexing and new features that bring relevant content to the top. Its evolving, which means that there are people who understand the system enough to effect change.
Google Search has been getting worse rapidly. I get more and more irrelevant ads crowding out the organic results, and more and more results that simply ignore my search terms. Nowadays I only use Google Search if I haven't found what I'm looking for by result-page-3 on DDG; and that usually doesn't help.
I think the people at Goo that want search to be "the bestest" possible, are now in the passenger seat; the driver is obviously advertising.
Wouldn't it be nice if "different methods of indexing and new features" really brought relevant content to the top? Instead, they seem to make relevant content disappear completely. Google could easily have the best search engine in the world, again, if they cared enough.
But I guess money is more important; revenue from pure search: $0. Revenue from advertising: I dunno, $1billion PA?
There will definitely be engineers who know one such system deeply, and maybe even a few who know two or three. But it is obvious that there can't be engineers knowing all of these things deeply, engineers who would be comfortable changing the UI or modifying the compute infra or changing the search algo params or the Ads code etc
Publishing a news article about sciencey stuff without providing the bloody citation should be a crime.
[0] https://mtsu.edu/first-amendment/article/937/content-neutral
The "content neutral" part is really important because it is what allows a huge range of government regulations that ideally are equally applied to everyone regardless of how popular a message is. The "public good" part is a portion of showing that a speech limiting regulation is narrowly tailored enough to achieve that public good without unnecessarily hampering speech.
Regardless of what you think about the validity of these court decisions, there is reasonable precedent to think that such a law would survive a 1A challenge.
Articles from high-circulation newspapers often have five or more interviewees per article. Quality newspapers are averse to publishing quotes without fact-checking them if possible (e.g. if a politician makes a false claim, you don't want to publish it without indicating it's false). To maintain the same principle, newspapers would need to fact-check the entire transcript, versus just the quoted part, for accuracy.
But if you want only a partial transcript, then you're essentially at the current state of affiars where you only quote the part you need, and paraphrase the rest. Journalistic ethical guidelines already require quotes to be in context for fairness. Reputable publications have an incentive to publish quotes in context (the interviewees, journalist watchdogs, and many readers would criticize that publication if they don't). So I don't see anything wrong with reading quotes and assuming they are published in good faith.
To mitigate ethical lapses, you can also read the same coverage from different sources (e.g. Wall Street Journal and New York Times) to get broader context about particularly important articles, and also subscribe to newsletters on reporting (e.g. the American Press Insitute newsletter, the Columbia Journalism Review).
The main downside with providing all the on the record statements in recorded audio, is that some statements by an interviewee can be false. If a scientist misstates a figure and corrects it later, listeners can latch on to the incorrect figure. Keeping it to print allows the reporting of the correct figure, or the printing of the quote with a note that it's a misstatement. You could also try to contextualize such statements in the transcript itself, but it then becomes more resource-intensive than the current system (publications are obligated to verify the entire transcript, versus selected parts).
There are plenty of cases in which transcripts exist (and they're auto-generated with high accuracy presently). The habit of not providing any direct access to the source where it is trivially available seems to be the one OP is specifically criticising, and I'd agree strongly.
So you need someone to review it and clean it for accuracy. It's not trivially easy at all to provide all the source materials for every interview because it's time consuming to clean and verify. For especially sensitive investigative reporting that isn't breaking news, and where there's more time to report, news outlets (e.g. CBC News) already publish recordings and full email transcripts.
I would also argue that it's the norm for journalists from respectable outlets (usually the ones with paid subscriptions) to put quotes in proper context. It's an ethical principle of the field. When they don't, the current system works when the interviewee, readership, and press watchdogs call out the unethical reporting.
If there's an observed inaccuracy of the transcription, then note that fact.
But source the goddamned quote.
You know what's best than providing some context and analysis? Providing a pointer to the whole context.
If it's science, there is a DOI or citation that lets anyone get to the source. There is no valid reason at all to not provide the source.
Also, figurative language is a lie made up by the establishment I guess.
Consider the Wikipedia definition:
> In economics, inflation (or infrequently, price inflation) is a general rise in the price level of an economy over a period of time.
https://en.wikipedia.org/wiki/Inflation
What is "the price level of an economy?" How do you measure it? What factors are included and excluded? Why? Who decides?
Do we include real estate? Financial assets like stocks and bonds? Or do we stick to things like milk and eggs. Housing? Is that an asset or a consumable?
And this happens before we can really talk about what causes inflation to increase or decrease. The problem with most of the discussions of inflation I've read and seen is that each side has its own, often implicit, definition of inflation.
Your link has a lot of options: https://en.wikipedia.org/wiki/Inflation#Measures
Sure, we usually use CPI, and it has some downsides, but all the measures are correlated to some degree.
Headlines regularly use the U-6 unemployment rate, but academics usually use U-3. Nothing's stopping you from using a different measure of inflation in a discussion, and I'd personally love to hear your take.
Any model that predicts things simply and well, will be gamed; thus requiring a more complex model.
Or as Goodhart's Law[1] has it: "When a measure becomes a target, it ceases to be a good measure."
That's presuming we never reach some economic state so perfect, that even with an accurate model, no one can find an extra advantage, nor can it be disrupted by natural events.
I think the bigger issue is that people are not as rational, nor as consistent, as the models treat them. The fundamental premise of a lot of economic theory is that people have consistent, ranked, preferences, and that people work to maximize their preferences. Most people don’t fit that.
My sister is a political science professor, and she says this is an open secret in political science. The assumption is that people have consistent preferences (e.g. someone who is pro gun control is always pro gun control), but research has shown people are fickle, and will give different answers at different times.
If you want to get to base levels, look at metabolism, energy inputs, conversion efficiencies, productive activity, and immunity / defence / risk dynamics.
Economic analysis arose out of cost accounting in which those inputs were specifically discounted, under-priced, and/or externalised.
I think economists are well aware of the nature of the beast they're studying.
