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Comment by jazzyjackson | Hacker News Reader

Right, velocity of money! I think this is the meatier part of the essay and I wish geohot would have skipped the bit about the gold standard - our main measure of growth is how quickly we hand money back and forth (is there another measure that allows expenditures to cancel out ? Net Domestic Product ?)

The graph that shocked me tho was the electricity production, I didn't realize US was so flat but it rings true, I know there's a 2 year wait-list to even have your energy production considered to be hooked up to the grid, but I assumed there was some at least some throughput, now we're taking about onsite mini nukes while China is building.

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Intuitively, if a toaster costs 5x in the US what it would cost in China, GDP says that a sale in the US was more productive when in reality it’s the same thing in both places.

My opinion is the money is a means to an end and we’d be served better by focusing on those ends instead: healthcare, housing, education, life expectancy etc.

That's what PPP is meant to measure.

Or even better, The Economist's "Big Mac Index":

https://en.wikipedia.org/wiki/Big_Mac_Index https://worldpopulationreview.com/country-rankings/big-mac-i...

The big mac index is quite literally PPP dumbed down to a single product that the general public can understand.

> in reality it’s the same thing in both places.

the utility of a toaster is different in different places.

It may also be the case that a toaster costing 5x in the US, because this is including an opportunity cost for that toaster being made (which means a different thing wasn't made).

The the benefits the new owner of the toaster derives from it.

Maybe toaster is not the best example to illustrate this by, so say we use microwave --and the time saving based off of it-- instead. A 100k/y worker's time savings are 5x the 20k/y workers savings when equal in time.

So the microwave is accepted to cost more. Sellers are great in caching in on this.

I think we have to be careful that by adding “utility” as an indirection we don’t accidentally traffic in “cost”. Because maybe I am dumb but it seems to me that the utility of a toaster is its ability to toast bread.

If I make 5x as much as someone in China and am willing to pay 5x as much for the same thing, at the end of the day we both just want toast. And if I buy a crappy toaster that only costs 2x as much and can only toast half as fast, “utility” (i.e. cost) says my toaster is still better despite it being an objectively worse toaster.

> at the end of the day we both just want toast

but the seller doesn't care about that. The seller will attempt to extract the maximum price of a toaster.

It is because americans are more productive, that their maximum price for a toaster is 5x that of china; they can afford to pay 5x. So this is a measure of their utility - not the ability to toast. An american finds that the ability to toast to be worth 5x that a chinese would be willing to pay for toast.

If america was poorer, the seller would not be able to sell the toaster for 5x (and instead would have to lower their price to match the price their customers can afford, up to the minimum margin the seller could afford to cut to).

I think my point is about an underlying quality of the toaster, the ability to make toast, which is independent of its cost in different places. The price of a product is complicated by many factors which are irrelevant to that underlying quality.

> an underlying quality of the toaster, the ability to make toast, which is independent of its cost in different places

and this is called intrinsic theory of value[0], which mostly has been superceded by other theories (such as the one in my post, which is the subjective theory of value[1]).

While the intrinsic theory of value isn't wrong per se, it is too naive, and "simple", such that this theory does not explain much when applied to real world scenarios.

[0] https://en.wikipedia.org/wiki/Intrinsic_theory_of_value

[1] https://en.wikipedia.org/wiki/Subjective_theory_of_value

The question is why would people buy a US-made toaster if the Chinese is 5 times cheaper.

Quality, perceived quality, nationalism?

Two quick thoughts… one, because every transaction in theory happens because the purchasing party values the good or service more than the money, every transaction does — in theory — create wealth, velocity of money is sort of measuring a proxy for growth. But I agree it’s weird.

Second, “GDP/watt” is absolutely an economic metric, and it captures something about energy efficiency but also the mix of an economy. Software and services scores highly; aluminum smelting does not.

I know you qualified it as "in theory", yet I find myself thinking of wash-trading as an example where transactional value is neutral or even very slightly negative, because they actually value manipulating the metrics.

That's a fair counterexample.

In that case, you could argue that "true GDP" didn't change at all, merely our measurement of it had error. But pretty soon you ask 'well, what is the real signal?' And it's turtles all the way down.

Again, economics is weird, but perhaps interesting because it's weird. (I'll confess I didn't care about the field at all until it suddenly got very interesting in ~2008.)

Normalising GDP for the amount of money in the system suggests that velocity of money is the is actually the interesting metric.

Say the monetary base is $100 and the GDP is $1,000 initially, then the monetary base doubles to $200 and the GDP doubles to $2,000. It looks suspiciously like no real economic activity was generated and that suggests that velocity is the growth measure.

You're essentially assuming an increase in the money supply leads to inflation, which it does if nothing else is different either, but if you also have e.g. a larger population then you're looking at something else.