And even if doing the task is daunting, and the landscape changing as it's described, it's still worth it.
Especially if anyone finds fixed points which do have the property that describing them doesn't invalidate them.
Psychohistory
There are certain novels that can shape a teenage boy's life. For some, it's Ayn Rand's Atlas Shrugged; for others it's Tolkien's The Lord of the Rings. As a widely quoted internet meme says, the unrealistic fantasy world portrayed in one of those books can warp a young man's character forever; the other book is about orcs. But for me, of course, it was neither. My Book – the one that has stayed with me for four-and-a-half decades – is Isaac Asimov's Foundation Trilogy, written when Asimov was barely out of his teens himself. I didn't grow up wanting to be a square-jawed individualist or join a heroic quest; I grew up wanting to be Hari Seldon, using my understanding of the mathematics of human behaviour to save civilisation.
https://www.theguardian.com/books/2012/dec/04/paul-krugman-a...
I studied Physics because of reading Asimov as a child, and discovered it was way more difficult and boring in real life. Re-read Foundation when I heard the TV show was coming out, and discovered that it was a terrible book. Asimov, you old deceiver
Economics is even worse, as it does hold to some fundamental aspects of finite resource allocation and supply/demand in addition to the self-reflectance. This means its model is probably some hybrid of physics-like fundamentals and the weird self-awareness of the "soft science" disciplines.
What I have been reading lately gives me the impression that different patterns of capital allocation have changed inflation dynamics.
There's excess demand for older-generation used by the auto industry. In text book economics, that would lead to higher prices and then more factories and the meeting of that demand at a higher level.
But what happens is chip makers, the only ones apparently capable of making even older generation chip factories, won't allocate capital for such factories because they view as on their way regardless of demand.
So essentially, with huge capital allocations, companies won't chase short-term demand surges because they don't want to be left with future excess capacity (which is more costly than any immediate payoff). Look at Nvidia actively fighting the demand of crypto miners for their products. This seems to be a barrier to any inflationary spiral (increased demand leads to shortfalls, not higher prices and production. Maybe prices too but increases not propagating).
So, it's not that the economy is incomprehensible but it's structure changes and so it's structure can't be captured by pure economic theory.
Money is tricky to do in all times for all use cases. Bitcoin is making a run for store of value money, and unlike gold it is truly scarce.
Usually inflation is defined using the prices of a basket of goods. This does not capture the inflation that people feel - most people are far more interested in the price of a home than the price of spaghetti, but spaghetti is the definition. One reason why spaghetti is used rather than house prices is that it is less subject to speculatory swings, or local variation - to be used as a basis for adjusting other prices inflation has to be defined in terms of something stable and uniformly priced. This may seem circular, and it is.
What we see is that increases in the money supply generally don't go into the prices of basic goods tracked by inflation. Instead they go into the prices of assets that are not tracked by inflation. Nobody is using spaghetti as an investment vehicle.
the inflation of the 70's was caused by the increase in the price of a single good, oil, due to the Arab oil embargo.
Oil being a factor in the cost of many other products, there was a knock on effect causing a broad increase in prices across the board, general inflation.
There were also 2nd order macroeconomic effects caused by the govt's attempts to deal with the inflation and economic slowdown, but at the root, price inflation was necessary to reflect the realities of factor prices in the economy.
reducing the money supply would not have worked to curb that inflation (nor btw did it work in the Great Depression, though it did bring about some deflation. Deflation is why bitcoin is not going to ever work.)
If the price of a single item goes up, and you buy it, you have less money to spend on other items, and so the prices of those other items goes down. Supply & demand.
In order for a general price increase, the supply of money must increase.
Almost no one buys crude oil directly.
But it is a production input for a lot of things, so a shift in its supply curve shifts the supply curve of lots of other goods (including most consumer goods) in the same direction.
> In order for a general price increase, the supply of money must increase.
For demand pull inflation, supply × velocity × average propensity to consume needs to increase; for supply push inflation, though, nothing is required on the money (which is demand) side, you just need on average decrease in supply of consumer goods and services.
But if someone gives you $20, now you have $7 to spend on X and $13 to bid up the prices on other things.
Demand push and supply pull explanations do not account for this, and are inadequate (though still popular) theories.
Only in the bizarre world where prices are set by demand alone, and quantity traded is held fixed by the Hand of God. Real supply curves aren't horizontal lines except in very bizarre circumstances.
In a real economy, a restriction in supply of a widely used input with no significant change in money supply, velocity, or relative spending vs. saving desire causes the price per unit of consumer goods to go up and the quantity traded to go down.
> Demand push and supply pull explanations do not account for this
No, they don't “account for” your fantasy that consumer goods behave such that a price change for one good has the results expected only if all other goods had perfectly inelastic supply, because perfectly inelastic supply isn't normal.
If you can explain how increasing the price of oil causes money to appear in my pocket to pay for it, I'm interested.
P.S. Nowhere did I say that supply was inelastic or prices are set by demand alone. I said "supply and demand".
And yet you keep positing a model which entirely ignores the effect of supply, by pretending that quantity of consumer goods traded is fixed constant and prices are set only by demand (i.e., assuming no changes in preference, supply of money among buyers), so that with a given supply of money being spent, increase in price of one good must be offset by decreases in other goods rather than decreases in aggregate quantity traded.
> The law holds whether it's a personal fantasy of mine or not.
Yes, despite their basis is known-false rational choice theory, the so-called laws (which aren't at all laws) of supply and demand are a reasonable approximation of real behavior of markets in aggregate.
But they don't predict the behavior you describe unless you assume perfect supply inelasticity of all goods other than the one whose price is assumed to increase.
> If you can explain how increasing the price of oil causes money to appear in my pocket to pay for it
It doesn't, decreasing the quantiry of oil traded at any price (increasing the price at any quantity traded) also has the same effect on all goods and services oil is used to produce or deliver. As a result, if the unit price of oil increases (and there are no changes in money supply, pre-purchase distribution, consumer preferences, etc.) so does the unit price of most consumer goods and services, with the quantity of goods traded likewise dropping.
What does not happen is the same basket of goods being traded, with those impacted by oil getting more expensive but that being offset by other goods getting cheaper, leaving overall nominal price levels the same as before despite shifts in per-sector prices. That would be expected if all non-oil goods had perfectly inelastic supply, but not otherwise.
> Nowhere did I say that supply was inelastic
No, you just described an effect that is total nonsense unless you assume perfectly inelastic supply.
That's only true if anyone is willing to sell those other things at lower prices. With changes in price in something as base-level as oil, the production costs of virtually all goods and most services increase. For low-margin goods, price can't decrease even if demand decreases. As people see their income dwindle, most only buy strict necessities and stop buying other things entirely - leading to increases in the price of luxuries to make up for reduced demand (targeting only those who can afford things at higher prices).
Let's say John has $50 and Sally has $10. The price of X which they both need goes from $5 to $7. The price of Y that they both want but don't need used to be $5. After buying X, John has $43 and Sally has $3. Sally can't afford to buy a Y, but since she doesn't need it, that's ok. The makers of Y realize that they will only get $5 if they only sell to John, where in the past they were making $10. So, they increase the price of Y, knowing that John will still afford to buy it at $7, so they now make $7 in total. If instead they had reduced it to $3, both John and Sally would have bought a Y, but the company would only make $6 in total.
Other notable examples of inflation in America:
1. The "not worth a Continental" inflation in the Civil War.
2. The inflation of the Confederate dollar as the Rebel treasury was a printing press
3. Inflation due to the flood of gold coming from the California gold rush
There is also the inflation in Spain as they looted the New World of gold and silver. It all didn't help Spain that much, as it just produced inflation. Spain never realized what the real wealth in the New World was.
That's not true, even with simplistic models like supply and demand curves. Prices can rise across the board with a fixed money supply, and you'll have a corresponding reduction in amount of goods traded.
Yesterday 1000 people each bought 2kg of potatoes at $1/kg, and 1 kg of meat at $10/kg. Today, potatoes cost $2/kg, and meat costs $15/kg. So, 800 people buy 3kg of potatoes and 0kg of meat, and only 200 people keep buying both potatoes and meat. Meat producers adjust their production down to account for the new conditions, firing extra staff and sending the spiral ever downward.
Herbert Weisberg argues in Willful Ignorance (paraphrasing for brevity; read and come to your own conclusions) we’re using statistical and probabilistic tools in economics that were purposely left crude by the mathematicians that defined them, as they were defined to handle abstract quantities.
Applying them to human economics means we’re mathematically accepting rounding errors that leave people behind.
That is the pattern we have to break politically. We spend a lot of time emotionally promoting certain stats and hand waving away at a number like “2% reduction in poverty” still means we’re leaving millions behind.
Not having services like universal healthcare is clearly politically gamed, but we refuse to see it as anything like a government bombing civilians.
This reminded me of General Relativity and the problem of unifying it with Quantum Mechanics. QM is defined on a fixed background, while GR says that background is dynamic.
Seems we need the Quantum Gravity version of economic theory, which tells you how interactions happen in a dynamic background.
Pure economic theory is an oxymoron, other fields dealing with human behavior figured this out a long time ago, while economics desperately clung to the idea that it was actually math, rather than a social science.
(Otherwise I agree with you)
A better way to describe the situation is that most mainstream established macroeconomic theories/models work only conditionally. They match reality accurately only in certain periods, on the condition that myriad of other factors doesn't become important. Over time, some excluded variables become important. The explanatory power of the old model erodes. When the theory is finalized and explains the situation for the era it was created, it may be already outdated.
Inflation expectations theory works reasonably well for fast growth, increasing labor force industrial era. It's not so good in 2% annual GPD growth, aging or slowly growing labor force era.
The new school of economists thinks that that inflation is not likely to be a long-term problem. Fed will be back in trying to get inflation up in 1-2 years. Old school economists who look at the older models and data from 50-90s think that expectations will keep inflation going once it starts.
Problems:
Companies and people are constantly changing how they do business to best exploit the economy. This can change how things work in large and small ways - every financial disaster leads to a raft of rule changes.
The logic is like saying we would all get a pony if we believed hard enough. Economics doesn't work that way, there is an underlying reality that people are trying to sniff out and some error bars around where prices end up because the signals are all noisy.
Inflation expectations being self fulfilling is the entire reason we measure the former.
> I went to read the paper, and I have to say I am baffled. It didn’t change my priors at all. I didn’t see new empirical estimates, or new theoretical arguments, and furthermore I didn’t see the most relevant factors discussed much. I did see a lot of pokes at Friedman, Phelps, and Lucas (and there is also an introductory assertion that, even given enough time, markets with flexible prices do not clear. Then he goes on to deny that the theory of household choice is sufficient to derive downward-sloping demand…why do that???).
> I would start by looking at the clearest cases where inflationary expectations do matter. If inflation rates become quite high (say above forty percent?), many people switch to alternate currencies. Or in hyperinflations the velocity of money, after some point, accelerates very dramatically, thereby fueling the inflation further. So inflation expectations really do matter, as supported by both theory and evidence. Contrary to Rudd, the theoretical case is there, though the question of magnitude at lower inflation rates is largely an open one. But let’s not slip from “open” to “we are justified in thinking they don’t matter very much at all.”
Isn't what is described here /actually/ a theory about inflation expectations?
Literally this mechanism that recent inflation creates the expectation of more inflation and that drives behaviour that generates further inflation.. and no one is sure how to turn that back around without a crushing recession. Isn't that the conventional wisdom this article is allegedly skewering?
The problem is centralization of wealth, absurd expectations on the returns of capital, and the coupled wage theft that enables those returns, popularized by an entire generation of Welch worshippers, and skewed expectations created by export of production, and increasing reliance on safe-harbor third world labor prices.