I don't buy the argument that every transaction in theory creates wealth. The only way that holds true, is by using a subjective/arbitrary meaning of wealth, which would imply, I can become wealthier/poorer by merely changing my mind. In such a case, I can be the wealthiest man in the world, and the poorest 10 minutes later, when no transaction or anything really even happened.

Sure mind over matter, but I'd prefer using a more objective definition for wealth, rather than an arbitrary one. It makes measuring and comparing things much more sensible, otherwise you are free to reason whatever you want and have no culpability, which is very unscientific.

If you can truly come up with an objective measure of wealth, I believe there might be a (quasi) Nobel Prize in economics for you.

The reason economics is hard, in part, is that there isn't some core firmament you can rest on; there is no fundamental, provable truth. And yet, with fancy statistics and clever experimental design, you can still make intelligent statements and understand the world better.

To me, economics is the field with the purest expression of "all models are wrong, some are useful." Which is actually sort of cool, if you let it be.

I think some people need to step back and ponder what's the purpose of economics? Why do we even study it? What are we hoping to achieve in analyzing it?

I can only think it began with the philosophy for making better decisions, solving problems, and improving society - particularly in the allocation of its resources.

As so, I think a huge part of the problem with economics, including most economists, is that people equate value for wealth. Value certainly is subjective, I mean, do you value having $80k, or a nice car? How about a pool, or a boat? Do you value your time less than the cost of a flight? All very subjective. But I think it's flawed to conflate value for wealth. Wealth is something real, the things you are evaluating in trade. Time is wealth. Money is wealth. Oil is wealth. Land is wealth. Why don't we simply measure these things, and how they're allocated? IMO, it seems more practical and more noble of pursuit to figuring out if someone actually needs food in society, rather than what people with plenty of resources ascribe their values to.

  You’ll find that money is noise, this, us, together, is wealth
  The body’s just cosines and vectors, love is the real health

Dog with Rabbit in Mouth, Unharmed, Beauty Pill

https://youtu.be/0GENOl4sbiE

Economics has two broad disciplinces, micro and macro economics. Macro economics is for if you're trying to plan or consider the economy, micro economics is if you want to understand a business or person and how it makes decisions etc.,. Broadly, there's also normative and positive economics. Normative economics is stating opinions about what's right (e.g,. there should be a minimum wage so that no one can be paid less than X for their work) whereas positive economics is about facts (e.g., if you raise the price of something, you'll generally sell less of it).

Anyway, idk if that's useful. I'd say though, economists don't really need to care about what people value, except to the extent that they can e.g,. learn about what people value by observing their behavior, or use how they ascribe value to something to predict their behavior. That is to say, "real" economists _do_ study allocations of physical resources etc., don't think they just try to model some theoretical value function :)

"The purpose of economics is to make astrology look respectable!"

> If you can truly come up with an objective measure of wealth, I believe there might be a (quasi) Nobel Prize in economics for you.

Is it actually that hard?

The material worth of something is what someone will pay you for it, i.e. the value it would sell for at auction. Your material wealth is the sum of the worth of what you have.

That means if you own something and the market price of it changes, i.e. someone changes their mind, then your wealth changes. But is that even wrong?

The real trouble here isn't measuring wealth, it's measuring surplus. If you sell your widget for $5, that implies it was worth less than $5 to you and at least $5 to someone else, but the gain isn't $5, it's whatever the difference is between how much you valued it and how much they did. If that was $4.50 and $5.50 then it's $1. If it was $3 and $1500 then it's $1497, even though they only paid $5. Imagine, for example, a $5 generic drug to someone who has what it treats.

> The material worth of something is what someone will pay you for it, i.e. the value it would sell for at auction.

The problem is that this i.e. isn't right, because the vast majority of market transactions are not auctions. The value a pallet of rice would auction for is very different than the value a rice farmer would accept to load it onto a truck, which is very different than the value a supermarket would pay to get one a month deposited in its loading dock, which is very different than the sum of values individual consumers would pay for the bags on that pallet.

That's because those are all different products. Water in the desert is a different product than water at the river and they can still differ in value even in a competitive market because of the cost of transportation.

I think that's a very reasonable way to look at it. But it still means that the auction strategy doesn't always work, because water flowing to me is a different product than water flowing to the auction winner.

Those are differences in the buyer/seller rather than differences in the product. It's why people value something differently, not why something is a different product. Even if the water is in the desert in both cases, you might still value it less than someone else, e.g. because you already have some and they don't, but that isn't a difference in the thing being sold.

Also, "I become richer just because I think I'm richer" was actually a thing Donald Trump once said in a deposition:

"My net worth fluctuates, and it goes up and down with markets and with attitudes and with feelings, even my own feelings." [1]

1: https://en.wikipedia.org/wiki/TrumpNation#:~:text=During%20d...

It doesn't obviously. GDP isn't a sum of all transactions, it's the market value of all newly produced goods and services in a given territory.

It doesn't. Inefficient system like US healthcare increases GDP and if they implemented an EU system it would go down.

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