It's all way more interconnected than it looks.
According to Dirk Löhr the biggest driver of wealth inequality is just good old real estate and it's mostly the land that appreciated in value. Chasing land rents (I mean speculation on rising land values, not renting out apartments as a landlord) feels wholly unproductive.
1. You need to be a citizen in order to buy realestate.
No more wealthy guys buying our land with an email. No more homes siting empty, or filled with illegial.
2. Wealthy guys can only buy two, or three at most.
3. Outlaw corporate speculation in realestate, like Blackstone.
I feel #1 is something that should have been outlawed years ago.
You make healthcare cheaper, but need to concurrently give the millions of people who depend on this overcomplicated system a different path...
A small minority of office jobs are “white collar” in the traditional sense
The laziest way to explain the rigidities is to just blame someone else, most of the time governments. However, getting rid of goverments doesn't seem to get rid of all rigidity because, as it turns out, our physical world is constrained by more than just politics. What's often forgotten is that governments can also fight against natural forces that reduce flexibility in the economy. Therefore the answer is neither more government or less government. No it's the usual boring answer. What we need is better governments. It's like a supply and demand situation. There is demand for a certain size of government and the supply is often either too high or too low. The goal is to find a balance.
To expand on the question's unknowability, "wealth" and "prosperity" are measures on a population's utility functions. "Utility" is an attempt at mapping the set of possible things a person could want to an ordered set [1]. This goes to the heart of preference, free will and consciousness.
Fortunately, at a population level, persistent effects do manifest. But we don't know why. Because at the individual level, they're inexplicable (if existent at all).
This is why, by the way, economics often finds inspiration in particle physics. Not because people are particles. But because it's a field that has developed techniques and methods that make useful population-level predictions without completely understanding the individual components.
Overly simplistic view from scratch: Individuals start businesses to offer other individuals and businesses goods and services. Wealth transfers daily to and from many individuals/businesses. Where does this definition fall apart/breakdown as you start to zoom in (or out)?
An analogy would be to start looking at a water molecule, H2O, and then trying to explain glaciers and oceans without any sort of similar system to use as a model.
That definition seems to be a bit too broad. So maybe there needs to be compensation. But then the determinists would say that even gift-giving has compensation (in the form of reciprocity) and thus isn't much different from credit. So the compensation should be something closer to monetary compensation. But then barter economies have no businesses. Etc.
"define why individuals are offering goods and services to one another."
What's important to keep in mind is that while money may transfer, utility doesn't. Utility is generally increasing on both sides of the exchange, otherwise one party wouldn't have entered the exchange.
This isn't always true (e.g gambling or opioid addiction), but it's true enough most of the time and explains why trade happens in the very first place.
Similar logic, I expect, applies to the boss side of things.
Most workers have little sense of demand for their position, and even if they did, most jobs are not fungible. Location is extremely important, as are subjective things like culture and the brand of the employer.
All that to say: the Econ 101 conception of supply and demand in the labor market is almost never enough to explain the labor market even in very simple terms. That's why the labor market is often doing "unexpected" things, like having trouble filling high-paid jobs driving trucks.
We like to believe it must be complicated because of course society is. But social laws are based on social network effects which are politically manipulated.
So in conclusion, it’s rhetorically a free market but in practical terms it’s gamed by social corruption as usual, requiring ever more Byzantine economic theory to capture the edge cases.
Infinitely big little numbers have allowed economists to iterate on the edge, but socially it’s belly button digging.
Which is to say that just because it's bullshit doesn't make it any less valid, yet bullshit is typically much harder to model as it lacks the internal logic that a non-bullshit system would have. It's full of contradictions and non-sequiturs. This could explain why economists (and especially Paul Krugman) are so consistently wrong about everything.
In much of its early history, the Soviet economy outperformed many other leading industrial economies, which is what scared capitalists in the West so profoundly in the 1930s. It did so at a great and terrible cost that would be unacceptable in a free society, but it performed nonetheless.
China today is another example of central planning and high performance.
In any case, the US is clearly a planned economy - the Fed even states its inflation target, and there is a target employment rate.
Friedrich August von Hayek
https://www.nobelprize.org/prizes/economic-sciences/1974/hay...
> Biden official says protecting US steel a national security issue [1]
on the front page of the Financial Times.
[1] https://www.ft.com/content/e1f33362-2c36-4f99-9b11-7dcd82ee7...
Citation needed.
Edit: Just as a counter point consider reading this article: https://www.latimes.com/opinion/op-ed/la-oe-schiller-shrinki...
[1] https://www.marketwatch.com/amp/story/china-really-is-to-bla...
Middle class in cities is shrinking, and most American cities of any notable size are split between knowledge workers and a service worker underclass. That’s why so many American cities are split between very nice neighborhoods aNd those that resemble 80s Detroit.
Krugman is the perfect proof of the fact that the entire field of economics is populated by charlatans.
His track record on predictions is worse than flipping a coin.
Some do, most don't. Most economists are just trying to publish their work in peer reviewed journals. The one that have time to talk on mass media every weeks are not regular economist. Krugman had some great papers, but he is definitely not considered as a researcher anymore by the profession.
> Allowing completely free trade will be great he said. Prices will be lowered and the economy will run more efficiently. Maybe that’s true, but it also hollowed out the U.S. manufacturing base and consequently the middle class. You don’t see articles like that anymore.
The HOS model, commonly accepted in the trade literature that Krugman knows well, is very clear about the effect of free trade (even if the model could be regared as too simplistic): it lowers the prices and increases total production, however, it creates unequal gains (or even loss) within countries. The standard policy recommandation among trade economists is public polices should be aimed to losers using a fraction of gains from trade.
[1] - https://en.wikipedia.org/wiki/List_of_The_Price_Is_Right_pri...
Economics of course is often expected to make much stronger claims, people have expectations of it that resemble Asimov's psychohistory despite the fact that there is no science that manages to tame that level of complexity.
I think it was Tyler Cowen who said once that economics is more useful as a tool to clarify thought rather than a tool to make predictions. People just have the wrong expectation of what economics is.
My intuition says there's probably a kind of uncertainty principle or incompleteness theorem at play in economics.
Hence why a lot of economics is speculative and should only really be applicable to specific cultures that are being studied, since cultural behaviors and expectations will effect economic behaviors and outcomes.
There’s a balance between data and interpretation in economics, which is why it’s a social science. There are disciplines like Austrian economics that discount quantitative analysis, but that’s as wrong as relying purely on quantitative analysis.
I think the accuracy is more complicated than that, because while they lose precision (and thereby the correct prediction of the amount of rain in your neighborhood or town), they can predict larger movements pretty accurately pretty far in the future. I remember how bad weather prediction was 30-40 years ago, and am shocked how they now have pretty good insight into the weather two or three weeks from now.
80% accurate about what ? If this is overall then I'm not impressed because in stable weather you'll get a high % of being right just by extrapolating. Similar with economics for that matter. What I usually care about and where weather forecast failed me just last month, is unstable time over a specific area. Just last weekend my wife and I were about to cancel our trip to my hometown because the forecast was high probability of rain for the entire weekend, this was the forecast on Friday. Went anyway and got a sunny Saturday and Sunday morning, got a bit cloudy by the end of Sunday when we were leaving. This happens so often that I don't know why I bother checking anymore.
There are heterodox schools, such as the Austrian school, that reject the scientific method, and these are definitely not scientific.
Really you need more modest goals, for example to at least try to approach the subject objectively rather than via sentimental moralizing. Even that is a massive effort. Imagine a physicist decrying how "wrong" it is for gravity to be weaker than the other forces. You would laugh at such a person and immediately classify them as not a real physicist. So you can use that as a filter to exclude much of heterodox economics and economists as a start. That's the battle being waged -- objectivity -- not falsifiability.
But in the physical sciences you have well-formed mathematical models that make very specific and precise predictions and can be tested to a high degree of accuracy. That specificity allows you to set threshholds like 5 sigma for acceptance of a result as being verified.
"Did we find copper" is a bit different, and thus there is a fuzziness in history that you don't have in physics or chemistry, which is why we don't view history as being a science even though it benefits from use of the scientific method. Everything -- cooking, dating, gardening -- can make use of the scientific method, but at issue here is the trust that the public places in accepted findings of science and such trust is not justified in the fuzzier fields. People need to add big error bars in their heads when listening to results from social sciences and much smaller error bars when listening to results from physics.
So far, this rule of thumb has not let me down.
FYI, you may want to read Feynman's lecture on Cargo Cult Science -- that is avoiding the trappings of science while not actually having the rigour and intellectual honesty of true science. A good link is here: https://calteches.library.caltech.edu/51/2/CargoCult.htm
I enjoy economics, political science, anthropology, sociology, etc, but they are most definately not science.
And this is your whole argument?
Isn't physics a "natural science" and therefore not science according your rule of thumb.
This discussion is stupid. If you want to argue that social sciences are not science, all you have to do is show that social sciences don't follow the scientific methodology. If you can't show that, you should shut up and stop wasting everybody's time.
How are you going to measure the outcomes and for how long will you measure them?
The problem with economics is how politicised this field is and how the best theory ends up being what's best for governments and politicians. Is mainstream economics what's more convenient for the 1% or what's best for the world?
We will never know what the economy would be if we weren't so Keysian. Maybe we wouldn't have a crisis every 10 years.
Economics is that way of understanding behavior that starts from the assumption that individuals have objectives and tend to choose the correct way to achieve them."
Excerpt from Hidden Order, a book which explains economic concepts to non-economists.
Non-falsifiable explanation aren't worth the paper they're printed on.
While it's a nice quote above, I suspect many economists would disagree with that reduction of their field to being only backwards looking.
Nonsense. Most sciences aren't about making predictions. Another example is linguistics. Linguists have reconstructed languages long extinct and figured out how they evolved into modern languages. Yet, they can't predict how these languages will evolve in the future. Does this mean these explanations useless? No. Why should they be useless? They may not be of interest to you, but that doesn't mean they're useless.
And we can quantify in various ways how much better the 50% prediction is than the 75% prediction.
Here's a pretty good explanation:
https://www.wsfa.com/2019/08/23/what-does-chance-rain-really...
And many more:
Everything else in "the economy" is incidental.
Their offical job description is. "maximum employment, stable prices, and moderate long-term interest rates." (aka the so called dual mandate).
"They think they want good government and justice for all, Vimes, yet what is it they really crave, deep in their hearts? Only that things go on as normal and tomorrow is pretty much like today."
I've often wondered if for the majority in a lot of societies, that isn't essentially true.
I guess how stable a social order is depends in part on for how many.
(Of course there are also societies in which an extreme minority who wants tomorrow to be much like today can keep it so by raw force; I guess that can be a kind of stability too, with enough force, maybe)
"They" aka the corrupt elite are screwing up "real people" who are poor. Ills of the system are moral issue, not really a structural issue.
But I see your point about how it (the simple 'most cynical' description) could be interpreted the other way too. I don't agree it is necessarily that way; perhaps that simple one-liner is not sufficient to distinguish the structural from the moral interpretation.
I'll have to think on it more.
I'm not saying it does. But most people with very negative view barely know what Fed does and why it does what it does. Also they don't differentiate between what tools Fed has and what should be done using other means by Treasury and the rest of the government, but was left to Fed because politics is dysfunctional.
We know from the Martingale Betting system that when you have a losing bet, it doesn't matter what sizing you employ. Eventually the risk accumulates and it blows up. We also know from the Kelly Criterion that even if you have a winning bet, if you bet to large, you will go broke.
As time goes on, the Feds bets have been getting bigger. They have been keeping more and more losing companies in business. Moral hazard is accumulating. Those that make the biggest bets get the biggest gains allowing themselves to make even bigger bets.
This has always been spoken like it's from someone who was not present at all during the Nixon destruction of the US dollar.
Or not observant in the least.
But that's when people started saying things like this, and after influential people start believing it without thorough questioning, well here we are.
The only significant demographic that could demand raises of any kind were unionized workers, who were shortly kneecapped by the Wage & Price Freeze.
Businesses at the time almost never felt confident about anything, and only raised prices out of desperation for survival. At least they were allowed a little head start ahead of consumers & workers, and the Wage & Price Freeze was delayed as long as possible (ie prices were allowed to skyrocket) before being strategically kicked in right before workers' pay would have had a chance to drift toward parity.
It always takes a lot longer for workers to share in any economic benefits, if at all, with great delay & lag when it does occasionally come to pass.
Since it appeared mathematically as if half the wealth in the pockets of a nation's workers had been lost forever in only a few years, yes people believed that inflation would keep spiraling, but nobody thought there was anything that could be done about it since the regime in power was not only crooked to the bone, but working for a corrupt political party which was already too big to fail. There was only one alternative party and they were not math wizards either, and equally untrustworthy.
By the time Reagan came along no one with good mathematical recognition could have come close to leadership advisory positions any more because it actually had been too late for a while.
They're not betting with their own money anyway, and people already had to accept that the chance of any winnings had become infintesimal by then.
Reagan did turn out to be a better actor than people thought at first.
But even George Bush Sr. was able to recognize what he called "Voodoo Economics" of the Reagan years because it was not based on reality or things that can be good to actually have faith in.
Not that he had a better plan, but at least his hindsight came into focus for a bit. Even the most excellent plan would have had no chance of deployment with the type of economists monopolizing worldwide influential positions by then.
So the Bush I Recession ended up based on somewhat different types of superstitions than the Reagan Recession.
And here we still are.
The problem a decade ago was not fundamentally that the banks had grown too big to fail, but rather the political parties which have proven their economic incompetence had already been too big to fail for longer than most voters have been alive.
And neither economists nor the voters can do the math since it is far too complicated for most, plus it doesn't matter anyway since the more powerful are going to extract as much as possible from the financially weakest before it's even more too late for them both.
And then there's the pessimistic narratives, but just trying to keep it as positive as possible right now.
The Fed's job is:
> The Federal Reserve works to promote a strong U.S. economy. Specifically, the Congress has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates. When prices are stable, long-term interest rates remain at moderate levels, so the goals of price stability and moderate long-term interest rates go together. As a result, the goals of maximum employment and stable prices are often referred to as the Fed’s “dual mandate.”
* https://www.federalreserve.gov/faqs/what-economic-goals-does...
There is a tension between maximum employment and stable prices though: if the economy is starting to run hot, it means more and more people may be employed to keep up with demand. But if there's too much demand, and not enough supply, inflation starts kicking in (there are other sources of inflation though). So the 'trick' is to know when employment has reached the point of being 'maximum enough', and slowing down the economy then.
We are all aware of what they, and our economist friends, say they are doing, but we also have eyes and brains.
Also sounds an awful like a planned economy lite. But I suppose they call that monetary policy.
Then once you have a model with realistic qualitative behaviors- once you can identify the important variables like clusteredness and inequality, identify constraints and artificial forcings like government programs, then you can try to measure those variables in the real world and you might be able to make some near term projections that have actual predictive power. You could also make some predictions of how new government programs will impact things you care about like total productivity, how precarious or robust each individual's situation might be (do people have second chances or do they collapse into homelessness after one bad decision or accident), what the baseline economic outcome is (do we have people starving), etc.
Right now I really don't feel like the state of the field of economics is advanced to the point where anybody is able to apply economics to problems we care about in any kind of rigorous way. After the fact you can always find some economist that will say "I predicted this" but you can also find 99 others who didn't predict it. And the people who get put in charge of the federal reserve are always one of the other 99. In fact I get the distinct impression that nobody in a position of power actually cares whether economics produces reliable intelligence. After the year 2000 bubble, after the financial collapse, nobody in a position of authority at that moment should have ever held a government job again. But yet here we are. (Same thing goes with the people who said that the Iraq war would pay for itself and that Afghanistan would be quick and easy- why do those people still have jobs?? But that's a tangent.) We are so used to catastrophic incompetence that we can't imagine any other situation.
Basically it is well known that the economy is a gigantic graph and that graph theory might help answer fundamental questions about it.
The issue is that you need a massive amount of data to have a somewhat accurate model. The central banks do have some data (none on cash tough) as banks have some reporting requirements but generally those data are available only in aggregate and in economics (or basically any forecasting activity) the devil is in the details.
Our lives are governed by relatively simple rules of physics but the world is in an incredibly complex state. Economics takes the output of those rules of physics and tries to wrangle the state of all the atoms in the world into some simple values, and then uses some simple equations to make predictions. How is this not worse than spherical cows?
Except it's not continuous. That assumption works most of the time. But sometimes--often--it doesn't. Particle interactions chaotically manifest systemic effects in unpredictable, dramatic ways.
The limitations on our current models of fluid dynamics and economics are uncannily symmetric. (The latter fails more unexpectedly.)
Why can't the flow of money be modeled? Don't we have enough data on human behavior historically? Can't we trace where money generally ends up?
Using the recently printed money isn't a super great example because as far as I understand, it's mainly held up in the banking system.
Maybe the stimulus money given to American citizens recently would be a better example. We know some of it went to savings, some of it went to bills, some of it went to frivolous purchases, etc.
If AI can detect fraud / objects on a road and make decisions, why can't a few of the most common economic possibilities be fed into some kind of model?
The thing that makes economies very hard to predict is they're a combination of people acting according to quantifiable economic incentives and people acting accord to a collection of ideas, fashions and emotions that can switch unpredictably or simply aren't known.
From the Fed perspective, they've discovered the hard way that the few knobs they can adjust, such as the discount rate, don't do what they thought they did.
Tax and spending policy can control an economy at a finer level of detail, but if taken beyond simple goals, like "increase exports" or "build war materiel", tends to result in boondoggles with lobbies behind them. The dairy industry, NASA, ethanol from corn, and university administration staffs are well known examples. As a control system, it has too much lag for stable control.
One thing that the pandemic has made clear is that today's "free market" has more lag than previously thought. Half-empty store shelves are the new normal. There's a correction, but it's slow. It takes several years to react to a disruption. With long supply chains, back-propagation of market signals through the supply chain takes longer. With today's excessive outsourcing, there may be only a few places in the world making some minor but essential item. Worse, that minor but essential item may not be a big money-maker for the producers, and so they lack the incentive to add capacity.
Then there's overshoot. It now looks like there will be a semiconductor fab glut around 2023.
What is the evidence for this? We have low rates spurring inflation expectations, in the population, and concerns, at the Fed. That's about as orthodox as monetary policy gets.
[1] https://www.babson.edu/academics/executive-education/babson-...
Still not harder than modern physics or modern math. Unknowable is not the same as complicated. The lottery is easy to play and model mathematically but unknowable. It's not that hard to understand: an economy is a set of inputs: govt. spending, personal consumption, innovation, private investment, etc. and then based on these inputs the economy either grows or shrinks, and then this can be indexed to some baseline such as CPI. The understanding of this stuff dates back to the 50s. Just because recessions cannot be predicted does not mean the economy is a black box.
Furthermore, it actually has a peculiarity unique to studying systems of humans (as does psychology or sociology): predictions about the system affect the system, which makes it even more difficult to distinguish true predictions from self-fulfiling prophecies.
As you say, I think the key component that introduces all the uncertainty is: humans. You can't prove anything interesting about a human-based system using pure logic (at least not that I'm aware of).
I'm reminded of the quote by Von Neumann: "If people do not believe that mathematics is simple, it is only because they do not realize how complicated life is."
But I will be the first to admit that my economics understanding is shallow. I'm curious: what are examples of theorems or definitive truths in economics that we know apply to the real world with real humans?
Supply/demand, IS-LM model, risk-neutral pricing, no arbitrage conditions. In the latter, 'free lunches' tend to be arbitrag-ed away by market participants (humans).
The only real definition I see is the equation of exchange which is purely mathematical and not linked to any real world data, but there are probably many other that are definitions and not theories / models.
The inputs of "the economy" are not even well defined. We measure SOME of the inputs and cannot predict the outputs like recession. Sounds like the economy is a black box.
We can make a good deal of economic predictions that validate. Predicting recessions is in a similar class of problem as predicting the weather. We understand, in broad terms, the system-level dynamics. But we don't get it at the granular level, and that granular level sometimes manifests systemically in a chaotic way.
I like the idea of examining "relationships" rather than models, we could better quantify social elements.
No references unfortunately, just my stream of thought!
I'm still working it out, so I would very much appreciate it if someone here had more insight to confirm/deny my understanding?
Since work has become a social activity people actually like to work more than they demand work themselves. So people compete for fewer and fewer full time jobs as productivity rises.
Here is my explanation. 8 people work at a restaurant and spend 5 hours out of 40 per week making pasta. Someone invents a pasta machine. So now everyone gets to work 35 hours. The boss decides to fire one worker so that the remaining employees work full time again. Everyone is competing desperately to not end up as the last guy without a job. Full employment in this scenario would require people to eat the additional pasta (=consume more) that the machine produces.
If you truly believed that the 8th person would find a better job then it wouldn't matter if you fire them or not. In fact, if you create a new full time job that needs 40 hours of work, then all 8 restaurant employees would apply at your company because they know they get to work 5 hours more. The best out of 8 would be chosen for the new job. One person leaves the restaurant, resulting in full employment of the 7 restaurant workers.
Meanwhile if you just fire a random restaurant worker then it is entirely possible that one of the 7 employed workers is switching jobs and the unemployed worker has to get back to work at the restaurant. It's quite inefficient.
The "8th person" is the person who made the pasta making machine.
Whats happened is you've lowered the cost of production of pasta. The owner can now try to increase profits by either keeping the price the same and taking the savings, or lower the price to increase sales, in which case consumers see the benefit, which most economic theories predict they should through a competitive market if the owner does have some monopoly on pasta making machines.
From the saved money that the owner and/or customers, they will (hopefully) spend it on other things. Like maybe remodeling the restaurant or their home. Which means jobs are generated for restaurant and home remodelers.
Yes for the laid off restaurant worker who only knows how to make pasta by hand and cannot easily transition into a job remodeling houses, this is a problem. But on the other hand you have two wins here - the company/person that made the pasta making machine, and the person who in the end receives money that otherwise would have been spent on laboriously making pasta by hand.
The answer is going to be no x)
Not necessarily.
If you think of money as representing a claim on the finite resources of the world then if the distribution of the increase in the money supply is too concentrated then you can have a situation where more people end up poorer.
I think economists neglect to include an obvious factor: people are greedy opportunists. When inflation first get reported on (in some tangentially related sector) the most opportunistic and greedy businesses jump at the opportunity to bump prices.
When less opportunistic (but still greedy) businesses see one of their suppliers bumping prices, they follow suit and it quickly gains momentum.
In general, if you ever find yourself thinking that an entire discipline is neglecting an obvious factor, you should check whether that's actually true. I am pretty sure that your phenomenon of opportunistic price-hikes at reports of irrelevant inflation is either
1. Well-understood to not happen.
or
2. Somebody's PhD thesis.
Fair. Perhaps I'd rephrase it to "economists might be able to better understand the inflation phenomenon by recognizing that people are - by nature - greedy opportunists".
To me it seems obvious that laissez-faire economy would just stabilize itself in the most optimal way. I don't know if the economists actually know this, but can't do it because of politics or their own benefit.
A capitalist economy is based on government intervention, in any case. They provide all the enforcement of contracts and property rights, and do some wealth redistribution, especially helping people who can't survive from what the market provides. Without the latter, it seems inevitable that the system devolves into a few winners and many losers, and such a system will eventually be overthrown by the losers.
- Massive pollution. Think of the burning Cuyahoga River or the terribly smoggy Pittsburgh.
- Horrible working conditions. Where plenty of employees (including children) were forced to work more hours than healthy, and in environments which kill them.
A similar modern example is hospitals price gouging super basic medical supplies.
Those are the natural results of companies operating in a purely profit-driven manner. A laissez-faire economy has no concept of morality or rights, just of profit.
Given that most people are completely unwilling to live under those sorts of conditions, our society has interjected itself into the economy to protect our rights. That happens via government regulation.
If we remove regulations and “stop meddling with the economy,” companies will take the cheapest route to profit, because they basically have to. With no regulations, that means many companies won’t build expensive filtering systems to reduce pollution or wool quickly disregard expensive or time consuming safety rules.
I’m also not convinced that laissez-faire actually works at all when the primary goal of the sector in question ought to be different from profit. A great example is health care, where the primary goal should be human well-being and health, but being profit focused would be completely at odds. If you’re profit-focused, there’s nothing stopping you from fixing prices very high because the person getting emergency services doesn’t have a chance to shop around or look at competition.
In fact, any place that competition can’t or doesn’t exist is very bad for society and consumers. Any sort of monopoly means prices are very high and quality is very low.
And monopolies always form over time in a laissez-fairs economy because it’s the best way to increase profit. And yet this is completely to the detriment of society and consumers —- e.g. to the detriment of everyone who exists. (I would posit that even a Walmart exec would have parts of their life that would be better if Walmart wasn’t monopolizing small markets.)
How do these problems get solved without “meddling” in the economy?
Even today, companies compete on being clean and treating their workers well, even further than any regulations would require them. The historical difference is that back then people weren't asking for higher standards, i.e. there was lack of knowledge and lack of alternatives. Also, I don't believe that horrible working conditions have ever been a standard practice, but rather an extreme example of some anomaly that has resulted from coercion or even state regulation of some sort.
There would be less price gouging and less monopolies, because these both are caused by lack of competition. There are lots of regulatory moats than decrease competition and increase costs.
In other words, not in my lifetime.
Basic economics. Amazing book that really explains the fundamentals from cave people economics to modern housing theory.
I can't stand basically any political commentary anymore, at least in regards to economics. It feels like everyone has "simple" solutions to the best way to solve every economic problem, and it doesn't really seem like the economy can easily be reduced to a ten second Fox News soundbyte.
And no one is surprised, least of of all economists (whose livelihood depends on it but know exactly how much BS their field is) and politicians, who, like tribal chieftains of old using sooth-Sayers to give justification to their decisions find economists very useful.
That's why economists are still in business to this day.
However, when it comes to predictive power, the entire field's output is exactly nil.
Works for me
From a labourer's perspective, inflation is making the results from work done in the past worth less, while those who have the means to take risks can negate these negative side effects.
if there are a 100 dollars today and tomorrow there are 200. a dollars worth is halved right? or?
Got some secret insight on supply demand, that the general public is unaware of?
I would sooo like to know :-)
https://github.com/freeduck/hellebrevet/blob/main/skizze.jpg
Sort of a mohammed drawing
Let's talk
Inject it at ground level. No banks. No taxing. Let's come up with a few scenarios.
Everyone invests it in Stocks. Everyone saves. Everyone invests in assets to start their own businesses.
The only time you "invest" in stocks is during a public offering. And when a company does a buyback, that's a de-vestment. Over the last 20 years there has been more buybacks than stock issuances. The market is running dry.
Deflationary assets are exactly what r > g predict.
Well, this wouldn't cause any inflation at all. It's basically just dead money. Either you own a stock or you save money in your bank account because someone bought your overpriced stock.
>Everyone invests in assets to start their own businesses.
This will cause inflation over the short term if there isn't enough labor available to do all investments. Interest rates would rise to encourage people to save their money.
There is also another form of inflation. There is enough labor available but the investment fails. You borrow $100 but only repay $80 (inflation adjusted of course). There is more money without enough production to back it up.
However a lowered velocity rises r - g. This exacerbates wealth inequality.
> However a lowered velocity rises r - g. This exacerbates wealth inequality.
The cantillion effect:
https://en.m.wikipedia.org/wiki/Richard_Cantillon#Monetary_t...
You have to explain how returns can exceed economic growth. Your returns have to be earned through coercion basically, the other party can't refuse. Overpriced stocks just result in lower yields. I can only think of real estate as something that is earning a fixed return through coercion. The other thing would be money if the fed forcibly raised interest rates but interest is already zero.
I borrow $100 from the bank which creates $100. I buy seeds and plant trees. I sell 100 Apples to pay the loan back. Did the value of the dollar go down? No it didn't. This is how the supply of money can go up much faster than inflation.
Fatal conceit anyone?
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account." --F.A. Hayek
How the economy works is pretty basic, knowing where all the corners of fraud lie is the part that makes it complicated.
Let's say the maslow hierarchy ranks needs according how productive they are with shelter and food at the bottom being the most productive and social needs at the top being the least productive.
By that logic we should be employing people according to their needs to achieve high productivity in the economy. If you have two employees and fire one the economy will shift away from the productive part of the economy to the less productive part because the second employee is no longer able to buy food. Income welfare exists for this very reason. To take the surplus of the first employee and reallocate it to food and rent. If we had "job welfare" then we would take the jobs and spread them out over more people.
Instead of, "oh you want to eat? too bad we won't let you work" it's "you eat, you work"
We might be most relevant to one as a source of raw materials:
Certainly not if you allow AGIs to be economic actors.